McDonald’s Corporation — Q3 2019 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and nine months ended September 30, 2019, compared with the same periods in 2018. McDonald’s operated or franchised 38,298 restaurants in 119 countries; 35,663 were franchised. The company’s model relies primarily on franchise rent and royalty income. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $5,430.6 | $5,369.4 | $15,727.5 | $15,862.2 |
| Operating income | $2,409.3 | $2,417.7 | $6,777.2 | $6,823.1 |
| Net income | $1,607.9 | $1,637.3 | $4,453.2 | $4,509.0 |
| Diluted EPS | $2.11 | $2.10 | $5.80 | $5.72 |
| Comparable sales growth | 5.9% | 4.2% | 5.9% | 4.5% |
- Reported revenue increased 1% in Q3 and declined 1% year to date; excluding currency translation, revenue grew 3% in both periods. Refranchising reduced reported company-operated sales while franchised revenue grew.
- Management reported systemwide sales growth of 7% in constant currencies in both periods. U.S. comparable sales rose 4.8% for Q3 and 5.0% year to date; International Operated Markets rose 5.6% and 6.1%, respectively; International Developmental Licensed Markets rose 8.1% and 7.3%.
- Operating income was approximately flat in Q3 and down 1% year to date as reported, but up 2% and 3%, respectively, in constant currencies. Foreign currency translation reduced diluted EPS by $0.03 in Q3 and $0.19 year to date.
- Q3 company-operated restaurant margin was 18.6% versus 18.4% a year earlier; the nine-month margin was 17.5% versus 17.4%. Franchise margin was 81.4% for Q3 and 81.1% year to date, down from 82.5% and 82.2%; the company attributed part of the percentage decline to lease-accounting presentation, with no impact on franchised margin dollars.
- Interest expense increased 12% in Q3 and 15% year to date, reflecting higher average debt and interest on certain euro-denominated deposits. The effective tax rate was 25.3% for Q3 and 25.7% year to date.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $6.23 billion, capital expenditures were $1.66 billion, and operating cash flow exceeded capital expenditures by $4.6 billion. Operating cash flow increased $0.78 billion from the comparable period, mainly due to lower tax payments and working-capital changes.
- Investing activities used $2.26 billion and financing activities used $3.55 billion year to date. Financing included $3.53 billion of treasury-stock purchases and $2.65 billion of dividends paid.
- At September 30, cash and equivalents were $1.18 billion; current assets were $3.60 billion and current liabilities were $4.28 billion. Long-term debt was $32.85 billion; management reported total debt obligations of $32.9 billion, up from $31.1 billion at December 31, 2018. Shareholders’ equity was a deficit of $8.60 billion.
- Adoption of lease accounting on January 1, 2019 added a $12.5 billion right-of-use asset and lease liability to the balance sheet; the adoption was non-cash. At September 30, lease liabilities totaled approximately $12.59 billion, including $703 million current.
Changes, outlook and notable items
- McDonald’s adopted the new lease standard in 2019. It stated that initial income-statement impact was minimal and there was no opening retained-earnings adjustment. Lease accounting affected reported franchise margin percentages.
- Year-to-date results included $80 million of net impairment and strategic charges, primarily a $99.4 million impairment tied to acquiring a joint venture partner’s interest in the India Delhi market, partly offset by $19.5 million of gains on former headquarters property sales. Lower gains on restaurant sales also weighed on operating-income comparisons.
- Management’s 2019 outlook included approximately 1 percentage point of systemwide sales growth from net restaurant additions; U.S. commodity-basket cost growth of 2%–3% and 2.5% in the Big Five international markets; SG&A growth of 1%–2% in constant currencies; interest expense growth of 13%–15%; an effective tax rate of 25%–26%; and capital expenditures of approximately $2.3 billion.
- The company expected roughly 1,200 restaurant openings and about 800 net additions in 2019. It expected approximately $600 million of company investment in 300 openings, with licensees and affiliates funding the remaining 900 openings. About $1.5 billion of planned capital expenditures was allocated to the U.S., including roughly 2,000 Experience of the Future projects. Substantially all U.S. restaurants were expected to complete modernization by year-end 2020.
- The company said the Dynamic Yield technology was being deployed at drive-thrus and that it acquired Apprente in the fourth quarter of 2019, after the reporting period. No subsequent events requiring recognition or disclosure were reported through the filing date.
- Key risks include execution and return on investments in restaurant modernization, digital and delivery; changing consumer preferences and intense competition; food, labor and other cost pressures; foreign-exchange exposure; franchisee financial and operational performance; supply-chain disruption; food safety; technology and cybersecurity incidents; and regulatory, tax, litigation and geopolitical risks. The filing reported no material changes to legal-proceeding disclosures in the 2018 Form 10-K.
Important facts for investors to verify
- Whether comparable-sales strength and constant-currency growth translate into sustained reported revenue and earnings growth despite refranchising and currency effects.
- Whether restaurant-level margins and franchisee sales remain resilient as labor, commodity and occupancy costs evolve.
- Debt, interest expense and lease obligations alongside the company’s substantial dividend and share-repurchase commitments.
- Actual 2019 results against the stated cost, tax, capital-expenditure and restaurant-opening outlook, and returns from modernization, digital, delivery and acquisitions.
- The scale and recurrence of impairment, restructuring, property-sale and other strategic items when assessing underlying performance.