McDonald’s Corporation — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. McDonald’s franchises and operates restaurants; it reported 32,461 restaurants in 117 countries, of which 26,204 were franchised. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $6,304.9 | $6,046.7 | $17,860.5 | $16,771.3 |
| Operating income | $2,096.5 | $1,932.8 | $5,615.9 | $5,014.7 |
| Net income | $1,388.4 | $1,261.0 | $3,704.0 | $3,334.2 |
| Diluted EPS | $1.29 | $1.15 | $3.42 | $3.00 |
| Cash provided by operations | $1,944.4 | $1,822.2 | $4,615.8 | $4,373.0 |
| Capital expenditures | $(523.1) | $(470.8) | $(1,319.4) | $(1,318.9) |
- Q3 revenue grew 4% reported (6% in constant currencies); operating income rose 8% (11% constant currency), net income 10%, and diluted EPS 12%. For the nine months, revenue grew 6% reported (5% constant currency), operating income 12% (11% constant currency), net income 11%, and diluted EPS 14%.
- Comparable sales increased 6.0% globally in Q3 and 5.1% for the nine months. Q3 comparable sales were up 5.3% in the U.S., 4.1% in Europe, and 8.1% in APMEA.
- Company-operated restaurant margin was 21.0% in Q3 versus 19.4% and 19.8% for the nine months versus 17.9%. Management attributed gains principally to positive comparable sales and lower commodity costs; higher labor costs partly offset gains in some markets.
- Combined operating margin for the nine months was 31.4%, versus 29.9% in 2009. Interest expense declined 3% in Q3 and 7% for the nine months, mainly due to lower average rates.
- Nine-month operating cash flow exceeded capital expenditures by $3.3 billion. Cash and equivalents were $2,495.0 at September 30, up from $1,796.0 at December 31, 2009.
- Debt obligations were $11.4 billion at September 30, compared with $10.6 billion at year-end 2009. Total current assets were $4,176.5 and current liabilities $3,266.3.
- The company repurchased 31.9 million shares for $2.2 billion and paid nearly $1.8 billion in dividends during the first nine months. Shares outstanding at September 30 were 1,056.5 million.
Material changes and unusual items
- Foreign currency translation reduced Q3 diluted EPS by $0.03 but increased nine-month diluted EPS by $0.03. Constant-currency results exclude translation effects.
- Nine-month 2010 results included $36.8 million after-tax impairment charges related to McDonald’s Japan’s planned closure of approximately 430 restaurants by mid-2011. The charge reduced reported nine-month EPS by $0.03.
- Nine-month 2009 results included a $94.9 million pretax gain ($58.8 million after tax, or $0.05 per share) from the sale of the company’s Redbox interest.
- In October 2010, McDonald’s prepaid a ¥40 billion ($479 million at September 30 rates) floating-rate loan due in 2014, without fees or gain/loss; the company expected to refinance the amount.
Outlook, risks and contingencies
- The company did not provide specific EPS guidance. Its 2010 outlook called for net restaurant additions to contribute nearly 1.5 percentage points to Systemwide sales growth in constant currencies; commodity basket costs to decline 3–4% in the U.S. and 2–3% in Europe; SG&A to rise about 3% in constant currencies; and interest expense to decline about 4%.
- Management expected a 29–31% full-year effective tax rate, about $2.3 billion in capital expenditures, approximately 1,000 restaurant openings and net additions of about 275 restaurants. It expected foreign currency translation to have minimal full-year EPS impact at then-current rates.
- Management cited competition, weak or uncertain economic conditions, value and pricing pressure, commodity and labor costs, foreign exchange and interest-rate movements, food safety and supply-chain matters, franchisee execution, regulation, litigation, and technology risks as factors that could affect results.
- The IRS proposed adjustments concerning foreign tax credits and transfer pricing for 2007–2008 that could result in about $600 million of additional tax, excluding interest and potential penalties. McDonald’s disputed the adjustments, intended to pursue available remedies, and did not expect resolution to materially affect results or cash flows.
- In an obesity-related lawsuit, the court denied plaintiffs’ class-certification motion on October 27, 2010. McDonald’s stated it intended to defend the case; claimed damages were unspecified.
- Management reported effective disclosure controls as of September 30, 2010 and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether comparable-sales growth and operating-margin improvement persist, particularly as commodity, labor, and pricing conditions change.
- Delivery of the stated 2010 outlook, including capital spending, restaurant openings/net additions, and shareholder distributions.
- Debt and liquidity developments, including the refinancing of the prepaid Japanese-yen loan and the effect of buybacks and dividends on financial flexibility.
- Progress and ultimate resolution of the IRS tax examination, including potential interest and penalties.
- Costs and execution of McDonald’s Japan restaurant closures and any further material legal or regulatory developments.