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MCDONALDS CORP Annual Report, Year Ended Dec 31, 1998

Filing Date
Filed March 31, 1999
Period End
December 31, 1998
Security
MCD
In the record · 2016–202610-K1110-Q328-K136

MCD filed 11 annual reports (10-K), 32 quarterly reports (10-Q) and 136 current reports (8-K) between 2016 and 2026.

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01—Abstract

Summary

Summary of the 10-K filed March 31, 1999. Cited figures are marked; the original filing is the authoritative source.

McDonald's reported 1998 Systemwide sales of $35.98 billiona (up 7%) and total revenues of $12.42 billion (up 9%), with 1,668 net restaurant additions bringing the system to 24,800 restaurants across 114 countries.

Excluding $322 millionb of pre-tax charges (Made For You costs of $162 million and a $160 million home office productivity special charge), operating income grew 10% to $3.08 billion and net income rose 8% to $1.77 billion, or $1.30 per share. Reported operating income fell 2% to $2.76 billion and reported net income declined 6% to $1.55 billion ($1.14 per share, $1.10 diluted), after the one-time charges. Constant-currency growth was notably stronger than reported results, as weaker Asian and Latin American currencies, particularly the Japanese yen, weighed on reported figures.

Cash generation strengthened, with cash from operations rising 13% to $2.77 billionc and free cash flow reaching $887 million, the eighth consecutive year of positive free cash flow and the first year operations outside the U.S. generated positive free cash flow. Management is returning cash to shareholders through buybacks, repurchasing 38 million shares for about $1.2 billion in 1998 and announcing a plan to buy back $3.5 billion of stock by year-end 2001. Total debt rose to $7.0 billion, with 67% now fixed-rate, and the company maintained strong credit ratings (Aa2/AA/AA+).

Investors should weigh the growth in unit expansion and cash flow against risks in international markets, notably Russia, Southeast Asia, Japan, and Brazil, where economic turmoil is expected to weigh on 1999 results. The company guided to about 1,750 new restaurants in 1999, a 1999 effective tax rate of 32.5% to 33.5%, and expects roughly $100 milliond in annual SG&A savings from the home office initiative beginning in 2000.

02—Key points

Key Highlights

  1. Systemwide sales rose 7% to $35.98 billion, and total revenues rose 9% to $12.42 billion in 1998.
  2. Excluding $322 million in pre-tax Made For You costs and special charges, operating income grew 10% to $3.08 billion and EPS rose 11% to $1.30; reported net income fell 6% to $1.55 billion ($1.10 diluted EPS).
  3. Free cash flow reached $887 million (up from $331 million), the eighth consecutive year of positive free cash flow, and operations outside the U.S. generated positive free cash flow for the first time.
  4. The system grew by 1,668 net restaurants to 24,800 across 114 countries; the company plans about 1,750 additions in 1999, mostly traditional restaurants outside the U.S.
  5. Share repurchases totaled about $1.2 billion in 1998 (38 million shares), with a new $3.5 billion buyback program authorized through year-end 2001.
  6. Franchising model remains central: franchisees and affiliates operate 78% of restaurants, and franchised margins were 80.8% of applicable revenues.
  7. Key risks include weak Asian currencies (notably the yen), Russia's economic difficulties, and Brazil's economic turmoil, which management expects to weigh on 1999 results.

03—Questions

Frequently Asked Questions

  1. How did McDonald's underlying performance compare with reported results in 1998?

    Excluding $322 million in pre-tax Made For You costs and the $160 million home office special charge, operating income rose 10% to $3.08 billion and net income rose 8% to $1.77 billion. Reported operating income fell 2% and reported net income fell 6% because of those charges and weaker foreign currencies. In constant currencies, underlying operating income grew 12%.

  2. Is McDonald's generating enough cash to fund growth and shareholder returns?

    Yes. Cash from operations rose to $2.77 billion, covering capital expenditures of $1.88 billion and leaving $887 million of free cash flow. The company used that cash, along with borrowings, to repurchase about $1.2 billion of stock and pay $240 million in dividends in 1998.

  3. What is the company's exposure to debt and interest rate changes?

    Total debt rose to $7.0 billion, and 67% is now fixed-rate, up from 49% in 1997, with a weighted-average interest rate of 6.6%. Debt is largely denominated in foreign currencies (75%) to hedge foreign assets. Management stated that a one-point rise in rates or a 10% adverse currency move would not materially affect results.

  4. What are the main risks and expected headwinds for 1999?

    Management highlighted economic difficulties in Russia, expected to continue in 1999, Brazil's economic turmoil, which is expected to hurt Latin American results, and Southeast Asian weakness. Weaker currencies, particularly the yen, reduced reported sales and revenue growth. The company also flagged that Made For You costs will continue into 1999 (about $30 million remaining) and that the 1999 effective tax rate is expected to be 32.5% to 33.5%.

04—Continue

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