McDonald’s Corporation (MCD) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited results; dollar amounts below are in millions unless otherwise stated.
Business context and performance
McDonald’s operates and franchises restaurants globally. At quarter-end, it had 40,801 restaurants, approximately 95% franchised. Management’s strategy emphasizes marketing, core menu items, digital, delivery, drive-thru and restaurant development.
- Global comparable sales increased 11.7% in Q2 and 12.2% in the first half. Q2 growth was 10.3% in the U.S., 11.9% in International Operated Markets and 14.0% in International Developmental Licensed Markets.
- Systemwide sales increased 12% in Q2 and 10% in the first half; in constant currencies, increases were 13% for both periods. Digital channels accounted for almost 40% of Systemwide sales in the top six markets in Q2.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $6,497.5 | $5,718.4 | $12,395.3 | $11,384.0 |
| Operating income | $3,104.1 | $1,711.8 | $5,636.5 | $4,024.4 |
| Net income | $2,310.4 | $1,188.0 | $4,112.7 | $2,292.4 |
| Diluted EPS | $3.15 | $1.60 | $5.60 | $3.08 |
| Cash provided by operations | $1,673.3 | $618.1 | $4,094.0 | $2,751.4 |
| Capital expenditures | $526.5 | $437.9 | $1,029.8 | $839.1 |
- Revenue rose 14% in Q2 and 9% in the first half; constant-currency growth was 14% and 11%, respectively. GAAP operating income rose 81% and 40%; diluted EPS rose 97% and 82%, respectively.
- Reported six-month operating margin was 45.5%. Excluding identified restructuring charges and prior-year Russia-sale charges and Dynamic Yield sale gains, operating income increased 20% in Q2 and 16% in the first half (constant currency: 21% and 18%). Adjusted diluted EPS was $3.17 for Q2 and $5.80 for the first half, as defined in the filing.
- Six-month operating cash flow exceeded capital expenditures by $3.1 billion. Cash and equivalents were $1,625.6 at June 30, versus $2,583.8 at year-end 2022; cash used for financing was $3,652.2 in the first half.
- Long-term debt was $35,710.1, compared with $35,903.5 at year-end. Total current assets were $4,945.4 and current liabilities $3,673.7. Shareholders’ equity remained in deficit at $(4,999.1). The filing estimates debt fair value at $33.6 billion versus a $35.7 billion carrying amount.
- Interest expense increased 14% in both Q2 and the first half, reflecting higher average rates and debt balances. The company paid $2.2 billion in dividends and repurchased $1.2 billion of shares in the first half.
Material changes and unusual items
Comparisons with 2022 are significantly affected by unusual prior-year items: Russia-sale charges of $1,153 million in Q2 and $1,281 million in the first half; a $271 million Dynamic Yield sale gain in both periods; and a French tax-audit settlement expense of $37 million in Q2 and $537 million in the first half. 2023 included $18 million of Q2 and $198 million of first-half restructuring charges, primarily for Accelerating the Organization. Accordingly, large GAAP growth rates do not represent underlying growth by themselves.
Management reported strong sales-driven franchise margins, supported by comparable-sales growth and menu price increases; company-operated results also faced ongoing inflationary cost pressures. Foreign currency translation reduced first-half revenue by $263.5 million and operating income by $117.2 million.
Outlook, risks and contingencies
- For 2023, management expects net restaurant expansion to contribute about 1.5% to Systemwide sales growth in constant currencies; approximately 1,900 openings and about 1,500 net additions are planned.
- Forecasts include SG&A of about 2.2%–2.3% of Systemwide sales; operating margin of about 45%, or about 46% excluding restructuring; interest expense growth of 10%–12%; an effective tax rate of 19%–21%; capital expenditures of $2.2–$2.4 billion; and free-cash-flow conversion above 90%.
- The company expected up to $250 million of 2023 costs for Accelerating the Organization and had incurred $199 million through June. Most accrued restructuring costs were expected to be paid by year-end. Further Global Business Services costs are expected, but cannot yet be estimated; most of that strategy is expected to be completed by 2027.
- Key disclosed risks include inflation and commodity, labor and supply-chain costs; foreign-exchange movements; geopolitical disruption, including the Russia-Ukraine war; consumer and competitive shifts; franchisee financial and operational performance; food safety; technology and cybersecurity; and legal, regulatory, tax, and environmental and social-impact matters. Management reported no material change in market-risk disclosures or legal-proceedings disclosures from the 2022 Form 10-K.
Management stated disclosure controls were effective as of June 30, 2023. A multi-year finance and technology systems transformation is underway; the filing says it is not in response to an identified internal-control deficiency.
Investor verification points
- Reconcile reported versus adjusted earnings and operating income, especially the Russia, Dynamic Yield, French tax-audit and restructuring items.
- Assess cash conversion and the reasons working-capital changes reduced first-half operating cash flow; review capital spending, dividends, repurchases and debt service together.
- Track debt, interest expense and liquidity against management’s 2023 outlook, including the stated free-cash-flow conversion target.
- Monitor comparable-sales drivers, pricing and guest counts, inflationary restaurant costs, franchisee health, and delivery/digital channel economics.
- Follow restructuring spending and the still-unquantified future costs of the Global Business Services initiative, as well as execution of restaurant-opening plans.