McDonald’s Corporation — Q1 2016 Form 10-Q
Reporting period: Quarter ended March 31, 2016; unaudited results compared with the quarter ended March 31, 2015. McDonald’s operated or franchised 36,467 restaurants in 120 countries at quarter-end and seeks to become 95% franchised over the long term.
Financial performance
| Metric | Q1 2016 | Change vs. Q1 2015 |
|---|---|---|
| Total revenue | $5.904 billion | Down 1% reported; up 3% in constant currencies |
| Operating income | $1.780 billion | Up 28% reported; up 33% in constant currencies |
| Operating margin | 30.2% | 23.3% in prior-year quarter |
| Net income | $1.099 billion | Up 35% |
| Diluted EPS | $1.23 | Up 46%; up 51% in constant currencies |
| Cash provided by operations | $1.719 billion | $1.700 billion in prior-year quarter |
| Capital expenditures | $392 million | $393 million in prior-year quarter |
| Cash and equivalents | $3.310 billion at March 31 | $7.686 billion at December 31, 2015 |
| Debt obligations | $23.4 billion at March 31 | $24.1 billion at December 31, 2015 |
Company-operated restaurant margin was 15.4% of sales, versus 14.3% a year earlier; franchised margin was 80.7%, versus 80.3%. Interest expense rose 48% to $218 million, primarily due to higher average debt balances. The effective tax rate was 30.3%, compared with 35.3%.
Cash used in investing activities was $256 million. Cash used in financing activities was $5.953 billion, including $4.312 billion of treasury stock purchases and $781 million of dividends. The company repurchased 31.3 million shares for $3.7 billion and declared dividends of $0.89 per share. Current assets were $5.052 billion and current liabilities were $2.859 billion.
Material changes and management commentary
- Global comparable sales rose 6.2%, including the benefit of one additional day from leap year; comparable guest counts increased 1.8%. Comparable sales increased 5.4% in the U.S., 5.2% in International Lead Markets, 3.6% in High Growth Markets, and 11.0% in Foundational Markets & Corporate.
- Franchised revenue increased 5% reported (8% in constant currencies), while company-operated sales declined 4% reported. Management noted refranchising shifts revenue from company-operated sales to franchise rent and royalty revenue.
- Reported operating income and EPS benefited from comparison with $195 million of prior-year strategic charges, including $0.17 per share. Excluding those charges, constant-currency EPS increased 26%. Currency translation reduced Q1 diluted EPS by $0.04.
- Higher franchised margins, improved performance in Japan and China, and gains on restaurant sales supported results. U.S. company-operated margins faced pressure from incremental wage and benefit investments; higher labor and occupancy costs also affected certain markets.
- Management described positive momentum across segments under its turnaround priorities: operational growth, brand excitement and financial value. It cited All Day Breakfast and McPick 2 as contributors to U.S. performance.
Outlook, risks and unusual items
- No specific EPS guidance was provided. Management expected 2016 net restaurant additions to contribute about 1 percentage point to systemwide sales growth in constant currencies.
- 2016 outlook included U.S. commodity basket costs down about 3.5%–4.5%; International Lead commodity costs relatively flat; SG&A down about 1%–2% in constant currencies, subject to stated exclusions; and an effective tax rate of 31%–33%.
- Capital expenditures were expected to be about $2.0 billion. The company expected to open about 1,000 restaurants and add approximately 500 net restaurants.
- McDonald’s targeted about $30 billion of shareholder returns for the three years ending 2016; approximately $20.3 billion had been returned through Q1, leaving about $10 billion to complete. Management expected some of the remaining amount to be debt-funded. It also expected full-year interest expense to rise about 40%–45% versus 2015.
- Long-term plans included refranchising about 4,000 restaurants through 2018 and achieving about $500 million of annual net G&A savings versus the beginning-2015 base, with most savings expected by the end of 2017. Additional strategic charges may arise from asset dispositions and restructuring.
- Key exposures include foreign exchange, competition and consumer preferences, commodity and labor costs, franchisee performance, food safety, supply-chain disruption, regulation, litigation, technology and cybersecurity, and execution of the turnaround and refranchising plans. Management said a 10% move in the Euro, British pound, Australian dollar and Canadian dollar in the same direction could change annual diluted EPS by up to $0.25.
- The quarter included a $2.7 billion accelerated share repurchase payment; final share settlement was expected between April 1 and May 13, 2016. Subsequent to quarter-end, the company issued €3.0 billion of notes in May as part of its capital-structure plans. Management reported no material changes to previously disclosed legal proceedings or market-risk disclosures.
Important facts for investors to verify
- How much of sales and earnings momentum persists after the leap-year benefit and comparison with prior-year strategic charges.
- Progress and economics of refranchising, including impacts on revenue, margins, cash flow and the 95%-franchised objective.
- Funding and completion of the shareholder-return target, debt levels, interest costs and credit-rating implications.
- Actual commodity, labor, tax and foreign-exchange outcomes versus management’s outlook and sensitivities.
- Final shares delivered under the accelerated repurchase agreement and the terms and effect of the May euro-denominated debt issuance.