McDonald’s Corporation — Q3 2011 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2011, compared with the corresponding 2010 periods. McDonald’s operated or franchised 33,144 restaurants in 119 countries; 26,751 were franchised or licensed and 6,393 company-operated.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $7.17B | $6.30B | $20.18B | $17.86B |
| Operating income | $2.39B | $2.10B | $6.41B | $5.62B |
| Net income | $1.51B | $1.39B | $4.13B | $3.70B |
| Diluted EPS | $1.45 | $1.29 | $3.94 | $3.42 |
| Cash provided by operations | $2.17B | $1.94B | $5.37B | $4.62B |
| Capital expenditures | $692M | $523M | $1.79B | $1.32B |
- Revenue increased 14% in Q3 and 13% year to date; excluding currency translation, growth was 8% in both periods. Operating income rose 14% reported and 8%/9% in constant currency, respectively.
- Net income increased 9% in Q3 and 11% year to date. Diluted EPS increased 12% and 15%; constant-currency increases were 6% and 10%. Share repurchases reduced diluted weighted-average shares by about 3%.
- Global comparable sales rose 5.0% in Q3 and 4.9% year to date; comparable guest counts rose 2.6% and 3.4%. Q3 comparable sales: U.S. 4.4%, Europe 4.9%, APMEA 3.4%.
- Company-operated restaurant margin was 20.0% in Q3 versus 21.0% a year earlier, and 19.0% year to date versus 19.8%. Higher commodity costs were a key pressure. Franchised margin was 83.7% in Q3 versus 83.3%, and 83.0% year to date versus 82.4%.
- Nine-month combined operating margin was 31.8%, versus 31.4%. Interest expense increased 8% in Q3 and 10% year to date, reflecting higher average debt and stronger foreign currencies, partly offset by lower rates.
Cash, debt and liquidity
- Nine-month operating cash flow exceeded capital expenditures by $3.57B. Cash used for investing was $1.67B; cash used for financing was $3.62B, including $2.99B of share repurchases and $1.89B of dividends.
- Cash and equivalents were $2.39B at September 30, 2011, essentially unchanged from December 31, 2010. Total debt obligations were $12.5B, up from $11.5B; estimated fair value of debt was $14.3B.
- Current assets were $4.42B and current liabilities $5.08B. Current liabilities included $816M of short-term borrowings and $725M of current long-term debt maturities. The filing explains that a $1.2B debt reclassification used at year-end 2010 was no longer available because the supporting credit line would expire within 12 months. The line was unused at September 30; the company expected to replace it in Q4 2011.
Outlook, commentary and risks
- The company provided no specific EPS guidance. It expected 2011 net restaurant additions to contribute about 1.5–2 percentage points to Systemwide sales growth in constant currencies. A one-point comparable-sales increase in the U.S. or Europe was estimated to add about $0.03 to annual diluted EPS, assuming no cost-structure change.
- Full-year 2011 commodity basket costs were expected to rise 4.5%–5% in both the U.S. and Europe. SG&A was expected to decline about 2% in constant currencies; interest expense was expected to increase 8%–10%. The expected effective tax rate was 31%–32%.
- 2011 capital expenditures were projected at about $2.6B, with 1,100–1,200 restaurant openings and approximately 800 net additions. More than half of reinvestment spending was expected to support reimaging at least 2,200 locations. Management expected approximately $6B of total cash returns to shareholders in 2011; the Q4 dividend was raised 15% to $0.70 per share.
- Management cited inflationary commodity and labor costs, weak economic conditions and consumer price sensitivity, euro-zone sovereign-debt uncertainty, currency and interest-rate movements, food safety and supply-chain risks, competition, and legal/regulatory complexity. Foreign currency translation benefited Q3 diluted EPS by $0.08 and nine-month EPS by $0.19; the four currencies highlighted by management could together change annual diluted EPS by about $0.20 if each moved 10% in the same direction.
- Q3 foreign-currency translation loss in other comprehensive income was $992M, substantially reducing Q3 comprehensive income to $511M despite net income of $1.51B. The filing reported no material nonfinancial fair-value adjustments, no subsequent events requiring disclosure, and no material changes to previously disclosed legal proceedings or market-risk disclosures. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether comparable-sales and guest-count momentum persists, particularly in APMEA, where Q3 comparable-sales growth slowed from 8.1% in the prior-year quarter to 3.4%.
- Whether commodity and labor inflation continues to pressure company-operated margins, and whether planned pricing can offset those costs without weakening traffic.
- How much reported growth depends on currency translation: constant-currency revenue growth was 8%, versus 14% reported in Q3.
- Progress on refinancing or replacing the unused credit line due to expire within 12 months, and the effect of debt levels and rates on interest expense and liquidity.
- Whether the stated full-year cost, capital-spending, restaurant-opening, tax-rate and shareholder-return expectations were achieved; interim results do not necessarily indicate full-year results.