01—Abstract
Summary
Summary of the 10-K filed March 29, 1995. Cited figures are marked; the original filing is the authoritative source.
McDonald's reported a strong 1994, with systemwide sales rising 10% to $25.99 billiona and total revenues up 12% to $8.32 billion.
Operating income grew 13% to $2.24 billionb and net income rose 13% to $1.22 billion, or $1.68 per share (up 16% per share, aided by share repurchases). Growth was driven by accelerated expansion, with 1,212 restaurants added (751 outside the U.S.), positive comparable sales in the U.S. from value programs such as Extra Value Meals, and stronger foreign currencies in 1994. Operations outside the U.S. now generate about 50% of revenues and operating income, and the company reported 15,205 systemwide restaurants across 79 countries at year-end.
Profitability and balance-sheet metrics remained solid. Company-operated margins improved to 19.8%c of sales and franchised margins were 82.8% of revenues. Return on average assets was 17.6% and return on average common equity was 19.4%.
Cash provided by operations rose 15% to $1.93 billiond and exceeded capital expenditures for the fourth straight year. Management kept leverage in check, with total debt at 39% of total capitalization and long-term debt down to $2.94 billion from $3.49 billion, while repurchasing about $500 million of stock in 1994 under a three-year $1.0 billion program. Investors should note several headwinds.
Mexico's economy and the December 1994 peso devaluation hurt results and are expected to weigh on 1995, Japan's affiliate remained weak, and a one-time $15 million non-cash advertising accounting charge reduced G&A. Net income was also held back by about $56 million in nonoperating losses, largely currency translation losses from Mexico and Brazil. Management guides to 1,200 to 1,500 new restaurants in 1995 and a 35.0% to 35.5% effective tax rate, and it continues to emphasize real estate ownership and franchising, which provides stable, rent-based revenue.
02—Key points
Key Highlights
- Systemwide sales rose 10% to $25,987 million, with the U.S. up 5% to $14,941 million and outside-U.S. sales up 18% to $11,046 million.
- Net income increased 13% to $1,224 million ($1.68 per share, up 16%), supported by share repurchases.
- Total revenues grew 12% to $8,321 million, and operating income rose 13% to $2,241 million.
- Expansion accelerated: 1,212 restaurants were added in 1994 (vs. 900 in 1993), bringing the system to 15,205 restaurants in 79 countries; 2026 guidance calls for 1,200 to 1,500 additions in 1995.
- Cash provided by operations rose 15% to $1,926 million and exceeded capital expenditures for the fourth consecutive year.
- Returns remained strong, with return on average assets of 17.6% and return on average common equity of 19.4%.
- Leverage fell: long-term debt declined to $2,935 million from $3,489 million, and total debt was 39% of total capitalization; the company repurchased about $500 million of stock in 1994.
03—Questions
Frequently Asked Questions
How did McDonald's perform financially in 1994?
Results were strong. Systemwide sales grew 10% to $25.99 billion, total revenues rose 12% to $8.32 billion, operating income increased 13% to $2.24 billion, and net income grew 13% to $1.22 billion, or $1.68 per share (up 16% per share on share repurchases).
What is driving growth at McDonald's?
Growth came mainly from accelerated restaurant expansion (1,212 openings in 1994), positive U.S. comparable sales from value-focused promotions such as Extra Value Meals and Happy Meals, and international growth, with sales outside the U.S. up 18%. Stronger foreign currencies in 1994 also helped, though currency translation losses in Latin America partly offset the gains.
What risks or challenges does the filing highlight?
Mexico's sluggish economy and the December 1994 peso devaluation hurt results and are expected to continue into 1995. Japan's affiliate remained weak, and the company took a one-time $15 million non-cash advertising accounting charge. Nonoperating expense of $49 million, mainly currency translation losses, reduced net income. Management also notes that the U.S. market remains highly competitive.
How strong is McDonald's balance sheet and how does it return cash to shareholders?
The balance sheet is solid, with total shareholders' equity of $6.9 billion (51% of total assets) and long-term debt reduced to $2.9 billion. Debt ratings are Aa2 (Moody's) and AA (S&P). Cash flow from operations covered capital spending, and the company repurchased about $500 million of common stock in 1994 under a three-year $1.0 billion program. Common dividends rose to $.23 per share from $.21.
What is McDonald's business model, and why does it matter to investors?
McDonald's primarily franchises its restaurants and owns or leases the underlying real estate. Franchisees invest capital in equipment and buildings and pay rent and service fees based on a percentage of sales with specified minimum payments, typically over 20-year terms. This generates stable, predictable revenue (franchised revenues were $2.53 billion in 1994) and gives the company high margins (82.8% franchised margins) with less capital at risk than company-operated restaurants.
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