10-QPeriod: Q3 FY2014

MCDONALDS CORP Quarterly Report for Q3 Ended Sep 30, 2014

Filed November 3, 2014For Securities:MCD

Summary

McDonald's Corporation reported a challenging third quarter and first nine months of 2014, with consolidated revenues declining 5% and 1% respectively (4% and 0% in constant currencies). This was primarily driven by a 3.3% decrease in global comparable sales for the quarter, impacted by negative guest traffic across major segments and a significant supplier issue in China. Net income for the quarter fell 30% to $1.07 billion, or $1.09 per diluted share, down from $1.52 billion ($1.52 per share) in the prior year period. The company highlighted that excluding the impact of a $0.26 per share increase in tax reserves, $0.15 per share from the supplier issue, and $0.01 per share from temporary store closures in Russia and Ukraine, earnings per share for the quarter would have been relatively flat year-over-year. Significant headwinds include ongoing competitive activity in the U.S., consumer confidence issues in Europe, and the lingering effects of the food safety incident in APMEA. Despite the top-line pressures and a notable decrease in operating income (down 14% for the quarter), McDonald's continued its commitment to returning capital to shareholders. The company returned $4.6 billion year-to-date through dividends and share repurchases, in line with its $18-$20 billion three-year cash return target. The quarterly cash dividend was increased by 5% to $0.85 per share. Management noted that pressures on operating performance are expected to persist into the fourth quarter, with an estimated $0.07-$0.10 per share impact from the supplier issue on diluted earnings per share.

Financial Highlights

50 data points
Beta

Revenue

$6.99B

Net Income

$1.07B

15.3% Net Margin

EPS (Diluted)

$1.09

Total Assets

$36.02B

Cash & Equivalents

$2.83B

Free Cash Flow

$1.17B

Financial Statements
Beta
Revenue$6.99B
SG&A Expenses$575.80M
Operating Expenses$4.91B
Operating Income$2.07B
Interest Expense$149.30M
Net Income$1.07B
EPS (Basic)$1.09
EPS (Diluted)$1.09
Shares Outstanding (Basic)978.70M
Shares Outstanding (Diluted)983.80M

Key Highlights

  • 1Consolidated revenues decreased by 5% to $7.0 billion for the quarter and 1% to $20.9 billion for the first nine months of 2014, reflecting challenges in comparable sales and currency impacts.
  • 2Global comparable sales declined by 3.3% in the third quarter and 1.0% for the first nine months, with negative guest traffic across all major segments.
  • 3Net income decreased significantly by 30% to $1.07 billion for the quarter and 13% to $3.66 billion for the first nine months, primarily impacted by a supplier issue in China and increased tax reserves.
  • 4Diluted earnings per share (EPS) fell to $1.09 for the quarter (down from $1.52) and $3.69 for the nine months (down from $4.16).
  • 5The company reported a substantial 14% decrease in operating income for the quarter, largely due to the supplier issue and soft operating performance in the U.S. and Europe.
  • 6McDonald's returned $4.6 billion to shareholders year-to-date through dividends and share repurchases, demonstrating a continued commitment to capital return.
  • 7The quarterly cash dividend was raised by 5% to $0.85 per share, signaling confidence in future cash flows despite current headwinds.

Frequently Asked Questions

The primary drivers were a decrease in global comparable sales, negatively impacted by reduced guest traffic across key markets, and a significant food supplier issue in China which affected results in the APMEA segment. Additionally, higher tax reserves related to foreign tax matters and temporary store closures in Russia and Ukraine contributed to the decline in net income.

In the U.S., McDonald's is focusing on organizational agility, revamping its marketing approach with a focus on food quality and transparency, and simplifying the menu. In Europe, efforts are underway to build guest traffic through value offerings, core favorites, and beverage initiatives, alongside continued investment in reimaging and technology.

McDonald's is committed to returning capital to shareholders and has returned $4.6 billion year-to-date through dividends and share repurchases. This is part of a larger $18-$20 billion, three-year cash return target. The company also announced a 5% increase in its quarterly cash dividend to $0.85 per share.

The company estimates that the supplier issue will have an impact of $0.07-$0.10 per share on diluted earnings per share for the fourth quarter. Management expects it will take at least 6-9 more months for business in the affected APMEA markets to return to a normalized level.