01—Abstract
Summary
Summary of the 10-K filed March 28, 2000. Cited figures are marked; the original filing is the authoritative source.
McDonald's (MCD) reported a strong 1999 for shareholders, with reported net income rising 26% to $1.95 billiona ($1.39 diluted EPS) and operating income up 20% to $3.32 billion.
Those reported figures are flattered by 1998 comparisons: 1998 included $322 millionb of pre-tax Made For You and home office special charges. Excluding those items, net income grew about 10% (13% in constant currencies) and operating income about 8% (10% in constant currencies). Systemwide sales grew 7% to $38.5 billion, and the company added 1,790 restaurants, bringing the system to 26,806 across 118 countries.
The balance sheet and cash flow profile remain strong. Cash from operations rose to $3.0 billionc and free cash flow (operating cash less capex) increased 29% to $1.14 billion. Management continues to prioritize share repurchases funded by free cash flow, buying back $933 million of stock in 1999 and sponsoring a $3.5 billion program through 2001.
Return on average common equity improved to 20.8%. Debt was roughly $7.3 billiond, and the company maintained Aa2/AA ratings. The key risks are geographic and operational.
Latin America was weak, with operating income down 29% as Brazil's currency devaluation and economic difficulties hit results, and Europe was pressured by Russia. Franchised margins slipped as the company leased more sites, which raises occupancy costs. Management guides to 1,800 to 1,900 new McDonald's restaurants in 2000, a 2000 effective tax rate of about 32%, and pending acquisition of Boston Market brand assets expected to close in mid-2000.
02—Key points
Key Highlights
- Reported net income rose 26% to $1.95 billion and diluted EPS rose to $1.39, but excluding 1998 one-time charges, net income grew 10% and diluted EPS grew 10%.
- Systemwide sales reached $38.5 billion, up 7% (8% in constant currencies), driven by expansion and positive comparable sales in the U.S. and Europe.
- Free cash flow increased 29% to $1.14 billion, and cash from operations reached $3.0 billion.
- Company repurchased $933 million of its stock in 1999 and has a $3.5 billion repurchase plan through 2001; it also sold put options that received $97.5 million in premiums.
- The system grew to 26,806 restaurants in 118 countries after adding 1,790 restaurants in 1999; 2000 guidance calls for 1,800 to 1,900 new McDonald's restaurants.
- Latin America was a weak spot, with operating income down 29% and constant-currency operating income down 8%, due to Brazil's devaluation and economic conditions.
- Return on average common equity improved to 20.8% in 1999 from 19.5% in 1998 (excluding one-time items).
03—Questions
Frequently Asked Questions
Did McDonald's earnings growth in 1999 reflect underlying business strength?
Partly. Reported net income rose 26%, but 1998 included $322 million of pre-tax charges (Made For You costs and a home office special charge), which depressed the base. Excluding those items, net income grew 10% and diluted EPS grew 10% (13% in constant currencies), which is a more representative view of underlying growth.
How healthy is McDonald's cash generation and capital allocation?
Cash from operations rose to $3.0 billion and free cash flow increased 29% to $1.14 billion. The company funds share repurchases from free cash flow and debt capacity, and returned capital through $933 million of buybacks and $265 million of dividends. The dividend was modest, with the company moving to annual payments starting in 2000.
What are the main risks to McDonald's growth outlook?
Key risks include weak economic conditions and currency devaluation in Latin America, which saw operating income fall 29%; economic difficulties in Russia, which weighed on Europe; and rising occupancy costs as more sites are leased, which pressured franchised margins (80.3% of revenues, down from 80.8%). Management also cited competition and changing consumer preferences as ongoing risks.
What does the company expect for 2000 and beyond?
Management expects to add 1,800 to 1,900 McDonald's restaurants in 2000, with emphasis on traditional locations outside the U.S. It expects about $100 million in annual SG&A savings from the home office productivity initiative, a 2000 effective tax rate of about 32%, and Other Brands openings of 160 to 180. The Boston Market asset acquisition is expected to close in mid-2000.
How is the company's balance sheet positioned?
Total assets were $21.0 billion and shareholders' equity was $9.6 billion at year-end 1999. Total debt was about $7.3 billion, with 70% at fixed rates and a weighted-average interest rate of 5.9%. Liquidity included $1.5 billion in committed credit lines and $1.1 billion available under shelf registrations, and the company's debt carried Aa2/AA/AA+ ratings from the three agencies.
04—Continue