McDonald’s Corporation — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2009. Unaudited consolidated results; amounts below are U.S. dollars unless noted. McDonald’s operated or franchised 32,158 restaurants in 118 countries at quarter-end.
Financial performance
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Total revenue | $5,647.2 million | $6,075.3 million | $10,724.6 million | $11,690.1 million |
| Operating income | $1,681.5 million | $1,654.2 million | $3,081.9 million | $3,117.0 million |
| Net income | $1,093.7 million | $1,190.5 million | $2,073.2 million | $2,136.6 million |
| Diluted EPS | $0.98 | $1.04 | $1.85 | $1.85 |
| Cash provided by operations | $1,420.1 million | $1,262.0 million | $2,550.8 million | $2,740.5 million |
- Q2 revenue declined 7% reported but increased 4% excluding currency translation; six-month revenue declined 8% reported but increased 3% in constant currencies. Company-operated sales fell 10% in Q2 and 12% in the first half, while franchised revenue grew 1% in Q2 and was essentially flat for six months.
- Operating income rose 2% in Q2 and fell 1% for six months on a reported basis; in constant currencies it rose 11% and 8%, respectively. Six-month combined operating margin was 28.7%, versus 26.7% in 2008 (a 140-basis-point increase in constant currencies).
- Q2 company-operated restaurant margin was 17.9%, versus 17.7%; franchised margin was 82.3%, unchanged. For six months, company-operated margin was 17.1%, unchanged, and franchised margin was 81.9%, unchanged.
- Q2 diluted EPS included an estimated $0.09 negative currency impact and $0.01 benefit from the Redbox sale. Six-month EPS included a $0.17 currency impact and $0.05 Redbox benefit. Both 2008 comparison periods included $0.10 per share from the Pret A Manger sale.
- Six-month operating cash flow exceeded capital expenditures of $848.1 million by approximately $1.7 billion. Cash and equivalents were $2,160.6 million at June 30, up from $2,063.4 million at year-end 2008.
- Debt obligations were approximately $11.0 billion, up from $10.2 billion at December 31, 2008, primarily reflecting $744 million of net issuances used in part to pre-fund second-half maturities. Debt fair value was estimated at $11.6 billion. Current assets were $3,597.0 million and current liabilities $2,843.5 million.
- Six-month cash returns to shareholders totaled $2.7 billion: $1.605 billion in share repurchases and $1.101 billion in dividends. The quarterly dividend declared was $0.50 per share.
Material changes and business drivers
- Global comparable sales increased 4.8% in Q2 and 4.6% for six months. Q2 increases were 3.5% in the U.S., 6.9% in Europe and 4.4% in APMEA. Management attributed performance to the Plan to Win, including menu, value, convenience and customer-service initiatives.
- Currency translation was a substantial headwind: $643.4 million on Q2 revenue and $1,285.8 million for six-month revenue; diluted EPS effects were negative $0.09 and $0.17, respectively.
- Refranchising shifted sales from company-operated to franchised restaurants. Franchised locations represented 80% of systemwide restaurants, versus 79% a year earlier. Management said this reduces consolidated revenue and company-operated margin dollars while increasing franchised margin dollars.
- Reported net income fell 8% in Q2 and 3% for six months. Q2 operating income nevertheless increased, while six-month operating income was slightly lower. Comparability was affected by currency and prior-year investment-sale gains.
Outlook, risks and unusual items
- 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; approximately 650 net additions were expected for the year.
- Management forecast the 2009 U.S. and Europe commodity basket to rise 3%–3.5%; full-year SG&A to decline in constant currencies; interest expense to decrease 5%–10%; and an effective tax rate of approximately 29%–31%. Capital expenditures were expected to be approximately $2.1 billion.
- At then-current exchange rates, management expected currency translation to reduce full-year 2009 revenue by $1.6 billion and EPS by $0.21. It targeted $15–$17 billion in shareholder returns for 2007–2009 and said it was likely to finish in the upper half of the range.
- The Redbox divestiture generated a $94.3 million pretax gain for the first half, including $17.8 million in Q2; approximately $9 million of deferred consideration remained receivable. In 2008, the Pret A Manger sale generated a $160.1 million pretax gain.
- Key risks cited include recession-related pressure on consumer spending, competition, commodity and labor costs, foreign-exchange exposure, food safety and brand reputation, regulation and litigation, franchisee performance, and execution of the refranchising and growth strategies.
- Allergen-related litigation over alleged disclosures about wheat, gluten or milk derivatives in fries and hash browns remained pending in individual cases; a federal court denied class certification in May 2009. One identified Florida case had been resolved. The company said it intended to defend the claims vigorously.
- Management reported no material change in market-risk disclosures, effective disclosure controls as of June 30, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether comparable-sales momentum and constant-currency operating growth persisted as the recession and currency headwinds continued.
- How refranchising affects reported revenue, operating margins, cash generation and the company’s ownership mix.
- Whether commodity-cost, tax, capital-spending, restaurant-addition and shareholder-return expectations were achieved.
- Actual foreign-exchange effects compared with management’s full-year estimates, and the sensitivity of results to major currencies.
- Debt maturities, financing needs, and progress in collecting the remaining Redbox consideration; also monitor pending litigation and other risks described in the filing.