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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 1-5231
McDONALD'S CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-2361282
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
McDonald's Plaza
Oak Brook, Illinois 60523
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (630) 623-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered
---------------------------------------------------------------------------------------
Common stock, $.01 par value New York Stock Exchange
Chicago Stock Exchange
8-7/8 % Debentures due 2011 New York Stock Exchange
7-3/8% Notes due 2002 New York Stock Exchange
6-3/4% Notes due 2003 New York Stock Exchange
7-3/8% Debentures due 2033 New York Stock Exchange
6-5/8% Notes due 2005 New York Stock Exchange
7.05% Debentures due 2025 New York Stock Exchange
7-1/2% Subordinated Deferrable Interest Debentures due 2036 New York Stock Exchange
7-1/2% Subordinated Deferrable Interest Debentures due 2037 New York Stock Exchange
7.31% Subordinated Deferrable Interest Debentures due 2027 New York Stock Exchange
6-3/8% Debentures due 2028 New York Stock Exchange
---------------------------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[_]
The aggregate market value of voting stock held by nonaffiliates of the
registrant is $53,373,541,566 and the number of shares of common stock
outstanding is 1,357,952,498 as of January 31, 1999 (the number of shares has
been restated to reflect the two-for-one stock split effected in March 1999).
Documents incorporated by reference. Part III of this 10-K incorporates
information by reference from the registrant's 1999 definitive proxy statement
which will be filed no later than 120 days after December 31, 1998.
- --------------------------------------------------------------------------------
Part I
ITEM 1. BUSINESS
McDonald's Corporation, the registrant, together with its subsidiaries, is
referred to herein as the "Company".
(a) GENERAL DEVELOPMENT OF BUSINESS
There have been no significant changes to the Company's corporate structure
during 1998, or material changes in the Company's method of conducting business.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Industry segment data for the years ended December 31, 1998, 1997 and 1996 is
included in Part II, Item 8, page 23 of this Form 10-K.
(c) NARRATIVE DESCRIPTION OF BUSINESS
General
The Company develops, operates, franchises and services a worldwide system of
restaurants which prepare, assemble, package and sell a limited menu of value-
priced foods. These restaurants are operated by the Company or, under the terms
of franchise arrangements, by franchisees who are independent third parties, or
by affiliates operating under joint-venture agreements between the Company and
local businesspeople.
The Company's franchising program is designed to assure consistency and
quality. The Company is selective in granting franchises and is not in the
practice of franchising to investor groups or passive investors. Under the
conventional franchise arrangement, franchisees supply capital--initially, by
purchasing equipment, signs, seating and decor, and over the long term, by
reinvesting in the business. The Company shares the investment by owning or
leasing the land and building. Beginning in 1998, the Company generally provides
franchisees in the United States the option to own new restaurant buildings.
Franchisees contribute to the Company's revenues through payment of rent and
service fees or royalties based upon a percent of sales, with specified minimum
payments. The conventional franchise arrangement typically lasts 20 years and
franchising practices are generally consistent throughout the world. Further
discussion regarding site selection is included in Part I, Item 2, page 4 of
this Form 10-K.
Training begins at the restaurant with one-on-one instruction and videotapes.
Aspiring restaurant managers progress through a development program of classes
in management and basic and intermediate operations, as well as learning
computer skills. Assistant managers are eligible to attend the advanced
operations and management class at one of the six Hamburger University (H.U.)
campuses in the U.S., Germany, England, Japan, Brazil or Australia. The
curriculum at H.U. concentrates on skills and practices essential to driving the
Company's strategies of delivering customer satisfaction and increasing market
share.
The Company's global brand is well-known. Marketing and promotional activities
are designed to nurture this brand image and differentiate the Company from
competitors by focusing on value, taste and customer satisfaction. Funding for
promotions is handled at the local restaurant level; funding for regional and
national efforts is handled through advertising cooperatives. Franchised,
Company-operated and affiliated restaurants throughout the world make voluntary
contributions to cooperatives which purchase media. Production costs for certain
advertising efforts are borne by the Company. The Company and affiliated
entities also market food products, in a few instances, under brand names
other than McDonald's well-known global brand.
Products
McDonald's restaurants offer a substantially uniform menu consisting of
hamburgers and cheeseburgers, including the Big Mac and Quarter Pounder with
Cheese, the Filet-O-Fish, several chicken sandwiches, french fries, Chicken
McNuggets, salads, milk shakes, McFlurries, sundaes and cones, pies, cookies and
soft drinks and other beverages. In addition, the restaurants sell a variety of
other products during limited promotional time periods. McDonald's restaurants
operating in the United States and certain international markets are open during
breakfast hours and offer a full or limited breakfast menu including the Egg
McMuffin and the Sausage McMuffin with Egg sandwiches, hotcakes and sausage,
three varieties of biscuit sandwiches and Apple-Bran muffins. The Company tests
new products on an ongoing basis.
The Company, its franchisees and affiliates purchase food products and
packaging from numerous independent suppliers. Quality specifications for both
raw and cooked food products are established and strictly enforced. Alternative
sources of these items are generally available. Quality assurance labs in the
U.S., Europe and the Pacific work to ensure that the Company's high standards
are consistently met. The quality assurance process involves ongoing testing and
on-site inspections of suppliers' facilities. Independently owned and operated
distribution centers distribute products and supplies to most McDonald's
restaurants. The restaurants then prepare, assemble and package these products
using specially designed production techniques and equipment to obtain uniform
standards of quality.
2
Food preparation
The Company introduced the Made For You food preparation system in 1998 and
plans to have it integrated into virtually all restaurants in the United States
and Canada by the end of 1999. Made For You is based on a just-in-time
production philosophy where each sandwich is made only when it is needed.
Through advances in equipment and technology, the new system aims to provide
customers with fresher, better-tasting food. In addition, the new system can
support future growth through product development because it can more easily
accommodate an expanded menu.
Trademarks and patents
The Company has registered trademarks and service marks, some of which,
including "McDonald's", "Ronald McDonald" and other related marks, are of
material importance to the Company's business. The Company also has certain
patents on restaurant equipment which, while valuable, are not material to its
business.
Seasonal operations
The Company does not consider its operations to be seasonal to any material
degree.
Working capital practices
Information about the Company's working capital practices is incorporated herein
by reference to Management's discussion and analysis of financial condition and
results of operations for the years ended December 31, 1998, 1997 and 1996 in
Part II, Item 7, pages 7 through 15, and the Consolidated statement of cash
flows for the years ended December 31, 1998, 1997 and 1996 in Part II, Item 8,
page 19 of this Form 10-K.
Customers
The Company's business is not dependent upon a single customer or small group of
customers.
Backlog
Company-operated restaurants have no backlog orders.
Government contracts
No material portion of the business is subject to renegotiation of profits or
termination of contracts or subcontracts at the election of the U.S. government.
Competition
McDonald's restaurants compete with international, national, regional, and local
retailers of food products. The Company competes on the basis of price,
convenience and service and by offering quality food products. The Company's
competition in the broadest perspective includes restaurants, quick-service
eating establishments, pizza parlors, coffee shops, street vendors, convenience
food stores, delicatessens, and supermarkets.
In the U.S., the quick service restaurant business consists of about 463,000
restaurants that generate nearly $247 billion in annual sales. McDonald's
accounts for about 2.7% of those restaurants and approximately 7.3% of those
sales. No reasonable estimate can be made of the number of competitors outside
the U.S.; however, the Company's business in foreign markets continues to grow.
Research and development
The Company operates research and development facilities in Illinois. While
research and development activities are important to the Company's business,
these expenditures are not material. Independent suppliers also conduct research
activities for the benefit of the McDonald's System, which includes franchisees
and suppliers, as well as McDonald's, its subsidiaries and joint ventures.
Environmental matters
The Company is not aware of any federal, state or local environmental laws or
regulations which will materially affect its earnings or competitive position,
or result in material capital expenditures; however, the Company cannot predict
the effect on its operations of possible future environmental legislation or
regulations. During 1998, there were no material capital expenditures for
environmental control facilities and no such material expenditures are
anticipated.
Number of employees
During 1998, the Company's average number of employees worldwide, including
Company-operated restaurant employees, was approximately 284,000.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
Financial information about foreign and domestic markets is incorporated herein
by reference to Management's discussion and analysis of financial condition and
results of operations in Part II, Item 7, pages 7 through 15 and Segment and
geographic information in Part II, Item 8, page 23 of this Form 10-K.
3
ITEM 2. PROPERTIES
The Company identifies and develops sites that offer convenience to customers
and provide for long-term sales and profit potential. To assess potential, the
Company analyzes traffic and walking patterns, census data, school enrollments
and other relevant data. The Company's experience and access to advanced
technology aids in evaluating this information. McDonald's generally owns or
secures long-term land and building leases for restaurant sites, which ensures
long-term tenure and helps control related costs. Restaurant profitability for
both the Company and franchisees is important; therefore, ongoing efforts are
made to control average development costs through construction and design
efficiencies, standardization and by leveraging the Company's global sourcing
system. Additional information about the Company's properties is included in
Management's discussion and analysis of financial condition and results of
operations in Part II, Item 7, pages 7 through 15 and in Financial statements
and supplementary data in Part II, Item 8, pages 17 through 28 of this Form
10-K.
ITEM 3. LEGAL PROCEEDINGS
The Company has pending a number of lawsuits which have been filed from time to
time in various jurisdictions. These lawsuits cover a broad variety of
allegations spanning the Company's entire business. The following is a brief
description of the more significant of these categories of lawsuits. In
addition, the Company is subject to various federal, state and local regulations
that impact various aspects of its business, as discussed below. The Company
does not believe that any such claims, lawsuits or regulations, will have a
material adverse effect on its financial condition or results of operations.
Franchising
A substantial number of McDonald's restaurants are franchised to independent
businesspeople operating under arrangements with the Company. In the course of
the franchise relationship, occasional disputes arise between the Company and
its franchisees relating to a broad range of subjects including, without
limitation, quality, service and cleanliness issues, contentions regarding
grants or terminations of franchises, franchisee claims for additional
franchises or rewrites of franchises, and delinquent payments.
Suppliers
The Company and its affiliates and subsidiaries do not supply, with minor
exceptions outside the United States, food, paper, or related items to any
McDonald's restaurants. The Company relies upon independent suppliers that are
required to meet and maintain the Company's standards and specifications. There
are a number of such suppliers worldwide and on occasion disputes arise between
the Company and its suppliers on a number of issues including, by way of
example, compliance with product specifications and McDonald's business
relationship with suppliers. Additionally, on occasion disputes arise on a
number of issues between the Company and individuals or entities who claim that
they should be (or should have been) granted the opportunity to supply products
or services to McDonald's restaurants.
Employees
Thousands of persons are employed by the Company and in restaurants owned and
operated by subsidiaries of the Company. In addition, thousands of persons, from
time to time, seek employment in such restaurants. In the ordinary course of
business, disputes arise regarding hiring, firing and promotion practices.
Customers
McDonald's restaurants serve a large cross-section of the public and in the
course of serving so many people, disputes arise as to products, service,
accidents and other matters typical of an extensive restaurant business such as
that of the Company.
Trademarks
McDonald's has registered trademarks and service marks, some of which are of
material importance to the Company's business. From time to time, the Company
may become involved in litigation to defend and protect its use of such
registered marks.
Government regulations
Local, state and federal governments have adopted laws and regulations involving
various aspects of the restaurant business, including, but not limited to,
franchising, health, safety, environment, zoning and employment. The Company
does not believe that it is in violation of any existing statutory or
administrative rules, but it cannot predict the effect on its operations from
the promulgation of additional requirements in the future.
4
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
All of the executive officers of McDonald's Corporation as of March 1, 1999 are
shown below. Unless otherwise indicated, each of the executive officers has been
continuously employed by the Company for at least five years and has a term of
office until the May 1999 Board of Directors' meeting.
- ----------------------------------------------------------------
Number of
Number of years in
Date of years with present
Name and office birth Company position
- ----------------------------------------------------------------
Claire H. Babrowski 7/25/57 21 *
Executive Vice President
Robert M. Beavers, Jr. 1/27/44 35 5
Senior Vice President
James R. Cantalupo 11/14/43 24 *
Vice Chairman; Chairman, and
Chief Executive Officer--
McDonald's International
Michael L. Conley 3/28/48 24 2
Executive Vice President
and Chief Financial Officer
Alan D. Feldman (1) 3/6/52 4 *
President--McDonald's USA
Jack M. Greenberg 9/28/42 17 *
President and
Chief Executive Officer
Jeffrey B. Kindler (2) 5/13/55 3 1
Executive Vice President,
Corporate General Counsel
Christopher Pieszko 12/2/55 20 1
Senior Vice President and
Corporate Controller
Michael R. Quinlan 12/9/44 35 9
Chairman of the Board
James A. Skinner 10/25/44 28 1
President--Europe Group
Stanley R. Stein 4/17/42 24 1
Executive Vice President
Fred L. Turner 1/6/33 42 9
Senior Chairman
- -----------------------------------------------------------------
*Less than one year in current position.
(1) Mr. Feldman joined the Company in 1994 as Corporate Vice President and was
promoted to Division President in 1997. He assumed his current position in
1998. Prior thereto, Mr. Feldman served as Senior Vice President and Chief
Financial Officer of Pizza Hut, Inc.
(2) Mr. Kindler joined the Company in 1996 as Senior Vice President, General
Counsel. He assumed his current position in 1997. Prior thereto, Mr.
Kindler served as Vice President, Senior Counsel of General Electric
Company.
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock trades under the symbol MCD and is listed on the
following stock exchanges in the United States: New York and Chicago. On January
26, 1999, the Board of Directors declared a two-for-one stock split of the
Company's common stock, effected in the form of a stock dividend paid on March
5, 1999. All references to the number of common shares, per common share amounts
and market prices have been restated to give retroactive effect to the stock
split for all periods presented.
The following table sets forth the common stock price range on the New York
Stock Exchange composite tape and dividends declared per common share.
1998 1997
- -------------------------------------------------------------------------
Dividend Dividend
per per
common common
Quarter High Low share High Low share
- -------------------------------------------------------------------------
First 30 1/8 22 5/16 .04125 24 11/16 21 1/4 .03750
Second 35 28 9/16 .04500 27 7/16 23 3/8 .04125
Third 37 1/2 26 3/4 .04500 27 3/8 22 7/8 .04125
Fourth 39 3/4 28 1/8 .04500 24 13/16 21 1/16 .04125
- --------------------------------------------------------------------------
Year 39 3/4 22 5/16 .17625 27 7/16 21 1/16 .16125
- --------------------------------------------------------------------------
The approximate number of shareholders of record and beneficial owners of the
Company's common stock as of January 31, 1999 was estimated to be 888,600.
Given the Company's returns on equity and assets, management believes it is
prudent to reinvest a significant portion of earnings back into the business and
use free cash flow for share repurchase. Accordingly, the common stock dividend
yield is modest. However, the Company has paid 92 consecutive quarterly
dividends on common stock through first quarter 1999 and has increased the
dividend amount at least once every year. Additional dividend increases will be
considered after reviewing returns to shareholders, profitability expectations
and financing needs.
5
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------------------------------------------------------
11-YEAR SUMMARY 1998 1997 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share data)
Systemwide sales $ 35,979 33,638 31,812 29,914 25,987 23,587 21,885
- --------------------------------------------------------------------------------------------------------------------------------
Systemwide sales by type
Operated by franchisees $ 22,330 20,863 19,969 19,123 17,146 15,756 14,474
Operated by the Company $ 8,895 8,136 7,571 6,863 5,793 5,157 5,103
Operated by affiliates $ 4,754 4,639 4,272 3,928 3,048 2,674 2,308
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 12,421 11,409 10,687 9,795 8,321 7,408 7,133
Operating income $ 2,762/(1)/ 2,808 2,633 2,601 2,241 1,984 1,862
Income before provision
for income taxes $ 2,307/(1)/ 2,407 2,251 2,169 1,887 1,676 1,448
Net income $ 1,550/(1)/ 1,642 1,573 1,427 1,224 1,083 959
- --------------------------------------------------------------------------------------------------------------------------------
Cash provided by operations $ 2,766 2,442 2,461 2,296 1,926 1,680 1,426
Capital expenditures $ 1,879 2,111 2,375 2,064 1,539 1,317 1,087
Treasury stock purchases $ 1,162 765 605 321 500 628 92
- --------------------------------------------------------------------------------------------------------------------------------
Financial position at year end
Net property and equipment $ 16,042 14,961 14,352 12,811 11,328 10,081 9,597
Total assets $ 19,784 18,242 17,386 15,415 13,592 12,035 11,681
Total debt $ 7,043 6,463 5,523 4,836 4,351 3,713 3,857
Total shareholders' equity $ 9,465 8,852 8,718 7,861 6,885 6,274 5,892
- --------------------------------------------------------------------------------------------------------------------------------
Per common share/(2)/
Net income $ 1.14/(1)/ 1.17 1.11 .99 .84 .73 .65
Net income-diluted $ 1.10/(1)/ 1.15 1.08 .97 .82 .71 .63
Dividends declared $ .18 .16 .15 .13 .12 .11 .10
Market price at year end $ 38 7/16 23 7/8 22 11/16 22 9/16 14 5/8 14 1/4 12 3/16
- --------------------------------------------------------------------------------------------------------------------------------
Systemwide restaurants at year end 24,800 23,132 21,022 18,380 15,950 14,163 13,093
Systemwide restaurants by type
Operated by franchisees 15,281 14,265 13,428 12,217 10,965 9,933 9,237
Operated by the Company 5,512 5,000 4,357 3,816 3,238 2,746 2,551
Operated by affiliates 4,007 3,867 3,237 2,347 1,747 1,484 1,305
- --------------------------------------------------------------------------------------------------------------------------------
Number of countries at year end 114 109 101 89 79 70 65
- --------------------------------------------------------------------------------------------------------------------------------
Number of shareholders at year end
(in thousands) 888.2 880.2 904.6 769.7 609.2 464.5 398.3
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
11-YEAR SUMMARY 1991 1990 1989 1988
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share data)
Systemwide sales 19,928 18,759 17,333 16,064
- --------------------------------------------------------------------------------------------------------------------------------
Systemwide sales by type
Operated by franchisees 12,959 12,017 11,219 10,424
Operated by the Company 4,908 5,019 4,601 4,196
Operated by affiliates 2,061 1,723 1,513 1,444
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues 6,695 6,640 6,066 5,521
Operating income 1,679 1,596 1,438 1,288
Income before provision
for income taxes 1,299 1,246 1,157 1,046
Net income 860 802 727 646
- --------------------------------------------------------------------------------------------------------------------------------
Cash provided by operations 1,423 1,301 1,246 1,177
Capital expenditures 1,129 1,571 1,555 1,321
Treasury stock purchases 117 157 497 136
- --------------------------------------------------------------------------------------------------------------------------------
Financial position at year end
Net property and equipment 9,559 9,047 7,758 6,800
Total assets 11,349 10,668 9,175 8,159
Total debt 4,615 4,792 4,036 3,269
Total shareholders' equity 4,835 4,182 3,550 3,413
- --------------------------------------------------------------------------------------------------------------------------------
Per common share/(2)/
Net income .59 .55 .49 .43
Net income-diluted .57 .54 .48 .42
Dividends declared .09 .09 .08 .07
Market price at year end 9 1/2 7 1/4 8 5/8 6
- --------------------------------------------------------------------------------------------------------------------------------
Systemwide restaurants at year end 12,418 11,803 11,162 10,513
Systemwide restaurants by type
Operated by franchisees 8,735 8,131 7,573 7,110
Operated by the Company 2,547 2,643 2,691 2,600
Operated by affiliates 1,136 1,029 898 803
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Number of countries at year end 59 53 51 50
- --------------------------------------------------------------------------------------------------------------------------------
Number of shareholders at year end
(in thousands) 371.7 362.6 330.5 168.6
- --------------------------------------------------------------------------------------------------------------------------------
(1) Includes $162 million of Made For You costs and $160 million special charge
related to the home office productivity initiative for a pre-tax total of
$322 million ($219 million after tax or $0.16 per share).
(2) Restated for two-for-one stock split in March 1999.
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CONSOLIDATED OPERATING RESULTS
- --------------------------------------------------------------------------------
In this report, all per share amounts have been restated to reflect the two-for-
one stock split in March 1999. In addition, all information in constant
currencies excludes the effect of foreign currency translation on reported
results, except for hyperinflationary economies, such as Russia, whose
functional currency is the U.S. dollar.
OPERATING RESULTS
- --------------------------------------------------------------------------------
1998 1997 1996
%
(Dollars in millions, Increase/ %
except per share data) Amount (decrease) Amount Increase Amount
- --------------------------------------------------------------------------------
SYSTEMWIDE SALES $35,979 7 $33,638 6 $31,812
- --------------------------------------------------------------------------------
REVENUES
Sales by Company-
operated restaurants $ 8,895 9 $ 8,136 7 $ 7,571
Revenues from
franchised and affiliated
restaurants 3,526 8 3,273 5 3,116
- --------------------------------------------------------------------------------
TOTAL REVENUES 12,421 9 11,409 7 10,687
- --------------------------------------------------------------------------------
OPERATING COSTS
AND EXPENSES
Company-operated
restaurants 7,261 9 6,650 8 6,163
Franchised restaurants 678 10 614 8 570
Selling, general and
administrative expenses 1,458 - 1,451 6 1,367
Made For You costs 162 n/m - - -
Special charges 160 n/m - n/m 72
Other operating (income)
expense (60) n/m (114) n/m (118)
- --------------------------------------------------------------------------------
TOTAL OPERATING
COSTS AND
EXPENSES 9,659 12 8,601 7 8,054
- --------------------------------------------------------------------------------
OPERATING INCOME/(1)/ 2,762 (2) 2,808 7 2,633
- --------------------------------------------------------------------------------
Interest expense 414 14 364 6 343
Nonoperating (income)
expense 41 n/m 37 n/m 39
- --------------------------------------------------------------------------------
INCOME BEFORE
PROVISION
FOR INCOME TAXES/(1)/ 2,307 (4) 2,407 7 2,251
- --------------------------------------------------------------------------------
Provision for income
taxes/(1)/ 757 (1) 765 13 678
- --------------------------------------------------------------------------------
NET INCOME/(1)/ $ 1,550 (6) $ 1,642 4 $ 1,573
================================================================================
NET INCOME PER
COMMON SHARE/(1)/ $ 1.14 (3) $ 1.17 5 $ 1.11
NET INCOME PER
COMMON SHARE-
DILUTED/(1)/ 1.10 (4) 1.15 6 1.08
- --------------------------------------------------------------------------------
(1) The 1998 results include $162 million of Made For You costs and the $160
million special charge, discussed on page 24, for a pre-tax total of $322
million ($219 million after tax or $0.16 per share). The 1996 results
include the $72 million pre-tax special charge and a $50 million tax benefit
resulting from certain international transactions, discussed on pages 24 and
26.
n/m=not meaningful
OPERATING RESULTS (EXCLUDING MADE FOR YOU COSTS AND SPECIAL CHARGES)
- --------------------------------------------------------------------------------
1998 1997 1996
(Dollars in millions, % %
except per share data) Amount Increase Amount Increase Amount
- --------------------------------------------------------------------------------
OPERATING INCOME $3,084 10 $2,808 4 $2,705
- --------------------------------------------------------------------------------
NET INCOME $1,769 8 $1,642 4 $1,573
================================================================================
Net income per
common share $ 1.30 11 $ 1.17 5 $ 1.11
Net income per
common share-
diluted 1.26 10 1.15 6 1.08
- --------------------------------------------------------------------------------
The spreads between the percent change in net income and net income per common
share reflected the positive effects of share repurchases and the absence of
preferred dividends in 1998, due to the retirement of our remaining Series E
Preferred Stock in December 1997, and lower preferred dividends in 1997 compared
with the prior year.
The following table presents the reported and constant currency results for
1998 and 1997, excluding Made For You costs and special charges:
- --------------------------------------------------------------------------------------
As reported In constant currency
(Dollars in billions, except ----------------------- --------------------------
per share data) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------
Systemwide sales $36.0 7% $33.6 6% $37.0 10% $35.0 10%
Revenues 12.4 9 11.4 7 12.8 12 11.8 11
Operating income 3.1 10 2.8 4 3.2 12 2.9 8
Net income 1.8 8 1.6 4 1.8 10 1.7 8
Net income per
common share 1.30 11 1.17 5 1.33 14 1.21 9
Net income per
common share-diluted 1.26 10 1.15 6 1.29 12 1.19 10
- --------------------------------------------------------------------------------------
SYSTEMWIDE SALES
Systemwide sales include sales by all restaurants, whether operated by the
Company, by franchisees or by affiliates operating under joint-venture
agreements. Increasing market share through expansion, and customer satisfaction
through quality, service, cleanliness and value continue as key strategic
initiatives to build sales. Sales increases in 1998 and 1997 were primarily due
to restaurant expansion and positive comparable sales (measured on a constant
currency basis), partly offset by weaker foreign currencies. At the end of 1998,
86% of Systemwide sales were in the following 11 markets--Australia, Brazil,
Canada, England, France, Germany, Hong Kong, Japan, the Netherlands, Taiwan and
the U.S. (major markets based on operating income). This is down slightly from
87% in 1997.
Sales increases in the U.S., Europe and Latin America were driven by expansion
and positive comparable sales in 1998 and 1997. In the U.S., successful
Monopoly, Teenie Beanie Babies, Get Back With Big Mac and Disney promotions,
combined with local market initiatives, contributed to the 1998 increase. In
Europe, performances benefited from value campaigns and successful promotions in
England, France and Germany. Europe's results were reduced by the difficult
economic conditions in Russia in the last half of 1998. In Latin America,
Argentina and Brazil accounted for approximately half of this segment's total
sales growth in both years, mainly due to expansion.
7
In Asia/Pacific, sales decreased in 1998 due to weaker foreign currencies and
negative comparable sales. Excluding the translation effect of weaker foreign
currencies, Japan realized strong sales growth despite experiencing its most
difficult economy in decades. In addition, Australia's sales improved due to
positive comparable sales in the last half of the year. Difficult economic
conditions in Southeast Asia, which began in the latter part of 1997 and
continued throughout 1998, negatively impacted consumer spending. In 1997, sales
increased primarily due to expansion.
- --------------------------------------------------------------------------------
(In millions) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
U.S. $18,123 $17,125 $16,370 $15,905 $14,941
Europe 8,909 7,835 7,377 6,685 5,211
Asia/Pacific 5,579 5,616 5,349 4,835 3,795
Latin America 1,761 1,511 1,273 1,129 794
Other 1,607 1,551 1,443 1,360 1,246
- --------------------------------------------------------------------------------
Systemwide sales $35,979 $33,638 $31,812 $29,914 $25,987
================================================================================
Sales by Company-operated restaurants grew at a higher rate than Systemwide
sales in 1998 and 1997, primarily due to the higher unit growth rate of Company-
operated restaurants outside the U.S. relative to Systemwide restaurants. In
addition, the weakened Japanese Yen had a significant negative effect on our
Japanese affiliate's sales, which reduced Systemwide sales growth.
AVERAGE ANNUAL SALES PER RESTAURANT/(1)/
- --------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
U.S.
Traditional $1,584 $1,523 $1,530
Satellite 459 445 425
Outside the U.S.
Traditional 1,801 1,966 2,262
Satellite 450 457 488
- --------------------------------------------------------------------------------
(1) Restaurants in operation at least 13 consecutive months
Average sales are affected by several factors: comparable sales and the size
and number of new restaurants. The number of new restaurants affects average
sales as new restaurants historically have taken a few years to reach long-term
volumes. In addition, over the last several years we have opened more
restaurants in lower density areas and countries with lower average sales
volumes. For these reasons, our focus is primarily on sales-to-investment ratios
and building comparable sales, rather than on average sales.
In 1998, positive comparable sales drove the increases in U.S. average annual
sales per restaurant. Outside the U.S., foreign currency translation accounted
for approximately half of the decreases in average annual sales in both 1998 and
1997. In addition, the significant number of new restaurants outside the U.S.
negatively impacted the averages.
AVERAGE ANNUAL SALES PER NEW RESTAURANT/(1)/
- --------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
U.S.
Traditional $1,332 $1,237 $1,206
Outside the U.S.
Traditional 1,357 1,431 1,710
Satellite 446 453 517
- --------------------------------------------------------------------------------
(1) Restaurants in operation at least 13 months but not more than 25 months
In 1998 and 1997, the increases in sales per new U.S. traditional restaurant
were due to a more selective expansion strategy. In addition, in 1998, larger
facilities supported higher average sales. The decreases in sales per new
restaurant outside the U.S. in 1998 and 1997 were due to foreign currency
translation and expansion. Excluding foreign currency translation, the 1998
average annual sales for new international traditional and satellite restaurants
increased to $1,439,000 and $479,000, respectively. Satellite restaurants
generally have significantly lower development costs and sales volumes than
traditional restaurants. Average annual sales per new traditional restaurant in
major markets outside the U.S., excluding Japan, were approximately $1.7 million
in 1998 and 1997.
TOTAL REVENUES
Total revenues include sales by Company-operated restaurants and fees from
restaurants operated by franchisees and affiliates. These fees include rent,
service fees and royalties that are based on a percent of sales with specified
minimum payments along with initial fees. Fees vary by type of site and
investment by the Company, and also according to local business conditions.
These fees, along with occupancy and operating rights, are stipulated in
franchise agreements that generally have 20-year terms.
Revenues grow as new restaurants are added and as sales build in existing
restaurants. Menu price changes also affect revenues and sales, but it is
impractical to quantify their impact because of different pricing structures,
new products, promotions and product-mix variations among restaurants and
markets.
Revenues increased at a faster rate than Systemwide sales in 1998 and 1997.
This was primarily due to the weakened Japanese Yen, which negatively affected
sales more than revenues due to our affiliate structure in Japan, and the higher
unit growth rate of Company-operated restaurants outside the U.S. relative to
Systemwide restaurants.
U.S. revenues increased $265 million in 1998 and $13 million in 1997. The
increased revenue growth in 1998 was primarily due to strong sales performance
for both Company-operated and franchised restaurants driven by positive
comparable sales and expansion. Lower initial fees resulting from fewer openings
partly offset the increase in revenues. The slower revenue growth in 1997 was
primarily because the number of U.S. Company-operated restaurants decreased
compared with the prior year, while the number of franchised and affiliated
restaurants increased. Lower initial fees also contributed to the slower revenue
growth in 1997.
8
U.S. OPERATING RESULTS
(EXCLUDING MADE FOR YOU COSTS AND SPECIAL CHARGES)
- -------------------------------------------------------------------------------------------------
(In millions) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
REVENUES
Sales by Company-operated
restaurants $2,829 $2,691 $2,776 $2,725 $2,550
Revenues from franchised
and affiliated restaurants 2,039 1,912 1,814 1,749 1,606
- -------------------------------------------------------------------------------------------------
TOTAL REVENUES 4,868 4,603 4,590 4,474 4,156
- -------------------------------------------------------------------------------------------------
OPERATING COSTS AND
EXPENSES
Company-operated restaurants 2,338 2,246 2,317 2,244 2,066
Franchised restaurants 389 361 334 304 270
Selling, general and
administrative expenses 750 788 740 682 628
Other operating (income)
expense 25 (3) (17) (8) (25)
- -------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS
AND EXPENSES/(1)/ 3,502 3,392 3,374 3,222 2,939
- -------------------------------------------------------------------------------------------------
U.S. OPERATING INCOME/(1)/ $1,366 $1,211 $1,216 $1,252 $1,217
=================================================================================================
(1) The 1998 results exclude $162 million of Made For You costs and the $160
million special charge for a pre-tax total of $322 million. The 1996
results exclude the $72 million pre-tax special charge.
Europe accounted for 36% of consolidated revenues in 1998 and 34% in 1997.
This region's revenues grew $535 million and $318 million in 1998 and 1997,
respectively. The increases were driven by strong sales in England, France and
Germany in 1998 and in England, Italy and Russia in 1997.
Asia/Pacific's revenues grew $110 million in 1998, compared with growth of
$250 million in 1997. In constant currencies, these increases were $341 million
in 1998 and $318 million in 1997. Due to an increase in ownership, several
affiliate markets were consolidated for financial reporting purposes in 1998.
This contributed to the revenue increase. The consolidation of Singapore in
1997, along with Taiwan's strong results, helped to advance 1997 revenues.
Difficult economic conditions in Southeast Asia, which began in the latter part
of 1997 and continued throughout 1998, dampened revenue growth in both years.
OPERATING RESULTS OUTSIDE THE U.S.
- -------------------------------------------------------------------------------------------------
(In millions) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
REVENUES
Sales by Company-operated
restaurants $6,066 $5,445 $4,795 $4,139 $3,242
Revenues from franchised
and affiliated restaurants 1,487 1,361 1,301 1,182 923
- -------------------------------------------------------------------------------------------------
TOTAL REVENUES 7,553 6,806 6,096 5,321 4,165
- -------------------------------------------------------------------------------------------------
OPERATING COSTS AND
EXPENSES
Company-operated restaurants 4,923 4,404 3,846 3,304 2,579
Franchised restaurants 289 253 236 211 165
Selling, general and
administrative expenses 632 601 574 507 408
Other operating (income)
expense (85) (111) (101) (98) (59)
- -------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS
AND EXPENSES 5,759 5,147 4,555 3,924 3,093
- -------------------------------------------------------------------------------------------------
OPERATING INCOME
OUTSIDE THE U.S. $1,794 $1,659 $1,541 $1,397 $1,072
=================================================================================================
Latin America's revenues grew $105 million in 1998 and $114 million in 1997.
Growth in both years was primarily due to expansion in Brazil and positive
comparable sales for the segment.
COMPANY-OPERATED MARGINS
Company-operated margin dollars are equal to sales by Company-operated
restaurants less the operating costs of these restaurants. Consolidated Company-
operated margin dollars increased $148 million or 10% in 1998 and $78 million or
6% in 1997. The increases were primarily driven by expansion, partly offset by
weaker foreign currencies. In addition, positive comparable sales contributed to
the increase in 1998.
Consolidated Company-operated margins were 18.4% of sales in 1998, 18.3% in
1997 and 18.6% in 1996. Operating cost trends as a percent of sales were as
follows: food & paper costs decreased in 1998 and increased in 1997; payroll
costs were flat in 1998 and decreased in 1997; and occupancy & other operating
costs increased in both years.
U.S. Company-operated margins were 17.3% of sales in 1998 and 16.5% in 1997
and 1996. Increased margins as a percent of sales in 1998 were driven by lower
food & paper costs related primarily to decreased commodity costs, partly offset
by higher payroll costs related to an increase in average hourly rates.
Occupancy & other operating costs were flat. U.S. Company-operated margins as a
percent of sales in 1997 reflected higher food & paper costs related primarily
to the Deluxe Line, lower payroll costs related to labor efficiencies and lower
occupancy & other operating costs.
Company-operated margins outside the U.S. were 18.8% of sales in 1998,
compared with 19.1% in 1997 and 19.8% in 1996. In 1998, increases in occupancy &
other operating costs as a percent of sales were the primary cause of the margin
decline as payroll costs and food & paper costs were flat as a percent of sales.
The decline in the 1997 margin as a percent of sales was due to increases in
food & paper costs as well as occupancy & other operating costs, partly offset
by a decrease in payroll costs. Weaker foreign currencies put pressure on
margins outside the U.S. in both 1998 and 1997, as food & paper costs were
negatively affected in those markets where we imported products.
FRANCHISED MARGINS
Franchised margin dollars are equal to revenues from franchised and affiliated
restaurants less the Company's occupancy costs (rent and depreciation)
associated with these sites. Franchised margin dollars represented more than 60%
of the combined operating margins in both 1998 and 1997. Consolidated franchised
margin dollars increased $189 million or 7% in 1998 and $113 million or 4% in
1997. The increases were primarily driven by expansion, partly offset by weaker
foreign currencies. In addition, positive comparable sales contributed to the
increase in 1998.
9
Consolidated franchised margins were 80.8% of applicable revenues in 1998,
81.2% in 1997 and 81.7% in 1996. Franchised margins in the U.S. were 80.9% of
revenues in 1998, 81.1% in 1997 and 81.6% in 1996. Outside the U.S., franchised
margins were 80.6% of revenues in 1998, 81.4% in 1997 and 81.8% in 1996.
The 1998 and 1997 declines reflected a higher proportion of leased sites, and
in the U.S. also reflected lower initial fees resulting from fewer openings. By
leasing a higher proportion of new sites over the past few years, we have
reduced initial capital requirements, but negatively affected franchised margins
as a percent of applicable revenues. This is because financing costs implicit in
the lease are included in rent expense, which affects these margins; for owned
sites, financing costs are reflected in interest expense, which does not affect
these margins. Also, our decision to increase our ownership in several affiliate
markets in 1998 and 1997 shifted revenues from franchised and affiliated
restaurants to Company-operated restaurants, reducing the franchised restaurant
margins outside the U.S.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses were relatively flat
in 1998 and decreased to 4.1% of sales from 4.3% of sales in 1997 and 1996. In
1998, U.S. selling, general and administrative expenses decreased primarily due
to lower advertising costs and savings realized from the home office
productivity initiative, partly offset by higher performance-based incentive
compensation. Outside the U.S., selling, general and administrative expenses
increased, due to support of restaurant development and to a lesser extent, from
the consolidation of several affiliate markets for financial reporting purposes,
partly offset by weaker foreign currencies. In 1997, consolidated selling,
general and administrative expenses increased primarily due to continued
investment in developing countries and the support of special marketing efforts
and new food initiatives in the U.S., partly offset by weaker foreign
currencies.
As a result of the home office productivity initiative, the Company expects to
save about $100 million of selling, general and administrative expenses per
year, beginning in 2000, with about two-thirds of the annual savings expected to
be realized by the end of 1999. About $15 million of these savings were realized
in 1998.
MADE FOR YOU COSTS
In 1998, the Company announced the introduction of Made For You, a new food
preparation system that is expected to be installed in virtually all restaurants
in the U.S. and Canada by the end of 1999. Through advances in equipment and
technology, the new system allows us to serve fresher, better-tasting food at
the speed of McDonald's. The system also supports future growth through product
development because it can more easily accommodate an expanded menu. The Company
is providing financial incentives of up to $12,500 per restaurant to
owner/operators to defray the cost of equipment made obsolete as a result of
converting to the new system. The Company is also making additional payments in
special cases where the conversion to Made For You is more extensive.
In 1998, the Company incurred $162 million in Made For You costs, which
primarily consisted of nonrefundable incentive payments made to owner/operators
as well as accelerated depreciation on equipment being replaced in Company-
operated restaurants. The Company expects the total costs related to the
implementation of Made For You to approximate $190 million. The remaining costs
are expected to be incurred by the end of 1999, and are comprised of about $15
million of incentive payments and $15 million of accelerated depreciation.
SPECIAL CHARGES
In second quarter 1998, the Company recorded a $160 million pre-tax special
charge related to the results of the Company's home office productivity
initiative. This initiative is designed to improve staff alignment, focus and
productivity and reduce ongoing selling, general and administrative expenses. As
a result, the Company is reducing home office staffing by approximately 525
positions, consolidating certain home office facilities and reducing other
expenditures in a variety of areas. The special charge was comprised of $85.8
million of employee severance and outplacement costs, $40.8 million of lease
cancellation and other facilities-related costs, $18.3 million of costs for the
write-off of capitalized technology made obsolete as a result of the
productivity initiative, and $15.1 million of other cash payments made in 1998.
Employee severance is paid in semi-monthly installments over a period of up to
one year after termination.
As of December 31, 1998, the Company had reduced home office staffing by
approximately 400 positions and expects the remaining positions to be eliminated
by year-end 1999. The remaining accrual, primarily related to employee
severance, was approximately $105 million at December 31, 1998. No significant
adjustments have been made to the original plan approved by management in second
quarter 1998. The Company expects to use cash provided by operations to fund the
remaining severance payments and other cash costs related to the productivity
initiative.
In 1996, the Company recorded a $72 million pre-tax special charge related
primarily to plans to strengthen the U.S. business and reduce ongoing costs by
closing low-volume U.S. satellite restaurants, outsourcing excess property
management and implementing other cost efficiencies. The actions required by
this plan were completed in 1997 and resulted in no significant adjustments to
the original cost estimate.
10
OTHER OPERATING (INCOME) EXPENSE
Other operating (income) expense includes gains on sales of restaurant
businesses, equity in earnings of unconsolidated affiliates, net gains or losses
from property dispositions and other transactions related to the food service
business.
Gains on sales of restaurant businesses include gains from sales of Company-
operated restaurants as well as gains from exercises of purchase options by
franchisees with business facilities lease arrangements (arrangements where the
Company leases the businesses, including equipment, to owner/operators who have
options to purchase the businesses). The Company's purchases and sales of
businesses with its franchisees and affiliates are aimed at achieving an optimal
ownership mix in each market. These transactions are an integral part of our
franchising business and resulting gains are recorded in operating income.
Equity in earnings of unconsolidated affiliates--businesses the Company
actively participates in, but does not control--is reported after interest
expense and income taxes, except for U.S. restaurant partnerships, which are
reported before income taxes.
Net gains or losses from property dispositions result from disposals of
properties due to restaurant closings, relocations and other transactions.
Other operating (income) expense decreased in 1998, primarily due to higher
provisions for property dispositions that reflected an increased number of
restaurant closings. These expenses were partly offset by higher gains on sales
of restaurant businesses and increased equity in earnings of unconsolidated
affiliates, due to strong performances in Japan and the U.S. The slight decline
in other operating (income) expense in 1997 was primarily due to lower equity in
earnings of unconsolidated affiliates and lower gains on sales of restaurant
businesses, partly offset by lower provisions for property dispositions.
OPERATING INCOME
Excluding Made For You costs and the special charges, operating income increased
$276 million or 10% to $3.1 billion in 1998, and $103 million or 4% to $2.8
billion in 1997. In constant currencies, these increases were 12% in 1998 and 8%
in 1997. The increases in 1998 and 1997 were primarily due to higher combined
operating margin dollars, partly offset by weaker foreign currencies and lower
other operating (income) expense. In addition, higher selling, general and
administrative expenses negatively affected the 1997 increase. Including Made
For You costs and the special charges, operating income decreased 2% in 1998 and
increased 7% in 1997.
Operating income in 1998 and 1997 from the major markets accounted for 92% of
total operating income, excluding 1998 Made For You costs and the special
charge.
U.S. operating income rose $155 million or 13% in 1998 and was flat in 1997,
excluding Made For You costs and special charges. In 1998, higher U.S. combined
operating margin dollars and lower selling, general and administrative expenses
were offset in part by lower other operating (income) expense. In 1997, higher
U.S. franchised margin dollars were offset by lower Company-operated margin
dollars and higher selling, general and administrative expenses. Including Made
For You costs and special charges, U.S. operating income decreased $167 million
or 14% in 1998 and increased $67 million or 6% in 1997.
Outside the U.S., operating income rose $135 million or 8% in 1998 and $118
million or 8% in 1997. In constant currencies, these increases were 12% in 1998
and 15% in 1997. This growth was driven by higher combined operating margin
dollars resulting from expansion in both years and slightly positive comparable
sales in 1998. In both years, weaker foreign currencies and higher selling,
general and administrative expenses partly offset these increases. In 1998, the
Australian Dollar, Brazilian Real, Canadian Dollar, Japanese Yen and Russian
Ruble, as well as the Southeast Asian currencies, were the primary currencies
negatively affecting results.
Europe accounted for 41% and 36% of consolidated operating income in 1998 and
1997, respectively. Europe's operating income grew $133 million in 1998 compared
with $54 million in 1997. Weaker currencies offset this region's operating
income increase in 1998 by only 1% or $6 million, and by 9% or $82 million in
1997. Strong operating results in England, France, Germany, Italy and Spain
drove the increase in operating income in 1998. The region's results were
negatively affected by the difficult economic conditions in Russia, which are
expected to continue in 1999. England, France and Germany accounted for 77% of
Europe's operating income in both 1998 and 1997.
Asia/Pacific's operating income declined $18 million in 1998 compared with an
increase of $14 million in 1997. The decline in 1998 was primarily due to weaker
foreign currencies. On a constant currency basis, Asia/Pacific's operating
income would have increased $29 million in 1998 and $38 million in 1997. In
1998, Japan and Hong Kong had strong operating results despite the difficult
economic conditions that were experienced by much of the region beginning in the
latter part of 1997 and continuing throughout 1998. In addition, this segment
benefited in both years from the financial reporting consolidation of several
affiliate markets. Australia, Hong Kong, Japan and Taiwan contributed about 90%
of Asia/ Pacific's operating income in both years.
Latin America's operating income increased $18 million in 1998 and $53 million
in 1997. Argentina, Brazil and Venezuela led this region's increase in 1998.
Continued expansion and positive comparable sales drove improved results across
this segment in 1998 and 1997. Brazil accounted for about 70% of Latin America's
operating income in both years. The recent economic turmoil in Brazil is
expected to negatively impact operating results in 1999. The Latin America
segment represented 7% of consolidated operating income in 1998.
INTEREST EXPENSE
Higher average debt levels, partly offset by weaker foreign currencies and lower
average interest rates, accounted for the 1998 and 1997 increases in interest
expense.
- --------------------------------------------------------------------------------
11
NONOPERATING (INCOME) EXPENSE
Nonoperating (income) expense includes miscellaneous income and expense items
such as interest income and gains and losses related to other investments,
financings and translation. Results in 1998 reflected translation losses
compared with translation gains in 1997, while in 1997 interest income and
translation gains were lower than in 1996.
PROVISION FOR INCOME TAXES
The effective income tax rate was 32.8% for 1998, compared with 31.8% for 1997
and 30.1% for 1996. A $50 million tax benefit resulting from certain
international transactions was primarily responsible for the unusually low tax
rate in 1996. The Company expects its 1999 effective income tax rate to be in
the range of 32.5% to 33.5%.
Consolidated net deferred tax liabilities included tax assets, net of
valuation allowance, of $516 million in 1998 and $451 million in 1997.
Substantially all of the tax assets arose in the U.S. and other profitable
markets, and a majority of them are expected to be realized in future U.S.
income tax returns.
RESTAURANTS
McDonald's continues to focus on managing capital outlays more effectively
through prudent and strategic expansion. In 1998, the Company added 1,668
restaurants Systemwide, compared with 2,110 in 1997 and 2,642 in 1996. In 1999,
the Company expects to add about 1,750 restaurants, with a continued emphasis on
traditional restaurants primarily in locations outside the U.S.
- --------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
U.S. 12,472 12,380 12,094 11,368 10,238
Europe 4,421 3,886 3,283 2,595 2,159
Asia/Pacific 5,055 4,456 3,633 2,735 2,168
Latin America 1,405 1,091 837 665 505
Other 1,447 1,319 1,175 1,017 880
- --------------------------------------------------------------------------------
Systemwide restaurants 24,800 23,132 21,022 18,380 15,950
================================================================================
The U.S. net additions declined in 1998 and 1997, primarily due to the closing
of low-volume satellite locations and a more stringent restaurant selection
process.
Asia/Pacific's percent of total restaurants has grown primarily due to Japan's
significant expansion. Japan added 415 restaurants in 1998, 433 in 1997 and 522
in 1996, representing 25% of Systemwide restaurant additions in 1998 and about
20% in 1997 and 1996. Approximately 60% of Japan's restaurant additions in 1998
and 1997, and about 70% in 1996, were satellites. Therefore, these additions
affected unit growth more than sales growth.
At the end of 1998, 84% of Systemwide restaurants were in the major markets,
compared with 85% in 1997. In 1998, 65% of restaurant additions were in these
major markets, and we anticipate a similar percent for 1999. Longer term,
markets like China, Italy and Mexico are expected to represent a growing
proportion of restaurant additions.
More than 75% of Company-operated restaurants and more than 85% of franchised
restaurants were located in the major markets in 1998. Franchisees and
affiliates operated 78% of restaurants at year-end 1998. That percentage has
remained relatively constant over the past three years.
FINANCIAL POSITION AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
TOTAL ASSETS AND CAPITAL EXPENDITURES
Total assets grew $1.5 billion or 8% in 1998 and $856 million or 5% in 1997. In
1998 and 1997, about 80% of consolidated assets were located in our major
markets excluding our affiliate in Japan. Net property and equipment rose $1.1
billion in 1998 and represented 81% of total assets at year end.
Capital expenditures decreased $232 million or 11% in 1998 and decreased $264
million or 11% in 1997, reflecting fewer restaurant additions, the new building
program in the U.S. in 1998 that gave owner/operators the option to own new
restaurant facilities, and more leased sites, combined with weaker foreign
currencies.
U.S. capital expenditures declined $139 million or 24% in 1998 and declined
$300 million or 34% in 1997, primarily due to a more selective expansion
strategy and the new building program. About 70% of the qualifying new
traditional restaurant buildings opened in 1998 are owned by owner/operators. In
addition, the Company leased the land for over 90% of the new traditional
restaurants opened in the U.S. in 1998. These programs saved the Company
approximately $155 million in capital outlays in 1998.
Capital expenditures outside the U.S. decreased $93 million or 6%, due to
fewer restaurant additions and weaker foreign currencies in 1998. Capital
expenditures outside the U.S. increased slightly in 1997.
In 1998, 76% of capital expenditures was invested in markets outside the U.S.,
compared with 72% in 1997 and 63% in 1996. Approximately 70% was invested in our
major markets excluding Japan in 1998, compared with 73% in 1997 and 78% in
1996.
- --------------------------------------------------------------------------------
(In millions) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
New restaurants $ 1,357 $ 1,531 $ 1,799 $ 1,550 $ 1,181
Existing restaurants 398 433 350 355 211
Other properties 124 147 226 159 147
- --------------------------------------------------------------------------------
Capital expenditures $ 1,879 $ 2,111 $ 2,375 $ 2,064 $ 1,539
================================================================================
Total assets $19,784 $18,242 $17,386 $15,415 $13,592
- --------------------------------------------------------------------------------
Expenditures for existing restaurants were made to achieve higher levels of
customer satisfaction, including technology to improve service and food quality,
and to enhance older facilities. Other properties primarily included
expenditures for office buildings and related computer equipment and
furnishings.
The Company's expenditures for new restaurants in the U.S. were minimal as a
result of the programs previously discussed. However, we continue to focus on
the System's average development costs (land, building and equipment) to ensure
an appropriate return on investment for the System.
- --------------------------------------------------------------------------------
12
Average development costs for the U.S. System were $1.4 million in 1998 and
$1.3 million in 1997. The increase was primarily due to the construction of
larger facilities to support higher average sales volumes.
Average development costs for traditional restaurants in our major markets
outside the U.S., excluding Japan, were approximately $1.8 million in both 1998
and 1997. Average development costs vary widely by market depending on the types
of restaurants built and the real estate and construction costs within each
market. These costs are managed through the use of right-sized restaurants,
construction and design efficiencies, standardization and global sourcing.
Average development costs for satellite restaurants located in Brazil, Canada
and Japan, which comprise over 90% of all satellites outside the U.S., were
approximately $200,000 in both years. The utilization of these small, often
limited-menu restaurants has allowed expansion into areas that would otherwise
not have been feasible.
Including affiliates, total land ownership was 44% and 45% of total restaurant
sites at year-end 1998 and 1997, respectively.
Capital expenditures by affiliates, which were not included in consolidated
amounts, were approximately $295 million in 1998, compared with $360 million in
1997. The decrease was primarily due to increased ownership in the Philippines,
South Korea and Thailand, which converted them from affiliates to majority-owned
subsidiaries in 1998, and to a lesser extent, weaker foreign currencies.
CASH PROVIDED BY OPERATIONS
The Company generates significant cash from operations and has substantial
borrowing capacity to meet its operating and discretionary spending
requirements. Free cash flow (cash from operations less capital expenditures)
grew to $887 million in 1998, compared with $331 million in 1997. Cash provided
by operations was reduced by approximately $135 million of Made For You
incentive payments made in 1998 and $110 million of U.S. franchisee security
deposit refunds in 1997. Cash provided by operations, along with other sources
of cash such as borrowings, was used for capital expenditures, share repurchase,
dividends and debt repayments. The Company generated positive free cash flow in
1998 for the eighth consecutive year. This trend is expected to continue. In
1998, operations outside the U.S. generated positive free cash flow for the
first time in our history, and this is expected to continue into the foreseeable
future.
- --------------------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Cash provided by operations $2,766 $2,442 $2,461 $2,296 $1,926
Free cash flow 887 331 86 232 387
Cash provided by operations
as a percent of capital
expenditures 147% 116% 104% 111% 125%
Cash provided by operations
as a percent of average
total debt 41 41 48 49 48
- --------------------------------------------------------------------------------
In addition to its free cash flow, the Company can meet short-term needs
through commercial paper borrowings and line of credit agreements. Accordingly,
the Company strategically maintains a relatively low current ratio--.52 at year-
end 1998.
FINANCINGS AND MARKET RISK
The Company is exposed to the impact of interest-rate changes and foreign
currency fluctuations. McDonald's strives to minimize these risks by financing
with debt in the currencies in which assets are denominated and employing
established policies and procedures to manage this exposure. See Summary of
significant accounting policies on page 21 for additional information regarding
our use of financial instruments and the impact of the new accounting standard
on derivatives.
The Company uses major capital markets and various techniques to meet its
financing requirements and reduce interest expense. For example, currency
exchange agreements in conjunction with borrowings help obtain desired
currencies at attractive rates and maturities. Interest-rate exchange agreements
effectively convert fixed-rate to floating-rate debt, or vice versa. The Company
also manages the level of fixed-rate debt to take advantage of changes in
interest rates.
The Company uses foreign currency debt and derivatives to hedge intercompany
financings and long-term investments in foreign subsidiaries and affiliates.
This reduces the impact of fluctuating foreign currencies on net income and
shareholders' equity. Total foreign-denominated debt, including the effects of
currency exchange agreements, was $5.2 billion and $5.0 billion at year-end 1998
and 1997, respectively.
- --------------------------------------------------------------------------------
(As a percent) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Fixed-rate debt as a
percent of total debt 67% 49% 68% 67% 64%
Weighted-average annual
interest rate of total debt 6.6 6.8 7.1 7.9 8.4
Foreign currency-denominated
debt as a percent of total debt 75 80 90 89 92
Total debt as a percent of total
capitalization (total debt and
total shareholders' equity) 43 42 39 38 39
- --------------------------------------------------------------------------------
Moody's and Standard & Poor's have rated McDonald's debt Aa2 and AA,
respectively, since 1982. Duff & Phelps began rating the debt in 1990 and
currently rates it AA+. These strong ratings are important to the Company
because of global development plans. The Company has not experienced, nor does
it expect to experience, difficulty in obtaining financing or refinancing
existing debt. At year-end 1998, the Company and its subsidiaries had $1.5
billion available under committed line of credit agreements, $1.0 billion under
a Euro medium-term note program and $.9 billion under shelf registrations for
future debt issuance.
The Company manages its debt portfolio in response to changes in interest
rates and foreign currency rates by periodically retiring, redeeming and
repurchasing debt; terminating exchange agreements; and using derivatives. Gains
of approximately $24 million, related to the early termination of interest-
- --------------------------------------------------------------------------------
12
rate exchange agreements in 1998, were deferred and are being amortized as an
adjustment to interest expense over various periods through 2002. The Company
does not use derivatives with a level of complexity or with a risk higher than
the exposures to be hedged and does not hold or issue derivatives for trading
purposes. All exchange agreements are over-the-counter instruments.
The Company actively hedges selected currencies to minimize the effect of
fluctuating foreign currencies on reported results and to minimize the cash
exposure of foreign currency royalty and other payments received in the U.S. In
addition, where practical, McDonald's restaurants purchase goods and services in
local currencies resulting in natural hedges, and the Company typically finances
in local currencies, creating economic hedges.
The Company's exposure is diversified among a broad basket of currencies. At
year-end 1998 and 1997, assets in hyperinflationary markets were principally
financed in U.S. Dollars. The Company's largest net asset exposures (defined as
foreign currency assets less foreign currency liabilities) were as follows:
- --------------------------------------------------------------------------------
(In millions of U.S. Dollars) December 31, 1998 1997
- --------------------------------------------------------------------------------
Canadian Dollars $749 $ 528
Deutsche Marks 456 88
British Pounds Sterling 447 590
Australian Dollars 322 298
Brazilian Reais 302 281
French Francs 196 194
Austrian Schillings 116 91
Japanese Yen 116 37
- --------------------------------------------------------------------------------
The Company prepared sensitivity analyses of its financial instruments to
determine the impact of hypothetical changes in interest rates and foreign
currency exchange rates on the Company's results of operations, cash flows and
the fair value of its financial instruments. The interest-rate analysis assumed
a one percentage point adverse change in interest rates on all financial
instruments but did not consider the effects of the reduced level of economic
activity that could exist in such an environment. The foreign currency rate
analysis assumed that each foreign currency rate would change by 10% in the same
direction relative to the U.S. Dollar on all financial instruments; however, the
analysis did not include the potential impact on sales levels or local currency
prices or the effect of fluctuating currencies on the Company's anticipated
foreign currency royalties and other payments received in the U.S. Based on the
results of these analyses of the Company's financial instruments, neither a one
percentage point adverse change in interest rates from year-end 1998 levels nor
a 10% adverse change in foreign currency rates from year-end 1998 levels would
materially affect the Company's results of operations, cash flows or the fair
value of its financial instruments.
TOTAL SHAREHOLDERS' EQUITY
Total shareholders' equity rose $613 million or 7% in 1998, and represented 48%
of total assets at year end. Weaker foreign currencies decreased shareholders'
equity by $52 million in 1998.
The Company uses free cash flow and debt capacity to repurchase shares because
we believe this enhances shareholder value. Over the past 10 years, the Company
has invested $4.8 billion to buy back 306 million shares at an average price of
approximately $16, while maintaining a strong equity base. At year-end 1998, the
Company held 304 million shares in treasury with a market value of $11.7
billion.
In September 1998, the Company announced plans to repurchase $3.5 billion of
its common stock by year-end 2001. During the third quarter 1998, the Company
completed its $2 billion, three-year share repurchase program begun in 1996. In
1998, the Company repurchased a total of 38 million shares for nearly $1.2
billion, $320 million of which related to the new $3.5 billion program. The
Company uses common equity put options in connection with its share repurchase
program. In 1998, the Company sold 7.3 million common equity put options, of
which 1.0 million options were outstanding at December 31, 1998. These options
expired unexercised in February 1999.
Given the Company's returns on equity and assets, management believes it is
prudent to reinvest a significant portion of earnings back into the business and
use free cash flow for share repurchase. Accordingly, the common stock dividend
yield is modest. However, the Company has paid 92 consecutive quarterly
dividends on common stock through first quarter 1999 and has increased the
dividend amount at least once every year. Additional dividend increases will be
considered after reviewing returns to shareholders, profitability expectations
and financing needs.
RETURNS
Operating income is used to compute return on average assets, while net income
less preferred stock dividends (net of tax) is used to calculate return on
average common equity. Month-end balances are used to compute both average
assets and average common equity.
- --------------------------------------------------------------------------------
(As a percent) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Return on average assets/(1)/ 16.4% 16.0% 16.8% 17.9% 17.6%
Return on average common
equity/(1)/ 19.5 19.0 19.5 19.9 19.4
- --------------------------------------------------------------------------------
(1) Computed excluding Made For You costs and special charges. Including Made
For You costs and special charges, return on average assets was 14.7% in
1998 and 16.3% in 1996; return on average common equity was 17.1% in 1998.
The increases in the 1998 returns are due to strong operating results,
enhanced by the Company's continued focus on more efficient capital deployment.
This included the closing of a number of low-volume satellite restaurants, a
more stringent site selection process, the new building program in the U.S. and
the use of free cash flow for share repurchase.
14
OTHER MATTERS
- --------------------------------------------------------------------------------
EFFECTS OF CHANGING PRICES--INFLATION
The Company has demonstrated an ability to manage inflationary cost increases
effectively. This is because of rapid inventory turnover, the ability to adjust
prices, cost controls and substantial property holdings--many of which are at
fixed costs and partly financed by debt made cheaper by inflation. In
hyperinflationary markets, menu board prices are typically adjusted to keep pace
with inflation, mitigating the effect on reported results.
YEAR 2000
The Company has assessed its computerized systems to determine their ability to
correctly identify the Year 2000 and is devoting the necessary internal and
external resources to replace, upgrade or modify all significant systems which
do not correctly identify the Year 2000. Substantially all necessary
modifications and testing of the Company's significant systems have been
completed. The last necessary replacement of a significant system is expected to
be completed in third quarter 1999.
In addition, the Company has determined the extent to which its operations may
be affected by the compliance efforts of its significant suppliers and is taking
the necessary steps to minimize potential problems. The Company has implemented
a Systemwide supply chain compliance monitoring program, which encompasses
supplier risk assessment and compliance validation for significant suppliers.
Management does not expect Year 2000 issues relating to internal systems and
suppliers to pose significant operational or financial difficulties for the
Company; however, in the unlikely event McDonald's or a significant number of
its key suppliers are unable to resolve an issue in a timely manner, such
matters could have a material impact on the Company's results of operations. In
addition, failures related to Year 2000 issues by providers of infrastructure
services could have a material adverse effect on results of operations.
Contingency plans are being developed, to the extent feasible, to address
unexpected Year 2000 issues that might arise either internally, within the
supply chain or by infrastructure service providers. These plans are expected to
be completed well before the end of 1999.
Modification and testing costs are expensed as incurred, while the costs of
new systems are capitalized. The Company expects its total costs related to
modification and testing as well as costs associated with supply chain risk
assessment and contingency planning to be less than $35 million, of which
approximately $23 million was incurred through December 31, 1998. In addition,
the Company expects to capitalize approximately $55 million of costs for ongoing
development of significant new systems that are replacing non-Year 2000
compliant systems. About $40 million of these costs were capitalized at Decem-
ber 31, 1998. The total Year 2000 costs have not and are not expected to have a
material adverse impact on the Company's financial position, results of
operations or cash flows.
All Year 2000 statements contained herein are designated as "Year 2000
Readiness Disclosures" pursuant to the Year 2000 Information and Readiness
Disclosure Act of 1998.
EURO CONVERSION
On January 1, 1999, 11 member countries of the European Union established fixed
conversion rates between their existing currencies ("legacy currencies") and one
common currency, the Euro. The Euro is now trading on currency exchanges and may
be used in certain transactions such as electronic payments. Beginning in
January 2002, new Euro-denominated notes and coins will be issued, and legacy
currencies will be withdrawn from circulation. The conversion to the Euro has
eliminated currency exchange rate risk for transactions between the member
countries, which for the Company, primarily consist of payments to suppliers. In
addition, as the Company uses foreign-denominated debt and derivatives to meet
its financing requirements and to minimize its foreign currency risks, certain
of these financial instruments will be redenominated into Euros.
The Company has restaurants located in all member countries and has been
preparing for the introduction of the Euro for the past several years. The
Company is currently addressing the issues involved with the new currency, which
include converting information technology systems, recalculating currency risk,
recalibrating derivatives and other financial instruments and revising processes
for preparing accounting and taxation records. Based on the work to date, the
Company does not believe the Euro conversion will have a significant impact on
the Company's financial position, results of operations or cash flows.
FORWARD-LOOKING STATEMENTS
Certain forward-looking statements are included in this report. They use such
words as "may," "will," "expect," "believe," "plan" and other similar
terminology. These statements reflect management's current expectations and
involve a number of risks and uncertainties. Actual results could differ
materially due to the success of operating initiatives, advertising and
promotional efforts, Year 2000 compliance efforts and Euro conversion efforts,
as well as changes in: global and local business and economic conditions;
currency exchange and interest rates; food, labor and other operating costs;
political or economic instability in local markets; competition; consumer
preferences, spending patterns and demographic trends; availability and cost of
land and construction; legislation and governmental regulation; and accounting
policies and practices.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk are included in Part
II, Item 7, pages 13 and 14 of this Form 10-K.
- --------------------------------------------------------------------------------
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
Page
reference
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated statement of income for each of the three years in the period ended December 31, 1998 17
Consolidated balance sheet at December 31, 1998 and 1997 18
Consolidated statement of cash flows for each of the three years in the period ended December 31, 1998 19
Consolidated statement of shareholders' equity for each of the three years in the period ended December 31, 1998 20
Notes to consolidated financial statements (Financial comments) 21-28
Quarterly results (unaudited) 29
Management's report 30
Audit Committee's report 30
Report of independent auditors 30
- ------------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
16
CONSOLIDATED STATEMENT OF INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions, except per share data) Years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
REVENUES
Sales by Company-operated restaurants $ 8,894.9 $ 8,136.5 $ 7,570.7
Revenues from franchised and affiliated restaurants 3,526.5 3,272.3 3,115.8
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 12,421.4 11,408.8 10,686.5
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Company-operated restaurants
Food and packaging 2,997.4 2,772.6 2,546.6
Payroll and employee benefits 2,220.3 2,025.1 1,909.8
Occupancy and other operating expenses 2,043.9 1,851.9 1,706.8
- ------------------------------------------------------------------------------------------------------------------------------------
7,261.6 6,649.6 6,163.2
- ------------------------------------------------------------------------------------------------------------------------------------
Franchised restaurants--occupancy expenses 678.0 613.9 570.1
Selling, general and administrative expenses 1,458.5 1,450.5 1,366.4
Made For You costs 161.6
Special charges 160.0 72.0
Other operating (income) expense (60.2) (113.5) (117.8)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS AND EXPENSES 9,659.5 8,600.5 8,053.9
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 2,761.9 2,808.3 2,632.6
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense--net of capitalized interest of $17.9, $22.7 and $22.2 413.8 364.4 342.5
Nonoperating (income) expense 40.7 36.6 39.1
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,307.4 2,407.3 2,251.0
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 757.3 764.8 678.4
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,550.1 $ 1,642.5 $ 1,572.6
====================================================================================================================================
NET INCOME PER COMMON SHARE $ 1.14 $ 1.17 $ 1.11
NET INCOME PER COMMON SHARE--DILUTED 1.10 1.15 1.08
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS PER COMMON SHARE $ .18 $ .16 $ .15
- ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE SHARES 1,365.3 1,378.7 1,396.4
WEIGHTED-AVERAGE SHARES--DILUTED 1,405.7 1,410.2 1,433.3
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying Financial Comments are an integral part of the consolidated
financial statements.
- --------------------------------------------------------------------------------
17
CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions, except per share data) December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 299.2 $ 341.4
Accounts and notes receivable 609.4 483.5
Inventories, at cost, not in excess of market 77.3 70.5
Prepaid expenses and other current assets 323.5 246.9
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,309.4 1,142.3
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Notes receivable due after one year 67.9 67.0
Investments in and advances to affiliates 854.1 634.8
Intangible assets--net 973.1 827.5
Miscellaneous 538.3 608.5
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 2,433.4 2,137.8
- ------------------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment, at cost 21,758.0 20,088.2
Accumulated depreciation and amortization (5,716.4) (5,126.8)
- ------------------------------------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 16,041.6 14,961.4
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $19,784.4 $18,241.5
====================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 686.8 $ 1,293.8
Accounts payable 621.3 650.6
Income taxes 94.2 52.5
Other taxes 143.5 148.5
Accrued interest 132.3 107.1
Other accrued liabilities 651.0 396.4
Current maturities of long-term debt 168.0 335.6
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,497.1 2,984.5
- ------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 6,188.6 4,834.1
OTHER LONG-TERM LIABILITIES AND MINORITY INTERESTS 492.6 427.5
DEFERRED INCOME TAXES 1,081.9 1,063.5
COMMON EQUITY PUT OPTIONS 59.5 80.3
SHAREHOLDERS' EQUITY
Preferred stock, no par value; authorized--165.0 million shares; issued--none
Common stock, $.01 par value; authorized--3.5 billion shares; issued--1,660.6 million 16.6 16.6
Additional paid-in capital 989.2 690.9
Guarantee of ESOP Notes (148.7) (171.3)
Retained earnings 13,879.6 12,569.0
Accumulated other comprehensive income (522.5) (470.5)
Common stock in treasury, at cost; 304.4 and 289.2 million shares (4,749.5) (3,783.1)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 9,464.7 8,851.6
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $19,784.4 $18,241.5
====================================================================================================================================
The accompanying Financial Comments are an integral part of the consolidated
financial statements.
18
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions) Years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 1,550.1 $ 1,642.5 $ 1,572.6
Adjustments to reconcile to cash provided by operations
Depreciation and amortization 881.1 793.8 742.9
Deferred income taxes 35.4 (1.1) 32.9
Changes in operating working capital items
Accounts receivable (29.9) (57.6) (77.5)
Inventories, prepaid expenses and other current assets (18.1) (34.5) (18.7)
Accounts payable (12.7) 52.8 44.5
Taxes and other liabilities 337.5 221.9 121.4
Refund of U.S. franchisee security deposits (109.6)
Other 22.9 (65.9) 42.9
- ------------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATIONS 2,766.3 2,442.3 2,461.0
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Property and equipment expenditures (1,879.3) (2,111.2) (2,375.3)
Purchases of restaurant businesses (118.4) (113.6) (137.7)
Sales of restaurant businesses 149.0 149.5 198.8
Property sales 42.5 26.9 35.5
Other (142.0) (168.8) (291.6)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH USED FOR INVESTING ACTIVITIES (1,948.2) (2,217.2) (2,570.3)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net short-term borrowings (repayments) (604.2) 1,097.4 228.8
Long-term financing issuances 1,461.5 1,037.9 1,391.8
Long-term financing repayments (594.9) (1,133.8) (841.3)
Treasury stock purchases (1,089.8) (755.1) (599.9)
Common and preferred stock dividends (240.5) (247.7) (232.0)
Series E preferred stock redemption (358.0)
Other 207.6 145.7 157.0
- ------------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (860.3) (213.6) 104.4
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS INCREASE (DECREASE) (42.2) 11.5 (4.9)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at beginning of year 341.4 329.9 334.8
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR $ 299.2 $ 341.4 $ 329.9
====================================================================================================================================
Supplemental cash flow disclosures
Interest paid $ 406.5 $ 401.7 $ 369.0
Income taxes paid $ 545.9 $ 650.8 $ 558.1
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying Financial Comments are an integral part of the consolidated
financial statements.
19
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Common Accumulated
(In millions, except per Preferred stock issued Additional Guarantee other Common Stock
stock --------------- paid-in of ESOP Retained comprehensive in treasury
share data) issued* Shares Amount capital Notes Earnings income Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $ 358.0 1,660.6 $184.6 $295.1 $(214.2) $9,831.3 $ (87.1) $(261.2) $(2,506.4)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 1,572.6
- -----------------------------------------------------------------------------------------------------------------------------------
Translation adjustments
(including taxes of $50.6) (88.0)
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
- -----------------------------------------------------------------------------------------------------------------------------------
Common stock cash
dividends ($.15 per share) (203.3)
- -----------------------------------------------------------------------------------------------------------------------------------
Preferred stock cash
dividends ($1.93 per Series E
depositary share) (27.6)
- -----------------------------------------------------------------------------------------------------------------------------------
Conversion to $.01 par
value stock (168.0) 168.0
- -----------------------------------------------------------------------------------------------------------------------------------
ESOP Notes payment 20.2
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury stock acquisitions (25.8) (604.8)
- ------------------------------------------------------------------------------------------------------------------------------------
Stock option exercises
and other (including tax benefits of
$86.4)