How much of McDonald's growth came from outside the United States?

Most of it. Sales outside the U.S. rose 27% to $14.0 billion in 1995, versus a 6% increase in U.S. sales to $15.9 billion. Outside-U.S. operations generated 54% of total operating income in 1995, and the Europe/Africa/Middle East segment was the largest contributor, with Germany, England, and France producing 83% of its operating income.

Are restaurant margins deteriorating?

Company-operated margins declined in 1995, to 19.2% of sales from 19.8% in 1994. The decline was driven by higher food, occupancy, and payroll costs in the U.S., where Company-operated margins fell to 17.7%. Management attributed the pressure to a higher average hourly wage, staffing investments to improve customer satisfaction, and an intentional strategy to reinvest margin dollars in value pricing. Franchised margins, which are more stable, remained about 82%.

What is the outlook for expansion and earnings?

Management plans to add 2,500 to 3,200 restaurants annually in 1996 and 1997, with about two-thirds outside the U.S. It guided to a 1996 effective tax rate of 32.5% to 33.5%, down from 34.2%. The filing also notes that a $16 million pre-tax impairment charge related to Mexico restaurant sites will be recorded upon adoption of SFAS 121 in early 1996.

How is McDonald's financed and how strong is its balance sheet?

Total debt was $4.8 billion at year-end 1995, with 67% at fixed rates and a weighted average interest rate of 7.9%. Total debt represented 38% of total capitalization. Cash from operations of $2.3 billion covered capital expenditures for the fifth straight year, though cash remaining after capex was only $233 million. The company had $1.3 billion in unused credit lines and ratings of Aa2 (Moody's), AA (S&P), and AA+ (Duff & Phelps).

What returns are shareholders receiving?

Shareholders received a dividend of $.26 per share in 1995, up from $.23, and the company has increased its dividend every year. The stock price rose from $29 1/4 to $45 1/8 during 1995, and the stock traded as high as $48. The company repurchased $314.5 million of stock in 1995 and announced a plan in January 1996 to buy back $2.2 billion over three years. Return on average common equity was 19.9%.

MCD 10-K FY1995 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 28, 1996. Cited figures are marked; the original filing is the authoritative source.

McDonald's reported a strong 1995 with systemwide sales of $29.9 billion^a (up 15%), total revenues of $9.8 billion (up 18%), operating income of $2.6 billion (up 16%), and net income of $1.43 billion (up 17%), or $1.97 per share.

Growth was driven by an accelerated expansion program, with 2,430 restaurants added systemwide (bringing the total to 18,380), positive comparable sales in the U.S., and stronger foreign currencies. Operations outside the U.S. now generate 47%^b of systemwide sales and 54% of operating income, with Europe, Asia/Pacific, and Latin America contributing the bulk of international growth. The filing also highlights several watch points.

Company-operated restaurant margins declined to 19.2% of sales from 19.8%, with U.S. company margins falling to 17.7% on higher payroll costs. U.S. operating income grew only 3%, and the Company flagged intense U.S. competition and continued margin pressure. Total debt rose to $4.8 billion^c, the current ratio was a deliberately low 0.53, and 1995 results included a $60 million unrealized loss on the Discovery Zone investment.

Management guided to 2,500 to 3,200 annual restaurant additions in 1996 and 1997 and a 1996 effective tax rate of 32.5% to 33.5%, and it authorized $2.2 billion^d of share repurchases over three years. From a shareholder perspective, the company continued to return capital through a dividend increase (to $.26 per share from $.23), buybacks, and a strong return on average common equity of 19.9%.

Credit ratings remained strong (Aa2/AA/AA+), and cash from operations of $2.3 billion exceeded capital expenditures for the fifth consecutive year. The key investor questions are whether international growth can offset U.S. margin pressure and whether the aggressive expansion pace can sustain returns.

02—Key points

Key Highlights

Systemwide sales rose 15% to $29.9 billion, with 47% now generated outside the U.S. (up from 43% in 1994)
Net income increased 17% to $1.43 billion, and EPS rose 17% to $1.97 per share
Record expansion: 2,430 restaurants added in 1995, bringing the system to 18,380 restaurants across 89 countries
U.S. Company-operated restaurant margins fell to 17.7% of sales (from 19.0%) on higher payroll costs, while international Company-operated margins declined to 20.2%
Return on average common equity improved to 19.9% and return on average assets to 17.9%
Balance sheet is leveraged but strong: total debt of $4.8 billion, 38% debt-to-capitalization, and AA-range credit ratings
Shareholder returns continued through a 23% dividend increase to $.26 per share and a new $2.2 billion three-year share repurchase plan

03—Questions

Frequently Asked Questions

How much of McDonald's growth came from outside the United States?
Most of it. Sales outside the U.S. rose 27% to $14.0 billion in 1995, versus a 6% increase in U.S. sales to $15.9 billion. Outside-U.S. operations generated 54% of total operating income in 1995, and the Europe/Africa/Middle East segment was the largest contributor, with Germany, England, and France producing 83% of its operating income.
Are restaurant margins deteriorating?
Company-operated margins declined in 1995, to 19.2% of sales from 19.8% in 1994. The decline was driven by higher food, occupancy, and payroll costs in the U.S., where Company-operated margins fell to 17.7%. Management attributed the pressure to a higher average hourly wage, staffing investments to improve customer satisfaction, and an intentional strategy to reinvest margin dollars in value pricing. Franchised margins, which are more stable, remained about 82%.
What is the outlook for expansion and earnings?
Management plans to add 2,500 to 3,200 restaurants annually in 1996 and 1997, with about two-thirds outside the U.S. It guided to a 1996 effective tax rate of 32.5% to 33.5%, down from 34.2%. The filing also notes that a $16 million pre-tax impairment charge related to Mexico restaurant sites will be recorded upon adoption of SFAS 121 in early 1996.
How is McDonald's financed and how strong is its balance sheet?
Total debt was $4.8 billion at year-end 1995, with 67% at fixed rates and a weighted average interest rate of 7.9%. Total debt represented 38% of total capitalization. Cash from operations of $2.3 billion covered capital expenditures for the fifth straight year, though cash remaining after capex was only $233 million. The company had $1.3 billion in unused credit lines and ratings of Aa2 (Moody's), AA (S&P), and AA+ (Duff & Phelps).
What returns are shareholders receiving?
Shareholders received a dividend of $.26 per share in 1995, up from $.23, and the company has increased its dividend every year. The stock price rose from $29 1/4 to $45 1/8 during 1995, and the stock traded as high as $48. The company repurchased $314.5 million of stock in 1995 and announced a plan in January 1996 to buy back $2.2 billion over three years. Return on average common equity was 19.9%.

04—Continue

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