McDonald’s Corporation — Q1 2010 Form 10-Q
Reporting period: First quarter ended March 31, 2010; unaudited results compared with the quarter ended March 31, 2009. McDonald’s operated and franchised 32,488 restaurants in 117 countries at quarter-end.
Financial performance
- Revenue: $5.61 billion, up 10% reported and 4% excluding currency translation. Company-operated sales were $3.80 billion; franchised revenue was $1.81 billion.
- Profit: Operating income was $1.67 billion, up 20% reported and 13% in constant currencies. Net income was $1.09 billion, up 11%; diluted EPS was $1.00, up 15% from $0.87. EPS included a $0.05 favorable currency impact.
- Margins: Combined operating margin increased to 29.8% from 27.6%. Company-operated restaurant margin rose to 18.2% of sales from 16.2%; franchised margin was 81.2% versus 81.4%.
- Cash flow and investment: Operating cash flow was $1.42 billion, versus $1.13 billion. Capital expenditures were $401.8 million; management said operating cash flow exceeded capital expenditures by $1.0 billion. Investing activities used $390.4 million and financing activities used $808.4 million.
- Liquidity and debt: Cash and equivalents were $2.01 billion, up from $1.80 billion at year-end 2009. Current assets were $3.47 billion and current liabilities $2.57 billion. Debt was $10.5 billion, down from $10.6 billion; its estimated fair value was $11.3 billion.
- Shareholder returns: The quarterly dividend was $0.55 per share, up from $0.50. The company repurchased 6.7 million shares for $427.1 million during the quarter.
Changes and operating drivers
- Comparable sales increased 4.2% globally and comparable guest counts rose 3.3%. Regional comparable sales were up 1.5% in the U.S., 5.2% in Europe, and 5.7% in APMEA.
- Europe and APMEA operating income increased 23% and 27%, respectively, as reported; growth in constant currencies was 14% and 9%. U.S. operating income increased 12%.
- Foreign currency translation added $334.9 million to reported revenue and $87.6 million to operating income. Refranchising supported franchised margins but reduced consolidated revenue as company-operated sales shifted to royalty and rent revenue.
- Company-operated food and paper costs fell to 32.9% of sales from 34.7%; total company-operated expenses declined to 81.8% from 83.8% of sales.
Outlook, risks, and unusual items
- The company did not provide specific EPS guidance. It expected net restaurant additions to contribute nearly 2 percentage points to 2010 Systemwide sales growth in constant currencies.
- For 2010, management expected commodity basket costs to decrease 2–3% in the U.S. and slightly in Europe; SG&A to be relatively flat in constant currencies; interest expense to decrease slightly; and the effective tax rate to be approximately 29–31%.
- Planned 2010 capital expenditures were approximately $2.4 billion, including reimaging more than 2,000 existing restaurants and opening about 1,000 restaurants. Expected net additions were about 325, reflecting planned Japan closures.
- McDonald’s Japan, a 50%-owned affiliate, planned to close approximately 430 restaurants by mid-2011. The quarter included $30.0 million of after-tax impairment charges related to the closures.
- Q1 2009 included a $76.5 million pretax gain on the Redbox investment sale, or $0.04 per share after tax; there was no comparable gain in Q1 2010.
- Management highlighted risks including competition and value-driven pricing pressure, uncertain economic conditions, food safety and supply-chain disruption, commodity and labor costs, foreign-exchange exposure, regulation and litigation, and execution of the Plan to Win. A 10% move in the Euro, British Pound, Australian Dollar, and Canadian Dollar together was estimated to change annual diluted EPS by about $0.17–$0.19.
- No material changes to previously disclosed legal proceedings or market-risk disclosures were reported. The company said no subsequent events required recognition or disclosure.
Important facts for investors to verify
- Whether comparable-sales momentum and operating-margin improvements persist, particularly as currency effects change.
- Progress and financial impact of the Japan restaurant closures and related impairment charges.
- Delivery against 2010 commodity, capital expenditure, restaurant opening, and net-addition expectations.
- How continued refranchising affects reported revenue, margins, cash generation, and franchisee performance.
- Foreign-currency sensitivity and the company’s debt, dividend, and share-repurchase priorities.