McDonald’s Corporation — Q2 2019 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the quarter and six months ended June 30, 2019, compared with the same 2018 periods. McDonald’s operates and franchises restaurants; 35,461 of 38,108 systemwide restaurants were franchised at quarter-end. The company reported under U.S., International Operated Markets, and International Developmental Licensed Markets & Corporate segments.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $5.341 billion | $5.354 billion | $10.297 billion | $10.493 billion |
| Operating income | $2.274 billion | $2.262 billion | $4.368 billion | $4.405 billion |
| Net income | $1.517 billion | $1.496 billion | $2.845 billion | $2.872 billion |
| Diluted EPS | $1.97 | $1.90 | $3.69 | $3.62 |
| Cash provided by operations | $1.926 billion | $1.339 billion | $3.946 billion | $2.984 billion |
- Global comparable sales rose 6.5% in Q2 and 6.0% for the first half. Systemwide sales grew 8% and 7%, respectively, in constant currencies.
- Reported revenue was essentially flat in Q2 and down 2% for the first half; in constant currencies, it increased 3% and 2%. Refranchising reduced reported company-operated sales while lifting franchised revenue.
- Q2 operating income rose 1% reported and 4% in constant currencies; first-half operating income fell 1% reported but rose 4% in constant currencies. Reported diluted EPS increased 4% in Q2 and 2% for the first half.
- Franchised restaurant margins were $2.396 billion in Q2, up 5% reported, while company-operated margins were $433 million, down 7%. First-half figures were $4.578 billion, up 4%, and $788 million, down 9%, respectively. Company-operated margin rates were 18.1% for Q2 and 17.0% for the first half.
- First-half capital expenditures were $1.113 billion. Operating cash flow exceeded capital expenditures by approximately $2.8 billion, as reported by management.
- At June 30, cash and equivalents were $1.135 billion and debt was $32.654 billion, versus $866 million and $31.075 billion at December 31, 2018. Shareholders’ equity was a deficit of $6.809 billion.
- Quarterly dividends declared were $1.16 per share, compared with $1.01 a year earlier. The company repurchased 5.45 million shares for approximately $1.1 billion in Q2.
Material changes and unusual items
- McDonald’s adopted the new lease accounting standard on January 1, 2019, recording a $12.5 billion right-of-use asset and lease liability. This noncash adoption materially increased reported assets and liabilities; management said it did not affect cash flows.
- Reported results included $78 million of pretax strategic charges in 2019, primarily a $99.4 million impairment related to acquiring its joint-venture partner’s interest in the India Delhi market, partly offset by $19.5 million of gains on former headquarters property sales. Q2 2018 included $92 million of pretax restructuring charges.
- First-half 2019 included $47 million of additional income-tax costs related to Tax Act regulations; first-half 2018 included $52 million of Tax Act-related costs. Foreign currency translation reduced diluted EPS by $0.07 in Q2 and $0.16 in the first half of 2019.
- Dynamic Yield was acquired in April 2019. Cash used for investing activities increased to $1.671 billion in the first half, with management citing strategic acquisitions, including Dynamic Yield and a real estate entity.
Outlook, management commentary, and risks
- Management expects 2019 net restaurant additions to contribute approximately 1 percentage point to systemwide sales growth in constant currencies. It expects about 800 net restaurant additions and roughly 1,200 openings globally.
- 2019 capital expenditures are forecast at approximately $2.3 billion; full-year shareholder returns are expected to be about $9 billion, completing a three-year target of approximately $25 billion.
- Management expects 2019 commodity basket costs to rise about 2%–3% in the U.S. and 2.5% in the Big Five international markets. SG&A is expected to be relatively flat in constant currencies.
- Full-year interest expense is expected to increase 15%–17%, reflecting higher average debt and interest on certain euro-denominated deposits. The expected effective tax rate is 24%–26% and capital spending plans include about $1.5 billion for the U.S., much of it for restaurant modernization.
- Management did not provide specific comparable-sales guidance. It estimated that a 10% simultaneous move in the euro, British pound, Australian dollar, and Canadian dollar would change annual diluted EPS by about $0.35.
- Key disclosed risks include execution and returns on modernization, digital and delivery investments; competition and changes in customer preferences; franchisee financial health and cooperation; labor and commodity costs; food safety and supply-chain disruption; foreign exchange, economic and regulatory developments; cybersecurity and privacy; litigation; and access to funding and credit-rating changes.
- The filing reported no material change in legal-proceedings disclosures and no subsequent events requiring recognition or disclosure. Management concluded disclosure controls were effective as of June 30, 2019.
Important facts for investors to verify
- Whether comparable-sales and systemwide-sales momentum continues, and whether it translates into sustained franchised margins and earnings.
- Progress, spending, and realized returns from Experience of the Future, Dynamic Yield, digital ordering, and delivery initiatives.
- Debt, interest expense, currency exposure, and the effects of lease liabilities after adoption of the new lease standard.
- Whether the forecast commodity, SG&A, capital expenditure, restaurant-opening, tax-rate, and shareholder-return expectations remain achievable.
- The effects of strategic charges, property-sale gains, tax items, and currency translation when assessing underlying year-over-year performance.