McDonald’s Corporation — Q3 2009 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and nine months ended September 30, 2009, compared with the same 2008 periods. McDonald’s operated or franchised 32,278 restaurants in 118 countries; 80% were franchised, versus 79% a year earlier. Amounts below are U.S. dollars in millions, except per-share data.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Total revenue | $6,046.7 | $6,267.3 | $16,771.3 | $17,957.4 |
| Operating income | $1,932.8 | $1,823.7 | $5,014.7 | $4,940.7 |
| Net income | $1,261.0 | $1,191.3 | $3,334.2 | $3,327.9 |
| Diluted EPS | $1.15 | $1.05 | $3.00 | $2.89 |
| Cash from operations | $1,822.2 | $1,706.4 | $4,373.0 | $4,446.9 |
| Capital expenditures | $470.8 | $534.9 | $1,318.9 | $1,422.0 |
- Reported revenue declined 4% in Q3 and 7% year to date; excluding currency translation, it rose 2% and 3%, respectively. Company-operated sales fell while franchised revenue grew, reflecting currency effects and the ongoing shift to franchising.
- Operating income increased 6% in Q3 and 1% year to date as reported; constant-currency growth was 11% and 9%. Nine-month combined operating margin was 29.9%, versus 27.5% in 2008 (up 180 basis points in constant currencies).
- Net income rose 6% in Q3 and was approximately flat year to date. Diluted EPS increased 10% and 4%, respectively. Foreign-currency translation reduced EPS by $0.05 in Q3 and $0.22 year to date. The Redbox sale contributed $0.05 per share after tax to nine-month 2009 results; the 2008 Pret A Manger sale contributed $0.09 per share.
- Comparable sales increased 3.8% globally in Q3 and 4.3% year to date. Q3 growth was 2.5% in the U.S., 5.8% in Europe and 2.2% in APMEA.
- At September 30, cash and equivalents were $2,201.0; total current assets were $3,602.8 and current liabilities $3,540.4. Long-term debt was $10,657.9, with $424.3 in current maturities; total debt obligations were reported at $11.1 billion, up from $10.2 billion at December 31, 2008. Estimated debt fair value was $11.9 billion.
- Nine-month operating cash flow exceeded capital expenditures by $3.1 billion. Cash used in investing was $1,112.8 and cash used in financing was $3,213.7. Cash increased $137.6 from year-end to $2,201.0.
Material changes and capital allocation
- Foreign-currency translation weighed materially on reported results, particularly in Europe. Nine-month revenue translation impact was negative $1,661.7; operating income impact was negative $388.4.
- Company-operated restaurant count fell to 6,303 from 6,639 a year earlier, while total franchised restaurants rose to 25,975 from 25,038. Management said approximately 970 restaurants had been refranchised in 2008 and the first nine months of 2009, toward a 2008–2010 target of 1,000–1,500.
- Q3 share repurchases were $758.6 for 13.6 million shares; year-to-date repurchases were $2.4 billion. Dividends paid year to date totaled $1.6 billion. A $0.55-per-share Q4 dividend was declared, 10% above Q3. The company expected to finish 2009 near the high end of its three-year $15–$17 billion shareholder-return target.
- In October 2009, the company repaid approximately $400 million of maturing debt. The board replaced its prior $10 billion repurchase authorization with a new $10 billion program effective October 1, 2009.
Outlook, commentary and risks
- Management did not provide specific EPS guidance. It expected 2009 net restaurant additions to contribute nearly 2 percentage points to systemwide sales growth in constant currencies.
- Full-year 2009 expectations included commodity basket cost increases of about 2% in the U.S. and 3% in Europe; capital expenditures of approximately $2.1 billion; and an effective tax rate of approximately 29%–31%.
- Management expected 2009 interest expense to decrease about 10% from 2008, while interest income was expected to decrease about 75%. At then-current exchange rates, currency translation was expected to reduce full-year EPS by about $0.16, but benefit Q4 revenue by about $300 million and EPS by $0.06.
- Management attributed performance to positive comparable sales across geographic segments, value offerings, menu initiatives and operating execution. It cited U.S. Angus Third Pounders and McCafé, strong European results, and growth in Australia and China. Economic conditions, value-focused consumers, commodity and labor costs, and exchange rates remained important uncertainties.
- Disclosed risks include recession-related consumer weakness and pricing pressure; competition; food safety, nutrition and brand perceptions; supply interruptions; labor and regulatory costs; litigation; currency and interest-rate movements; developing-market risks; severe weather and other disruptions; and execution and franchisee risks associated with refranchising.
- The company reported allergen-related litigation alleging misrepresentation of ingredients in fries and hash browns. A motion for class certification was denied in May 2009; one case involving three individual plaintiffs remained pending in Illinois state court. The company said it intended to defend the claims.
- No material nonrecurring fair-value adjustments were required. Management said adoption of the accounting guidance discussed in the filing did not materially affect the financial statements; adoption of new variable-interest-entity guidance was planned for January 1, 2010.
Important facts for investors to verify
- Whether constant-currency sales and operating-income trends persist, and how much reported growth is affected by exchange rates and refranchising.
- Cash generation, capital spending, debt maturities and the sustainability of elevated dividends and share repurchases.
- Progress toward the refranchising and restaurant-opening targets, including the resulting change in revenue mix and margins.
- Actual commodity, labor, tax and foreign-exchange outcomes versus management’s 2009 expectations.
- Developments in allergen litigation and other food-safety, regulatory, franchisee and brand-related risks.