McDonald’s Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited consolidated results; comparisons are with the corresponding 2020 periods. McDonald’s operated or franchised 39,676 restaurants, with 93% franchised.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $6.20bn (+14%) | $5.42bn | $17.21bn (+24%) | $13.89bn |
| Operating income | $2.99bn (+18%) | $2.53bn | $7.96bn (+54%) | $5.18bn |
| Net income | $2.15bn (+22%) | $1.76bn | $5.91bn (+76%) | $3.35bn |
| Diluted EPS | $2.86 (+22%) | $2.35 | $7.86 (+76%) | $4.47 |
| Cash provided by operations | $2.62bn | $2.94bn | $6.48bn | $4.27bn |
| Capital expenditures | $0.50bn | $0.39bn | $1.35bn | $1.18bn |
- Sales and margins: Global comparable sales rose 12.7% in Q3 and 18.8% year to date. Systemwide sales increased 16% and 24%, respectively (14% and 20% excluding currency translation). Nine-month operating margin was 46.2%, versus 37.3% a year earlier; management cited sales-driven restaurant margin growth and other operating income.
- Cash flow: Nine-month free cash flow, calculated as operating cash flow less capital expenditures, was approximately $5.12bn, versus $3.09bn in 2020. Operating cash flow benefited from stronger results and working-capital changes, partly offset by higher income-tax payments.
- Debt and liquidity: At September 30, cash and equivalents were $4.31bn; current assets were $6.80bn and current liabilities $5.10bn. Current and long-term debt totaled approximately $35.13bn. Shareholders’ equity remained in deficit at $5.68bn. The fair value of debt was estimated at $39.7bn, compared with a carrying amount of $35.1bn.
- Capital returns: The company paid $2.89bn in dividends in the first nine months and resumed share repurchases in September. The board raised the quarterly dividend 7% to $1.38 per share, payable in December 2021.
Material changes and notable items
- Reported nine-month net income and EPS growth included a $364m tax benefit from remeasurement of deferred taxes following a U.K. statutory tax-rate change, and $339m of net strategic gains, primarily from sales of McDonald’s Japan stock. Excluding these items, management reported nine-month non-GAAP EPS of $7.05, up 62% (57% in constant currencies).
- The Japan stock sales reduced McDonald’s ownership to 35%. The company reported $106m of related net strategic gains in Q3 and $339m year to date.
- Reported results also benefited from favorable currency translation: $0.04 per diluted share in Q3 and $0.23 year to date.
- In October 2021, after the quarter-end, the company issued approximately $1.2bn of euro-denominated bonds to replace upcoming debt maturities.
Outlook, management commentary and risks
- For 2021, management expected constant-currency Systemwide sales growth in the high teens, with net restaurant unit expansion contributing about 1%; operating margin in the low-to-mid 40% range; SG&A at approximately 2.4% of Systemwide sales; and free-cash-flow conversion above 90%.
- Expected 2021 capital expenditures were approximately $2.3bn. The company expected about 1,500 restaurant openings and roughly 800 net additions, with approximately 325 U.S. closures, mostly lower-volume Walmart locations.
- Management attributed sales growth to strong average checks, menu price increases, promotions, digital-channel growth and fewer closures in some international markets as COVID-19 restrictions eased. The U.S. loyalty program launched in Q3; management reported 21 million enrolled members since its July launch.
- COVID-19 restrictions and resurgences remained a source of operating uncertainty. Disclosed risks also include labor availability and costs, supply-chain disruption, commodity inflation, franchisee financial health, competition, regulatory and legal complexity, cyber and privacy risks, foreign-exchange movements and execution of the company’s strategy.
- Management said disclosure controls were effective as of September 30, 2021. A multi-year finance and technology transformation was underway; the filing said it was not prompted by an identified control deficiency.
Investor verification points
- Assess underlying earnings growth after adjusting for the Japan-related strategic gains, U.K. deferred-tax benefit and currency effects.
- Verify whether comparable-sales momentum, pricing and digital growth persist, and monitor COVID-19, labor and supply-chain impacts across markets.
- Track cash generation against capital spending, dividend increases, resumed buybacks and debt maturities; consider the company’s substantial debt and shareholders’ deficit.
- Compare actual 2021 sales, margin, capital-expenditure and restaurant-expansion results with management’s stated outlook.
- Review the financial and operational effects of the Japan ownership reduction and the October 2021 bond issuance.