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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
September 30, 2020
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
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
110 North Carpenter Street
Chicago, Illinois
 
60607
(Address of Principal Executive Offices)
 
(Zip Code)
(630) 623-3000
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
MCD
New York Stock Exchange
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    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 
Accelerated Filer
 
 
 
 
Non-accelerated Filer
 
Smaller Reporting Company
 
 
 
 
 
Emerging Growth Company
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No  
745,110,988
(Number of shares of common stock
outstanding as of 9/30/2020)
 
 
 
 
 



McDONALD’S CORPORATION
___________________________
INDEX
_______
 
 
 
Page Reference
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1A – Risk Factors
 
 
 
 
Item 6 – Exhibits
 
 
All trademarks used herein are the property of their respective owners and are used with permission.

2


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEET
 
 
 
 
 
 
 
 
(unaudited)
 
 
 
In millions, except per share data
 
September 30,
2020
 
 
December 31,
2019
Assets
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and equivalents
 
$
3,683.8

 
 
$
898.5

Accounts and notes receivable
 
2,391.8

 
 
2,224.2

Inventories, at cost, not in excess of market
 
44.2

 
 
50.2

Prepaid expenses and other current assets
 
616.3

 
 
385.0

Total current assets
 
6,736.1

 
 
3,557.9

Other assets
 
 
 
 
 
Investments in and advances to affiliates
 
1,283.3

 
 
1,270.3

Goodwill
 
2,715.8

 
 
2,677.4

Miscellaneous
 
2,469.6

 
 
2,584.0

Total other assets
 
6,468.7

 
 
6,531.7

Lease right-of-use asset, net
 
13,276.2

 
 
13,261.2

Property and equipment
 
 
 
 
 
Property and equipment, at cost
 
40,088.6

 
 
39,050.9

Accumulated depreciation and amortization
 
(15,870.3
)
 
 
(14,890.9
)
Net property and equipment
 
24,218.3

 
 
24,160.0

Total assets
 
$
50,699.3

 
 
$
47,510.8

Liabilities and shareholders’ equity
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accounts payable
 
689.0

 
 
988.2

Lease liability
 
718.2

 
 
621.0

Income taxes
 
364.0

 
 
331.7

Other taxes
 
256.6

 
 
247.5

Accrued interest
 
340.2

 
 
337.8

Accrued payroll and other liabilities
 
1,223.4

 
 
1,035.7

Current maturities of long-term debt
 
2,688.8

 
 
59.1

Total current liabilities
 
6,280.2

 
 
3,621.0

Long-term debt
 
35,143.4

 
 
34,118.1

Long-term lease liability
 
12,736.0

 
 
12,757.8

Long-term income taxes
 
1,957.3

 
 
2,265.9

Deferred revenues - initial franchise fees
 
679.8

 
 
660.6

Other long-term liabilities
 
951.5

 
 
979.6

Deferred income taxes
 
1,423.2

 
 
1,318.1

Shareholders’ equity (deficit)
 
 
 
 
 
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 shares
 
16.6

 
 
16.6

Additional paid-in capital
 
7,854.7

 
 
7,653.9

Retained earnings
 
53,492.5

 
 
52,930.5

Accumulated other comprehensive income (loss)
 
(2,758.8
)
 
 
(2,482.7
)
Common stock in treasury, at cost; 915.5 and 914.3 million shares
 
(67,077.1
)
 
 
(66,328.6
)
Total shareholders’ equity (deficit)
 
(8,472.1
)
 
 
(8,210.3
)
Total liabilities and shareholders’ equity (deficit)
 
$
50,699.3

 
 
$
47,510.8

See Notes to condensed consolidated financial statements.

3


CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarters Ended
 
 
Nine Months Ended
 
 
September 30,
 
 
September 30,
In millions, except per share data
 
2020
 
 
2019
 
 
2020
 
 
2019
Revenues
 
 
 
 
 
 
 
 
 
 
 
Sales by Company-operated restaurants
 
$
2,286.4

 
 
$
2,416.6

 
 
$
5,905.9

 
 
$
7,057.5

Revenues from franchised restaurants
 
3,044.8

 
 
3,014.0

 
 
7,740.8

 
 
8,670.0

Other revenues
 
86.9

 
 
71.7

 
 
247.3

 
 
208.7

Total revenues
 
5,418.1

 
 
5,502.3

 
 
13,894.0

 
 
15,936.2

Operating costs and expenses
 
 
 
 
 
 
 
 
 
 
 
Company-operated restaurant expenses
 
1,876.3

 
 
1,967.7

 
 
5,077.5

 
 
5,821.0

Franchised restaurants-occupancy expenses
 
567.9

 
 
559.5

 
 
1,646.6

 
 
1,637.3

Other restaurant expenses
 
69.2

 
 
57.5

 
 
198.0

 
 
166.2

Selling, general & administrative expenses
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
75.8

 
 
69.0

 
 
220.3

 
 
193.6

Other
 
454.7

 
 
474.6

 
 
1,547.0

 
 
1,382.2

Other operating (income) expense, net
 
(152.2
)
 
 
(35.3
)
 
 
23.5

 
 
(41.3
)
Total operating costs and expenses
 
2,891.7

 
 
3,093.0

 
 
8,712.9

 
 
9,159.0

Operating income
 
2,526.4

 
 
2,409.3

 
 
5,181.1

 
 
6,777.2

Interest expense
 
310.1

 
 
280.6

 
 
909.2

 
 
838.9

Nonoperating (income) expense, net
 
(0.8
)
 
 
(23.5
)
 
 
(38.8
)
 
 
(53.0
)
Income before provision for income taxes
 
2,217.1

 
 
2,152.2

 
 
4,310.7

 
 
5,991.3

Provision for income taxes
 
454.5

 
 
544.3

 
 
957.4

 
 
1,538.1

Net income
 
$
1,762.6

 
 
$
1,607.9

 
 
$
3,353.3

 
 
$
4,453.2

Earnings per common share-basic
 
$
2.37

 
 
$
2.13

 
 
$
4.50

 
 
$
5.85

Earnings per common share-diluted
 
$
2.35

 
 
$
2.11

 
 
$
4.47

 
 
$
5.80

Dividends declared per common share
 
$
1.25

 
 
$
2.41

 
 
$
3.75

 
 
$
4.73

Weighted-average shares outstanding-basic
 
744.5

 
 
756.6

 
 
744.4

 
 
761.1

Weighted-average shares outstanding-diluted
 
750.0

 
 
763.9

 
 
749.8

 
 
768.1

See Notes to condensed consolidated financial statements.

4


CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarters Ended
 
 
Nine Months Ended
 
 
September 30,
 
 
September 30,
In millions
 
2020
 
 
2019
 
 
2020
 
 
2019
Net income
 
$
1,762.6

 
 
$
1,607.9

 
 
$
3,353.3

 
 
$
4,453.2

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in accumulated other comprehensive
income ("AOCI"), including net investment hedges
56.6

 
 
(179.1
)
 
 
(202.5
)
 
 
(108.3
)
Reclassification of (gain) loss to net income
9.0

 
 

 
 
9.0

 
 
46.8

Foreign currency translation adjustments-net of tax
benefit (expense) of $116.8, ($145.5), $67.6, and ($177.6)
65.6

 
 
(179.1
)
 
 
(193.5
)
 
 
(61.5
)
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in AOCI
(27.1
)
 
 
24.4

 
 
(84.2
)
 
 
33.6

Reclassification of (gain) loss to net income
5.1

 
 
(13.4
)
 
 
(5.8
)
 
 
(30.4
)
Cash flow hedges-net of tax benefit (expense) of $6.6, ($3.3), $27.1, and ($1.0)
(22.0
)
 
 
11.0

 
 
(90.0
)
 
 
3.2

Defined benefit pension plans:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in AOCI
0.5

 
 
0.1

 
 
(2.0
)
 
 
0.5

Reclassification of (gain) loss to net income
3.4

 
 
1.5

 
 
9.4

 
 
4.2

Defined benefit pension plans-net of tax benefit (expense)
of $0.0, $0.0, $0.5, and $0.0
3.9

 
 
1.6

 
 
7.4

 
 
4.7

Total other comprehensive income (loss), net of tax
47.5

 
 
(166.5
)
 
 
(276.1
)
 
 
(53.6
)
Comprehensive income (loss)
 
$
1,810.1

 
 
$
1,441.4

 
 
$
3,077.2

 
 
$
4,399.6

See Notes to condensed consolidated financial statements.

5


CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarters Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
In millions
 
2020
 
2019
 
2020
 
2019
 
Operating activities
 
 
 
 
 
 
 
 
 
Net income
 
$
1,762.6

 
$
1,607.9

 
$
3,353.3

 
$
4,453.2

 
Adjustments to reconcile to cash provided by operations
 
 
 
 
 
 
 
 
 
Charges and credits:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
440.1

 
413.4

 
1,287.1

 
1,204.3

 
Deferred income taxes
 
(38.0
)
 
78.5

 
196.3

 
190.8

 
Share-based compensation
 
7.3

 
29.6

 
64.0

 
90.1

 
Other
 
(56.8
)
 
(64.2
)
 
(25.5
)
 
2.2

 
Changes in working capital items
 
824.3

 
221.5

 
(602.8
)
 
292.2

 
Cash provided by operations
 
2,939.5

 
2,286.7

 
4,272.4

 
6,232.8

 
Investing activities
 
 
 
 
 
 
 
 
 
Capital expenditures
 
(390.2
)
 
(548.7
)
 
(1,177.7
)
 
(1,661.8
)
 
Purchases of restaurant businesses
 
(6.7
)
 
(41.0
)
 
(50.0
)
 
(434.8
)
 
Sales of restaurant businesses
 
8.0

 
49.4

 
35.5

 
249.9

 
Sales of property
 
0.2

 
21.1

 
17.8

 
112.3

 
Other
 
120.8

 
(73.6
)
 
(8.5
)
 
(529.7
)
 
Cash used for investing activities
 
(267.9
)
 
(592.8
)
 
(1,182.9
)
 
(2,264.1
)
 
Financing activities
 
 
 
 
 
 
 
 
 
Net short-term borrowings
 
(993.4
)
 
(600.7
)
 
(885.7
)
 
(105.6
)
 
Long-term financing issuances
 
2.8

 
1,975.0

 
5,543.0

 
4,494.8

 
Long-term financing repayments
 
(451.5
)
 
(667.9
)
 
(1,414.1
)
 
(2,064.1
)
 
Treasury stock purchases
 
(0.7
)
 
(1,467.8
)
 
(905.6
)
 
(3,531.3
)
 
Common stock dividends
 
(930.9
)
 
(876.9
)
 
(2,791.3
)
 
(2,646.7
)
 
Proceeds from stock option exercises
 
105.3

 
73.4

 
262.3

 
323.4

 
Other
 
(0.1
)
 
(12.7
)
 
(122.0
)
 
(23.5
)
 
Cash used for financing activities
 
(2,268.5
)
 
(1,577.6
)
 
(313.4
)
 
(3,553.0
)
 
Effect of exchange rates on cash and cash equivalents
 
25.0

 
(73.5
)
 
9.2

 
(104.4
)
 
Cash and equivalents increase
 
428.1

 
42.8

 
2,785.3

 
311.3

 
Cash and equivalents at beginning of period
 
3,255.7

 
1,134.5

 
898.5

 
866.0

 
Cash and equivalents at end of period
 
$
3,683.8

 
$
1,177.3

 
$
3,683.8

 
$
1,177.3

 
See Notes to condensed consolidated financial statements.

6


CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
For the nine months ended September 30, 2019
 
Common stock
issued
 
 
 
 
 
 
Accumulated other
comprehensive income (loss)
 
 
Common stock in
treasury
 
Total
shareholders’
equity (deficit)
 
Additional
paid-in
capital
 
 
Retained
earnings

Pensions
 
Cash flow
hedges
 
Foreign
currency
translation
 
 
In millions, except per share data
Shares

Amount
 
Shares

 
Amount

Balance at December 31, 2018
1,660.6

 
$
16.6

 
$
7,376.0

 
$
50,487.0

 
$
(216.6
)
 
$
32.4

 
$
(2,425.3
)
 
(893.5
)
 
$
(61,528.5
)
 
$
(6,258.4
)
Net income
 
 
 
 
 
 
4,453.2

 
 
 
 
 
 
 
 
 
 
 
4,453.2

Other comprehensive income (loss),
net of tax
 
 
 
 
 
 
 
 
4.7

 
3.2

 
(61.5
)
 
 
 
 
 
(53.6
)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4,399.6

Common stock cash dividends
($4.73 per share)
 
 
 
 
 
 
(3,580.7
)
 
 
 
 
 
 
 
 
 
 
 
(3,580.7
)
Treasury stock purchases
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(17.9
)
 
(3,571.4
)
 
(3,571.4
)
Share-based compensation
 
 
 
 
90.1

 
 
 
 
 
 
 
 
 
 
 
 
 
90.1

Stock option exercises and other
 
 
 
 
153.6

 
 
 
 
 
 
 
 
 
3.9

 
168.0

 
321.6

Balance at September 30, 2019
1,660.6

 
$
16.6

 
$
7,619.7

 
$
51,359.5

 
$
(211.9
)
 
$
35.6

 
$
(2,486.8
)
 
(907.5
)
 
$
(64,931.9
)
 
$
(8,599.2
)

For the nine months ended September 30, 2020
 
Common stock
issued
 
 
 
 
 
 
Accumulated other
comprehensive income (loss)
 
 
Common stock in
treasury
 
Total
shareholders’
equity (deficit)
 
Additional
paid-in
capital
 
 
Retained
earnings

Pensions
 
Cash flow
hedges
 
Foreign
currency
translation
 
 
In millions, except per share data
Shares

Amount
 
Shares

 
Amount

Balance at December 31, 2019
1,660.6

 
$
16.6

 
$
7,653.9

 
$
52,930.5

 
$
(243.7
)
 
$
12.0

 
$
(2,251.0
)
 
(914.3
)
 
$
(66,328.6
)
 
$
(8,210.3
)
Net income
 
 
 
 
 
 
3,353.3

 
 
 
 
 
 
 
 
 
 
 
3,353.3

Other comprehensive income (loss),
net of tax
 
 
 
 
 
 
 

 
7.4

 
(90.0
)
 
(193.5
)
 
 
 
 
 
(276.1
)
Comprehensive income
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
3,077.2

Common stock cash dividends
($3.75 per share)
 
 
 
 
 
 
(2,791.3
)
 
 
 
 
 
 
 
 
 
 
 
(2,791.3
)
Treasury stock purchases
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(4.3
)
 
(871.9
)
 
(871.9
)
Share-based compensation
 
 
 
 
64.0

 
 
 
 
 
 
 
 
 
 
 
 
 
64.0

Stock option exercises and other
 
 
 
 
136.8

 
 
 
 
 
 
 
 
 
3.1

 
123.4

 
260.2

Balance at September 30, 2020
1,660.6

 
$
16.6

 
$
7,854.7

 
$
53,492.5

 
$
(236.3
)
 
$
(78.0
)
 
$
(2,444.5
)
 
(915.5
)
 
$
(67,077.1
)
 
$
(8,472.1
)

See Notes to condensed consolidated financial statements.


7


CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
For the quarter ended September 30, 2019
 
Common stock
issued
 
 
 
 
 
 
Accumulated other
comprehensive income (loss)
 
 
Common stock in
treasury
 
Total
shareholders’
equity (deficit)
 
Additional
paid-in
capital
 
 
Retained
earnings

Pensions
 
Cash flow
hedges
 
Foreign
currency
translation
 
 
In millions, except per share data
Shares

Amount
 
Shares

 
Amount

Balance at June 30, 2019
1,660.6

 
$
16.6

 
$
7,549.5

 
$
51,562.5

 
$
(213.5
)
 
$
24.6

 
$
(2,307.7
)
 
(901.2
)
 
$
(63,440.8
)
 
$
(6,808.8
)
Net income
 
 
 
 
 
 
1,607.9

 
 
 
 
 
 
 
 
 
 
 
1,607.9

Other comprehensive income (loss),
net of tax
 
 
 
 
 
 
 
 
1.6

 
11.0

 
(179.1
)
 
 
 
 
 
(166.5
)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,441.4

Common stock cash dividends
($2.41 per share)
 
 
 
 
 
 
(1,810.9
)
 
 
 
 
 
 
 
 
 
 
 
(1,810.9
)
Treasury stock purchases
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(7.1
)
 
(1,524.1
)
 
(1,524.1
)
Share-based compensation
 
 
 
 
29.6

 
 
 
 
 
 
 
 
 
 
 
 
 
29.6

Stock option exercises and other
 
 
 
 
40.6

 
 
 
 
 
 
 
 
 
0.8

 
33.0

 
73.6

Balance at September 30, 2019
1,660.6

 
$
16.6

 
$
7,619.7

 
$
51,359.5

 
$
(211.9
)
 
$
35.6

 
$
(2,486.8
)
 
(907.5
)
 
$
(64,931.9
)
 
$
(8,599.2
)

For the quarter ended September 30, 2020
 
Common stock
issued
 
 
 
 
 
 
Accumulated other
comprehensive income (loss)
 
 
Common stock in
treasury
 
Total
shareholders’
equity (deficit)
 
Additional
paid-in
capital
 
 
Retained
earnings

Pensions
 
Cash flow
hedges
 
Foreign
currency
translation
 
 
In millions, except per share data
Shares

Amount
 
Shares

 
Amount

Balance at June 30, 2020
1,660.6

 
$
16.6

 
$
7,780.0

 
$
52,660.8

 
$
(240.2
)
 
$
(56.0
)
 
$
(2,510.1
)
 
(916.5
)
 
$
(67,114.2
)
 
$
(9,463.1
)
Net income
 
 
 
 
 
 
1,762.6

 
 
 
 
 
 
 
 
 
 
 
1,762.6

Other comprehensive income (loss),
net of tax
 
 
 
 
 
 
 
 
3.9

 
(22.0
)
 
65.6

 
 
 
 
 
47.5

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,810.1

Common stock cash dividends
($1.25 per share)
 
 
 
 
 
 
(930.9
)
 
 
 
 
 
 
 
 
 
 
 
(930.9
)
Treasury stock purchases
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(0.7
)
 
(0.7
)
Share-based compensation
 
 
 
 
7.3

 
 
 
 
 
 
 
 
 
 
 
 
 
7.3

Stock option exercises and other
 
 
 
 
67.4

 
 
 
 
 
 
 
 
 
1.0

 
37.8

 
105.2

Balance at September 30, 2020
1,660.6

 
$
16.6

 
$
7,854.7

 
$
53,492.5

 
$
(236.3
)
 
$
(78.0
)
 
$
(2,444.5
)
 
(915.5
)
 
$
(67,077.1
)
 
$
(8,472.1
)

See Notes to condensed consolidated financial statements.









8


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
McDonald’s Corporation, the registrant, together with its subsidiaries, is referred to herein as the "Company." The Company, its franchisees and suppliers, are referred to herein as the "System."
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements contained in the Company’s December 31, 2019 Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. The results for the quarter and nine months ended September 30, 2020, do not necessarily indicate the results that may be expected for the full year.
Prior to January 1, 2020, the Company presented both expenditures and receipts related to technology fees charged to franchisees and revenues related to certain licensing arrangements within Other operating (income) expense, net, because these activities were not part of the Company’s ongoing major or central operations. Effective January 1, 2020, the Company is presenting the revenues and expenses related to these activities within Other revenues and Other restaurant expenses, respectively, in the Condensed Consolidated Statement of Income. The change in presentation was applied retrospectively to all periods presented and had no effect on Operating income, Net income, or Earnings per share.

Restaurant Information
The following table presents restaurant information by ownership type:
Restaurants at September 30,
2020
 
2019
Conventional franchised
21,781

 
21,758

Developmental licensed
7,660

 
7,473

Foreign affiliated
6,997

 
6,432

Total Franchised
36,438

 
35,663

Company-operated
2,658

 
2,635

Total Systemwide restaurants
39,096

 
38,298


The results of operations of restaurant businesses purchased and sold in transactions with franchisees were not material either individually or in the aggregate to the Condensed Consolidated Financial Statements for the periods prior to purchase and sale.

Per Common Share Information

Diluted earnings per common share is calculated using net income divided by diluted weighted-average shares. Diluted weighted-average shares include weighted-average shares outstanding plus the dilutive effect of share-based compensation, calculated using the treasury stock method, of 5.5 million shares and 7.3 million shares for the quarters 2020 and 2019, respectively, and 5.4 million shares and 7.0 million shares for the nine months 2020 and 2019, respectively. Share-based compensation awards that would have been antidilutive, and therefore were not included in the calculation of diluted weighted-average shares, totaled 1.8 million shares and 0.1 million shares for the quarters 2020 and 2019, respectively, and 1.9 million shares and 0.1 million shares for the nine months 2020 and 2019, respectively.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Financial Instruments - Credit Losses

In June 2016, the FASB issued guidance codified in Accounting Standards Codification Topic 326, "Financial Instruments – Credit Losses: Measurements of Credit Losses on Financial Instruments". The standard replaces the incurred loss impairment methodology in prior GAAP with a methodology that instead reflects a current estimate of all expected credit losses on financial assets, including receivables. The guidance requires that an entity measure and recognize expected credit losses at the time the asset is recorded, while considering a broader range of information to estimate credit losses including country specific macroeconomic conditions that correlate with historical loss experience, delinquency trends and aging behavior of receivables, among others. The Company adopted this guidance effective January 1, 2020, prospectively, and the adoption of this standard did not have a material impact to the Condensed Consolidated Financial Statements. The Company had an Allowance for bad debts of $85.3 million as of September 30, 2020 recorded as a reduction to Accounts and notes receivable on the Condensed Consolidated Balance Sheet. Included in this amount were net reductions in the allowance related to rent and royalty deferrals of $27 million for the quarter and an increase in the allowance related to rent and royalty deferrals of $66 million for the nine months. The Company will continue to actively monitor the impact of the COVID-19 pandemic on expected losses.

9


Recent Accounting Pronouncements Not Yet Adopted

Income Taxes

In December 2019, the FASB issued Accounting Standard Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” ("ASU 2019-12"), which simplifies the accounting for income taxes. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including applicable interim periods. The Company anticipates the adoption of ASU 2019-12 will not have a material impact on its consolidated financial statements.

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" ("ASU 2020-04"). The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently evaluating the impact the adoption of ASU 2020-04 will have on its consolidated financial statements.

Updates to Significant Accounting Policies

Revenue recognition

The Company's revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees, developmental licensees and affiliates. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales with minimum rent payments, and initial fees. Revenues from restaurants licensed to developmental licensees and affiliates include a royalty based on a percent of sales, and generally include initial fees. The Company’s Other revenues are comprised of fees paid by franchisees to recover a portion of costs incurred by the Company for various technology platforms, revenues from brand licensing arrangements to market and sell consumer packaged goods using the McDonald’s brand, and third party revenues for the Dynamic Yield business.
Sales by Company-operated restaurants are recognized on a cash basis at the time of the underlying sale and are presented net of sales tax and other sales-related taxes. Royalty revenues are based on a percent of sales and recognized at the time the underlying sales occur. Rental income includes both minimum rent payments, which are recognized straight-line over the franchise term (with the exception of rent concessions as a result of COVID-19 – refer to the Leasing policy update on page 11), and variable rent payments based on a percent of sales, which are recognized at the time the underlying sales occur. Initial fees are recognized as the Company satisfies the performance obligation over the franchise term, which is generally 20 years.
The Company provides goods or services related to various technology platforms to certain franchisees that are distinct from the franchise agreement because they do not require integration with other goods or services we provide. The Company has determined that it is the principal in these arrangements. Accordingly, the related revenue is presented on a gross basis on the Condensed Consolidated Statement of Income. These revenues are recognized as the goods or services are transferred to the franchisee, and related expenses are recognized as incurred. Brand licensing arrangement revenues are based on a percent of sales and are recognized at the time the underlying sales occur. Dynamic Yield third party revenues are generated from providing software as a service solutions to customers and are recognized over the applicable subscription period as the service is performed.

Long-lived assets, Goodwill and Capitalized Software

Long-lived assets and Goodwill are typically reviewed for impairment annually in the fourth quarter and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable or if an indicator of impairment exists. The Company has continued to monitor the global economic uncertainty as a result of COVID-19 to assess the outlook for restaurant operations and the impact that any disruption may have on the Company's business and overall financial performance.
As a result of the Company's analysis, and in consideration of the totality of events and circumstances, including the potential impact of COVID-19 related disruptions on the Company’s operating results, there were no indicators of impairment during the quarter or nine months 2020.
In addition to the Long-lived assets and Goodwill impairment analysis, the Company reviews capitalized software for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable or if an indicator of impairment exists, which occurs more regularly throughout the year, such as when new software may be ready for its intended use. Results for the nine months 2020 reflected write-offs of impaired software that were no longer being used of $26.3 million.

10



Leasing

The FASB issued guidance for how companies may account for COVID-19 related rent concessions in the form of FASB staff and Board members’ remarks at the April 8, 2020 public meeting and the FASB Staff Q&A issued on April 10, 2020.
The Company elected the practical expedient to account for COVID-19 related rent concessions as if they were part of the enforceable rights and obligations of the parties under the existing lease contract. This was elected for the Company’s entire lessee and lessor portfolio for any rent deferrals or rent abatements. For the lessee portfolio, the Company elected not to remeasure the lease liability and right-of-use asset if a rent deferral or a rent abatement is granted.
The Company deferred collection of approximately $20 million and $470 million of rental income on revenue that was recognized in the quarter and nine months, respectively. Rental income includes both minimum rent payments and variable rent payments based on a percent of sales.
Refer to the Cash Flow and Liquidity section on page 29 of this Form 10-Q for additional information on deferred collections of rental income as well as royalties.

Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value. Fair value disclosures are reflected in a three-level hierarchy, maximizing the use of observable inputs and minimizing the use of unobservable inputs. The Company did not have any significant changes to the valuation techniques used to measure fair value as described in the Company's December 31, 2019 Annual Report on Form 10-K.
At September 30, 2020, the fair value of the Company’s debt obligations was estimated at $43.4 billion, compared to a carrying amount of $37.8 billion, which reflects $5.5 billion of debt issuances during the first quarter under the Company's existing registration statement on Form S-3 with maturities ranging from 2025 to 2050 and interest rates ranging from 1.45% to 4.20%. The balances at September 30, 2020 also reflect the retirement of $900 million of commercial paper and $1.4 billion of other debt maturities compared with December 31, 2019. In addition, a $1 billion line of credit was entered into during the first quarter of 2020, and subsequently repaid in the third quarter. The fair value was based upon quoted market prices, Level 2 within the valuation hierarchy. The carrying amounts of cash and equivalents, short-term investments and notes receivable approximate fair value.

11


Financial Instruments and Hedging Activities
The Company is exposed to global market risks, including the effect of changes in interest rates and foreign currency fluctuations. The Company uses foreign currency denominated debt and derivative instruments to mitigate the impact of these changes. The Company does not hold or issue derivatives for trading purposes.
The following table presents the fair values of derivative instruments included on the Condensed Consolidated Balance Sheet:
  
Derivative Assets
 
Derivative Liabilities
In millions
Balance Sheet Classification
 
September 30, 2020
 
December 31, 2019
 
Balance Sheet Classification
 
September 30, 2020
 
December 31, 2019
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
Foreign currency
Prepaid expenses and other current assets
 
$
2.1

 
$
10.0

 
Accrued payroll and other liabilities
 
$
(25.8
)
 
$
(5.2
)
Interest rate
Prepaid expenses and other current assets
 
 
 
 
 
Accrued payroll and other liabilities
 

 

Foreign currency
Miscellaneous other assets
 
15.0

 
9.5

 
Other long-term liabilities
 
(6.3
)
 
(1.2
)
Interest rate
Miscellaneous other assets

 
37.9

 
12.1

 
Other long-term liabilities
 


 


Total derivatives designated as hedging instruments
 
$
55.0

 
$
31.6

 
 
 
$
(32.1
)
 
$
(6.4
)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
Equity
Prepaid expenses and other current assets


 
$
190.2

 
$
1.6

 
Accrued payroll and other liabilities
 
$
(5.6
)
 
$
(0.1
)
Foreign currency
Prepaid expenses and other current assets


 

 
12.4

 
Accrued payroll and other liabilities
 
(6.9
)
 
(4.8
)
Equity
Miscellaneous other assets
 

 
179.1

 
 
 
 
 
 
Total derivatives not designated as hedging instruments
 
$
190.2

 
$
193.1

 
 
 
$
(12.5
)
 
$
(4.9
)
Total derivatives
 
$
245.2

 
$
224.7

 
 
 
$
(44.6
)
 
$
(11.3
)

    The following table presents the pre-tax amounts from derivative instruments affecting income and AOCI for the nine months ended September 30, 2020 and 2019, respectively:
 
Location of Gain or Loss
Recognized in Income on
Derivative
 
Gain (Loss)
Recognized in AOCI
 
Gain (Loss)
Reclassified into Income from AOCI
 
Gain (Loss) Recognized in
Income on Derivative
 
 
 
 
 
 
 
 
In millions
 
 
2020
 
2019
 
2020
 
2019
 
2020
 
2019
Foreign currency
Nonoperating income/expense
 
$
(18.8
)
 
$
43.5

 
$
11.3

 
$
40.3

 
 
 
 
Interest rate
Interest expense
 
(90.8
)
 


 
(3.8
)
 
(1.0
)
 
 
 
 
Cash flow hedges
 
$
(109.6
)
 
$
43.5

 
$
7.5

 
$
39.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency denominated debt
Nonoperating income/expense
 
$
(396.8
)
 
$
766.6

 
$
17.6

 
 
 
 
 
 
Foreign currency derivatives
Nonoperating income/expense
 
2.1

 
11.9

 
 
 
 
 
 
 
 
Foreign currency derivatives(1)
Interest expense
 
 
 
 
 
 
 
 
 
$
11.0

 
$
8.0

Net investment hedges
 
$
(394.7
)
 
$
778.5

 
$
17.6

 
 
 
$
11.0

 
$
8.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency
Nonoperating income/expense
 
 
 
 
 
 
 
 
 
$
(17.2
)
 
$
5.2

Equity
Selling, general & administrative expenses
 
 
 
 
 
 
 
 
 
27.2

 
70.5

Equity
Other operating income/expense, net

 
 
 
 
 
 
 
 
 
(5.6
)
 
 
Undesignated derivatives
 
 
 
 
 
 
 
 
 
$
4.4

 
$
75.7

(1)The amount of gain (loss) recognized in income related to components excluded from effectiveness testing.





12



Fair Value Hedges
The Company enters into fair value hedges to reduce the exposure to changes in fair values of certain liabilities. The Company enters into fair value hedges that convert a portion of its fixed rate debt into floating rate debt by use of interest rate swaps.  At September 30, 2020, the carrying amount of fixed-rate debt that was effectively converted was $1.0 billion, which included an increase of $37.9 million of cumulative hedging adjustments. For the nine months ended September 30, 2020, the Company recognized a $25.8 million gain on the fair value of interest rate swaps, and a corresponding loss on the fair value of the related hedged debt instrument to interest expense.
Cash Flow Hedges
The Company enters into cash flow hedges to reduce the exposure to variability in certain expected future cash flows. To protect against the reduction in value of forecasted foreign currency cash flows (such as royalties denominated in foreign currencies), the Company uses foreign currency forwards to hedge a portion of anticipated exposures. The hedges cover the next 18 months for certain exposures and are denominated in various currencies. To protect against the variability of interest rates of an anticipated bond issuance, the Company may use treasury locks to hedge a portion of the expected future cash flows.
As of September 30, 2020, the Company had derivatives outstanding with an equivalent notional amount of $1.1 billion that hedged a portion of forecasted foreign currency denominated cash flows.
Based on market conditions at September 30, 2020, the $78.0 million in cumulative cash flow hedging losses, after tax, is not expected to have a significant effect on earnings over the next 12 months.
Net Investment Hedges
The Company primarily uses foreign currency denominated debt (third party and intercompany) to hedge its investments in certain foreign subsidiaries and affiliates. Realized and unrealized translation adjustments from these hedges are included in shareholders' equity in the foreign currency translation component of Other comprehensive income ("OCI") and offset translation adjustments on the underlying net assets of foreign subsidiaries and affiliates, which also are recorded in OCI. As of September 30, 2020, $12.7 billion of the Company's third party foreign currency denominated debt and $0.6 billion of intercompany foreign currency denominated debt was designated to hedge investments in certain foreign subsidiaries and affiliates.
Undesignated Derivatives
The Company enters into certain derivatives that are not designated for hedge accounting, therefore the changes in the fair value of these derivatives are recognized immediately in earnings together with the gain or loss from the hedged balance sheet position. As an example, the Company enters into equity derivative contracts, including total return swaps, to hedge market-driven changes in certain of its supplemental benefit plan liabilities. Changes in the fair value of these derivatives are recorded in Selling, general & administrative expenses together with the changes in the supplemental benefit plan liabilities. The Company may also use certain derivatives to mitigate the share price risk related to its sale of stock in McDonald’s Japan.  The changes in the fair value of the undesignated derivatives used for the most recent sale transaction were recognized immediately in earnings in Other Operating (income) expense, net. In addition, the Company uses foreign currency forwards to mitigate the change in fair value of certain foreign currency denominated assets and liabilities. The changes in the fair value of these derivatives are recognized in Nonoperating (income) expense, net, along with the currency gain or loss from the hedged balance sheet position.
Credit Risk
The Company is exposed to credit-related losses in the event of non-performance by its derivative counterparties. The Company did not have significant exposure to any individual counterparty at September 30, 2020 and has master agreements that contain netting arrangements. For financial reporting purposes, the Company presents gross derivative balances in the financial statements and supplementary data, including for counterparties subject to netting arrangements. Some of these agreements also require each party to post collateral if credit ratings fall below, or aggregate exposures exceed, certain contractual limits. At September 30, 2020, the Company was required to post an immaterial amount of collateral due to the negative fair value of certain derivative positions. The Company's counterparties were not required to post collateral on any derivative position, other than on certain hedges of the Company’s supplemental benefit plan liabilities where the counterparties were required to post collateral on their liability positions.

13


Franchise Arrangements
Revenues from franchised restaurants consisted of:
 
 
 
 
 
 
 
 
 
Quarters Ended
 
Nine Months Ended
 
September 30,
 
September 30,
In millions
2020
 
2019
 
2020
 
2019
 
 
 
 
 
 
 
 
Rents
$
1,961.7

 
$
1,935.9

 
$
4,944.8

 
$
5,582.1

Royalties
1,071.3

 
1,067.6

 
2,762.1

 
3,056.1

Initial fees
11.8

 
10.5

 
33.9

 
31.8

Revenues from franchised restaurants
$
3,044.8

 
$
3,014.0

 
$
7,740.8

 
$
8,670.0



Segment Information
The Company operates under an organizational structure with the following global business segments reflecting how management reviews and evaluates operating performance:
U.S. - the Company's largest market. The segment is 95% franchised as of September 30, 2020.
International Operated Markets - comprised of wholly-owned markets, or countries in which the Company operates restaurants, including Australia, Canada, France, Germany, Italy, the Netherlands, Russia, Spain and the U.K. The segment is 84% franchised as of September 30, 2020.
International Developmental Licensed Markets & Corporate - comprised of primarily developmental licensee and affiliate markets in the McDonald’s system. Corporate activities are also reported within this segment. The segment is 98% franchised as of September 30, 2020.
The following table presents the Company’s revenues and operating income by segment:
 
Quarters Ended
 
Nine Months Ended
  
September 30,
 
September 30,
In millions
2020
 
2019
 
2020
 
2019
Revenues
 
 
 
 
 
 
 
U.S.
$
2,094.2

 
$
2,028.5

 
$
5,723.8

 
$
5,959.9

International Operated Markets
2,845.9

 
2,986.2

 
6,862.7

 
8,573.4

International Developmental Licensed Markets & Corporate
478.0

 
487.6

 
1,307.5

 
1,402.9

Total revenues
$
5,418.1

 
$
5,502.3

 
$
13,894.0

 
$
15,936.2

Operating Income
 
 
 
 
 
 
 
U.S.
$
1,078.3

 
$
1,038.7

 
$
2,705.9

 
$
3,039.4

International Operated Markets
1,197.9

 
1,284.0

 
2,311.8

 
3,550.8

International Developmental Licensed Markets & Corporate *
250.2

 
86.6

 
163.4

 
187.0

Total operating income
$
2,526.4

 
$
2,409.3

 
$
5,181.1

 
$
6,777.2


*
Results for the quarter and nine months 2020 included $139 million of strategic gains related to the sale of McDonald's Japan stock, which reduced the Company's ownership by about 3%.

Subsequent Events
The Company evaluated subsequent events through the date the financial statements were issued and filed with the Securities and Exchange Commission.
The Company began the third quarter with nearly all restaurants globally open for business, and which currently remain open as of the date of filing. However, as a result of COVID-19 resurgences, since September, there have been numerous instances of government restrictions on operating hours, limited dine-in capacity in most countries and, in some cases, mandated dining room closures. These restrictions are impacting most of the Company's key markets outside of the U.S., including France, Germany, Canada and the U.K. The Company expects some restrictions in various markets so long as the COVID-19 pandemic continues.
There were no other subsequent events that required recognition or disclosure.

14


Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company franchises and operates McDonald’s restaurants, which serve a locally-relevant menu of quality food and beverages in 119 countries. Of the 39,096 restaurants at September 30, 2020, 36,438 were franchised, which is 93% of McDonald's restaurants.
The Company’s reporting segments are aligned with its strategic priorities and reflect how management reviews and evaluates operating performance. Significant reportable segments include the United States ("U.S.") and International Operated Markets. In addition, throughout this report we present the International Developmental Licensed Markets & Corporate segment, which includes markets in over 80 countries, as well as Corporate activities.
McDonald’s franchised restaurants are owned and operated under one of the following structures - conventional franchise, developmental license or affiliate. The optimal ownership structure for an individual restaurant, trading area or market (country) is based on a variety of factors, including the availability of individuals with entrepreneurial experience and financial resources, as well as the local, legal and regulatory environment in critical areas such as property ownership and franchising. The business relationship between McDonald’s and its independent franchisees is supported by adhering to standards and policies and is of fundamental importance to overall performance and to protecting the McDonald’s brand.
The Company is primarily a franchisor and believes franchising is paramount to delivering great-tasting food, locally relevant customer experiences and driving profitability. Franchising enables an individual to be their own employer and maintain control over all employment related matters, marketing and pricing decisions, while also benefiting from the strength of McDonald’s global brand, operating system and financial resources.
Directly operating McDonald’s restaurants contributes significantly to our ability to act as a credible franchisor. One of the strengths of the franchising model is that the expertise from operating Company-owned restaurants allows McDonald’s to improve the operations and success of all restaurants while innovations from franchisees can be tested and, when viable, efficiently implemented across relevant restaurants. Company-owned and operated restaurants provide Company personnel with a venue for restaurant operations training experience. In addition, in our Company-owned and operated restaurants, and in collaboration with franchisees, we are able to further develop and refine operating standards, marketing concepts and product and pricing strategies that will ultimately benefit McDonald’s restaurants.
The Company’s revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. Fees vary by type of site, amount of Company investment, if any, and local business conditions. These fees, along with occupancy and operating rights, are stipulated in franchise/license agreements that generally have 20-year terms. The Company’s Other revenues are comprised of technology fees paid by franchisees, revenues from brand licensing arrangements, and third party revenues for the Dynamic Yield business.
Conventional Franchise
Under a conventional franchise arrangement, the Company generally owns or secures a long-term lease on the land and building for the restaurant location and the franchisee pays for equipment, signs, seating and décor. The Company believes that ownership of real estate, combined with the co-investment by franchisees, enables us to achieve restaurant performance levels that are among the highest in the industry.
Franchisees are responsible for reinvesting capital in their businesses over time. In addition, to accelerate implementation of certain initiatives, the Company may co-invest with franchisees to fund improvements to their restaurants or their operating systems. These investments, developed in collaboration with franchisees, are designed to cater to consumer preferences, improve local business performance, and increase the value of our brand through the development of modernized, more attractive and higher revenue generating restaurants.
The Company requires franchisees to meet rigorous standards and generally does not work with passive investors. The business relationship with franchisees is designed to facilitate consistency and high quality at all McDonald’s restaurants. Conventional franchisees contribute to the Company’s revenue, primarily through the payment of rent and royalties based upon a percent of sales, with specified minimum rent payments, along with initial fees paid upon the opening of a new restaurant or grant of a new franchise. The Company's heavily franchised business model is designed to generate stable and predictable revenue, which is largely a function of franchisee sales, and resulting cash flow streams. As most revenues are based on a percent of sales, the Company expects that consumer sentiment and government regulations as a result of COVID-19 will continue to have a negative impact on revenue.
Developmental License or Affiliate
Under a developmental license or affiliate arrangement, licensees are responsible for operating and managing the business, providing capital (including the real estate interest) and developing and opening new restaurants. The Company generally does not invest any capital under a developmental license or affiliate arrangement, and it receives a royalty based on a percent of sales, and generally receives initial fees upon the opening of a new restaurant or grant of a new license.

15


While developmental license and affiliate arrangements are largely the same, affiliate arrangements are used in a limited number of foreign markets (primarily China and Japan) where the Company also has an equity investment and records its share of net results in Equity in earnings of unconsolidated affiliates.
As both royalty revenues and the Company's share of net results in equity investments are based on sales results, the Company expects to continue to have a negative impact to revenues and Equity in earnings of unconsolidated affiliates as a result of COVID-19.


Strategic Direction
The Company recently announced a new growth strategy, Accelerating the Arches (the “Strategy”). The Strategy encompasses all aspects of McDonald’s business as the leading global omni-channel restaurant brand, and includes a refreshed purpose, updated values, and new growth pillars that build on the Company’s competitive advantages.

Purpose, Mission, & Values
The Company is embracing and prioritizing its role and commitments to the communities in which it operates through our:
Purpose to feed and foster communities,
Mission to create delicious feel-good moments for everyone, and
Core values that define who we are and how we run our business.

Growth Pillars
The new growth pillars, rooted in the Company’s identity, MCD, build on historic strengths and articulate areas of further opportunity. Under the new Strategy, the Company will:
Maximize our Marketing by investing in new, culturally relevant approaches to effectively communicate the story of our brand, food and purpose. This will focus on enhanced digital capabilities that provide a more personal connection with customers. The Company is also committed to a marketing strategy that highlights value at every tier of the menu, as affordability remains a cornerstone of the McDonald’s brand.
Commit to the Core by tapping into customer demand for the familiar and focusing on serving delicious burgers, chicken and coffee. The Company will prioritize chicken and beef offerings as we expect they represent the largest growth opportunities. The Company expects there is significant opportunity to expand its chicken offerings by leveraging line extensions of customer favorites. In addition, the Company plans to introduce a new Crispy Chicken Sandwich in the U.S. in early 2021. The Company will also implement a series of operational and formulation changes designed to improve upon the great taste of our burgers. We also see a significant opportunity with coffee, and markets will leverage the McCafe brand, experience, value and quality to drive long-term growth.
Double Down on the 3D's: Digital, Delivery and Drive Thru by leveraging competitive strengths and building a powerful digital experience growth engine that provides a fast, easy experience for our customers. To unlock further growth, the Company will accelerate technology innovation so that when customers interact with McDonald’s, they can enjoy a fast, easy experience that meets their needs.
Digital: The Company’s new digital experience growth engine, “MyMcDonald’s” will transform its digital offerings across drive thru, takeaway, delivery, curbside pick-up and dine-in. Through the digital tools across this platform, customers will receive tailored offers, be able to participate in a new loyalty program and order and receive McDonald's food through the channel of their choice. The Company expects to launch “MyMcDonald’s” across its top six markets by the end of 2021.
Delivery: Over the past three years, the Company has expanded the number of McDonald’s restaurants offering delivery to about 28,000 restaurants, and delivery sales have grown significantly. The Company will build on this progress and enhance the delivery experience for customers by adding the ability to order on the McDonald’s app, which is already available in several markets around the world, and optimizing operations with a focus on speed and accuracy.

16



Drive Thru:. The Company has drive thru locations in 65% of restaurants globally, including nearly 95% of the approximately 14,000 locations in the U.S. During the COVID-19 pandemic, this channel has heightened importance and we expect that it will become even more critical to meet customers’ demand for flexibility and choice. The Company will build on its drive thru advantage as the vast majority of new restaurant openings in the U.S. and International Operated Markets will include a drive thru. The Company will test new concepts and technology to enhance the customer experience, including automated order taking; a new drive thru express pick-up lane for customers with a digital order; and a restaurant concept that offers drive thru, delivery and takeaway only to provide a faster, more convenient experience.
The Company’s new Strategy is underpinned by a relentless focus on running great restaurants, including improving speed of service to enhance the customer experience. The Company believes this Strategy will build on our inherent strengths by harnessing our competitive advantages and investing in innovations that will enhance the customer experience and deliver long-term growth.

Third Quarter and Nine Months 2020 Financial Performance
Global monthly comparable sales results improved from the second quarter and throughout the third quarter, including month over month improvement across all segments throughout the third quarter of 2020. Global comparable sales decreased 2.2% for the quarter and 9.9% for the nine months.
U.S. comparable sales increased 4.6% for the quarter and decreased 1.4% for the nine months. Comparable sales results for the third quarter of 2020 continued to benefit from strong average check growth from larger group orders as well as strong performance at the dinner daypart. The Company's strategic marketing investments and resulting promotional activity drove low double-digit comparable sales for the month of September, including positive comparable sales across all dayparts. Comparable guest counts remained negative for the quarter.
International Operated Markets segment comparable sales decreased 4.4% for the quarter and 17.6% for the nine months. The third quarter comparable sales were a significant improvement over the second quarter comparable sales of negative 41.4%. While nearly all restaurants were open, performance was impacted by customer sentiment and instances of government restrictions on operating hours, limited dine-in capacity and in some cases, forced dining room closures. While performance was mixed, the pace of recovery in each market is also impacted by drive thru penetration. For both periods, comparable sales varied across markets with negative comparable sales in France, Spain, Germany and the U.K., partly offset by positive comparable sales in Australia.
International Developmental Licensed Markets segment comparable sales decreased 10.1% for the quarter and 12.9% for the nine months. Results for both periods were primarily impacted by negative comparable sales in Latin America and China, partly offset by strong positive comparable sales in Japan.
In addition to the comparable sales results, the Company had the following financial results for the quarter and nine months 2020:
Consolidated revenues decreased 2% (2% in constant currencies) for the quarter and 13% (12% in constant currencies) for the nine months.
Systemwide sales were flat with the prior year (decreased 1% in constant currencies) for the quarter and decreased 10% (9% in constant currencies) for the nine months.
Consolidated operating income increased 5% (3% in constant currencies) for the quarter and decreased 24% (23% in constant currencies) for the nine months. Refer to the Operating Income section on page 28 for additional details.
Diluted earnings per share increased 11% (10% in constant currencies) to $2.35 for the quarter and decreased 23% (23% in constant currencies) to $4.47 for the nine months. Refer to the Net Income and Diluted Earnings per Share section on page 21 for additional details.

Management reviews and analyzes business results excluding the effect of foreign currency translation, impairment and other strategic charges and gains, as well as income tax provision adjustments related to the Tax Cuts and Jobs Act of 2017 ("Tax Act"), and bases incentive compensation plans on these results, because the Company believes this better represents underlying business trends.

17


The Following Definitions Apply to these Terms as Used Throughout this Form 10-Q:
Constant currency results exclude the effects of foreign currency translation and are calculated by translating current year results at prior year average exchange rates. Management reviews and analyzes business results excluding the effect of foreign currency translation, impairment and other strategic charges and gains, as well as income tax provision adjustments related to the Tax Act, and bases incentive compensation plans on these results, because the Company believes this better represents underlying business trends.
Comparable sales are compared to the same period in the prior year and represent sales at all restaurants, whether operated by the Company or by franchisees, in operation at least thirteen months including those temporarily closed. Some of the reasons restaurants may be temporarily closed include reimaging or remodeling, rebuilding, road construction and natural disasters (which includes restaurants temporarily closed due to COVID-19 in 2020). Comparable sales exclude the impact of currency translation, and, since 2017, also exclude sales from Venezuela due to its hyper-inflation. Management generally identifies hyper-inflationary markets as those markets whose cumulative inflation rate over a three-year period exceeds 100%. Management believes that these exclusions more accurately reflect the underlying business trends. Comparable sales are driven by changes in guest counts and average check, which is affected by changes in pricing and product mix. The goal is to achieve a relatively balanced contribution from both guest counts and average check.
Comparable guest counts represent the number of transactions at all restaurants, whether operated by the Company or by franchisees, in operation at least thirteen months including those temporarily closed.
Systemwide sales include sales at all restaurants, whether operated by the Company or by franchisees. While franchised sales are not recorded as revenues by the Company, management believes the information is important in understanding the Company's financial performance, because these sales are the basis on which the Company calculates and records franchised revenues and are indicative of the financial health of the franchisee base. The Company's revenues consist solely of sales by Company-operated restaurants and fees from franchised restaurants operated by conventional franchisees, developmental licensees and affiliates.
Free cash flow, defined as cash provided by operations less capital expenditures, and free cash flow conversion rate, defined as free cash flow divided by net income, are measures reviewed by management in order to evaluate the Company’s ability to convert net profits into cash resources, after reinvesting in the core business, that can be used to pursue opportunities to enhance shareholder value.


18


CONSOLIDATED OPERATING RESULTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter Ended
 
Nine Months Ended
Dollars in millions, except per share data
September 30, 2020
 
September 30, 2020
 
Amount
 
 
Increase/
(Decrease)

 
Amount
 
 
Increase/
(Decrease)

Revenues
 
 
 
 
 
 
 
 
 
Sales by Company-operated restaurants
 
$
2,286.4

 
(5
)%
 
 
$
5,905.9

 
(16
)%
Revenues from franchised restaurants
 
3,044.8

 
1

 
 
7,740.8

 
(11
)
Other revenues
 
86.9

 
21

 
 
247.3

 
18

Total revenues
 
5,418.1

 
(2
)
 
 
13,894.0

 
(13
)
Operating costs and expenses
 
 
 
 
 
 
 
 
 
Company-operated restaurant expenses
 
1,876.3

 
(5
)
 
 
5,077.5

 
(13
)
Franchised restaurants-occupancy expenses
 
567.9

 
2

 
 
1,646.6

 
1

Other restaurant expenses
 
69.2

 
20

 
 
198.0

 
19

Selling, general & administrative expenses
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
75.8

 
10

 
 
220.3

 
14

Other
 
454.7

 
(4
)
 
 
1,547.0

 
12

Other operating (income) expense, net
 
(152.2
)
 
n/m

 
 
23.5

 
n/m

Total operating costs and expenses
 
2,891.7

 
(7
)
 
 
8,712.9

 
(5
)
Operating income
 
2,526.4

 
5

 
 
5,181.1

 
(24
)
Interest expense
 
310.1

 
10

 
 
909.2

 
8

Nonoperating (income) expense, net
 
(0.8
)
 
97

 
 
(38.8
)
 
27

Income before provision for income taxes
 
2,217.1

 
3

 
 
4,310.7

 
(28
)
Provision for income taxes
 
454.5

 
(16
)
 
 
957.4

 
(38
)
Net income
 
$
1,762.6

 
10
 %
 
 
$
3,353.3

 
(25
)%
Earnings per common share-basic
 
$
2.37

 
11
 %
 
 
$
4.50

 
(23
)%
Earnings per common share-diluted
 
$
2.35

 
11
 %
 
 
$
4.47

 
(23
)%
n/m Not meaningful

19


Impact of Foreign Currency Translation
While changes in foreign currency exchange rates affect reported results, McDonald's mitigates exposures, where practical, by purchasing goods and services in local currencies, financing in local currencies and hedging certain foreign-denominated cash flows. Results excluding the effect of foreign currency translation (also referred to as constant currency) are calculated by translating current year results at prior year average exchange rates.
IMPACT OF FOREIGN CURRENCY TRANSLATION
 
 
 
 
 
 
 
 
Dollars in millions, except per share data
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency
Translation
Benefit/ (Cost)
 
Quarters Ended September 30,
 
2020

 
 
2019

 
 
2020

Revenues
 
$
5,418.1

 
 
$
5,502.3

 
 
$
30.7

Company-operated margins
 
410.1

 
 
448.9

 
 
1.9

Franchised margins
 
2,476.9

 
 
2,454.5

 
 
36.9

Selling, general & administrative expenses
 
530.5

 
 
543.6

 
 
(4.0
)
Operating income
 
2,526.4

 
 
2,409.3

 
 
34.4

Net income
 
1,762.6

 
 
1,607.9

 
 
23.5

Earnings per share-diluted
 
$
2.35

 
 
$
2.11

 
 
$
0.03

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency
Translation
Benefit/ (Cost)
 
Nine Months Ended September 30,
 
2020

 
 
2019

 
 
2020

Revenues
 
$
13,894.0

 
 
$
15,936.2

 
 
$
(126.6
)
Company-operated margins
 
828.4

 
 
1,236.5

 
 
(3.0
)
Franchised margins
 
6,094.2

 
 
7,032.7

 
 
(19.4
)
Selling, general & administrative expenses
 
1,767.3

 
 
1,575.8

 
 
4.6

Operating income
 
5,181.1

 
 
6,777.2

 
 
(18.4
)
Net income
 
3,353.3

 
 
4,453.2

 
 
0.2

Earnings per share-diluted
 
$
4.47

 
 
$
5.80

 
 
$
0.00

The impact of foreign currency translation on consolidated operating results for the quarter and nine months primarily reflected the strengthening of the Euro and British Pound. The nine months was offset by the weakening of the Brazilian Real and Australian Dollar.


20


Net Income and Diluted Earnings per Share
For the quarter, net income increased 10% (8% in constant currencies) to $1,762.6 million, and diluted earnings per share increased 11% (10% in constant currencies) to $2.35. Foreign currency translation had a positive impact of $0.03 on diluted earnings per share.
For the nine months, net income decreased 25% (25% in constant currencies) to $3,353.3 million, and diluted earnings per share decreased 23% (23% in constant currencies) to $4.47. Foreign currency translation had no impact on diluted earnings per share.
Results for the quarter reflected stronger operating performance in the U.S. due to higher sales-driven restaurant margins, partly offset by sales performance declines in the International Operated Markets and International Developmental Licensed Markets segments as a result of COVID-19. The nine months reflected sales performance declines in all segments as a result of COVID-19.
Results for the quarter and nine months 2020 included $139 million of pre-tax strategic gains, or $0.13 per share, related to the sale of McDonald’s Japan stock, which reduced the Company's ownership by about 3%. Results for the nine months also included $0.01 per share of pre-tax strategic charges primarily due to the write-off of impaired software that was no longer being used of $26 million, partly offset by $13 million of income primarily comprised of a reversal of a reserve associated with the Company's sale of its business in the India Delhi market in January 2020.
Results for the nine months 2019 included $80 million of pre-tax strategic charges, or $0.07 per share, primarily related to impairment associated with the purchase of our joint venture partner's interest in the India Delhi market, partly offset by gains on the sales of property at the former Corporate headquarters.
Results also included the following:
Lower incentive-based compensation expense for the quarter and nine months.
A net reduction of reserves for bad debts of $27 million for the quarter and an increase of reserves for bad debts of $66 million for the nine months, all related to rent and royalty deferrals.
The nine months included over $200 million of committed incremental franchisee support for marketing to accelerate recovery and drive growth across the U.S. and International Operated Markets.
About $100 million was recorded in the U.S. and the remaining support was recorded in the International Operated Markets segment.

Outlined below is additional information for the quarter and nine months ended September 30, 2020:

EARNINGS PER SHARE-DILUTED RECONCILIATION
 
Quarters Ended September 30,
 
 
Nine Months Ended September 30,
 
 
2020

 
2019

 
Inc/ (Dec)
 
 
Inc/ (Dec)
Excluding
Currency
Translation
 
 
2020

 
2019

 
Inc/ (Dec)

 
 
Inc/ (Dec)
Excluding
Currency
Translation

 
GAAP earnings per share-diluted
$
2.35

 
$
2.11

 
11
%
 
10
%
 
$
4.47

 
$
5.80

 
(23
)
%
 
(23
)
%
Strategic charges
(0.13
)
 

 
 
 
 
 
 
 
(0.12
)
 
0.07

 
 
 
 
 
 
Non-GAAP earnings per share-diluted
$
2.22

 
$
2.11

 
5
%
 
4
%
 
$
4.35

 
$
5.87

 
(26
)
%
 
(26
)
%

Excluding the current year and prior year strategic gains and charges described above, for the quarter net income increased 3% (2% in constant currencies) and diluted earnings per share increased 5% (4% in constant currencies), and for the nine months net income decreased 28% (28% in constant currencies) and diluted earnings per share decreased 26% (26% in constant currencies).
Diluted earnings per share for both periods benefited from a decrease in diluted weighted average shares outstanding. For the nine months, the Company repurchased 4.3 million shares of stock for $872.0 million. The Company suspended its share repurchase program in early March; therefore, no shares have been repurchased since then. In addition, in the third quarter, the Company paid a quarterly dividend of $1.25 per share, or $930.9 million, bringing total dividends paid for the nine months to $2.8 billion.

RESTAURANT UPDATE
The Company has continued to follow the guidance of expert health authorities to ensure the appropriate precautionary steps are taken to protect the health and safety of our people and our customers.
The Company began the third quarter with nearly all restaurants globally open for business, and which currently remain open as of the date of filing. However, as a result of COVID-19 resurgences, since September, there have been numerous instances of government restrictions on operating hours, limited dine-in capacity in most countries and, in some cases, mandated dining room closures. These restrictions are impacting most of the Company's key markets outside of the U.S., including France, Germany, Canada and the U.K. The Company expects some restrictions in various markets so long as the COVID-19 pandemic continues.

21


Revenues
The Company's revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees, developmental licensees and affiliates. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales with minimum rent payments, and initial fees. Revenues from restaurants licensed to developmental licensees and affiliates include a royalty based on a percent of sales, and generally include initial fees. The Company’s Other revenues are comprised of fees paid by franchisees to recover a portion of costs incurred by the Company for various technology platforms, revenues from brand licensing arrangements to market and sell consumer packaged goods using the McDonald’s brand, and third party revenues for the Dynamic Yield business.
Franchised restaurants represented 93% of McDonald's restaurants worldwide at September 30, 2020. The Company's heavily franchised business model is designed to generate stable and predictable revenue, which is largely a function of franchisee sales, and resulting cash flow streams. As most revenues are based on a percent of sales, the Company expects that consumer sentiment and government regulations as a result of COVID-19 will continue to have a negative impact on revenue. The Company granted the deferral of cash collection for certain rent and royalties earned from franchisees in substantially all markets primarily during the first and second quarters of 2020. The extent of the deferrals differs in length by market, with approximately half of the deferrals having been collected by September 30, 2020. Although the Company has deferred some cash collection, revenue is continuing to be recognized as sales are incurred.



22


REVENUES
 
 
 
 
 
Dollars in millions
 
 
 
 
 
Quarters Ended September 30,
2020

 
2019

Inc/ (Dec)

Inc/ (Dec)
Excluding
Currency
Translation

Company-operated sales
 
 
 
 
 
U.S.
$
625.9

 
$
624.8

0
 %
0
 %
International Operated Markets
1,499.2

 
1,639.7

(9
)
(7
)
International Developmental Licensed Markets & Corporate
161.3

 
152.1

6

5

Total
$
2,286.4

 
$
2,416.6

(5
)%
(5
)%
Franchised revenues
 
 
 
 
 
U.S.
$
1,425.6

 
$
1,365.6

4
 %
4
 %
International Operated Markets
1,318.1

 
1,326.2

(1
)
(5
)
International Developmental Licensed Markets & Corporate
301.1

 
322.2

(7
)
(5
)
Total
$
3,044.8

 
$
3,014.0

1
 %
(1
)%
Total Company-operated sales and Franchised revenues
 
 
 
 
 
U.S.
$
2,051.5

 
$
1,990.4

3
 %
3
 %
International Operated Markets
2,817.3

 
2,965.9

(5
)
(6
)
International Developmental Licensed Markets & Corporate
462.4

 
474.3

(3
)
(1
)
Total
$
5,331.2

 
$
5,430.6

(2
)%
(2
)%
 
 
 
 
 
 
Total Other revenues
$
86.9

 
$
71.7

21
 %
20
 %
 
 
 
 
 
 
Total Revenues
$
5,418.1

 
$
5,502.3

(2
)%
(2
)%
Nine Months Ended September 30,
2020

 
2019

Inc/ (Dec)

Inc/ (Dec)
Excluding
Currency
Translation

Company-operated sales
 
 
 
 

 
U.S.
$
1,756.9

 
$
1,857.2

(5
)%
(5
)%
International Operated Markets
3,687.3

 
4,749.5

(22
)
(21
)
International Developmental Licensed Markets & Corporate
461.7

 
450.8

2

6

Total
$
5,905.9

 
$
7,057.5

(16
)%
(15
)%
Franchised revenues
 
 
 
 
 
U.S.
$
3,841.5

 
$
3,987.0

(4
)%
(4
)%
International Operated Markets
3,098.6

 
3,763.7

(18
)
(18
)
International Developmental Licensed Markets & Corporate
800.7

 
919.3

(13
)
(10
)
Total
$
7,740.8

 
$
8,670.0

(11
)%
(10
)%
Total Company-operated sales and Franchised revenues
 
 
 
 
 
U.S.
$
5,598.4

 
$
5,844.2

(4
)%
(4
)%
International Operated Markets
6,785.9

 
8,513.2

(20
)
(19
)
International Developmental Licensed Markets & Corporate
1,262.4

 
1,370.1

(8
)
(5
)
Total
$
13,646.7

 
$
15,727.5

(13
)%
(12
)%
 
 
 
 
 
 
Total Other revenues
$
247.3

 
$
208.7

18
 %
19
 %
 
 
 
 
 
 
Total Revenues
$
13,894.0

 
$
15,936.2

(13
)%
(12
)%
Total Company-operated sales and franchised revenues decreased 2% (2% in constant currencies) for the quarter and decreased 13% (12% in constant currencies) for the nine months. The quarter reflected stronger operating performance in the U.S., partly offset by sales declines in the International Operated Markets and International Developmental Licensed Markets segments as a result of COVID-19. The nine months reflected sales declines in all segments as a result of COVID-19.
Revenue declines were more significant in the International Operated Markets segment, driven by the temporary restaurant closures and limited operations for the nine months. For the quarter, while nearly all restaurants were open, performance was impacted by customer sentiment and instances of government restrictions on operating hours, limited dine-in capacity and in some cases, mandated dining room closures. While performance was mixed, the pace of recovery in each market is also impacted by drive thru penetration. The revenue declines for both periods were driven by the U.K., France, Germany and Spain.


23


Comparable Sales
The following table presents the percent change in comparable sales for the quarters and nine months ended September 30, 2020 and 2019:
 
Increase/(Decrease)
 
Quarters Ended September 30,
Nine Months Ended September 30,
 
2020

2019

 
2020

2019

U.S.
4.6
 %
4.8
%
 
(1.4
)%
5.0
%
International Operated Markets
(4.4
)
5.6

 
(17.6
)
6.1

International Developmental Licensed Markets & Corporate
(10.1
)
8.1

 
(12.9
)
7.3

Total
(2.2
)%
5.9
%
 
(9.9
)%
5.9
%

Systemwide Sales and Franchised Sales
The following table presents the percent change in Systemwide sales for the quarter and nine months ended September 30, 2020:
 
Quarter Ended September 30, 2020
 
Nine Months Ended September 30,
 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

U.S.
4
 %
 
4
 %
 
(1
)%
 
(1
)%
International Operated Markets
0

 
(3
)
 
(17
)
 
(16
)
International Developmental Licensed Markets & Corporate
(9
)
 
(7
)
 
(13
)
 
(10
)
Total
0
 %
 
(1
)%
 
(10
)%
 
(9
)%
*
Unlike comparable sales, the Company has not excluded hyper-inflationary market results (currently, only Venezuela) from Systemwide sales as these sales are the basis on which the Company calculates and records revenues.


24


Franchised sales are not recorded as revenues by the Company, but are the basis on which the Company calculates and records franchised revenues and are indicative of the financial health of the franchisee base. The following table presents Franchised sales and the related increases/(decreases):
FRANCHISED SALES
 
 
 
 
 
 
 
 
Dollars in millions
 
 
 
 
 
 
 
 
Quarters Ended September 30,
 
2020

 
2019

 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

U.S.
 
$
10,180.3

 
$
9,721.7

 
5
 %
 
5
 %
International Operated Markets
 
7,700.5

 
7,569.1

 
2

 
(2
)
International Developmental Licensed Markets & Corporate
 
5,748.7

 
6,325.8

 
(9
)
 
(8
)
Total
 
$
23,629.5

 
$
23,616.6

 
0
 %
 
(1
)%
 
 
 
 
 
 
 
 
 
Ownership type
 
 
 
 
 
 
 
 
Conventional franchised
 
$
17,775.7

 
$
17,172.5

 
4
 %
 
2
 %
Developmental licensed
 
3,126.4

 
3,769.3

 
(17
)
 
(14
)
Foreign affiliated
 
2,727.4

 
2,674.8

 
2

 
1

Total
 
$
23,629.5

 
$
23,616.6

 
0
 %
 
(1
)%
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2020

 
2019

 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

U.S.
 
$
27,943.9

 
$
28,283.0

 
(1
)%
 
(1
)%
International Operated Markets
 
18,078.1

 
21,430.3

 
(16
)
 
(16
)
International Developmental Licensed Markets & Corporate
 
15,577.4

 
17,889.4

 
(13
)
 
(11
)
Total
 
$
61,599.4

 
$
67,602.7

 
(9
)%
 
(8
)%
 
 
 
 
 
 
 
 
 
Ownership type
 
 
 
 
 
 
 
 
Conventional franchised
 
$
45,813.2

 
$
49,448.8

 
(7
)%
 
(7
)%
Developmental licensed
 
8,411.3

 
10,648.9

 
(21
)
 
(17
)
Foreign affiliated
 
7,374.9

 
7,505.0

 
(2
)
 
(2
)
Total
 
$
61,599.4

 
$
67,602.7

 
(9
)%
 
(8
)%

25


Restaurant Margins
RESTAURANT MARGINS
 
 
 
 
 
 
 
Dollars in millions
 
Amount    
 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

Quarters Ended September 30,
2020

 
2019

 
 
Franchised
 
 
 
 
 
 
 
U.S.
$
1,122.1

 
$
1,076.2

 
4
 %
 
4
 %
International Operated Markets
1,059.9

 
1,063.1

 
0

 
(4
)
International Developmental Licensed Markets & Corporate
294.9

 
315.2

 
(6
)
 
(5
)
Total
$
2,476.9

 
$
2,454.5

 
1
 %
 
(1
)%
Company-operated
 
 
 
 
 
 
 
U.S.
$
118.7

 
$
97.8

 
21
 %
 
21
 %
International Operated Markets
289.5

 
348.8

 
(17
)
 
(18
)
International Developmental Licensed Markets & Corporate
n/m

 
n/m

 
n/m

 
n/m

Total
$
410.1

 
$
448.9

 
(9
)%
 
(9
)%
Total restaurant margins
 
 
 
 
 
 
 
U.S.
$
1,240.8

 
$
1,174.0

 
6
 %
 
6
 %
International Operated Markets
1,349.4

 
1,411.9

 
(4
)
 
(8
)
International Developmental Licensed Markets & Corporate
n/m

 
n/m

 
n/m

 
n/m

Total
$
2,887.0

 
$
2,903.4

 
(1
)%
 
(2
)%
 
 
 
 
 
 
 
 
 
Amount
 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

Nine Months Ended September 30,
2020

 
2019

 
 
Franchised
 
 
 
 
 
 
 
U.S.
$
2,966.1

 
$
3,148.9

 
(6
)%
 
(6
)%
International Operated Markets
2,345.7

 
2,986.6

 
(21
)
 
(22
)
International Developmental Licensed Markets & Corporate
782.4

 
897.2

 
(13
)
 
(10
)
Total
$
6,094.2

 
$
7,032.7

 
(13
)%
 
(13
)%
Company-operated
 
 
 
 
 
 
 
U.S.
$
282.5

 
$
284.8

 
(1
)%
 
(1
)%
International Operated Markets
544.3

 
946.2

 
(42
)
 
(42
)
International Developmental Licensed Markets & Corporate
n/m

 
n/m

 
n/m

 
n/m

Total
$
828.4

 
$
1,236.5

 
(33
)%
 
(33
)%
Total restaurant margins
 
 
 
 
 
 
 
U.S.
$
3,248.6

 
$
3,433.7

 
(5
)%
 
(5
)%
International Operated Markets
2,890.0

 
3,932.8

 
(27
)
 
(27
)
International Developmental Licensed Markets & Corporate
n/m

 
n/m

 
n/m

 
n/m

Total
$
6,922.6

 
$
8,269.2

 
(16
)%
 
(16
)%
n/m Not meaningful
Total restaurant margins decreased $16.4 million or 1% (2% in constant currencies) for the quarter and decreased $1,346.6 million or 16% (16% in constant currencies) for the nine months. The quarter reflected stronger operating performance in the U.S., partly offset by sales declines in the International Operated Markets segment as a result of COVID-19. The nine months reflected sales declines in the U.S. and International Operated Markets segments as a result of COVID-19.
Franchised margins represented over 85% of restaurant margin dollars for both the quarter and nine months.
For both periods, the U.S. franchised margin reflected higher depreciation costs related to investments in Experience of the Future ("EOTF"). In addition, the nine months also reflected support provided for marketing to accelerate recovery and drive growth, including the free Thank You Meals served across the country to first responders and health care workers.
The U.S. and International Operated Markets segments Company-operated margins for both periods reflected incremental COVID-19 expenses incurred for employee related costs, personal protective equipment, signage and other restaurant costs.
Due to the nature of our operating model, franchised margin expenses (primarily comprised of lease expense and depreciation expense) are mainly fixed, whereas Company-operated restaurant expenses have more variable cost components. Total restaurant margins included $376.6 million and $1,082.1 million of depreciation and amortization expense for the quarter and nine months, respectively.

26


Selling, General & Administrative Expenses
Selling, general and administrative expenses decreased $13.1 million or 2% (3% in constant currencies) for the quarter and increased $191.5 million or 12% (12% in constant currencies) for the nine months. Both periods reflected lower incentive-based compensation expense and travel costs, and higher investments in strategic technology initiatives. The nine months also reflected about $175 million of committed incremental marketing contributions by the Company to the System's advertising cooperative arrangements across the U.S. and International Operated Markets to accelerate recovery and drive growth; $40 million of costs related to the cancellation of the 2020 Worldwide Owner/Operator Convention; and approximately $20 million of incremental costs related to contractual obligations as a result of a reduction in scope of certain investments in restaurant technology and research & development.
Selling, general and administrative expenses as a percent of Systemwide sales was 2.6% and 2.1% for the nine months ended 2020 and 2019, respectively.

Other Operating (Income) Expense, Net
OTHER OPERATING (INCOME) EXPENSE, NET
 
 
 
 
 
 
 
Dollars in millions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarters Ended
Nine Months Ended
 
September 30,
September 30,
 
2020

 
2019

 
2020

 
2019

Gains on sales of restaurant businesses
$
(0.7
)
 
$
(17.4
)
 
$
(3.5
)
 
$
(90.4
)
Equity in earnings of unconsolidated affiliates
(48.7
)
 
(42.8
)
 
(67.9
)
 
(112.0
)
Asset dispositions and other (income) expense, net
35.9

 
23.3

 
220.3

 
80.9

Impairment and other charges, net
(138.7
)
 
1.6

 
(125.4
)
 
80.2

Total
$
(152.2
)
 
$
(35.3
)
 
$
23.5

 
$
(41.3
)
Gains on sales of restaurant businesses decreased for the quarter and nine months primarily due to fewer restaurant sales.
Equity in earnings of unconsolidated affiliates declined for the nine months primarily due to sales declines as a result of COVID-19 in both the International Operated Markets and International Developmental Licensed Markets.
Asset dispositions and other expense reflected a net reduction of reserves for bad debts of $27 million for the quarter and an increase of reserves for bad debts of $66 million for the nine months, all related to rent and royalty deferrals. The Company does not currently expect any significant changes in reserves for bad debts related to rent and royalty deferrals for the remainder of 2020.
Results for the quarter and nine months reflected store closing costs in the U.S. primarily related to the planned closings of McDonald’s in Walmart store locations. Results for the nine months also reflected $31 million of payments to distribution centers for obsolete inventory to support franchisee liquidity.
Impairment and other charges, net for the quarter and nine months 2020 reflected $138.7 million of pre-tax strategic gains related to the sale of McDonald’s Japan stock as the Company divested about 3% of its ownership in McDonald's Japan. The nine months also reflected the write-off of impaired software that was no longer being used of $26.3 million, partly offset by $13.0 million of income primarily comprised of a reversal of a reserve associated with the Company's sale of its business in the India Delhi market in January 2020.
Results for the nine months 2019 primarily reflected $99.4 million of impairment associated with the purchase of our joint venture partner's interest in the India Delhi market, partly offset by $19.5 million of gains on the sales of property at the former Corporate headquarters.



27


Operating Income
OPERATING INCOME
Dollars in millions
Quarters Ended September 30,
2020

 
2019

 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

U.S.
$
1,078.3

 
$
1,038.7

 
4
 %
 
4
 %
International Operated Markets
1,197.9

 
1,284.0

 
(7
)
 
(10
)
International Developmental Licensed Markets & Corporate
250.2

 
86.6

 
n/m

 
n/m

Total
$
2,526.4

 
$
2,409.3

 
5
 %
 
3
 %
Nine Months Ended September 30,
2020

 
2019

 
Inc/ (Dec)

 
Increase
Excluding
Currency
Translation

U.S.
$
2,705.9

 
$
3,039.4

 
(11
)%
 
(11
)%
International Operated Markets
2,311.8

 
3,550.8

 
(35
)
 
(35
)
International Developmental Licensed Markets & Corporate
163.4

 
187.0

 
(13
)%
 
0
 %
Total
$
5,181.1

 
$
6,777.2

 
(24
)%
 
(23
)%
 
 
 
 
 
 
 
 
Operating margin
37.3
%
 
42.5
%
 
 
 
 
Non-GAAP operating Margin
36.4
%
 
43.0
%
 
 
 
 
 
 
 
 
 
 
 
 
n/m Not meaningful

Operating Income: Operating income increased $117.1 million or 5% (3% in constant currencies) for the quarter and decreased $1,596.1 million or 24% (23% in constant currencies) for the nine months. Results for the quarter and nine months 2020 included $139 million of strategic gains related to the sale of McDonald's Japan stock, and results for the nine months 2020 also included a net $13 million of strategic charges. Results for the nine months 2019 reflected $80 million of net impairment and strategic charges. Excluding these current year and prior year items, operating income decreased $21.6 million or 1% (2% in constant currencies) for the quarter and decreased $1,801.7 million or 26% (26% in constant currencies) for the nine months.
U.S.: The operating income increase for the quarter was driven by strong sales performance. The decrease for the nine months reflected sales declines as a result of COVID-19; about $100 million of support for marketing to accelerate recovery and drive growth; and lower gains on sales of restaurant businesses.
International Operated Markets: The operating income decrease for the quarter and nine months reflected sales declines as a result of COVID-19; incremental COVID-19 Company-operated expenses primarily for employee related costs; and lower gains on sales of restaurant businesses primarily in the U.K. Results for the nine months also reflected over $100 million of support for marketing to accelerate recovery and drive growth; lower equity in earnings from unconsolidated affiliates; and $23 million of payments to distribution centers for obsolete inventory.
International Developmental Licensed Markets & Corporate: Excluding the current year and prior year strategic gains and charges described above, results reflected a net reduction of reserves for bad debts of $27 million for the quarter and an increase of reserves for bad debts of $66 million for the nine months, all related to rent and royalty deferrals.
Operating Margin: Operating margin is defined as operating income as a percent of total revenues. The contributions to operating margin differ by segment due to each segment's ownership structure, primarily due to the relative percentage of franchised versus Company-operated restaurants. Additionally, the number of temporary restaurant closures, which varies by segment, as a result of COVID-19, also impacts the contribution of each segment to the consolidated operating margin.
The decrease in operating margin percent for the nine months was driven by a decline in sales, higher other operating expenses and higher G&A. While the sales driven franchised margin decline had a dilutive effect on operating margin percent, franchised margin dollars represented over 85% of overall margin dollars and were a key component of operating income.


28


Interest Expense
Interest expense increased 10% (10% in constant currencies) for the quarter and increased 8% (9% in constant currencies) for the nine months, reflecting higher average debt balances, partly offset by a decrease in the amount of Euro denominated deposits incurring interest expense as a result of the Company's cash management strategies.
Based on current interest and foreign currency exchange rates, the Company expects interest expense for the full year 2020 to increase about 8% to 9% due primarily to higher average debt balances as a result of additional issuances in response to COVID-19.

Nonoperating (Income) Expense, Net
NONOPERATING (INCOME) EXPENSE, NET
 
 
 
 
 
 
 
Dollars in millions
 
 
 
 
 
 
 
 
Quarters Ended
Nine Months Ended
 
September 30,
September 30,
 
2020

 
2019

 
2020

 
2019

Interest income
$
(3.4
)
 
$
(8.9
)
 
$
(13.8
)
 
$
(29.6
)
Foreign currency and hedging activity
0.6

 
(18.8
)
 
(17.8
)
 
(38.5
)
Other expense, net
2.0

 
4.2

 
(7.2
)
 
15.1

Total
$
(0.8
)
 
$
(23.5
)
 
$
(38.8
)
 
$
(53.0
)


Income Taxes
The effective income tax rate was 20.5% and 25.3% for the quarters ended 2020 and 2019, respectively, and 22.2% and 25.7% for the nine months ended 2020 and 2019, respectively.
Results for the quarter and nine months 2020 included $50 million of income tax benefits due to new U.S. tax regulations issued in the third quarter and $48 million of income tax benefits related to the impact of a tax rate change in the U.K.
The Company expects the effective income tax rate for the full year 2020 to be about 23% and the fourth quarter 2020 to be about 25%.

Cash Flows and Liquidity
The Company has a long history of generating significant cash from operations and has substantial credit capacity to fund operating and discretionary spending such as capital expenditures, debt repayments, dividends and share repurchases. As our operations have been impacted due to COVID-19, we have taken actions to preserve financial flexibility, primarily during the peak of the pandemic.
Cash provided by operations totaled $4.3 billion and exceeded capital expenditures by $3.1 billion for the nine months 2020. Cash provided by operations decreased $2.0 billion compared with the nine months 2019, primarily due to a reduction in operating earnings due to COVID-19 and changes in working capital. The change in working capital is primarily driven by increased accounts receivable as the Company deferred collection of rent and royalties earned from franchisees. In total, the Company deferred collection of approximately $1 billion, and has collected approximately half of these total deferrals as of September 30, 2020. The Company deferred collection of approximately $40 million of additional rent and royalties earned during the third quarter. The extent of the remaining deferrals differs in length by market, with more than half of the amount expected to be collected in the fourth quarter of 2020 and the remaining amounts expected to be collected in the first and second quarters of 2021.
Cash used for investing activities totaled $1.2 billion for the nine months 2020, a decrease of $1.1 billion compared with the nine months 2019. The decrease was primarily due to lower capital expenditures and reduced other investing activity as a result of a strategic acquisition of a real estate entity in the first quarter 2019. Refer to the Capital Expenditures and Restaurant Development Update section on page 30 for additional information.
Cash used for financing activities totaled $313.4 million for the nine months 2020, a decrease of $3.2 billion compared with the nine months 2019. The decrease is primarily due to $2.6 billion of lower treasury stock purchases in 2020 as the Company suspended its share repurchase program in early March 2020 and $918.1 million higher net debt activity in 2020.
Debt obligations at September 30, 2020 totaled $37.8 billion compared with $34.2 billion at December 31, 2019. During the first quarter, the Company secured $6.5 billion of new financing, including $5.5 billion of debt issuances at various maturities and a new $1 billion line of credit that was drawn upon immediately. In the third quarter, the Company repaid the total $1 billion balance on its line of credit. The $1 billion line of credit agreement remains in place and the amount remains available to be borrowed. The Company also has $3.5 billion available under a committed line of credit, which has not been drawn upon, as well as continuing authority to issue commercial paper in the U.S. and global markets.

29


Financing and Market Risk
Debt obligations at September 30, 2020 totaled $37.8 billion, compared with $34.2 billion at December 31, 2019. The net increase in 2020 was primarily due to net long-term debt issuances of $5.5 billion, which were used to bolster our cash position in anticipation of the adverse macroeconomic and business conditions associated with COVID-19.
In connection with the increased funding activity during the first quarter, both Moody’s and Standard & Poor's ("S&P") affirmed our Baa1/BBB+ credit ratings, although S&P put McDonald’s on negative outlook. There are no provisions in the Company’s debt obligations that would accelerate repayment of debt as a result of a change in credit ratings or a material adverse change in the Company’s business.
In December 2019, the Company's Board of Directors authorized $15 billion of borrowing capacity with no specified expiration date, of which $9.5 billion remains outstanding as of September 30, 2020. These borrowings may include (i) public or private offering of debt securities; (ii) direct borrowing from banks or other financial institutions; and (iii) other forms of indebtedness.
In addition to the $15 billion authorized above, in April 2020 the Company’s Board of Directors provided additional authorization to issue commercial paper and draw on lines of credit agreements up to $8 billion.

Capital Expenditures and Restaurant Development Update
The COVID-19 pandemic has resulted in delayed development projects across the segments. The Company expects capital expenditures for 2020 to be approximately $1.6 billion. About $850 million will be dedicated to our U.S. business, about half of which is allocated to approximately 900 EOTF projects. Globally, the Company expects to open roughly 950 restaurants. We will spend approximately $500 million in the U.S. and International Operated segments to open about 270 restaurants and our developmental licensee and affiliates will contribute capital towards the remaining 680 restaurant openings in their respective markets. Additionally, the U.S. expects to close roughly 200 restaurants in 2020; over half of which are lower sales volume McDonald's in Walmart store locations. The Company expects about 300 net restaurant additions in 2020.

Outlook for 2021 and 2022
As a result of the COVID-19 pandemic and associated resurgences, countries around the world continue to be impacted by economic instability, government regulations and changes in consumer behavior. Due to this ongoing uncertainty, the Company continues to evaluate its financial expectations on an ongoing basis and will provide updates as situations warrant.
Based on current conditions, the Company expects its strong foundation and new growth strategy described above to deliver the following key metrics for 2021 and 2022:
The Company expects Systemwide sales growth in the mid-single digits. Changes in Systemwide sales are driven by comparable sales and net restaurant unit expansion.
For 2021, the expected Systemwide sales growth will be as compared to 2019.
For 2022, the Company expects net restaurant unit expansion to contribute 1.5% to 2% to Systemwide sales growth.
The Company expects operating margin percent to be in the low-to-mid 40% range. Operating margin is defined as operating income as a percent of total revenues.
The Company expects full year selling, general and administrative expenses to be about 2.3% of Systemwide sales.
The Company expects capital expenditures to be approximately $2.3 billion for each year 2021 and 2022, about half of which will be directed towards new unit expansion across the U.S. and International Operated Markets for both years.
In 2021, about $1.1 billion will be dedicated to our U.S. business, about half of which is allocated to approximately 1,300 EOTF projects. Globally, the Company expects to open roughly 1,300 restaurants. We will open about 500 restaurants in the U.S. and International Operated Markets segments, and our developmental licensee and affiliates will contribute capital towards the remaining 800 restaurant openings in their respective markets. Additionally, the U.S. expects to close roughly 325 restaurants in 2021; a majority of which are lower sales volume McDonald's in Walmart store locations. The Company expects about 600 net restaurant additions in 2021.
The Company expects to achieve a free cash flow conversion rate greater than 90%.

Recent Accounting Pronouncements
Recent accounting pronouncements are discussed in Part I, Item 1, page 9 of this Form 10-Q.

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Risk Factors and Cautionary Statement Regarding Forward-Looking Statements
The information in this report includes forward-looking statements about future events and circumstances and their effects upon revenues, expenses and business opportunities. Generally speaking, any statement in this report not based upon historical fact is a forward-looking statement. Forward-looking statements can also be identified by the use of forward-looking words, such as “could,” “should,” “continue,” “estimate,” “forecast,” “intend,” “look,” “may,” “will,” “expect,” “believe,” “anticipate,” “plan,” “remain” and “confident” or similar expressions. In particular, statements regarding our plans, strategies, prospects and expectations regarding our business and industry are forward-looking statements. They reflect our expectations, are not guarantees of performance and speak only as of the date the statement is made. Except as required by law, we do not undertake to update such forward-looking statements. Our business results are subject to a variety of risks, including those that are reflected in the following considerations and risks, as well as elsewhere in our filings with the SEC. If any of these considerations or risks materialize, our expectations (or the underlying assumptions) may change and our performance may be adversely affected. You should not rely unduly on forward-looking statements.
The COVID-19 pandemic has adversely affected and could continue to adversely affect our financial results, condition and outlook.
Health epidemics or pandemics can adversely affect consumer spending and confidence levels and supply availability and costs, as well as the local operations in impacted markets, all of which can affect our financial results, condition and outlook. Importantly, the global pandemic resulting from COVID-19 has disrupted global health, economic and market conditions, consumer behavior and McDonald’s global restaurant operations beginning in early 2020. Local and national governmental mandates or recommendations and public perceptions of the risks associated with the COVID-19 pandemic have caused, and may continue to cause, consumer behavior to change and worsening or volatile economic conditions, which could continue to adversely affect our business. In addition, our global operations have been and may continue to be disrupted to varying degrees (from limited operations including drive thru, delivery and/or take-away operations, sometimes with limited hours, menus and/or capacity, to full restaurant closures in some markets). While we cannot predict the duration or scope of the COVID-19 pandemic, or the resurgence of infections in one or more markets, the COVID-19 pandemic has negatively impacted our business and such impact could be material to our financial results, condition and outlook.
The COVID-19 pandemic may also heighten other risks disclosed in these Risk Factors, such as, but not limited to, those related to consumer behavior, consumer perceptions of our brand, supply chain interruptions, commodity costs and labor availability and cost.
If we do not successfully evolve and execute against our business strategies we may not be able to increase operating income.
To drive Systemwide sales, operating income and free cash flow growth, our business strategies must be effective in maintaining and strengthening customer appeal and capturing additional market share. Whether these strategies are successful depends mainly on our System’s ability to:
Capitalize on our global scale, iconic brand and local market presence to build upon our historic strengths and competitive advantages;
Continue to innovate and differentiate the McDonald's experience, including by preparing and serving our food in a way that balances value and convenience to our customers with profitability;
Accelerate digital innovation for a fast and easy customer experience;
Continue to run great restaurants by driving efficiencies and expanding capacities while continuing to prioritize health and safety;
Identify and develop restaurant sites consistent with our plans for net growth of Systemwide restaurants;
Accelerate our existing strategies, including through growth opportunities and potential acquisitions, investments and partnerships; and
Evolve and adjust our business strategies in response to, among other things, changing consumer behavior, operational restrictions and impacts to our results of operations and liquidity as a result of the COVID-19 pandemic.
If we are delayed or unsuccessful in executing our strategies, or if our strategies do not yield the desired results, our business, financial condition and results of operations may suffer.

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Failure to preserve the value and relevance of our brand could have an adverse impact on our financial results.
To be successful in the future, we believe we must preserve, enhance and leverage the value of our brand. Brand value is based in part on consumer perceptions. Those perceptions are affected by a variety of factors, including the nutritional content and preparation of our food, the ingredients we use, the manner in which we source commodities and our general business practices. Consumer acceptance of our offerings is subject to change for a variety of reasons, and some changes can occur rapidly. For example, nutritional, health, environmental and other scientific studies and conclusions, which constantly evolve and may have contradictory implications, drive popular opinion, litigation and regulation (including initiatives intended to drive consumer behavior) in ways that affect the “informal eating out” (“IEO”) segment or perceptions of our brand, generally or relative to available alternatives. Consumer perceptions may also be affected by adverse commentary from third parties, including through social media or conventional media outlets, regarding the quick-service category of the IEO segment, our brand, our culture, our operations, our suppliers, or our franchisees. If we are unsuccessful in addressing adverse commentary or perceptions, whether or not accurate, our brand and our financial results may suffer.
Additionally, the ongoing relevance of our brand may depend on the success of our sustainability initiatives, which require Systemwide coordination and alignment. We are working to manage any risks and costs to us, our franchisees and our supply chain of any effects of climate change, greenhouse gases, and diminishing energy and water resources. These risks include any increased public focus, including by governmental and nongovernmental organizations, on these and other environmental sustainability matters, such as packaging and waste, animal health and welfare, deforestation and land use. These risks also include any increased pressure to make commitments, set targets or establish additional goals and take actions to meet them. These risks could expose us to market, operational and execution costs or risks.
If we are not effective in addressing social and environmental responsibility matters or achieving relevant sustainability goals, consumer trust in our brand may suffer. In particular, business incidents or practices, whether actual or perceived, that erode consumer trust or confidence, particularly if such incidents or practices receive considerable publicity or result in litigation, can significantly reduce brand value and have a negative impact on our financial results.
If we do not anticipate and address evolving consumer preferences and effectively execute our pricing, promotional and marketing plans, our business could suffer.
Our continued success depends on our System’s ability to build upon our historic strengths and competitive advantages. In order to do so, we need to anticipate and respond effectively to continuously shifting consumer demographics and trends in food sourcing, food preparation, food offerings and consumer preferences and behaviors in the IEO segment. If we are not able to predict, or quickly and effectively respond to, these changes, or our competitors predict or respond more effectively, our financial results could be adversely impacted.
Our ability to build upon our strengths and advantages also depends on the impact of pricing, promotional and marketing plans across the System, and the ability to adjust these plans to respond quickly and effectively to evolving customer preferences, as well as shifting economic and competitive conditions. Existing or future pricing strategies, marketing plans, and the value proposition they represent, are expected to continue to be important components of our business strategy; however, they may not be successful, or may not be as successful as the efforts of our competitors, and could negatively impact sales, guest counts and market share.
Additionally, we operate in a complex and costly advertising environment. Our marketing and advertising programs may not be successful in reaching our customers in the way we intend. Our success depends in part on whether the allocation of our advertising and marketing resources across different channels, including digital marketing, allows us to reach our customers effectively and efficiently, and in ways that are meaningful to them. If the advertising and marketing programs are not successful, or are not as successful as those of our competitors, our sales, guest counts and market share could decrease.
Our investments to enhance the customer experience, including through technology, may not generate the expected returns.
Our long-term business objectives depend on the successful Systemwide execution of our strategies. We continue to build upon our investments in technology and modernization, digital engagement and delivery, in order to transform the customer experience. As part of these investments, we are placing renewed emphasis on improving our service model and strengthening relationships with customers, in part through digital channels and loyalty initiatives, as well as mobile ordering and payment systems. We also continue to offer and refine our delivery initiatives, including through growing awareness and trial, and to enhance our drive thru technologies, which may not generate expected returns. If these initiatives are not well executed, or if we do not fully realize the intended benefits of these significant investments, our business results may suffer.
We face intense competition in our markets, which could hurt our business.
We compete primarily in the IEO segment, which is highly competitive. We also face sustained, intense competition from traditional, fast casual and other competitors, which may include many non-traditional market participants such as convenience stores, grocery stores and coffee shops as well as online retailers. We expect our environment to continue to be highly competitive, and our results in any particular reporting period may be impacted by a contracting IEO segment or by new or continuing actions, product offerings or consolidation of our competitors and third party partners, which may have a short- or long-term impact on our results.

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We compete on the basis of product choice, quality, affordability, service and location. In particular, we believe our ability to compete successfully in the current market environment depends on our ability to improve existing products, successfully develop and introduce new products, price our products appropriately, deliver a relevant customer experience, manage the complexity of our restaurant operations, manage our investments in technology and modernization, and respond effectively to our competitors’ actions or offerings or to unforeseen disruptive actions. There can be no assurance these strategies will be effective, and some strategies may be effective at improving some metrics while adversely affecting other metrics, which could have the overall effect of harming our business.
Unfavorable general economic conditions could adversely affect our business and financial results.
Our results of operations are substantially affected by economic conditions, which can vary significantly by market and can impact consumer disposable income levels and spending habits. Economic conditions can also be impacted by a variety of factors including hostilities, epidemics, pandemics and actions taken by governments to manage national and international economic matters, whether through austerity, stimulus measures or trade measures, and initiatives intended to control wages, unemployment, credit availability, inflation, taxation and other economic drivers. Sustained adverse economic conditions or periodic adverse changes in economic conditions in our markets could pressure our operating performance and our business continuity disruption planning, and our business and financial results may suffer.
Our results of operations are also affected by fluctuations in currency exchange rates and unfavorable currency fluctuations could adversely affect reported earnings.
Supply chain interruptions may increase costs or reduce revenues.
We depend on the effectiveness of our supply chain management to assure reliable and sufficient supply of quality products on favorable terms. Although many of the products we sell are sourced from a wide variety of suppliers in countries around the world, certain products have limited suppliers, which may increase our reliance on those suppliers. Supply chain interruptions, including as a result of shortages and transportation issues or unexpected increases in demand, and price increases can adversely affect us as well as our suppliers and franchisees, whose performance may have a significant impact on our results. Such shortages or disruptions could be caused by factors beyond the control of our suppliers, franchisees or us. If we experience interruptions in our System’s supply chain, our costs could increase and it could limit the availability of products critical to our System’s operations.
Our franchise business model presents a number of risks.
The Company's success as a heavily franchised business relies to a large degree on the financial success and cooperation of our franchisees, including our developmental licensees and affiliates. Our restaurant margins arise from two sources: fees from franchised restaurants (e.g., rent and royalties based on a percentage of sales) and, to a lesser degree, sales from Company-operated restaurants. Our franchisees and developmental licensees manage their businesses independently, and therefore are responsible for the day-to-day operation of their restaurants. The revenues we realize from franchised restaurants are largely dependent on the ability of our franchisees to grow their sales. Business risks affecting our operations also affect our franchisees. In particular, our franchisees have also been significantly impacted by the COVID-19 pandemic, and the Company granted the deferral of cash collection for certain rent and royalties earned from franchisees in substantially all markets. The extent of the deferrals differs in length by market. If franchisee sales trends worsen, or do not improve at a sufficiently rapid rate, our financial results will continue to be negatively affected, which may be material.
Our success also relies on the willingness and ability of our independent franchisees and affiliates to implement major initiatives, which may include financial investment, and to remain aligned with us on operating, value/promotional and capital-intensive reinvestment plans. The ability of franchisees to contribute to the achievement of our plans is dependent in large part on the availability to them of funding at reasonable interest rates and may be negatively impacted by the financial markets in general, by the creditworthiness of our franchisees or the Company or by banks’ lending practices. If our franchisees are unwilling or unable to invest in major initiatives or are unable to obtain financing at commercially reasonable rates, or at all, our future growth and results of operations could be adversely affected.
Our operating performance could also be negatively affected if our franchisees experience food safety or other operational problems or project an image inconsistent with our brand and values, particularly if our contractual and other rights and remedies are limited, costly to exercise or subjected to litigation and potential delays. If franchisees do not successfully operate restaurants in a manner consistent with our required standards, our brand’s image and reputation could be harmed, which in turn could hurt our business and operating results.
Our ownership mix also affects our results and financial condition. The decision to own restaurants or to operate under franchise or license agreements is driven by many factors whose interrelationship is complex. The benefits of our more heavily franchised structure depend on various factors including whether we have effectively selected franchisees, licensees and/or affiliates that meet our rigorous standards, whether we are able to successfully integrate them into our structure and whether their performance and the resulting ownership mix supports our brand and financial objectives.

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Challenges with respect to labor, including availability and cost, could impact our business and results of operations.
Our success depends in part on our System’s ability to proactively recruit, motivate and retain qualified individuals to work in McDonald's restaurants and to maintain appropriately-staffed restaurants in an intensely competitive environment. Increased costs associated with recruiting, motivating and retaining qualified employees to work in our Company-operated restaurants, as well as costs to promote awareness of the opportunities of working at McDonald's restaurants, could have a negative impact on our Company-operated margins. Similar concerns apply to our franchisees.
We are also impacted by the costs and other effects of compliance with U.S. and international regulations affecting our workforce, which includes our staff and employees working in our Company-operated restaurants. These regulations are increasingly focused on employment issues, including wage and hour, healthcare, immigration, retirement and other employee benefits and workplace practices. Claims of non-compliance with these regulations could result in liability and expense to us. Our potential exposure to reputational and other harm regarding our workplace practices or conditions or those of our independent franchisees or suppliers, including those giving rise to claims of harassment or discrimination (or perceptions thereof) or workplace safety could have a negative impact on consumer perceptions of us and our business. Additionally, economic action, such as boycotts, protests, work stoppages or campaigns by labor organizations, could adversely affect us (including our ability to recruit and retain talent) or the franchisees and suppliers that are also part of the McDonald's System and whose performance may have a material impact on our results.
Food safety concerns may have an adverse effect on our business.
Our ability to increase sales and profits depends on our System’s ability to meet expectations for safe food and on our ability to manage the potential impact on McDonald’s of food-borne illnesses and food or product safety issues that may arise in the future, including in the supply chain, restaurants or delivery. Food safety is a top priority, and we dedicate substantial resources to ensure that our customers enjoy safe food products, including as our menu and service model evolve. However, food safety events, including instances of food-borne illness, occur within the food industry and our System from time to time and could occur in the future. Instances of food tampering, food contamination or food-borne illness, whether actual or perceived, could adversely affect our brand and reputation as well as our revenues and profits.
Challenges with respect to talent management could harm our business.
Effective succession planning is important to our long-term success. Failure to effectively identify, develop and retain key personnel, recruit high-quality candidates and ensure smooth management and personnel transitions, including the recent leadership transitions, could disrupt our business and adversely affect our results.
Information technology system failures or interruptions, or breaches of network security, may impact our operations or cause reputational harm.
We are increasingly reliant upon technology systems, such as point-of-sale, technologies supporting McDonald’s digital and delivery solutions, and technologies that facilitate communication and collaboration with affiliated entities, customers, employees, franchisees, suppliers, service providers or other independent third parties to conduct our business, whether developed and maintained by us or provided by third parties. Any failure or interruption of these systems could significantly impact our franchisees’ operations, or our customers’ experience and perceptions. Additionally, we provide certain technology systems to businesses that are unaffiliated with the McDonald’s System and a failure, interruption or breach of these systems may cause harm to those unaffiliated parties, which may result in liability to the Company or reputational harm.
Despite the implementation of security measures, those technology systems could become vulnerable to damage, disability or failures due to theft, fire, power loss, telecommunications failure or other catastrophic events. Certain technology systems may also become vulnerable, unreliable or inefficient in cases where technology vendors limit or terminate product support and maintenance. Our increasing reliance on third party systems also present the risks faced by the third party’s business, including the operational, security and credit risks of those parties. If those systems were to fail or otherwise be unavailable, and we were unable to recover in a timely manner, we could experience an interruption in our or our franchisees’ operations.
Furthermore, security incidents or breaches have from time to time occurred and may in the future occur involving our systems, the systems of the parties we communicate or collaborate with (including franchisees), or those of third party providers. These may include such things as unauthorized access, phishing attacks, account takeovers, denial of service, computer viruses, introduction of malware or ransomware and other disruptive problems caused by hackers. Our technology systems contain personal, financial and other information that is entrusted to us by our customers, our employees, our franchisees, our business customers and other third parties, as well as financial, proprietary and other confidential information related to our business. An actual or alleged security breach could result in disruptions, shutdowns, theft or unauthorized disclosure of personal, financial, proprietary or other confidential information. The occurrence of any of these incidents could result in reputational damage, adverse publicity, loss of consumer confidence, reduced sales and profits, complications in executing our growth initiatives and regulatory and legal risk, including criminal penalties or civil liabilities.

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If we fail to comply with privacy and data collection laws, we could be subject to legal proceedings and penalties, which could negatively affect our financial results or brand perceptions.
We are subject to legal and compliance risks and associated liability related to privacy and data collection, protection and management, as it relates to information associated with our technology-related services and platforms made available to business partners, customers, employees, franchisees or other third parties. For example, the General Data Protection Regulation (“GDPR”) requires entities processing the personal data of individuals in the European Union to meet certain requirements regarding the handling of that data. We are also subject to U.S. federal and state and foreign laws and regulations in this area. These regulations have been subject to frequent change, and there may be markets or jurisdictions that propose or enact new or emerging data privacy requirements in the future. Failure to meet GDPR or other data privacy requirements could result in legal proceedings and substantial penalties, and materially adversely impact our financial results or brand perceptions.
The global scope of our business subjects us to risks that could negatively affect our business.
We encounter differing cultural, regulatory, geopolitical and economic environments within and among the more than 100 countries where McDonald’s restaurants operate, and our ability to achieve our business objectives depends on the System's success in these environments. Meeting customer expectations is complicated by the risks inherent in our global operating environment, and our global success is partially dependent on our System’s ability to leverage operating successes across markets and brand perceptions. Planned initiatives may not have appeal across multiple markets with McDonald's customers and could drive unanticipated changes in customer perceptions and guest counts.
Disruptions in operations or price volatility in a market can also result from governmental actions, such as price, foreign exchange or changes in trade-related tariffs or controls, sanctions and counter sanctions, government-mandated closure of our, our franchisees’ or our suppliers’ operations, and asset seizures. Trade policies, tariffs and other regulations affecting trade between the U.S. and other countries could adversely affect our business and operations. These and other government actions may impact our results and could cause reputational or other harm. Our international success depends in part on the effectiveness of our strategies and brand-building initiatives to reduce our exposure to such governmental actions.
Additionally, challenges and uncertainties are associated with operating in developing markets, which may entail a relatively higher risk of political instability, economic volatility, crime, corruption and social and ethnic unrest. Such challenges may be exacerbated in many cases by a lack of an independent and experienced judiciary and uncertainties in how local law is applied and enforced, including in areas most relevant to commercial transactions and foreign investment. An inability to manage effectively the risks associated with our international operations could have a material adverse effect on our business and financial condition.
We may also face challenges and uncertainties in developed markets. For example, as a result of the U.K.’s decision to leave the European Union and the ongoing transition period, it is possible that there will be increased regulatory complexities and uncertainty in European or worldwide economic conditions. The decision created volatility in certain foreign currency exchange rates that may or may not continue, and may result in increased supply chain costs for items that are imported from other countries. Any of these effects, and others we cannot anticipate, could adversely affect our business, results of operations, financial condition and cash flows.
If we do not effectively manage our real estate portfolio, our operating results may be negatively impacted.
We have significant real estate operations, primarily in connection with our restaurant business. We generally own or secure a long-term lease on the land and building for conventional franchised and Company-operated restaurant sites. We seek to identify and develop restaurant locations that offer convenience to customers and long-term sales and profit potential. As we generally secure long-term real estate interests for our restaurants, we have limited flexibility to quickly alter our real estate portfolio. The competitive business landscape continues to evolve in light of changing business trends, consumer preferences, trade area demographics, consumer use of digital and delivery, local competitive positions and other economic factors. If our restaurants are not located in desirable locations, or if we do not evolve in response to these factors, it could adversely affect Systemwide sales and profitability.
Our real estate values and the costs associated with our real estate operations are also impacted by a variety of other factors, including governmental regulations; insurance; zoning, tax and eminent domain laws; interest rate levels and the cost of financing. A significant change in real estate values, or an increase in costs as a result of any of these factors, could adversely affect our operating results.
Changes in tax laws and unanticipated tax liabilities could adversely affect the taxes we pay and our profitability.
We are subject to income and other taxes in the U.S. and foreign jurisdictions, and our operations, plans and results are affected by tax and other initiatives around the world. In particular, we are affected by the impact of changes to tax laws or policy or related authoritative interpretations. We are also impacted by settlements of pending or any future adjustments proposed by taxing and governmental authorities inside and outside of the U.S. in connection with our tax audits, all of which will depend on their timing, nature and scope. Any significant increases in income tax rates, changes in income tax laws or unfavorable resolution of tax matters could have a material adverse impact on our financial results.

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Changes in commodity and other operating costs could adversely affect our results of operations.
The profitability of our Company-operated restaurants depends in part on our ability to anticipate and react to changes in commodity costs, including food, paper, supplies, fuel, utilities and distribution, and other operating costs, including labor. Any volatility in certain commodity prices or fluctuation in labor costs could adversely affect our operating results by impacting restaurant profitability. The commodity markets for some of the ingredients we use, such as beef and chicken, are particularly volatile due to factors such as seasonal shifts, climate conditions, industry demand, international commodity markets, food safety concerns, product recalls and government regulation, all of which are beyond our control and, in many instances, unpredictable. We can only partially address future price risk through hedging and other activities, and therefore increases in commodity costs could have an adverse impact on our profitability.
Increasing regulatory and legal complexity may adversely affect our business and financial results.
Our regulatory and legal environment worldwide exposes us to complex compliance, litigation and similar risks that could affect our operations and results in material ways. Many of our markets are subject to increasing, conflicting and highly prescriptive regulations involving, among other matters, restaurant operations, product packaging, marketing, the nutritional and allergen content and safety of our food and other products, labeling and other disclosure practices. Compliance efforts with those regulations may be affected by ordinary variations in food preparation among our own restaurants and the need to rely on the accuracy and completeness of information from third-party suppliers. Our success depends in part on our ability to manage the impact of regulations that can affect our business plans and operations, and have increased our costs of doing business and exposure to litigation, governmental investigations or other proceedings.
We are also subject to legal proceedings that may adversely affect our business, including class actions, administrative proceedings, government investigations and proceedings, shareholder proceedings, employment and personal injury claims, landlord/tenant disputes, supplier related disputes, and claims by current or former franchisees. Regardless of whether claims against us are valid or whether we are found to be liable, claims may be expensive to defend and may divert management's attention away from operations.
Litigation and regulatory action concerning our relationship with franchisees and the legal distinction between our franchisees and us for employment law purposes, if determined adversely, could increase costs, negatively impact our business operations and the business prospects of our franchisees and subject us to incremental liability for their actions. Similarly, although our commercial relationships with our suppliers remain independent, there may be attempts to challenge that independence, which, if determined adversely, could also increase costs, negatively impact the business prospects of our suppliers, and subject us to incremental liability for their actions.
Our results could also be affected by the following:
The relative level of our defense costs, which vary from period to period depending on the number, nature and procedural status of pending proceedings;
The cost and other effects of settlements, judgments or consent decrees, which may require us to make disclosures or take other actions that may affect perceptions of our brand and products; and
Adverse results of pending or future litigation, including litigation challenging the composition and preparation of our products, or the appropriateness or accuracy of our marketing or other communication practices.
A judgment significantly in excess of any applicable insurance coverage or third party indemnity could materially adversely affect our financial condition or results of operations. Further, adverse publicity resulting from claims may hurt our business. If we are unable to effectively manage the risks associated with our complex regulatory and legal environment, it could have a material adverse effect on our business and financial condition.
We may not be able to adequately protect our intellectual property or adequately ensure that we are not infringing the intellectual property of others, which could harm the value of the McDonald’s brand and our business.
The success of our business depends on our continued ability to use our existing trademarks and service marks in order to increase brand awareness and further develop our branded products in both domestic and international markets. We rely on a combination of trademarks, copyrights, service marks, trade secrets, patents and other intellectual property rights to protect our brand and branded products.

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We have registered certain trademarks and have other trademark registrations pending in the U.S. and certain foreign jurisdictions. The trademarks that we currently use have not been registered in all of the countries outside of the U.S. in which we do business or may do business in the future and may never be registered in all of these countries. It may be costly and time consuming to protect our intellectual property, and the steps we have taken to protect our intellectual property in the U.S. and foreign countries may not be adequate. In addition, the steps we have taken may not adequately ensure that we do not infringe the intellectual property of others, and third parties may claim infringement by us in the future. In particular, we may be involved in intellectual property claims, including often aggressive or opportunistic attempts to enforce patents used in information technology systems, which might affect our operations and results. Any claim of infringement, whether or not it has merit, could be time-consuming, result in costly litigation and harm our business.
We cannot ensure that franchisees and other third parties who hold licenses to our intellectual property will not take actions that hurt the value of our intellectual property.
Changes in accounting standards or the recognition of impairment or other charges may adversely affect our future operations and results.
New accounting standards or changes in financial reporting requirements, accounting principles or practices, including with respect to our critical accounting estimates, could adversely affect our future results. We may also be affected by the nature and timing of decisions about underperforming markets or assets, including decisions that result in impairment or other charges that reduce our earnings. In assessing the recoverability of our long-lived assets, we consider changes in economic conditions and make assumptions regarding estimated future cash flows and other factors. These estimates are highly subjective and can be significantly impacted by many factors such as global and local business and economic conditions, operating costs, inflation, competition, consumer and demographic trends, and our restructuring activities. If our estimates or underlying assumptions change in the future, we may be required to record impairment charges. If we experience any such changes, they could have a significant adverse effect on our reported results for the affected periods.
A decrease in our credit ratings or an increase in our funding costs could adversely affect our profitability.
Our credit ratings may be negatively affected by our results of operations or changes in our debt levels. As a result, our interest expense, the availability of acceptable counterparties, our ability to obtain funding on favorable terms, collateral requirements and our operating or financial flexibility could all be negatively affected, especially if lenders impose new operating or financial covenants.
Our operations may also be impacted by regulations affecting capital flows, financial markets or financial institutions, which can limit our ability to manage and deploy our liquidity or increase our funding costs. If any of these events were to occur, they could have a material adverse effect on our business and financial condition.
Trading volatility and the price of our common stock may be adversely affected by many factors.
Many factors affect the volatility and price of our common stock in addition to our operating results and prospects. The most important of these factors, some of which are outside our control, are the following:
The unpredictable nature of global economic and market conditions;
Governmental action or inaction in light of key indicators of economic activity or events that can significantly influence financial markets, particularly in the U.S., which is the principal trading market for our common stock, and media reports and commentary about economic, trade or other matters, even when the matter in question does not directly relate to our business;
Trading activity in our common stock or trading activity in derivative instruments with respect to our common stock or debt securities, which can be affected by market commentary (including commentary that may be unreliable or incomplete); unauthorized disclosures about our performance, plans or expectations about our business; our actual performance and creditworthiness; investor confidence, driven in part by expectations about our performance; actions by shareholders and others seeking to influence our business strategies; portfolio transactions in our stock by significant shareholders; or trading activity that results from the ordinary course rebalancing of stock indices in which McDonald’s may be included, such as the S&P 500 Index and the Dow Jones Industrial Average;
The impact of our stock repurchase program or dividend rate; and
The impact on our results of corporate actions and market and third-party perceptions and assessments of such actions, such as those we may take from time to time as we implement our strategies, including through acquisitions, in light of changing business, legal and tax considerations and evolve our corporate structure.

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Events such as severe weather conditions, natural disasters, hostilities and social unrest, among others, can adversely affect our results and prospects.
Severe weather conditions, natural disasters, hostilities and social unrest, climate change or terrorist activities (or expectations about them) can adversely affect consumer spending and confidence levels and supply availability and costs, as well as the local operations in impacted markets, all of which can affect our results and prospects. Our receipt of proceeds under any insurance we maintain with respect to some of these risks may be delayed or the proceeds may be insufficient to cover our losses fully.


Item 3. Quantitative and Qualitative Disclosures About Market Risk
An update to the disclosure made in our Annual Report on Form 10-K for the year ended December 31, 2019 regarding this matter has been included within Part I, Item 2, page 30 of this Form 10-Q.


Item 4. Controls and Procedures

Disclosure Controls
An evaluation was conducted under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of September 30, 2020. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of such date to provide reasonable assurances that information required to be disclosed by the Company in the reports filed or submitted under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and is accumulated and communicated to the Company's management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting
The Company's management, including the CEO and CFO, confirm there was no change in the Company's internal control over financial reporting during the quarter ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

38


PART II – OTHER INFORMATION

Item 1. Legal Proceedings
There were no material changes to the disclosure made in our Annual Report on Form 10-K for the year ended December 31, 2019 regarding these matters.

Item 1A. Risk Factors
For a discussion of risk factors affecting our business, refer to statements appearing under the caption “Risk Factors and Cautionary Statement Regarding Forward-Looking Statements” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities*
The following table presents information related to repurchases of common stock the Company made during the quarter ended September 30, 2020:
 
Period
Total Number of
Shares Purchased
 
Average Price
Paid
per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (1)
 
Approximate Dollar
Value of Shares
that May Yet
Be Purchased Under
the Plans or Programs (1)
 
 
 
 
July 1-31, 2020
1,896

 
$
192.40

 
1,896

 
$
14,128,474,585

 
August 1-31, 2020
1,802

 
207.27

 
1,802

 
14,128,101,079

 
September 1-30, 2020
261

 
205.33

 
261

 
14,128,047,489

 
Total
3,959

 
$
200.02

 
3,959

 
 
*
Subject to applicable law, the Company may repurchase shares directly in the open market, in privately negotiated transactions, or pursuant to derivative instruments and plans complying with Rule 10b5-1, among other types of transactions and arrangements.

(1)
On December 31, 2019, the Company's Board of Directors approved a share repurchase program, effective January 1, 2020, that authorized the purchase of up to $15 billion of the Company's outstanding common stock. In early March 2020, the Company voluntarily suspended share repurchases from the open market. Therefore, the table above reflects only shares withheld for taxes under the Company’s equity compensation program.

 

39


Item 6. Exhibits
 
 
 
 
 
 
 
Exhibit Number
Description
 
 
 
 
 
 
 
(3)
(a)
 
 
 
 
 
 
 
 
 
(b)
 
 
 
 
 
 
(4)
Instruments defining the rights of security holders, including Indentures:*
 
 
 
 
 
 
 
 
 
(a)
 
 
 
 
 
 
 
 
(b)
 
 
 
 
 
 
 
 
(10)
Material Contracts
 
 
 
 
 
 
 
 
 
(a)
 
 
 
 
 
 
 
 
 
(b)
 
 
 
 
 
 
 
 
 
 
(i)
 
 
 
 
 
 
 
 
 
(c)
 
 
 
 
 
 
 
 
 
(d)
 
 
 
 
 
 
 
 
 
 
(i)
 
 
 
 
 
 
 
 
 
 
(ii)
 
 
 
 
 
 
 
 
 
(e)
 
 
 
 
 
 
 
 
 
 
(i)
 
 
 
 
 
 
 
 
 
 
(ii)
 
 
 
 
 
 
 
 
 
(f)
 
 
 
 
 
 
 
 
 
(g)
 
 
 
 
 
 
 
 
 
(h)
 
 
 
 
 
 
 
 
 
(i)
 
 
 
 
 
 
 
 
 
(j)
 
 
 
 
 
 

40


 
 
(k)
 
 
 
 
 
 
 
 
 
(l)
 
 
 
 
 
 
 
 
 
(m)
 
 
 
 
 
 
 
 
 
(n)
 
 
 
 
 
 
 
 
 
(o)
 
 
 
 
 
 
 
 
 
(p)
 
 
 
 
 
 
 
 
 
(q)
 
 
 
 
 
 
 
 
 
(r)
 
 
 
 
 
 
 
 
 
(s)
 
 
 
 
 
 
 
 
 
(t)
 
 
 
 
 
 
 
 
 
(u)
 
 
 
 
 
 
 
 
(31.1)
 
 
 
 
 
 
 
 
(31.2)
 
 
 
 
 
 
 
 
(32.1)
 
 
 
 
 
 
 
 
(32.2)
 
 
 
 
 
 
 
 
(101.INS)
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
 
 
 
 
 
 
 
 
(101.SCH)
Inline XBRL Taxonomy Extension Schema Document.
 
 
 
 
 
 
 
 
(101.CAL)
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
 
 
 
 
 
(101.DEF)
Inline XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
 
 
 
 
 
(101.LAB)
Inline XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
 
 
 
 
 
(101.PRE)
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
 
 
 
 
 
 
(104)
Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document.
 
 
 
 
 
 
 
*
Other instruments defining the rights of holders of long-term debt of the registrant, and all of its subsidiaries for which consolidated financial statements are required to be filed and which are not required to be registered with the Commission, are not included herein as the securities authorized under these instruments, individually, do not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. An agreement to furnish a copy of any such instruments to the Commission upon request has been filed with the Commission.
 
 
**
Denotes compensatory plan.

41


SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
McDONALD’S CORPORATION
        (Registrant)
 
 
 
 
 
/s/ Kevin M. Ozan
Date:
November 9, 2020
Kevin M. Ozan
 
 
Corporate Executive Vice President and
Chief Financial Officer

42




Exhibit 31.1
Rule 13a-14(a) Certification of Chief Executive Officer
I, Christopher J. Kempczinski, certify that:
(1)
I have reviewed this quarterly report on Form 10-Q of McDonald’s Corporation;
(2)
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3)
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4)
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(5)
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 9, 2020
/s/ Christopher J. Kempczinski
Christopher J. Kempczinski
President and Chief Executive Officer








Exhibit 31.2
Rule 13a-14(a) Certification of Chief Financial Officer
I, Kevin M. Ozan, certify that:
(1)
I have reviewed this quarterly report on Form 10-Q of McDonald’s Corporation;
(2)
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3)
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4)
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(5)
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 9, 2020
/s/ Kevin M. Ozan
Kevin M. Ozan
Corporate Executive Vice President and
Chief Financial Officer







Exhibit 32.1
Certification pursuant to 18 U.S.C. Section 1350 by the Chief Executive Officer, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned officer of McDonald’s Corporation (the “Company”), does hereby certify, to such officer’s knowledge, that the Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 9, 2020
/s/ Christopher J. Kempczinski
Christopher J. Kempczinski
President and Chief Executive Officer







Exhibit 32.2
Certification pursuant to 18 U.S.C. Section 1350 by the Chief Financial Officer, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned officer of McDonald’s Corporation (the “Company”), does hereby certify, to such officer’s knowledge, that the Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 9, 2020
/s/ Kevin M. Ozan
Kevin M. Ozan
Corporate Executive Vice President and
Chief Financial Officer





v3.20.2
Document and Entity Information
9 Months Ended
Sep. 30, 2020
shares
Entity Information [Line Items]  
Document Type 10-Q
Document Fiscal Period Focus Q3
Document Quarterly Report true
Document Period End Date Sep. 30, 2020
Document Transition Report false
Amendment Flag false
Document Fiscal Year Focus 2020
Current Fiscal Year End Date --12-31
Entity File Number 1-5231
Entity Registrant Name MCDONALDS CORP
Entity Central Index Key 0000063908
Entity Incorporation, State or Country Code DE
Entity Tax Identification Number 36-2361282
Entity Address, Address Line One 110 North Carpenter StreetChicago, Illinois
Entity Address, City or Town Chicago
Entity Address, State or Province IL
Entity Address, Postal Zip Code 60607
City Area Code 630
Local Phone Number 623-3000
Entity Current Reporting Status Yes
Entity Interactive Data Current Yes
Entity Filer Category Large Accelerated Filer
Entity Small Business false
Entity Emerging Growth Company false
Entity Shell Company false
Title of 12(b) Security Common Stock, $0.01 par value
Trading Symbol MCD
Security Exchange Name NYSE
Entity Common Stock, Shares Outstanding 745,110,988


v3.20.2
Condensed Consolidated Balance Sheet - USD ($)
$ in Millions
Sep. 30, 2020
Dec. 31, 2019
Current assets    
Cash and equivalents $ 3,683.8 $ 898.5
Accounts and notes receivable 2,391.8 2,224.2
Inventories, at cost, not in excess of market 44.2 50.2
Prepaid expenses and other current assets 616.3 385.0
Total current assets 6,736.1 3,557.9
Other assets    
Investments in and advances to affiliates 1,283.3 1,270.3
Goodwill 2,715.8 2,677.4
Miscellaneous 2,469.6 2,584.0
Total other assets 6,468.7 6,531.7
Lease right-of-use asset, net 13,276.2 13,261.2
Property and equipment    
Property and equipment, at cost 40,088.6 39,050.9
Accumulated depreciation and amortization (15,870.3) (14,890.9)
Net property and equipment 24,218.3 24,160.0
Total assets 50,699.3 47,510.8
Current liabilities    
Accounts payable 689.0 988.2
Lease liability 718.2 621.0
Income taxes 364.0 331.7
Other taxes 256.6 247.5
Accrued interest 340.2 337.8
Accrued payroll and other liabilities 1,223.4 1,035.7
Current maturities of long-term debt 2,688.8 59.1
Total current liabilities 6,280.2 3,621.0
Long-term debt 35,143.4 34,118.1
Long-term lease liability 12,736.0 12,757.8
Long-term income taxes 1,957.3 2,265.9
Deferred revenues - initial franchise fees 679.8 660.6
Other long-term liabilities 951.5 979.6
Deferred income taxes 1,423.2 1,318.1
Shareholders' equity (deficit)    
Preferred stock, no par value; authorized—165.0 million shares; issued—none 0.0 0.0
Common stock, $.01 par value; authorized—3.5 billion shares; issued—1,660.6 million shares 16.6 16.6
Additional paid-in capital 7,854.7 7,653.9
Retained earnings 53,492.5 52,930.5
Accumulated other comprehensive income (loss) (2,758.8) (2,482.7)
Common stock in treasury, at cost; 915.5 and 914.3 million shares (67,077.1) (66,328.6)
Total shareholders' equity (deficit) (8,472.1) (8,210.3)
Total liabilities and shareholders' equity (deficit) $ 50,699.3 $ 47,510.8


v3.20.2
Condensed Consolidated Balance Sheet (Parenthetical) - $ / shares
Sep. 30, 2020
Dec. 31, 2019
Preferred stock, par value $ 0 $ 0
Preferred stock, authorized 165,000,000 165,000,000
Preferred stock, issued 0 0
Common stock, par value $ 0.01 $ 0.01
Common stock, authorized 3,500,000,000 3,500,000,000
Common stock, issued 1,660,600,000 1,660,600,000
Common stock in treasury, shares 915,500,000 914,300,000


v3.20.2
Condensed Consolidated Statement of Income - USD ($)
shares in Millions, $ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2020
Sep. 30, 2019
Revenues        
Sales by Company-operated restaurants $ 2,286.4 $ 2,416.6 $ 5,905.9 $ 7,057.5
Revenues from franchised restaurants 3,044.8 3,014.0 7,740.8 8,670.0
Other Revenues 86.9 71.7 247.3 208.7
Total revenues 5,418.1 5,502.3 13,894.0 15,936.2
Operating costs and expenses        
Company-operated restaurant expenses 1,876.3 1,967.7 5,077.5 5,821.0
Franchised restaurants-occupancy expenses 567.9 559.5 1,646.6 1,637.3
Other Restaurant Expenses 69.2 57.5 198.0 166.2
Depreciation and Amortization 75.8 69.0 220.3 193.6
Other Selling, General and Administrative Expense 454.7 474.6 1,547.0 1,382.2
Other operating (income) expense, net (152.2) (35.3) 23.5 (41.3)
Total operating costs and expenses 2,891.7 3,093.0 8,712.9 9,159.0
Operating income 2,526.4 2,409.3 5,181.1 6,777.2
Interest expense 310.1 280.6 909.2 838.9
Nonoperating (income) expense, net (0.8) (23.5) (38.8) (53.0)
Income before provision for income taxes 2,217.1 2,152.2 4,310.7 5,991.3
Provision for income taxes 454.5 544.3 957.4 1,538.1
Net income $ 1,762.6 $ 1,607.9 $ 3,353.3 $ 4,453.2
Earnings per common share-basic $ 2.37 $ 2.13 $ 4.50 $ 5.85
Earnings per common share-diluted 2.35 2.11 4.47 5.80
Dividends declared per common share $ 1.25 $ 2.41 $ 3.75 $ 4.73
Weighted average shares outstanding-basic 744.5 756.6 744.4 761.1
Weighted average shares outstanding-diluted 750.0 763.9 749.8 768.1


v3.20.2
Condensed Consolidated Statement of Comprehensive Income - USD ($)
$ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2020
Sep. 30, 2019
Document Fiscal Year Focus     2020  
Net income $ 1,762.6 $ 1,607.9 $ 3,353.3 $ 4,453.2
Foreign currency translation adjustments:        
Gain (loss) recognized in accumulated other comprehensive income (AOCI), including net investment hedges 56.6 (179.1) (202.5) (108.3)
Reclassification of (gain) loss to net income 9.0 0.0 9.0 46.8
Foreign currency translation adjustments-net of tax benefit (expense) of $116.8, ($145.5), $67.6, and ($177.6) 65.6 (179.1) (193.5) (61.5)
Cash flow hedges:        
Gain (loss) recognized in AOCI (27.1) 24.4 (84.2) 33.6
Reclassification of (gain) loss to net income 5.1 (13.4) (5.8) (30.4)
Cash flow hedges-net of tax benefit (expense) of $6.6, ($3.3), $27.1, and ($1.0) (22.0) 11.0 (90.0) 3.2
Defined benefit pension plans:        
Gain (loss) recognized in AOCI 0.5 0.1 (2.0) 0.5
Reclassification of (gain) loss to net income 3.4 1.5 9.4 4.2
Defined benefit pension plans-net of tax benefit (expense) of $0.0, $0.0, $0.5, and $0.0 3.9 1.6 7.4 4.7
Total other comprehensive income (loss), net of tax 47.5 (166.5) (276.1) (53.6)
Comprehensive income (loss) $ 1,810.1 $ 1,441.4 $ 3,077.2 $ 4,399.6


v3.20.2
Condensed Consolidated Statement of Comprehensive Income (Parenthetical) - USD ($)
$ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2020
Sep. 30, 2019
Other comprehensive income (loss), foreign currency translation adjustment, tax $ 116.8 $ (145.5) $ 67.6 $ (177.6)
Other comprehensive income (loss), derivatives qualifying as hedges, tax 6.6 (3.3) 27.1 (1.0)
Other comprehensive income (loss), pension and other postretirement benefit plans, tax $ 0.0 $ 0.0 $ 0.5 $ 0.0


v3.20.2
Condensed Consolidated Statement of Cash Flows - USD ($)
$ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2020
Sep. 30, 2019
Operating activities        
Net income $ 1,762.6 $ 1,607.9 $ 3,353.3 $ 4,453.2
Charges and credits:        
Depreciation and amortization 440.1 413.4 1,287.1 1,204.3
Deferred income taxes (38.0) 78.5 196.3 190.8
Share-based compensation 7.3 29.6 64.0 90.1
Other (56.8) (64.2) (25.5) 2.2
Changes in working capital items 824.3 221.5 (602.8) 292.2
Cash provided by operations 2,939.5 2,286.7 4,272.4 6,232.8
Investing activities        
Capital expenditures (390.2) (548.7) (1,177.7) (1,661.8)
Purchases of restaurant businesses (6.7) (41.0) (50.0) (434.8)
Sales of restaurant businesses 8.0 49.4 35.5 249.9
Sales of property 0.2 21.1 17.8 112.3
Other 120.8 (73.6) (8.5) (529.7)
Cash used for investing activities (267.9) (592.8) (1,182.9) (2,264.1)
Financing activities        
Net short-term borrowings (993.4) (600.7) (885.7) (105.6)
Long-term financing issuances 2.8 1,975.0 5,543.0 4,494.8
Long-term financing repayments (451.5) (667.9) (1,414.1) (2,064.1)
Treasury stock purchases (0.7) (1,467.8) (905.6) (3,531.3)
Common stock dividends (930.9) (876.9) (2,791.3) (2,646.7)
Proceeds from stock option exercises 105.3 73.4 262.3 323.4
Other (0.1) (12.7) (122.0) (23.5)
Cash used for financing activities (2,268.5) (1,577.6) (313.4) (3,553.0)
Effect of exchange rates on cash and cash equivalents 25.0 (73.5) 9.2 (104.4)
Cash and equivalents increase 428.1 42.8 2,785.3 311.3
Cash and equivalents at beginning of period 3,255.7 1,134.5 898.5 866.0
Cash and equivalents at end of period $ 3,683.8 $ 1,177.3 $ 3,683.8 $ 1,177.3


v3.20.2
Condensed Consolidated Statement of Shareholders' Equity - USD ($)
shares in Millions, $ in Millions
Total
Common stock issued
Additional paid-in capital
Retained earnings
Pensions
Cash Flow Hedges
Foreign currency translation
Common stock in treasury
Beginning Balance (in shares) at Dec. 31, 2018   1,660.6           (893.5)
Beginning Balance at Dec. 31, 2018 $ (6,258.4) $ 16.6 $ 7,376.0 $ 50,487.0 $ (216.6) $ 32.4 $ (2,425.3) $ (61,528.5)
Net income 4,453.2     4,453.2        
Other comprehensive income (loss), net of tax (53.6)       4.7 3.2 (61.5)  
Comprehensive income 4,399.6              
Common stock cash dividends (3,580.7)     (3,580.7)        
Treasury stock purchases (in shares)               (17.9)
Treasury stock purchases (3,571.4)             $ (3,571.4)
Share-based compensation 90.1   90.1          
Stock option exercises and other (in shares)               3.9
Stock option exercises and other 321.6   153.6         $ 168.0
Ending Balance (in shares) at Sep. 30, 2019   1,660.6           (907.5)
Ending Balance at Sep. 30, 2019 (8,599.2) $ 16.6 7,619.7 51,359.5 (211.9) 35.6 (2,486.8) $ (64,931.9)
Beginning Balance (in shares) at Jun. 30, 2019   1,660.6           (901.2)
Beginning Balance at Jun. 30, 2019 (6,808.8) $ 16.6 7,549.5 51,562.5 (213.5) 24.6 (2,307.7) $ (63,440.8)
Net income 1,607.9     1,607.9        
Other comprehensive income (loss), net of tax (166.5)       1.6 11.0 (179.1)  
Comprehensive income 1,441.4              
Common stock cash dividends (1,810.9)     (1,810.9)        
Treasury stock purchases (in shares)               (7.1)
Treasury stock purchases (1,524.1)             $ (1,524.1)
Share-based compensation 29.6   29.6          
Stock option exercises and other (in shares)               0.8
Stock option exercises and other 73.6   40.6         $ 33.0
Ending Balance (in shares) at Sep. 30, 2019   1,660.6           (907.5)
Ending Balance at Sep. 30, 2019 (8,599.2) $ 16.6 7,619.7 51,359.5 (211.9) 35.6 (2,486.8) $ (64,931.9)
Beginning Balance (in shares) at Dec. 31, 2019   1,660.6           (914.3)
Beginning Balance at Dec. 31, 2019 (8,210.3) $ 16.6 7,653.9 52,930.5 (243.7) 12.0 (2,251.0) $ (66,328.6)
Net income 3,353.3     3,353.3        
Other comprehensive income (loss), net of tax (276.1)       7.4 (90.0) (193.5)  
Comprehensive income 3,077.2              
Common stock cash dividends (2,791.3)     (2,791.3)        
Treasury stock purchases (in shares)               (4.3)
Treasury stock purchases (871.9)             $ (871.9)
Share-based compensation 64.0   64.0          
Stock option exercises and other (in shares)               3.1
Stock option exercises and other 260.2   136.8         $ 123.4
Ending Balance (in shares) at Sep. 30, 2020   1,660.6           (915.5)
Ending Balance at Sep. 30, 2020 (8,472.1) $ 16.6 7,854.7 53,492.5 (236.3) (78.0) (2,444.5) $ (67,077.1)
Beginning Balance (in shares) at Jun. 30, 2020   1,660.6           (916.5)
Beginning Balance at Jun. 30, 2020 (9,463.1) $ 16.6 7,780.0 52,660.8 (240.2) (56.0) (2,510.1) $ (67,114.2)
Net income 1,762.6     1,762.6        
Other comprehensive income (loss), net of tax 47.5       3.9 (22.0) 65.6  
Comprehensive income 1,810.1              
Common stock cash dividends (930.9)     (930.9)        
Treasury stock purchases (in shares)               0.0
Treasury stock purchases (0.7)             $ (0.7)
Share-based compensation 7.3   7.3          
Stock option exercises and other (in shares)               1.0
Stock option exercises and other 105.2   67.4         $ 37.8
Ending Balance (in shares) at Sep. 30, 2020   1,660.6           (915.5)
Ending Balance at Sep. 30, 2020 $ (8,472.1) $ 16.6 $ 7,854.7 $ 53,492.5 $ (236.3) $ (78.0) $ (2,444.5) $ (67,077.1)


v3.20.2
Condensed Consolidated Statement of Shareholders' Equity Consolidated Statement of Shareholders Equity (Parenthetical) - $ / shares
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2020
Sep. 30, 2019
Statement of Stockholders' Equity [Abstract]        
Dividends declared per common share $ 1.25 $ 2.41 $ 3.75 $ 4.73


v3.20.2
Basis of Presentation
9 Months Ended
Sep. 30, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Basis of Presentation
McDonald’s Corporation, the registrant, together with its subsidiaries, is referred to herein as the "Company." The Company, its franchisees and suppliers, are referred to herein as the "System."
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements contained in the Company’s December 31, 2019 Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. The results for the quarter and nine months ended September 30, 2020, do not necessarily indicate the results that may be expected for the full year.
Prior to January 1, 2020, the Company presented both expenditures and receipts related to technology fees charged to franchisees and revenues related to certain licensing arrangements within Other operating (income) expense, net, because these activities were not part of the Company’s ongoing major or central operations. Effective January 1, 2020, the Company is presenting the revenues and expenses related to these activities within Other revenues and Other restaurant expenses, respectively, in the Condensed Consolidated Statement of Income. The change in presentation was applied retrospectively to all periods presented and had no effect on Operating income, Net income, or Earnings per share.


v3.20.2
Restaurant Information
9 Months Ended
Sep. 30, 2020
Disclosure Restaurant Information By Ownership Type [Abstract]  
Restaurant Information
Restaurant Information
The following table presents restaurant information by ownership type:
Restaurants at September 30,
2020
 
2019
Conventional franchised
21,781

 
21,758

Developmental licensed
7,660

 
7,473

Foreign affiliated
6,997

 
6,432

Total Franchised
36,438

 
35,663

Company-operated
2,658

 
2,635

Total Systemwide restaurants
39,096

 
38,298


The results of operations of restaurant businesses purchased and sold in transactions with franchisees were not material either individually or in the aggregate to the Condensed Consolidated Financial Statements for the periods prior to purchase and sale.


v3.20.2
Per Common Share Information
9 Months Ended
Sep. 30, 2020
Earnings Per Share [Abstract]  
Per Common Share Information
Per Common Share Information

Diluted earnings per common share is calculated using net income divided by diluted weighted-average shares. Diluted weighted-average shares include weighted-average shares outstanding plus the dilutive effect of share-based compensation, calculated using the treasury stock method, of 5.5 million shares and 7.3 million shares for the quarters 2020 and 2019, respectively, and 5.4 million shares and 7.0 million shares for the nine months 2020 and 2019, respectively. Share-based compensation awards that would have been antidilutive, and therefore were not included in the calculation of diluted weighted-average shares, totaled 1.8 million shares and 0.1 million shares for the quarters 2020 and 2019, respectively, and 1.9 million shares and 0.1 million shares for the nine months 2020 and 2019, respectively.


v3.20.2
Fair Value Measurements
9 Months Ended
Sep. 30, 2020
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value. Fair value disclosures are reflected in a three-level hierarchy, maximizing the use of observable inputs and minimizing the use of unobservable inputs. The Company did not have any significant changes to the valuation techniques used to measure fair value as described in the Company's December 31, 2019 Annual Report on Form 10-K.
At September 30, 2020, the fair value of the Company’s debt obligations was estimated at $43.4 billion, compared to a carrying amount of $37.8 billion, which reflects $5.5 billion of debt issuances during the first quarter under the Company's existing registration statement on Form S-3 with maturities ranging from 2025 to 2050 and interest rates ranging from 1.45% to 4.20%. The balances at September 30, 2020 also reflect the retirement of $900 million of commercial paper and $1.4 billion of other debt maturities compared with December 31, 2019. In addition, a $1 billion line of credit was entered into during the first quarter of 2020, and subsequently repaid in the third quarter. The fair value was based upon quoted market prices, Level 2 within the valuation hierarchy. The carrying amounts of cash and equivalents, short-term investments and notes receivable approximate fair value.


v3.20.2
Financial Instruments and Hedging Activities
9 Months Ended
Sep. 30, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Financial Instruments and Hedging Activities
Financial Instruments and Hedging Activities
The Company is exposed to global market risks, including the effect of changes in interest rates and foreign currency fluctuations. The Company uses foreign currency denominated debt and derivative instruments to mitigate the impact of these changes. The Company does not hold or issue derivatives for trading purposes.
The following table presents the fair values of derivative instruments included on the Condensed Consolidated Balance Sheet:
  
Derivative Assets
 
Derivative Liabilities
In millions
Balance Sheet Classification
 
September 30, 2020
 
December 31, 2019
 
Balance Sheet Classification
 
September 30, 2020
 
December 31, 2019
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
Foreign currency
Prepaid expenses and other current assets
 
$
2.1

 
$
10.0

 
Accrued payroll and other liabilities
 
$
(25.8
)
 
$
(5.2
)
Interest rate
Prepaid expenses and other current assets
 
 
 
 
 
Accrued payroll and other liabilities
 

 

Foreign currency
Miscellaneous other assets
 
15.0

 
9.5

 
Other long-term liabilities
 
(6.3
)
 
(1.2
)
Interest rate
Miscellaneous other assets

 
37.9

 
12.1

 
Other long-term liabilities
 


 


Total derivatives designated as hedging instruments
 
$
55.0

 
$
31.6

 
 
 
$
(32.1
)
 
$
(6.4
)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
Equity
Prepaid expenses and other current assets


 
$
190.2

 
$
1.6

 
Accrued payroll and other liabilities
 
$
(5.6
)
 
$
(0.1
)
Foreign currency
Prepaid expenses and other current assets


 

 
12.4

 
Accrued payroll and other liabilities
 
(6.9
)
 
(4.8
)
Equity
Miscellaneous other assets
 

 
179.1

 
 
 
 
 
 
Total derivatives not designated as hedging instruments
 
$
190.2

 
$
193.1

 
 
 
$
(12.5
)
 
$
(4.9
)
Total derivatives
 
$
245.2

 
$
224.7

 
 
 
$
(44.6
)
 
$
(11.3
)

    The following table presents the pre-tax amounts from derivative instruments affecting income and AOCI for the nine months ended September 30, 2020 and 2019, respectively:
 
Location of Gain or Loss
Recognized in Income on
Derivative
 
Gain (Loss)
Recognized in AOCI
 
Gain (Loss)
Reclassified into Income from AOCI
 
Gain (Loss) Recognized in
Income on Derivative
 
 
 
 
 
 
 
 
In millions
 
 
2020
 
2019
 
2020
 
2019
 
2020
 
2019
Foreign currency
Nonoperating income/expense
 
$
(18.8
)
 
$
43.5

 
$
11.3

 
$
40.3

 
 
 
 
Interest rate
Interest expense
 
(90.8
)
 


 
(3.8
)
 
(1.0
)
 
 
 
 
Cash flow hedges
 
$
(109.6
)
 
$
43.5

 
$
7.5

 
$
39.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency denominated debt
Nonoperating income/expense
 
$
(396.8
)
 
$
766.6

 
$
17.6

 
 
 
 
 
 
Foreign currency derivatives
Nonoperating income/expense
 
2.1

 
11.9

 
 
 
 
 
 
 
 
Foreign currency derivatives(1)
Interest expense
 
 
 
 
 
 
 
 
 
$
11.0

 
$
8.0

Net investment hedges
 
$
(394.7
)
 
$
778.5

 
$
17.6

 
 
 
$
11.0

 
$
8.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency
Nonoperating income/expense
 
 
 
 
 
 
 
 
 
$
(17.2
)
 
$
5.2

Equity
Selling, general & administrative expenses
 
 
 
 
 
 
 
 
 
27.2

 
70.5

Equity
Other operating income/expense, net

 
 
 
 
 
 
 
 
 
(5.6
)
 
 
Undesignated derivatives
 
 
 
 
 
 
 
 
 
$
4.4

 
$
75.7

(1)The amount of gain (loss) recognized in income related to components excluded from effectiveness testing.





Fair Value Hedges
The Company enters into fair value hedges to reduce the exposure to changes in fair values of certain liabilities. The Company enters into fair value hedges that convert a portion of its fixed rate debt into floating rate debt by use of interest rate swaps.  At September 30, 2020, the carrying amount of fixed-rate debt that was effectively converted was $1.0 billion, which included an increase of $37.9 million of cumulative hedging adjustments. For the nine months ended September 30, 2020, the Company recognized a $25.8 million gain on the fair value of interest rate swaps, and a corresponding loss on the fair value of the related hedged debt instrument to interest expense.
Cash Flow Hedges
The Company enters into cash flow hedges to reduce the exposure to variability in certain expected future cash flows. To protect against the reduction in value of forecasted foreign currency cash flows (such as royalties denominated in foreign currencies), the Company uses foreign currency forwards to hedge a portion of anticipated exposures. The hedges cover the next 18 months for certain exposures and are denominated in various currencies. To protect against the variability of interest rates of an anticipated bond issuance, the Company may use treasury locks to hedge a portion of the expected future cash flows.
As of September 30, 2020, the Company had derivatives outstanding with an equivalent notional amount of $1.1 billion that hedged a portion of forecasted foreign currency denominated cash flows.
Based on market conditions at September 30, 2020, the $78.0 million in cumulative cash flow hedging losses, after tax, is not expected to have a significant effect on earnings over the next 12 months.
Net Investment Hedges
The Company primarily uses foreign currency denominated debt (third party and intercompany) to hedge its investments in certain foreign subsidiaries and affiliates. Realized and unrealized translation adjustments from these hedges are included in shareholders' equity in the foreign currency translation component of Other comprehensive income ("OCI") and offset translation adjustments on the underlying net assets of foreign subsidiaries and affiliates, which also are recorded in OCI. As of September 30, 2020, $12.7 billion of the Company's third party foreign currency denominated debt and $0.6 billion of intercompany foreign currency denominated debt was designated to hedge investments in certain foreign subsidiaries and affiliates.
Undesignated Derivatives
The Company enters into certain derivatives that are not designated for hedge accounting, therefore the changes in the fair value of these derivatives are recognized immediately in earnings together with the gain or loss from the hedged balance sheet position. As an example, the Company enters into equity derivative contracts, including total return swaps, to hedge market-driven changes in certain of its supplemental benefit plan liabilities. Changes in the fair value of these derivatives are recorded in Selling, general & administrative expenses together with the changes in the supplemental benefit plan liabilities. The Company may also use certain derivatives to mitigate the share price risk related to its sale of stock in McDonald’s Japan.  The changes in the fair value of the undesignated derivatives used for the most recent sale transaction were recognized immediately in earnings in Other Operating (income) expense, net. In addition, the Company uses foreign currency forwards to mitigate the change in fair value of certain foreign currency denominated assets and liabilities. The changes in the fair value of these derivatives are recognized in Nonoperating (income) expense, net, along with the currency gain or loss from the hedged balance sheet position.
Credit Risk
The Company is exposed to credit-related losses in the event of non-performance by its derivative counterparties. The Company did not have significant exposure to any individual counterparty at September 30, 2020 and has master agreements that contain netting arrangements. For financial reporting purposes, the Company presents gross derivative balances in the financial statements and supplementary data, including for counterparties subject to netting arrangements. Some of these agreements also require each party to post collateral if credit ratings fall below, or aggregate exposures exceed, certain contractual limits. At September 30, 2020, the Company was required to post an immaterial amount of collateral due to the negative fair value of certain derivative positions. The Company's counterparties were not required to post collateral on any derivative position, other than on certain hedges of the Company’s supplemental benefit plan liabilities where the counterparties were required to post collateral on their liability positions.


v3.20.2
Segment Information
9 Months Ended
Sep. 30, 2020
Segment Reporting [Abstract]  
Segment Information
Segment Information
The Company operates under an organizational structure with the following global business segments reflecting how management reviews and evaluates operating performance:
U.S. - the Company's largest market. The segment is 95% franchised as of September 30, 2020.
International Operated Markets - comprised of wholly-owned markets, or countries in which the Company operates restaurants, including Australia, Canada, France, Germany, Italy, the Netherlands, Russia, Spain and the U.K. The segment is 84% franchised as of September 30, 2020.
International Developmental Licensed Markets & Corporate - comprised of primarily developmental licensee and affiliate markets in the McDonald’s system. Corporate activities are also reported within this segment. The segment is 98% franchised as of September 30, 2020.
The following table presents the Company’s revenues and operating income by segment:
 
Quarters Ended
 
Nine Months Ended
  
September 30,
 
September 30,
In millions
2020
 
2019
 
2020
 
2019
Revenues
 
 
 
 
 
 
 
U.S.
$
2,094.2

 
$
2,028.5

 
$
5,723.8

 
$
5,959.9

International Operated Markets
2,845.9

 
2,986.2

 
6,862.7

 
8,573.4

International Developmental Licensed Markets & Corporate
478.0

 
487.6

 
1,307.5

 
1,402.9

Total revenues
$
5,418.1

 
$
5,502.3

 
$
13,894.0

 
$
15,936.2

Operating Income
 
 
 
 
 
 
 
U.S.
$
1,078.3

 
$
1,038.7

 
$
2,705.9

 
$
3,039.4

International Operated Markets
1,197.9

 
1,284.0

 
2,311.8

 
3,550.8

International Developmental Licensed Markets & Corporate *
250.2

 
86.6

 
163.4

 
187.0

Total operating income
$
2,526.4

 
$
2,409.3

 
$
5,181.1

 
$
6,777.2


*
Results for the quarter and nine months 2020 included $139 million of strategic gains related to the sale of McDonald's Japan stock, which reduced the Company's ownership by about 3%.


v3.20.2
Subsequent Events
9 Months Ended
Sep. 30, 2020
Subsequent Events [Abstract]  
Subsequent Events
Subsequent Events
The Company evaluated subsequent events through the date the financial statements were issued and filed with the Securities and Exchange Commission.
The Company began the third quarter with nearly all restaurants globally open for business, and which currently remain open as of the date of filing. However, as a result of COVID-19 resurgences, since September, there have been numerous instances of government restrictions on operating hours, limited dine-in capacity in most countries and, in some cases, mandated dining room closures. These restrictions are impacting most of the Company's key markets outside of the U.S., including France, Germany, Canada and the U.K. The Company expects some restrictions in various markets so long as the COVID-19 pandemic continues.
There were no other subsequent events that required recognition or disclosure.


v3.20.2
Updates to Significant Accounting Policies (Notes)
9 Months Ended
Sep. 30, 2020
Accounting Policies [Abstract]  
Significant Accounting Policies [Text Block]
Updates to Significant Accounting Policies

Revenue recognition

The Company's revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees, developmental licensees and affiliates. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales with minimum rent payments, and initial fees. Revenues from restaurants licensed to developmental licensees and affiliates include a royalty based on a percent of sales, and generally include initial fees. The Company’s Other revenues are comprised of fees paid by franchisees to recover a portion of costs incurred by the Company for various technology platforms, revenues from brand licensing arrangements to market and sell consumer packaged goods using the McDonald’s brand, and third party revenues for the Dynamic Yield business.
Sales by Company-operated restaurants are recognized on a cash basis at the time of the underlying sale and are presented net of sales tax and other sales-related taxes. Royalty revenues are based on a percent of sales and recognized at the time the underlying sales occur. Rental income includes both minimum rent payments, which are recognized straight-line over the franchise term (with the exception of rent concessions as a result of COVID-19 – refer to the Leasing policy update on page 11), and variable rent payments based on a percent of sales, which are recognized at the time the underlying sales occur. Initial fees are recognized as the Company satisfies the performance obligation over the franchise term, which is generally 20 years.
The Company provides goods or services related to various technology platforms to certain franchisees that are distinct from the franchise agreement because they do not require integration with other goods or services we provide. The Company has determined that it is the principal in these arrangements. Accordingly, the related revenue is presented on a gross basis on the Condensed Consolidated Statement of Income. These revenues are recognized as the goods or services are transferred to the franchisee, and related expenses are recognized as incurred. Brand licensing arrangement revenues are based on a percent of sales and are recognized at the time the underlying sales occur. Dynamic Yield third party revenues are generated from providing software as a service solutions to customers and are recognized over the applicable subscription period as the service is performed.

Long-lived assets, Goodwill and Capitalized Software

Long-lived assets and Goodwill are typically reviewed for impairment annually in the fourth quarter and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable or if an indicator of impairment exists. The Company has continued to monitor the global economic uncertainty as a result of COVID-19 to assess the outlook for restaurant operations and the impact that any disruption may have on the Company's business and overall financial performance.
As a result of the Company's analysis, and in consideration of the totality of events and circumstances, including the potential impact of COVID-19 related disruptions on the Company’s operating results, there were no indicators of impairment during the quarter or nine months 2020.
In addition to the Long-lived assets and Goodwill impairment analysis, the Company reviews capitalized software for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable or if an indicator of impairment exists, which occurs more regularly throughout the year, such as when new software may be ready for its intended use. Results for the nine months 2020 reflected write-offs of impaired software that were no longer being used of $26.3 million.

Leasing

The FASB issued guidance for how companies may account for COVID-19 related rent concessions in the form of FASB staff and Board members’ remarks at the April 8, 2020 public meeting and the FASB Staff Q&A issued on April 10, 2020.
The Company elected the practical expedient to account for COVID-19 related rent concessions as if they were part of the enforceable rights and obligations of the parties under the existing lease contract. This was elected for the Company’s entire lessee and lessor portfolio for any rent deferrals or rent abatements. For the lessee portfolio, the Company elected not to remeasure the lease liability and right-of-use asset if a rent deferral or a rent abatement is granted.
The Company deferred collection of approximately $20 million and $470 million of rental income on revenue that was recognized in the quarter and nine months, respectively. Rental income includes both minimum rent payments and variable rent payments based on a percent of sales.
Refer to the Cash Flow and Liquidity section on page 29 of this Form 10-Q for additional information on deferred collections of rental income as well as royalties.


v3.20.2
Recent Accounting Pronouncements Recent Accounting Pronouncements (Policies)
9 Months Ended
Sep. 30, 2020
New Accounting Pronouncements or Change in Accounting Principle [Line Items]  
Accounting Standards Update and Change in Accounting Principle [Text Block]

Recently Adopted Accounting Pronouncements

Financial Instruments - Credit Losses

In June 2016, the FASB issued guidance codified in Accounting Standards Codification Topic 326, "Financial Instruments – Credit Losses: Measurements of Credit Losses on Financial Instruments". The standard replaces the incurred loss impairment methodology in prior GAAP with a methodology that instead reflects a current estimate of all expected credit losses on financial assets, including receivables. The guidance requires that an entity measure and recognize expected credit losses at the time the asset is recorded, while considering a broader range of information to estimate credit losses including country specific macroeconomic conditions that correlate with historical loss experience, delinquency trends and aging behavior of receivables, among others. The Company adopted this guidance effective January 1, 2020, prospectively, and the adoption of this standard did not have a material impact to the Condensed Consolidated Financial Statements. The Company had an Allowance for bad debts of $85.3 million as of September 30, 2020 recorded as a reduction to Accounts and notes receivable on the Condensed Consolidated Balance Sheet. Included in this amount were net reductions in the allowance related to rent and royalty deferrals of $27 million for the quarter and an increase in the allowance related to rent and royalty deferrals of $66 million for the nine months. The Company will continue to actively monitor the impact of the COVID-19 pandemic on expected losses.
Recent Accounting Pronouncements Not Yet Adopted

Income Taxes

In December 2019, the FASB issued Accounting Standard Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” ("ASU 2019-12"), which simplifies the accounting for income taxes. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including applicable interim periods. The Company anticipates the adoption of ASU 2019-12 will not have a material impact on its consolidated financial statements.

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" ("ASU 2020-04"). The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently evaluating the impact the adoption of ASU 2020-04 will have on its consolidated financial statements.


v3.20.2
Updates to Significant Accounting Policies (Policies)
9 Months Ended
Sep. 30, 2020
Accounting Policies [Abstract]  
Goodwill and Intangible Assets Disclosure [Text Block]
Long-lived assets, Goodwill and Capitalized Software

Long-lived assets and Goodwill are typically reviewed for impairment annually in the fourth quarter and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable or if an indicator of impairment exists. The Company has continued to monitor the global economic uncertainty as a result of COVID-19 to assess the outlook for restaurant operations and the impact that any disruption may have on the Company's business and overall financial performance.
As a result of the Company's analysis, and in consideration of the totality of events and circumstances, including the potential impact of COVID-19 related disruptions on the Company’s operating results, there were no indicators of impairment during the quarter or nine months 2020.
In addition to the Long-lived assets and Goodwill impairment analysis, the Company reviews capitalized software for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable or if an indicator of impairment exists, which occurs more regularly throughout the year, such as when new software may be ready for its intended use. Results for the nine months 2020 reflected write-offs of impaired software that were no longer being used of $26.3 million.
Revenue Recognition, Sales of Goods [Policy Text Block]
Revenue recognition

The Company's revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees, developmental licensees and affiliates. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales with minimum rent payments, and initial fees. Revenues from restaurants licensed to developmental licensees and affiliates include a royalty based on a percent of sales, and generally include initial fees. The Company’s Other revenues are comprised of fees paid by franchisees to recover a portion of costs incurred by the Company for various technology platforms, revenues from brand licensing arrangements to market and sell consumer packaged goods using the McDonald’s brand, and third party revenues for the Dynamic Yield business.
Sales by Company-operated restaurants are recognized on a cash basis at the time of the underlying sale and are presented net of sales tax and other sales-related taxes. Royalty revenues are based on a percent of sales and recognized at the time the underlying sales occur. Rental income includes both minimum rent payments, which are recognized straight-line over the franchise term (with the exception of rent concessions as a result of COVID-19 – refer to the Leasing policy update on page 11), and variable rent payments based on a percent of sales, which are recognized at the time the underlying sales occur. Initial fees are recognized as the Company satisfies the performance obligation over the franchise term, which is generally 20 years.
The Company provides goods or services related to various technology platforms to certain franchisees that are distinct from the franchise agreement because they do not require integration with other goods or services we provide. The Company has determined that it is the principal in these arrangements. Accordingly, the related revenue is presented on a gross basis on the Condensed Consolidated Statement of Income. These revenues are recognized as the goods or services are transferred to the franchisee, and related expenses are recognized as incurred. Brand licensing arrangement revenues are based on a percent of sales and are recognized at the time the underlying sales occur. Dynamic Yield third party revenues are generated from providing software as a service solutions to customers and are recognized over the applicable subscription period as the service is performed.
Leases of Lessee Disclosure [Text Block]

Leasing

The FASB issued guidance for how companies may account for COVID-19 related rent concessions in the form of FASB staff and Board members’ remarks at the April 8, 2020 public meeting and the FASB Staff Q&A issued on April 10, 2020.
The Company elected the practical expedient to account for COVID-19 related rent concessions as if they were part of the enforceable rights and obligations of the parties under the existing lease contract. This was elected for the Company’s entire lessee and lessor portfolio for any rent deferrals or rent abatements. For the lessee portfolio, the Company elected not to remeasure the lease liability and right-of-use asset if a rent deferral or a rent abatement is granted.
The Company deferred collection of approximately $20 million and $470 million of rental income on revenue that was recognized in the quarter and nine months, respectively. Rental income includes both minimum rent payments and variable rent payments based on a percent of sales.
Refer to the Cash Flow and Liquidity section on page 29 of this Form 10-Q for additional information on deferred collections of rental income as well as royalties.


v3.20.2
Restaurant Information (Tables)
9 Months Ended
Sep. 30, 2020
Disclosure Restaurant Information By Ownership Type [Abstract]  
Restaurant Information by Ownership Type
The following table presents restaurant information by ownership type:
Restaurants at September 30,
2020
 
2019
Conventional franchised
21,781

 
21,758

Developmental licensed
7,660

 
7,473

Foreign affiliated
6,997

 
6,432

Total Franchised
36,438

 
35,663

Company-operated
2,658

 
2,635

Total Systemwide restaurants
39,096

 
38,298




v3.20.2
Financial Instruments and Hedging Activities (Tables)
9 Months Ended
Sep. 30, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Fair Values of Derivative Instruments Included on Consolidated Balance Sheet
The following table presents the fair values of derivative instruments included on the Condensed Consolidated Balance Sheet:
  
Derivative Assets
 
Derivative Liabilities
In millions
Balance Sheet Classification
 
September 30, 2020
 
December 31, 2019
 
Balance Sheet Classification
 
September 30, 2020
 
December 31, 2019
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
Foreign currency
Prepaid expenses and other current assets
 
$
2.1

 
$
10.0

 
Accrued payroll and other liabilities
 
$
(25.8
)
 
$
(5.2
)
Interest rate
Prepaid expenses and other current assets
 
 
 
 
 
Accrued payroll and other liabilities
 

 

Foreign currency
Miscellaneous other assets
 
15.0

 
9.5

 
Other long-term liabilities
 
(6.3
)
 
(1.2
)
Interest rate
Miscellaneous other assets

 
37.9

 
12.1

 
Other long-term liabilities
 


 


Total derivatives designated as hedging instruments
 
$
55.0

 
$
31.6

 
 
 
$
(32.1
)
 
$
(6.4
)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
Equity
Prepaid expenses and other current assets


 
$
190.2

 
$
1.6

 
Accrued payroll and other liabilities
 
$
(5.6
)
 
$
(0.1
)
Foreign currency
Prepaid expenses and other current assets


 

 
12.4

 
Accrued payroll and other liabilities
 
(6.9
)
 
(4.8
)
Equity
Miscellaneous other assets
 

 
179.1

 
 
 
 
 
 
Total derivatives not designated as hedging instruments
 
$
190.2

 
$
193.1

 
 
 
$
(12.5
)
 
$
(4.9
)
Total derivatives
 
$
245.2

 
$
224.7

 
 
 
$
(44.6
)
 
$
(11.3
)

Derivatives Pretax Amounts Affecting Income and Other Comprehensive Income The following table presents the pre-tax amounts from derivative instruments affecting income and AOCI for the nine months ended September 30, 2020 and 2019, respectively:
 
Location of Gain or Loss
Recognized in Income on
Derivative
 
Gain (Loss)
Recognized in AOCI
 
Gain (Loss)
Reclassified into Income from AOCI
 
Gain (Loss) Recognized in
Income on Derivative
 
 
 
 
 
 
 
 
In millions
 
 
2020
 
2019
 
2020
 
2019
 
2020
 
2019
Foreign currency
Nonoperating income/expense
 
$
(18.8
)
 
$
43.5

 
$
11.3

 
$
40.3

 
 
 
 
Interest rate
Interest expense
 
(90.8
)
 


 
(3.8
)
 
(1.0
)
 
 
 
 
Cash flow hedges
 
$
(109.6
)
 
$
43.5

 
$
7.5

 
$
39.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency denominated debt
Nonoperating income/expense
 
$
(396.8
)
 
$
766.6

 
$
17.6

 
 
 
 
 
 
Foreign currency derivatives
Nonoperating income/expense
 
2.1

 
11.9

 
 
 
 
 
 
 
 
Foreign currency derivatives(1)
Interest expense
 
 
 
 
 
 
 
 
 
$
11.0

 
$
8.0

Net investment hedges
 
$
(394.7
)
 
$
778.5

 
$
17.6

 
 
 
$
11.0

 
$
8.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency
Nonoperating income/expense
 
 
 
 
 
 
 
 
 
$
(17.2
)
 
$
5.2

Equity
Selling, general & administrative expenses
 
 
 
 
 
 
 
 
 
27.2

 
70.5

Equity
Other operating income/expense, net

 
 
 
 
 
 
 
 
 
(5.6
)
 
 
Undesignated derivatives
 
 
 
 
 
 
 
 
 
$
4.4

 
$
75.7

(1)The amount of gain (loss) recognized in income related to components excluded from effectiveness testing.






v3.20.2
Franchise Arrangements (Tables)
9 Months Ended
Sep. 30, 2020
Disclosure Franchise Arrangements Additional Information [Abstract]  
Revenues from Franchised Restaurants
Revenues from franchised restaurants consisted of:
 
 
 
 
 
 
 
 
 
Quarters Ended
 
Nine Months Ended
 
September 30,
 
September 30,
In millions
2020
 
2019
 
2020
 
2019
 
 
 
 
 
 
 
 
Rents
$
1,961.7

 
$
1,935.9

 
$
4,944.8

 
$
5,582.1

Royalties
1,071.3

 
1,067.6

 
2,762.1

 
3,056.1

Initial fees
11.8

 
10.5

 
33.9

 
31.8

Revenues from franchised restaurants
$
3,044.8

 
$
3,014.0

 
$
7,740.8

 
$
8,670.0




v3.20.2
Segment Information (Tables)
9 Months Ended
Sep. 30, 2020
Segment Reporting [Abstract]  
Revenues and Operating Income by Geographic Segment
The following table presents the Company’s revenues and operating income by segment:
 
Quarters Ended
 
Nine Months Ended
  
September 30,
 
September 30,
In millions
2020
 
2019
 
2020
 
2019
Revenues
 
 
 
 
 
 
 
U.S.
$
2,094.2

 
$
2,028.5

 
$
5,723.8

 
$
5,959.9

International Operated Markets
2,845.9

 
2,986.2

 
6,862.7

 
8,573.4

International Developmental Licensed Markets & Corporate
478.0

 
487.6

 
1,307.5

 
1,402.9

Total revenues
$
5,418.1

 
$
5,502.3

 
$
13,894.0

 
$
15,936.2

Operating Income
 
 
 
 
 
 
 
U.S.
$
1,078.3

 
$
1,038.7

 
$
2,705.9

 
$
3,039.4

International Operated Markets
1,197.9

 
1,284.0

 
2,311.8

 
3,550.8

International Developmental Licensed Markets & Corporate *
250.2

 
86.6

 
163.4

 
187.0

Total operating income
$
2,526.4

 
$
2,409.3

 
$
5,181.1

 
$
6,777.2


*
Results for the quarter and nine months 2020 included $139 million of strategic gains related to the sale of McDonald's Japan stock, which reduced the Company's ownership by about 3%.


v3.20.2
Restaurant Information by Ownership Type (Details) - Restaurant
Sep. 30, 2020
Sep. 30, 2019
Segment Reporting Information [Line Items]    
Number of Restaurants 39,096 38,298
Franchised    
Segment Reporting Information [Line Items]    
Number of Restaurants 36,438 35,663
Franchised | Conventional franchised    
Segment Reporting Information [Line Items]    
Number of Restaurants 21,781 21,758
Franchised | Developmental licensed    
Segment Reporting Information [Line Items]    
Number of Restaurants 7,660 7,473
Franchised | Affiliated    
Segment Reporting Information [Line Items]    
Number of Restaurants 6,997 6,432
Company-operated    
Segment Reporting Information [Line Items]    
Number of Restaurants 2,658 2,635


v3.20.2
Per Common Share Information (Additional Information) (Details) - shares
shares in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2020
Sep. 30, 2019
Earnings Per Share [Abstract]        
Dilutive effect of share-based compensation 5.5 7.3 5.4 7.0
Stock options that were not included in diluted weighted-average shares 1.8 0.1 1.9 0.1


v3.20.2
Recent Accounting Pronouncements (Recently Adopted Accounting Standards) (Income Taxes) (Details) - USD ($)
$ in Millions
Sep. 30, 2020
Dec. 31, 2019
New Accounting Pronouncements or Change in Accounting Principle [Line Items]    
Retained earnings $ 53,492.5 $ 52,930.5


v3.20.2
Recent Accounting Pronouncements (Recently Adopted Accounting Standards) (Lease Accounting) (Details) - USD ($)
$ in Millions
Sep. 30, 2020
Dec. 31, 2019
Accounting Policies [Abstract]    
Lease right-of-use asset, net $ 13,276.2 $ 13,261.2


v3.20.2
Recent Accounting Pronouncements Recent Accounting Pronouncements (Details) - USD ($)
$ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2020
New Accounting Pronouncements or Change in Accounting Principle [Line Items]    
Allowance For Doubtful Accounts, Accounts Receivable   $ 85.3
Increase (Decrease) in Accounts and Notes Receivable $ (27.0) $ 66.0


v3.20.2
Fair Value Measurements (Additional Information) (Details)
$ in Billions
Sep. 30, 2020
USD ($)
Fair Value Measurements [Line Items]  
Debt obligations, carrying amount $ 37.8
Line of Credit, Current 1.0
Long-term Debt 5.5
Commercial Paper 0.9
Debt, Current 1.4
Level 2  
Fair Value Measurements [Line Items]  
Debt obligations, fair value $ 43.4
Minimum [Member]  
Fair Value Measurements [Line Items]  
Debt Instrument, Interest Rate, Stated Percentage 1.45%
Maximum [Member]  
Fair Value Measurements [Line Items]  
Debt Instrument, Interest Rate, Stated Percentage 4.20%


v3.20.2
Financial Instruments and Hedging Activities (Fair Values of Derivative Instruments Included on Consolidated Balance Sheet) (Details) - USD ($)
$ in Millions
Sep. 30, 2020
Dec. 31, 2019
Derivatives, Fair Value [Line Items]    
Asset Derivatives Fair Value $ 245.2 $ 224.7
Liability Derivatives Fair Value 44.6 11.3
Designated as Hedging Instrument    
Derivatives, Fair Value [Line Items]    
Asset Derivatives Fair Value 55.0 31.6
Liability Derivatives Fair Value 32.1 6.4
Derivatives Not Designated as Hedging Instruments    
Derivatives, Fair Value [Line Items]    
Asset Derivatives Fair Value 190.2 193.1
Liability Derivatives Fair Value 12.5 4.9
Interest Rate Contract [Member] | Accrued Expenses And Other Current Liabilities [Member] | Designated as Hedging Instrument    
Derivatives, Fair Value [Line Items]    
Liability Derivatives Fair Value
Interest Rate Contract [Member] | Other Liabilities [Member] | Designated as Hedging Instrument    
Derivatives, Fair Value [Line Items]    
Liability Derivatives Fair Value
Interest Rate Contract [Member] | Other Assets [Member] | Designated as Hedging Instrument    
Derivatives, Fair Value [Line Items]    
Asset Derivatives Fair Value 37.9 12.1
Equity [Member] | Accrued Expenses And Other Current Liabilities [Member] | Derivatives Not Designated as Hedging Instruments    
Derivatives, Fair Value [Line Items]    
Liability Derivatives Fair Value 5.6 0.1
Equity [Member] | Prepaid Expenses and Other Current Assets [Member] | Derivatives Not Designated as Hedging Instruments    
Derivatives, Fair Value [Line Items]    
Asset Derivatives Fair Value 190.2 1.6
Equity [Member] | Other Assets [Member] | Derivatives Not Designated as Hedging Instruments    
Derivatives, Fair Value [Line Items]    
Asset Derivatives Fair Value 0.0 179.1
Foreign Exchange [Member] | Accrued Expenses And Other Current Liabilities [Member] | Designated as Hedging Instrument    
Derivatives, Fair Value [Line Items]    
Liability Derivatives Fair Value 25.8 5.2
Foreign Exchange [Member] | Accrued Expenses And Other Current Liabilities [Member] | Derivatives Not Designated as Hedging Instruments    
Derivatives, Fair Value [Line Items]    
Liability Derivatives Fair Value 6.9 4.8
Foreign Exchange [Member] | Prepaid Expenses and Other Current Assets [Member] | Designated as Hedging Instrument    
Derivatives, Fair Value [Line Items]    
Asset Derivatives Fair Value 2.1 10.0
Foreign Exchange [Member] | Prepaid Expenses and Other Current Assets [Member] | Derivatives Not Designated as Hedging Instruments    
Derivatives, Fair Value [Line Items]    
Asset Derivatives Fair Value 0.0 12.4
Foreign Exchange [Member] | Other Liabilities [Member] | Designated as Hedging Instrument    
Derivatives, Fair Value [Line Items]    
Liability Derivatives Fair Value 6.3 1.2
Foreign Exchange [Member] | Other Assets [Member] | Designated as Hedging Instrument    
Derivatives, Fair Value [Line Items]    
Asset Derivatives Fair Value $ 15.0 $ 9.5


v3.20.2
(Derivatives Pretax Amounts Affecting Income and Other Comprehensive Income) (Details) - USD ($)
$ in Millions
9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Derivatives in Cash Flow Hedging Relationships    
Derivative Instruments, Gain (Loss) [Line Items]    
Gain (Loss) Reclassified into Income from Accumulated OCI (Effective Portion) $ 7.5 $ 39.3
Gain (Loss) Recognized in Accumulated OCI (Effective Portion) (109.6) 43.5
Net Investment Hedging Relationships    
Derivative Instruments, Gain (Loss) [Line Items]    
Gain (Loss) Reclassified into Income from Accumulated OCI (Effective Portion) 17.6  
Gain (Loss) Recognized in Accumulated OCI (Effective Portion) (394.7) 778.5
Gain (Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing and Ineffective Portion) 11.0 8.0
Derivatives Not Designated as Hedging Instruments    
Derivative Instruments, Gain (Loss) [Line Items]    
Derivative instruments, gain (loss) recognized in income, net 4.4 75.7
Foreign Exchange [Member] | Derivatives in Cash Flow Hedging Relationships    
Derivative Instruments, Gain (Loss) [Line Items]    
Gain (Loss) Reclassified into Income from Accumulated OCI (Effective Portion) 11.3 40.3
Gain (Loss) Recognized in Accumulated OCI (Effective Portion) (18.8) 43.5
Foreign Exchange [Member] | Derivatives Not Designated as Hedging Instruments    
Derivative Instruments, Gain (Loss) [Line Items]    
Derivative instruments, gain (loss) recognized in income, net (17.2) 5.2
Foreign Exchange Forward [Member] | Net Investment Hedging Relationships    
Derivative Instruments, Gain (Loss) [Line Items]    
Gain (Loss) Recognized in Accumulated OCI (Effective Portion) 2.1 11.9
Cross Currency Interest Rate Contract [Member] | Net Investment Hedging Relationships    
Derivative Instruments, Gain (Loss) [Line Items]    
Gain (Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing and Ineffective Portion) 11.0 8.0
Interest Rate Contract [Member] | Derivatives in Cash Flow Hedging Relationships    
Derivative Instruments, Gain (Loss) [Line Items]    
Gain (Loss) Reclassified into Income from Accumulated OCI (Effective Portion) (3.8) (1.0)
Gain (Loss) Recognized in Accumulated OCI (Effective Portion) (90.8)
Other Foreign Currency Denominated Debt [Member] | Net Investment Hedging Relationships    
Derivative Instruments, Gain (Loss) [Line Items]    
Gain (Loss) Reclassified into Income from Accumulated OCI (Effective Portion) 17.6  
Gain (Loss) Recognized in Accumulated OCI (Effective Portion) (396.8) 766.6
Equity [Member] | Derivatives Not Designated as Hedging Instruments    
Derivative Instruments, Gain (Loss) [Line Items]    
Derivative instruments, gain (loss) recognized in income, net 27.2 $ 70.5
Equity Contract [Member] | Derivatives Not Designated as Hedging Instruments    
Derivative Instruments, Gain (Loss) [Line Items]    
Derivative instruments, gain (loss) recognized in income, net $ (5.6)  


v3.20.2
(Financial Instruments and Hedging Activities - Additional Information) (Details)
$ in Millions
9 Months Ended
Sep. 30, 2020
USD ($)
Derivative Instruments and Hedging Activities Disclosure [Line Items]  
Cumulative deferred hedging gain (loss), after tax, included in accumulated other comprehensive income $ 78.0
Interest Rate Swap  
Derivative Instruments and Hedging Activities Disclosure [Line Items]  
Derivative, Notional Amount 1,000.0
Intercompany Debt [Member]  
Derivative Instruments and Hedging Activities Disclosure [Line Items]  
Foreign currency denominated debt designated to hedge investments in certain foreign subsidiaries and affiliates 600.0
Debt [Member]  
Derivative Instruments and Hedging Activities Disclosure [Line Items]  
Foreign currency denominated debt designated to hedge investments in certain foreign subsidiaries and affiliates 12,700.0
Interest Rate Risk [Member] | Fair Value Hedging [Member]  
Derivative Instruments and Hedging Activities Disclosure [Line Items]  
Derivative instruments, gain (loss) recognized in income, net 25.8
Increase (Decrease) in Fair Value of Interest Rate Fair Value Hedging Instruments 37.9
Royalty Arrangement [Member]  
Derivative Instruments and Hedging Activities Disclosure [Line Items]  
Derivative, Notional Amount $ 1,100.0
Period covered by hedge 18 months


v3.20.2
Revenues from Franchised Restaurants (Detail) - USD ($)
$ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2020
Sep. 30, 2019
Franchisor Disclosure        
Rents $ 1,961.7 $ 1,935.9 $ 4,944.8 $ 5,582.1
Royalties 1,071.3 1,067.6 2,762.1 3,056.1
Initial Fees 11.8 10.5 33.9 31.8
Revenues from franchised restaurants $ 3,044.8 $ 3,014.0 $ 7,740.8 $ 8,670.0


v3.20.2
Franchise Arrangements - Additional Information (Detail)
9 Months Ended
Sep. 30, 2020
Franchisor Disclosure [Abstract]  
Franchise Agreement Period 20 years


v3.20.2
Segment Information (Segment and Geographic Information) (Details) - USD ($)
$ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2020
Sep. 30, 2019
Segment Reporting Information [Line Items]        
Gain (Loss) on Disposition of Stock in Subsidiary or Equity Method Investee     $ 139.0  
Document Fiscal Year Focus     2020  
Total revenues $ 5,418.1 $ 5,502.3 $ 13,894.0 $ 15,936.2
Operating Income 2,526.4 2,409.3 5,181.1 6,777.2
United States        
Segment Reporting Information [Line Items]        
Total revenues 2,094.2 2,028.5 5,723.8 5,959.9
Operating Income 1,078.3 1,038.7 2,705.9 3,039.4
International Operated Markets        
Segment Reporting Information [Line Items]        
Total revenues 2,845.9 2,986.2 6,862.7 8,573.4
Operating Income 1,197.9 1,284.0 2,311.8 3,550.8
International Developmental Licensed Markets and Corporate        
Segment Reporting Information [Line Items]        
Total revenues 478.0 487.6 1,307.5 1,402.9
Operating Income $ 250.2 $ 86.6 $ 163.4 $ 187.0


v3.20.2
Subsequent Events Subsequent Events (Details)
$ in Billions
Sep. 30, 2020
USD ($)
Subsequent Events [Abstract]  
Line of Credit, Current $ 1


v3.20.2
Updates to Significant Accounting Policies (Details) - USD ($)
$ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2020
Accounting Policies [Abstract]    
Deferred collection amount of rental income $ 20 $ 470
Franchise Agreement Period   20 years


v3.20.2
Updates to Significant Accounting Policies Capitalized Software (Details)
$ in Millions
9 Months Ended
Sep. 30, 2020
USD ($)
Capitalized Software [Abstract]  
Asset Impairment Charges $ 26.3


This regulatory filing also includes additional resources:
mcd930202010q.pdf
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