01—Abstract
Summary
Summary of the 10-K filed March 28, 1997. Cited figures are marked; the original filing is the authoritative source.
McDonald's reported 1996 Systemwide sales of $31.8 billiona (up 6% in U.S. dollars, but roughly 8% on a constant-currency basis) and total revenues of $10.7 billion (up 9%).
Net income rose 10% to $1.57 billionb, or $2.21 per share, though operating income grew only about 1% to $2.63 billion because of a $72 million special charge to strengthen the U.S. business (closing roughly 115 low-volume satellite restaurants) and a $16 million SFAS 121 impairment charge in Mexico. Excluding these charges, operating income would have risen about 5%. The company's franchise-driven model, with rent and service fees of roughly 12.5% of sales and 20-year contracts, provides stable, predictable revenue, and 1996 was the sixth consecutive year that operating cash flow exceeded capital expenditures.
Growth is increasingly international. Outside the U.S. accounted for 49%c of Systemwide sales, 57% of total revenues, and 59% of operating income, and the company added 2,642 restaurants in 1996, bringing the system to 21,022 locations in 101 countries. U.S. comparable sales were negative in 1996, reflecting a highly competitive domestic environment, while weaker foreign currencies, particularly the Japanese yen, dampened reported results.
Management plans 2,400 to 2,800 openings in 1997, with more emphasis on full-menu traditional restaurants and international markets. Balance sheet leverage edged up as total debt rose to $5.5 billiond and the company continued buybacks ($605 million in 1996, under a $2.0 billion program through 1998).
Shareholders' equity grew 11% to $8.7 billion, and the company maintains strong credit ratings (Aa2/AA). Management guided to a 1997 effective tax rate of 32.5% to 33.5%, versus 30.1% in 1996, which benefited from a $50 million one-time international tax benefit.
02—Key points
Key Highlights
- Net income up 10% to $1.57 billion ($2.21 per share), with operating income up only about 1% to $2.63 billion after a $72 million special charge and a $16 million SFAS 121 charge.
- Systemwide sales rose 6% to $31.8 billion; U.S. comparable sales were negative in 1996, while international sales grew 10% (reduced by weaker currencies).
- Total revenues grew 9% to $10.7 billion, supported by a franchise model that generates stable rent and service fees of about 12.5% of sales.
- Expansion accelerated: 2,642 restaurants added in 1996 (21,022 total in 101 countries), with 2,400-2,800 planned for 1997.
- International operations are now the majority of sales and profit growth drivers: 59% of operating income and 63% of Company-operated sales came from outside the U.S.
- Strong cash generation: operating cash flow of $2.46 billion covered capital expenditures of $2.38 billion for the sixth straight year, while $605 million was spent on share repurchases.
- Effective tax rate fell to 30.1% from 34.2%, helped by a $50 million international tax benefit; the 1997 rate is guided to 32.5%-33.5%.
03—Questions
Frequently Asked Questions
Why did operating income grow much more slowly than net income in 1996?
Operating income rose only about 1% to $2.63 billion because of a $72 million special charge tied to closing about 115 low-volume U.S. satellite restaurants and restructuring, plus a $16 million SFAS 121 impairment charge for restaurant sites in Mexico. Net income grew 10% because of a $50 million one-time international tax benefit and lower tax rates, and because the company reduced its share count through buybacks. Excluding the charges, operating income would have increased about 5%.
How is McDonald's performing in the U.S. versus internationally?
The U.S. is mature and under pressure: U.S. comparable sales were negative in 1996 amid a competitive environment, and U.S. operating income fell 9% (3% excluding the special charge). Outside the U.S., sales grew 10% in reported terms and operating income rose about 10%, driven by expansion in Asia/Pacific, Europe and Latin America, though weaker currencies such as the yen and Deutsche Mark reduced reported growth.
How does McDonald's earn its revenue, and how stable is it?
Most restaurants are franchised. Franchisees invest their own capital and pay McDonald's rent and service fees, typically about 12.5% of sales for new U.S. franchise arrangements, with specified minimum payments under 20-year agreements. This provides a predictable revenue stream. Company-operated restaurants generate direct sales, which made up $7.6 billion of the $10.7 billion in total revenues in 1996 (the rest came from franchise and affiliate fees).
Is McDonald's leverage and shareholder return policy sustainable?
Total debt rose to $5.5 billion from $4.8 billion, but the company's debt-to-capitalization ratio was about 39% and its debt is rated Aa2/AA. Cash from operations exceeded capital spending in 1996, and management intends to fund expansion with internal cash flow. The company repurchased $605 million of stock in 1996 under a $2.0 billion program running through 1998 and has raised its dividend every year, though the dividend payout remains modest at $0.29 per share.
What are the main risks to McDonald's outlook for 1997?
Key risks include continued weak U.S. comparable sales and rising cost pressures in payroll, occupancy and promotion; currency volatility, notably the weak Japanese yen and European currencies; slow economic growth in France, Germany and Canada; and the execution risk of 2,400 to 2,800 new restaurant openings in increasingly smaller, lower-volume markets. The company also faces regulatory and legal exposure, though management does not believe any claims will be materially adverse.
04—Continue