Business context and reporting period
McDonald’s Corporation’s unaudited Form 10-Q covers the quarter ended March 31, 2013, compared with the quarter ended March 31, 2012. The company franchises and operates restaurants; at quarter-end it had 34,565 restaurants in 119 countries, including 27,970 franchised or licensed and 6,595 company-operated.
Key financial results
Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Total revenue | $6,605.3 | $6,546.6; up 1% reported and in constant currencies |
| Operating income | $1,949.5 | $1,964.6; down 1% reported, flat in constant currencies |
| Operating margin | 29.5% | 30.0% |
| Net income | $1,270.2 | $1,266.7; essentially flat reported, up 1% in constant currencies |
| Diluted EPS | $1.26 | $1.23; up 2% reported and 3% in constant currencies |
| Cash provided by operations | $1,686.9 | $1,633.5 |
| Capital expenditures | $634.2 | $588.4 |
| Cash and equivalents | $1,869.3 at March 31 | $2,336.1 at December 31, 2012 |
| Long-term debt | $12,797.9 at March 31 | $13,632.5 at December 31, 2012 |
Company-operated restaurant margin was 16.2%, down from 17.5%; franchised restaurant margin was 81.7%, down from 82.3%. Current assets were $4,191.2 million and current liabilities were $3,017.1 million at March 31. Debt obligations had an estimated fair value of $14.6 billion versus a carrying amount of $12.8 billion.
Material changes and operating performance
- Global comparable sales fell 1.0% and comparable guest counts fell 1.9%; the prior-year quarter had strong comparables and an additional leap-year day.
- Comparable sales declined 1.2% in the U.S., 1.1% in Europe and 3.3% in APMEA. Revenue growth reflected restaurant expansion, partly offset by weaker comparable sales.
- Company-operated margin dollars decreased 8% (7% in constant currencies), as lower sales and higher labor, commodity, occupancy and other costs pressured margins. Franchised margin dollars rose 1% reported (2% constant currency).
- Operating income decreased 3% in the U.S., increased 1% in Europe, and decreased 1% in APMEA on a reported basis. Europe’s constant-currency increase reflected higher franchised margins and restaurant-sale gains.
- Operating cash flow exceeded capital expenditures by approximately $1.1 billion. Investing activities used $524.5 million and financing activities used $1,568.9 million; cash declined $466.8 million during the quarter.
- The company paid dividends of $772.2 million, or $0.77 per share, and repurchased 3.7 million shares for $354.3 million. Lower average interest rates partly offset higher average debt balances.
Outlook, commentary and risks
Management did not provide specific EPS guidance. It expected net restaurant additions to contribute about 2.5 percentage points to 2013 Systemwide sales growth in constant currencies. Full-year 2013 expectations included U.S. commodity-basket cost growth of 1.5%–2.5%, Europe growth of 2.5%–3.5%, SG&A growth of about 2%–3% in constant currencies, interest expense growth of about 3%–4%, and an effective tax rate of 31%–33%.
Management forecast 2013 capital expenditures of about $3.2 billion, 1,500–1,600 restaurant openings (including licensed markets), and net additions of 1,200–1,300 traditional restaurants. More than 1,600 restaurants were expected to be reimaged. It cautioned that challenging economic conditions, flat or contracting informal eating-out markets, consumer price sensitivity and cost pressures could continue to weigh on sales and margins through 2013.
Key risks include consumer demand and competitive conditions; food, labor and occupancy costs; foreign exchange and interest-rate movements; execution of menu, value, service, reimaging and expansion initiatives; franchisee performance; supply-chain, food-safety and product risks; and evolving regulatory, tax, labor, nutritional, privacy and litigation matters. The company reported no material change in market-risk disclosures or legal-proceedings disclosures from its 2012 Form 10-K. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Unusual or notable items: the Q1 effective tax rate was 30.1%, including a benefit of nearly $50 million from the retroactive impact of tax provisions enacted in 2012. Other operating income included $52.7 million of gains on restaurant sales, primarily in Australia and China. Foreign currency translation reduced diluted EPS by $0.01 and contributed to a $402.6 million other comprehensive loss, primarily from translation adjustments. In April, the company agreed to issue $500 million of 30-year U.S. dollar bonds, expected to settle in early May.
Important facts for investors to verify
- Whether comparable sales and guest counts recover, particularly in the U.S., Europe, Japan and China, and whether expansion offsets weak same-store trends.
- Whether margin pressure from labor, commodities, occupancy and value initiatives persists, and how planned restaurant openings and reimaging affect returns.
- Whether operating cash flow continues to cover capital spending, dividends and repurchases while debt and cash balances change.
- The assumptions behind management’s commodity, SG&A, interest, tax, capital-spending and restaurant-growth outlook, and the sensitivity to currency movements.
- The sustainability of reported earnings growth given the tax benefit, restaurant-sale gains, lower weighted-average share count and foreign-currency effects.