Business context and reporting period
McDonald’s Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2012, compared with the same 2011 periods. The company franchises and operates restaurants; at quarter-end it had 33,735 restaurants in 119 countries, including 27,263 franchised or licensed and 6,472 company-operated.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $6,915.9 million | $6,905.4 million | $13,462.5 million | $13,017.0 million |
| Operating income | $2,155.0 million | $2,189.1 million | $4,119.6 million | $4,015.0 million |
| Net income | $1,347.0 million | $1,410.2 million | $2,613.7 million | $2,619.2 million |
| Diluted EPS | $1.32 | $1.35 | $2.54 | $2.49 |
| Cash provided by operations | $1,483.1 million | $1,642.8 million | $3,116.6 million | $3,195.9 million |
| Capital expenditures | $712.0 million | $590.4 million | $1,300.4 million | $1,099.1 million |
Quarterly revenue was flat as reported, but up 5% excluding currency translation; six-month revenue rose 3% as reported and 7% excluding currency. Operating income declined 2% in Q2 but increased 3% over six months, as reported. Foreign currency translation reduced diluted EPS by $0.07 in Q2 and $0.10 for the six months. Six-month combined operating margin was 30.6%, versus 30.8% a year earlier. Company-operated restaurant margin was 18.2% in Q2, down from 19.0%; franchised margin was 83.2%, versus 83.1%.
Quarterly comparable sales increased 3.7% globally; six-month comparable sales rose 5.4%, while comparable guest counts increased 3.0%. Six-month sales growth was positive across the U.S. (6.1%), Europe (4.4%) and APMEA (3.2%). Reported Q2 net income fell 4%, while six-month net income was approximately flat. Higher food and paper, labor and occupancy costs pressured company-operated margins; management also cited higher SG&A and taxes.
At June 30, cash and equivalents were $2,484.6 million and current assets totaled $4,500.1 million, against current liabilities of $3,622.3 million. Total debt obligations were $13.6 billion, up from $12.5 billion at December 31, 2011, primarily due to net debt issuance. Debt carrying value was $13.6 billion; estimated fair value was $15.3 billion. For the six months, operating cash flow exceeded capital expenditures by $1.8 billion. Cash used in investing was $1.3 billion and cash used in financing was $1.6 billion.
The company repurchased 17.5 million shares for $1.7 billion and paid $1.4 billion in dividends during the first half. The quarterly dividend declared was $0.70 per share, versus $0.61 a year earlier. Shareholders’ equity was $14.0 billion at June 30, compared with $14.4 billion at year-end.
Outlook, commentary and risks
- Management did not provide specific EPS guidance. It expected 2012 constant-currency operating income growth to be at or somewhat below its long-term 6%–7% target, citing heightened global economic challenges.
- 2012 outlook included approximately $2.9 billion of capital expenditures, more than 1,300 restaurant openings and about 900 net additions. Management expected restaurant additions to contribute approximately 2 percentage points to systemwide sales growth in constant currencies.
- Management forecast 2012 commodity-basket cost increases of 3.5%–4.5% in the U.S. and 2.5%–3.5% in Europe, with less pressure expected in the second half. Full-year SG&A was expected to rise about 6% in constant currencies; interest expense was expected to increase 4%–6%, and the effective tax rate was expected to be 31%–33%.
- Management highlighted foreign-exchange exposure: a 10% move in the Euro, British Pound, Australian Dollar and Canadian Dollar in the same direction could change annual diluted EPS by about $0.24. Currency translation also weighed on reported results in the first half.
- Principal risks include weak economic conditions and consumer price sensitivity, competitive pressure, commodity and labor cost inflation, foreign-exchange and interest-rate movements, food safety and reputational concerns, franchisee execution, technology and cybersecurity risks, and legal or regulatory changes. Management said these factors could continue to pressure margins.
- No material changes were reported to the prior 10-K legal-proceedings or market-risk disclosures. No subsequent events requiring recognition or disclosure were identified. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
- After quarter-end, the board approved a new $10 billion share-repurchase authorization effective August 1, 2012, replacing the prior program.
Important facts for investors to verify
- Whether comparable-sales and guest-count momentum continues, particularly given Q2 deceleration in APMEA and increased consumer focus on value.
- Whether commodity, labor and occupancy costs continue to outpace pricing and sales growth, and how this affects company-operated margins.
- Whether reported performance remains materially affected by currency translation and higher debt-related interest expense.
- Execution of the stated 2012 growth, capital-spending and share-repurchase plans, including the post-quarter authorization change.
- How operating cash flow, debt levels, dividends and repurchases affect financial flexibility over the remainder of the year.