McDonald’s Corporation — Q2 2013 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2013, compared with the same periods in 2012. McDonald’s operated or franchised 34,734 restaurants in 119 countries; 28,107 were franchised and 6,627 company-operated.
Financial performance
- Q2 revenue: $7.084 billion, up 2% year over year (2% in constant currencies). Company-operated sales were $4.761 billion; franchised revenue was $2.322 billion.
- Q2 operating income and profit: Operating income was $2.198 billion, up 2% (3% constant currency); net income was $1.397 billion, up 4%; diluted EPS was $1.38, up 5% (6% constant currency).
- Six-month revenue and profit: Revenue was $13.689 billion, up 2%; operating income was $4.147 billion, up 1%; net income was $2.667 billion, up 2%; diluted EPS was $2.64, up 4% (5% constant currency).
- Margins: Company-operated restaurant margin was 17.7% in Q2 versus 18.2% a year earlier, and 17.0% for six months versus 17.9%. Franchised margin was 82.8% in Q2 versus 83.2%, and 82.3% for six months versus 82.8%. Six-month combined operating margin was 30.3% versus 30.6%.
- Cash flow, six months: Operating cash flow was $3.197 billion; capital expenditures were $1.234 billion; cash used in investing was $1.081 billion and cash used in financing was $2.094 billion. Cash and equivalents ended at $2.278 billion, down $57.7 million from year-end.
- Debt and balance sheet: Long-term debt was $13.370 billion at June 30, down from $13.633 billion at December 31, 2012. Estimated fair value of debt was $14.5 billion. Current assets were $4.632 billion and current liabilities $2.805 billion.
- Shareholder returns: Six-month dividends paid totaled $1.543 billion; 8.1 million shares were repurchased for $786 million. Dividends declared were $0.77 per share for Q2.
Changes and operating trends
- Global comparable sales rose 1.0% in Q2 but were flat for six months; comparable guest counts fell 1.2% for six months. Q2 comparable sales were +1.0% in the U.S., -0.1% in Europe and -0.3% in APMEA.
- Franchised margin dollars increased, while company-operated margin dollars declined 1% in Q2 and 4% for six months. Management attributed pressure to soft comparable sales and higher labor, occupancy, commodity and other operating costs.
- Europe’s operating income grew 5% in both Q2 and the six-month period. U.S. operating income was flat in Q2 and down 2% for six months; APMEA was down 1% in both reported periods.
- Foreign currency translation reduced diluted EPS by $0.02 for both Q2 and the six-month period. Six-month other comprehensive loss was $767.2 million, principally reflecting foreign currency translation losses.
Outlook, risks and notable items
- Management expected challenging conditions to continue through the rest of 2013: weak or declining informal-eating-out markets, limited pricing power, cost pressures and heightened competition. It said results for the remainder of the year would remain challenged.
- 2013 outlook included expected net restaurant additions contributing about 2.5 percentage points to systemwide sales growth in constant currencies; U.S. commodity basket costs up 1.5%–2.5% and Europe up 2.0%–3.0%; SG&A relatively flat in constant currencies; interest expense up approximately 2%–3%; and an effective tax rate of 31%–33%.
- Expected 2013 capital expenditures were about $3.1 billion. The company planned 1,500–1,550 restaurant openings, including 1,200–1,250 net traditional additions, and expected to reimage more than 1,600 restaurants.
- The six-month 2013 effective tax rate included a nearly $50 million benefit from retroactive tax benefits under the American Taxpayer Relief Act of 2012.
- Key risks included weak consumer demand and pricing sensitivity, competitive and commodity-cost pressures, foreign exchange exposure, food safety and brand perception, franchisee execution, labor and regulatory costs, litigation, supply interruptions, and information-system or data-security failures. The filing reported no material change in previously disclosed legal proceedings or market-risk disclosures.
- The board declared a $0.77-per-share quarterly dividend on July 18, payable September 17, 2013. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether comparable-sales and guest-count trends improve, particularly in Europe and APMEA, and whether company-operated margins stabilize.
- Whether the stated 2013 commodity, capital spending, restaurant-opening, tax-rate and other outlook assumptions are achieved.
- How foreign currency movements and the reported translation losses affect earnings, debt and shareholders’ equity.
- Whether cash generation adequately supports capital investment, dividends and repurchases while maintaining debt and liquidity levels.
- The size and timing of any effects from the nearly $50 million tax benefit and other tax, legal, food-safety or regulatory contingencies.