10-QPeriod: Q1 FY2016

MCDONALDS CORP Quarterly Report for Q1 Ended Mar 31, 2016

Filed May 6, 2016For Securities:MCD

Summary

McDonald's Corporation's first quarter 2016 report showcases a company demonstrating positive momentum driven by its turnaround plan. The company reported a significant increase in diluted earnings per share (EPS) of 46% (51% in constant currencies), reaching $1.23. This growth was bolstered by a global comparable sales increase of 6.2%, with particularly strong performance in the U.S. and International Lead segments. The company continues its strategic focus on refranchising and returning capital to shareholders, with over $20 billion returned towards its $30 billion three-year target by the end of the first quarter. Despite a slight overall decrease in consolidated revenues due to ongoing refranchising efforts, the underlying business performance, when excluding currency fluctuations, showed a 3% increase. The company saw improved operating income, up 28% (33% in constant currencies), benefiting from higher franchised margins and a favorable comparison to prior-year strategic charges. Management is optimistic about the continued execution of its strategy to be a modern, progressive burger company, focusing on operational growth, brand excitement, and enhanced financial value.

Financial Highlights

48 data points
Beta

Revenue

$5.90B

Net Income

$1.12B

19.1% Net Margin

EPS (Diluted)

$1.25

Total Assets

$33.80B

Cash & Equivalents

$3.31B

Free Cash Flow

$1.35B

Financial Statements
Beta
Revenue$5.90B
SG&A Expenses$578.00M
Operating Expenses$4.12B
Operating Income$1.78B
Interest Expense$218.30M
Net Income$1.12B
EPS (Basic)$1.27
EPS (Diluted)$1.25
Shares Outstanding (Basic)888.90M
Shares Outstanding (Diluted)896.30M

Key Highlights

  • 1Diluted Earnings Per Share (EPS) increased by 46% to $1.23 (51% in constant currencies) compared to the prior year, indicating strong bottom-line improvement.
  • 2Global comparable sales grew by 6.2%, driven by positive performance across all segments, reflecting successful operational strategies.
  • 3Consolidated revenues saw a 1% decrease but increased by 3% in constant currencies, primarily due to the ongoing refranchising strategy which shifts revenue recognition from company-operated sales to franchised revenues.
  • 4Operating income significantly increased by 28% (33% in constant currencies) to $1,780.3 million, partly due to a favorable comparison with prior year strategic charges.
  • 5The company returned $4.5 billion to shareholders in the first quarter through share repurchases and dividends, bringing the cumulative return to $20.3 billion towards its $30 billion three-year target.
  • 6Significant treasury stock purchases were made, with $4.3 billion used in the quarter, contributing to the reduction in weighted average shares outstanding and boosting EPS.
  • 7The company is actively refranchising, aiming for a long-term goal of being 95% franchised, which impacts revenue mix but is expected to create more stable cash flows.

Frequently Asked Questions

The significant increase in Net Income (35%) and Diluted Earnings Per Share (46%) is driven by several factors including strong global comparable sales growth (6.2%), higher franchised margin dollars across all segments, improved company-operated margins in some segments, gains on sales of restaurant businesses, and importantly, a favorable comparison to strategic charges incurred in the prior year's first quarter. Excluding these strategic charges, EPS in constant currencies increased by 26%.

Consolidated revenues decreased by 1% (though increased by 3% in constant currencies) primarily due to the company's strategic decision to accelerate refranchising. As more restaurants are refranchised, company-operated sales revenue decreases, and the company recognizes franchised revenue (rent and royalties) instead, which is generally a smaller portion of the total sales. This shift is part of a long-term strategy to optimize the ownership mix and generate more stable cash flows.

McDonald's is actively returning capital to shareholders. In the first quarter of 2016, they returned $4.5 billion through share repurchases and dividends. This brings the cumulative return to approximately $20.3 billion against their target of $30 billion for the three-year period ending 2016. The company plans to continue these returns, partly funded by issuing additional debt to optimize its capital structure.

The company is exposed to foreign currency risks, particularly with currencies like the Euro, British Pound, Australian Dollar, and Canadian Dollar. For the first quarter of 2016, the strengthening U.S. dollar had a negative impact on reported results, reducing diluted EPS by $0.04. McDonald's mitigates these risks by purchasing goods and services in local currencies, financing in local currencies, and using derivative instruments such as foreign currency forwards, options, and cross-currency swaps to hedge certain foreign-denominated cash flows and net investments. Management also analyzes results in constant currencies to better represent underlying business trends.