McDonald’s Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited results; amounts below are in U.S. dollars. McDonald’s operated or franchised 36,368 restaurants in 119 countries at quarter-end.
Financial performance
| Metric | Q2 2015 | Six months 2015 |
|---|---|---|
| Total revenue | $6.50 billion; down 10% reported, up 1% in constant currencies | $12.46 billion; down 10% reported, flat in constant currencies |
| Operating income | $1.85 billion; down 16% reported, down 6% in constant currencies | $3.23 billion; down 22% reported, down 13% in constant currencies |
| Net income | $1.20 billion; down 13% | $2.01 billion; down 22% |
| Diluted EPS | $1.26; down 10% reported, down 1% in constant currencies | $2.09; down 20% reported, down 11% in constant currencies |
| Comparable sales | Global down 0.7% | Global down 1.5%; comparable guest counts down 4.4% |
Six-month combined operating margin was 26.0%, versus 29.7% a year earlier. Company-operated restaurant margin was 15.6% in Q2 and 15.0% for the six months, compared with 17.1% and 16.6%, respectively. Franchised restaurant margin was 81.6% in Q2 and 81.0% for the six months, versus 82.2% and 81.7%.
For the six months, cash provided by operations was $3.21 billion and capital expenditures were $808.5 million, leaving operating cash flow less capital expenditures of approximately $2.40 billion. Cash and equivalents were $4.00 billion at June 30, versus $2.08 billion at year-end 2014. Long-term debt was $17.90 billion, up from $14.99 billion; total debt obligations were $17.9 billion. The increase primarily reflected $4.2 billion of bond issuances, partly offset by $1.0 billion of repayments. The fair value of debt was estimated at $18.7 billion.
Six-month dividends paid were $1.63 billion and treasury-stock purchases were $2.16 billion. The company returned $3.9 billion to shareholders year to date. Dividends declared were $0.85 per share in Q2, versus $0.81 a year earlier.
Material changes and operating drivers
- Currency translation materially reduced reported results: it lowered six-month revenue by $1.45 billion, operating income by $370.3 million, net income by $215.3 million and diluted EPS by $0.23. Reported revenue declines also reflected refranchising, which shifts company-operated sales to lower franchise-fee revenue.
- Comparable sales were weakest in APMEA: down 4.5% in Q2 and 6.3% for the six months, primarily reflecting prolonged consumer-perception issues in Japan following the 2014 supplier issue, as well as weakness in China and other Asian markets. U.S. comparable sales fell 2.0% in Q2 and 2.3% year to date; Europe rose 1.2% in Q2 and 0.3% year to date.
- Company-operated margins were pressured by negative traffic and higher labor and commodity costs in the U.S.; weaker results and currency/inflationary commodity pressures in Russia; and higher commodity and labor costs in China and other Asian markets.
- Strategic charges were approximately $45 million in Q2 and $195 million in Q1. The six-month charges included restaurant and other asset write-offs and restructuring; Q2 charges related to restructuring the global operating structure. Excluding these charges and currency effects, six-month EPS would have declined $0.08, or 3%.
- Interest expense rose 8% in both the quarter and first half, principally due to higher average debt balances. Q2’s effective tax rate was 29.8%, compared with 33.0% a year earlier, primarily due to a lower tax cost from ongoing foreign cash repatriation.
Outlook, management commentary and risks
Management described recent results as disappointing and said the urgent priority was to reset and turn around the business. Beginning July 1, 2015, the company moved to four segments: U.S., International Lead Markets, High-Growth Markets, and Foundational Markets and Corporate.
- For Q3, management expected positive global comparable sales, led by International Lead Markets and China’s continuing recovery. It expected China to return to normalized performance in the second half, while Japan was expected to remain challenged for the foreseeable future.
- 2015 outlook included net restaurant additions contributing about 2 percentage points to systemwide sales growth in constant currencies; U.S. commodity-basket cost inflation of 1.5%–2.5%; SG&A growth of about 2%–4% in constant currencies; interest expense growth of about 10%; an effective tax rate at the high end of the 31%–33% range; and capital expenditures of approximately $2.0 billion.
- The company targeted $8–$9 billion of shareholder returns in 2015 and the top end of its $18–$20 billion three-year target by the end of 2016; refranchising about 3,500 restaurants to reach approximately 90% franchised by the end of 2018; and about $300 million in net annual SG&A savings by the end of 2017.
- Key risks include execution of the turnaround and refranchising plans, intense competition, changing consumer preferences, food safety and brand trust (including the China supplier issue), commodity and labor cost volatility, franchisee performance, foreign exchange movements, regulation, litigation, and technology or cybersecurity disruptions. Management estimated that a 10% move in the same direction across the Euro, British Pound, Australian Dollar and Canadian Dollar would change annual diluted EPS by about $0.25.
No material changes to previously disclosed legal proceedings or market-risk disclosures were reported. Management concluded disclosure controls were effective at June 30, 2015; no subsequent events requiring recognition or disclosure were identified.
Important facts for investors to verify
- Whether comparable-sales trends, especially in the U.S., Japan and China, improve as management anticipated.
- How much of the decline in reported revenue and earnings reflects currency and refranchising versus underlying operating performance.
- Progress and execution costs for restructuring, the four-segment organization, restaurant closings and the refranchising target.
- Whether planned shareholder returns and capital spending remain supportable alongside increased debt and higher interest expense.
- Whether expected commodity, SG&A and tax-rate assumptions hold, and how labor costs and foreign exchange affect margins and EPS.