McDonald’s Corporation — Q1 2020 Form 10-Q
Reporting period: Quarter ended March 31, 2020. Financial statement amounts are in U.S. dollars; amounts below are in millions unless noted. McDonald’s operated or franchised 38,984 restaurants in 119 countries; 93% of restaurants were franchised.
Financial performance
- Revenue: $4,714.4, down 6% year over year (5% excluding currency effects). Company-operated sales were $2,025.8, down 10%; franchised revenue was $2,608.0, down 4%.
- Profit and earnings: Operating income was $1,693.6, down 19%; net income was $1,106.9, down 17%; diluted EPS was $1.47, down 15%. The effective tax rate was 23.4%, versus 27.5% a year earlier.
- Margins: Operating margin was 35.9%, compared with 41.7%. Restaurant margin dollars totaled $2,326.8, down 8%; franchised restaurant margins were $2,053.8 and Company-operated margins were $273.0.
- Comparable sales: Global comparable sales declined 3.4% for the quarter, following 7.2% growth for January and February combined; March comparable sales fell 22.2%. U.S. comparable sales rose 0.1%; International Operated Markets declined 6.9%; International Developmental Licensed Markets & Corporate declined 4.3%.
- Cash flow: Operating cash flow was $1,546.0, down from $2,020.6. Capital expenditures were $482.5; investing cash outflow was $518.4. Financing provided $3,533.0, including $5,539.4 of long-term financing issuances. Cash and equivalents ended the quarter at $5,379.8, versus $898.5 at year-end.
- Debt and liquidity: Debt obligations were $39.2 billion at March 31, up from $34.2 billion at December 31, 2019. The company issued $5.5 billion of long-term debt and drew a new $1 billion line of credit. It reported a further $3.5 billion available under a committed line of credit.
- Shareholder returns: Dividends declared were $1.25 per share; cash dividends paid were $930.7. The company repurchased 4.2 million shares for $868.9 million before suspending buybacks in early March.
Material changes and unusual items
- COVID-19 drove restaurant closures, restricted operations and changing consumer behavior, with sales declining sharply in the second half of March. Management said these trends continued into April and were expected to persist while restrictions remained in place.
- International Operated Markets were particularly affected by closures in France, the U.K. and Italy. China’s closures also weighed on results; approximately 25% of restaurants there were fully closed at the peak in early February.
- Segment operating income was $892.4 in the U.S. (down 6%), $879.1 in International Operated Markets (down 16%) and negative $77.9 in International Developmental Licensed Markets & Corporate, versus positive $94.1 a year earlier.
- SG&A increased 18% to $589.8, including about $40 million related to cancelling the 2020 Worldwide Owner/Operator Convention and approximately $20 million of contractual costs from reducing certain technology and R&D investments. Asset dispositions and other expense included higher bad-debt reserves and litigation settlements; impairment and other charges included a $14.4 million software write-off, largely offset by $13.0 million of income, primarily a reserve reversal.
- McDonald’s deferred collection of approximately $300 million of first-quarter rental income. It expected to defer collection of more than $1 billion of rent and royalties earned in the first and second quarters; revenue continued to be recognized as earned.
- Currency translation reduced quarterly revenue by $74.8 million and diluted EPS by $0.02. Other comprehensive loss was $513.7 million, primarily reflecting foreign-currency translation losses.
Outlook, liquidity and risks
- Management said it could not predict the duration or scope of the pandemic, which could materially affect financial results, condition and outlook. No quantified full-year revenue or earnings guidance was provided in the filing.
- The company expected 2020 capital expenditures to be reduced by approximately $1 billion from its original $2.4 billion plan. It expected full-year interest expense to rise about 10%–12%, primarily due to higher average debt from pandemic-related financing.
- Management warned that second-quarter operating cash flow would be significantly affected by rent and royalty collection deferrals and free cash flow could be negative until collections, expected mainly in the third and fourth quarters, begin.
- The company added $6.5 billion of financing during the quarter to bolster cash and preserve financial flexibility. Moody’s and S&P affirmed Baa1/BBB+ ratings; S&P placed McDonald’s on negative outlook. In April, the board authorized up to an additional $8 billion of commercial paper and line-of-credit draws, with $7 billion remaining available.
- Management reduced planned capital spending, suspended share repurchases and worked with franchisees on liquidity and operating feasibility. It highlighted drive-thru and delivery as important service channels, alongside ongoing digital initiatives.
- Principal disclosed risks include prolonged pandemic disruption, reduced customer demand, franchisee financial stress, supply-chain and labor constraints, liquidity and funding costs, foreign-exchange volatility, and legal, regulatory and technology risks. Management reported no impairment indicators in Q1 despite economic uncertainty.
Important facts for investors to verify
- Whether restaurant restrictions, sales trends and comparable-sales declines improved or worsened after the quarter, and how those trends affected later results.
- Actual timing and collectability of deferred rent and royalties, and the resulting effect on cash flow, franchisee liquidity and bad-debt reserves.
- Debt, cash balances, credit-rating outlook and financing availability, including the use of the additional April borrowing authority.
- Whether the reduced capital-spending plan and suspended repurchases continued, and how these actions affected investment and shareholder returns.
- Whether management’s interest-expense estimate and anticipated collection schedule were realized; the filing’s outlook was subject to substantial pandemic uncertainty.