What changed in this filing

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Item 1. Financial Statements

2022-05-02 compared with 2021-11-02 · 69 added, 107 removed, 285 unchanged (38% of the section changed)

1 unchanged sentence

CONDENSED CONSOLIDATED BALANCE SHEET

In millions, except per share data September 30,

In millions, except per share data March 31,

2022 December 31,

18 unchanged sentences

Accounts payable $ 718.6 $ 1,006.8

Dividends payable 1,027.3 —

Lease liability 691.9 705.5

3 unchanged sentences

Accrued payroll and other liabilities 1,637.5 1,347.0

Current maturities of long-term debt 500.0 2,243.6

Total current liabilities 4,234.6 4,020.0

21 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

Quarters Ended Nine Months Ended

September 30, September 30,

Quarters Ended

In millions, except per share data 2022 2021

25 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

Quarters Ended Nine Months Ended

September 30, September 30,

Quarters Ended

In millions 2022 2021

6 unchanged sentences

Reclassification of (gain) loss to net income — 10.7

Foreign currency translation adjustments-net of tax benefit (expense) of ($66.1), $116.8, ($133.7) and $67.6

Foreign currency translation adjustments-net of tax

benefit (expense) of ( 59.0 ) and ( 90.3 )

( 84.2 ) ( 77.0 )

6 unchanged sentences

Reclassification of (gain) loss to net income ( 1.4 ) ( 10.9 )

Defined benefit pension plans-net of tax benefit (expense) of $0.0, $0.0, $0.1 and $0.5

Defined benefit pension plans-net of tax benefit (expense)

of 0.0 and 0.0

( 1.3 ) ( 10.2 )

3 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

Quarters Ended Nine Months Ended

September 30, September 30,

Quarters Ended

In millions 2022 2021

26 unchanged sentences

Effect of exchange rates on cash and cash equivalents ( 122.2 ) ( 44.9 )

Cash and equivalents increase 1,256.4 428.1 856.7 2,785.3

Cash and equivalents decrease ( 2,373.5 ) ( 429.4 )

Cash and equivalents at beginning of period 4,709.2 3,449.1

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)

For the nine months ended September 30, 2020

For the quarter ended March 31, 2021

issued Accumulated other

14 unchanged sentences

($ 1.29 per share)

( 962.3 ) ( 962.3 )

Treasury stock purchases ( 0.1 ) ( 21.5 ) ( 21.5 )

1 unchanged sentence

Stock option exercises and other 28.2 0.8 29.6 57.8

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 )

For the nine months ended September 30, 2021

Balance at March 31, 2021 1,660.6 $ 16.6 $ 7,959.1 $ 54,483.0 $ ( 297.8 ) $ ( 73.2 ) $ ( 2,264.9 ) ( 914.5 ) $ ( 67,058.3 ) $ ( 7,235.5 )

For the quarter ended March 31, 2022

issued Accumulated other

14 unchanged sentences

($ 1.38 per share)

Treasury stock purchases ( 0.2 ) ( 59.0 ) ( 59.0 )

Share-based compensation 97.9 97.9

Stock option exercises and other 124.3 2.0 73.5 197.8

Balance at September 30, 2021 1,660.6 $ 16.6 $ 8,125.8 $ 55,897.7 $ ( 307.1 ) $ ( 30.2 ) $ ( 2,325.9 ) ( 913.4 ) $ ( 67,051.9 ) $ ( 5,675.0 )

See Notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)

For the quarter ended September 30, 2020

issued Accumulated other

comprehensive income (loss) Common stock in

treasury Total

shareholders’

equity (deficit)

capital Retained

earnings Pensions Cash flow

hedges Foreign

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 )

For the quarter ended September 30, 2021

issued Accumulated other

comprehensive income (loss) Common stock in

treasury Total

shareholders’

equity (deficit)

capital Retained

earnings Pensions Cash flow

hedges Foreign

In millions, except per share data Shares Amount Shares Amount

Balance at June 30, 2021 1,660.6 $ 16.6 $ 8,046.0 $ 55,739.0 $ ( 302.8 ) $ ( 61.0 ) $ ( 2,207.4 ) ( 913.8 ) $ ( 67,038.4 ) $ ( 5,808.0 )

Net income 2,149.9 2,149.9

Other comprehensive income (loss),

net of tax ( 4.3 ) 30.8 ( 118.5 ) ( 92.0 )

Comprehensive income 2,057.9

Common stock cash dividends

($2.67 per share) ( 1,991.2 ) ( 1,991.2 )

( 1,025.1 ) ( 1,025.1 )

Treasury stock purchases ( 6.1 ) ( 1,506.5 ) ( 1,506.5 )

1 unchanged sentence

Stock option exercises and other 21.2 0.8 30.1 51.3

Balance at September 30, 2021 1,660.6 $ 16.6 $ 8,125.8 $ 55,897.7 $ ( 307.1 ) $ ( 30.2 ) $ ( 2,325.9 ) ( 913.4 ) $ ( 67,051.9 ) $ ( 5,675.0 )

Balance at March 31, 2022 1,660.6 $ 16.6 $ 8,307.1 $ 57,614.0 $ ( 180.8 ) $ ( 7.5 ) $ ( 2,453.6 ) ( 921.1 ) $ ( 69,286.6 ) $ ( 5,990.8 )

See Notes to condensed consolidated financial statements.

4 unchanged sentences

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, 2021 do not necessarily indicate the results that may be expected for the full year.

The results for the quarter ended March 31, 2022 do not necessarily indicate the results that may be expected for the full year.

During the first quarter of 2022, McDonald's announced it was temporarily suspending operations and closing restaurants in Russia and Ukraine.

The temporary closures were effective at the end of February in Ukraine and mid-March in Russia.

The Company is supporting its businesses in these markets through the continuation of employee salaries and lease payments as well as providing support to the Company's supply chain in the region.

Restaurant Information

The following table presents restaurant information by ownership type:

Restaurants at September 30, 2021 2020

Restaurants at March 31, 2022 2021

Conventional franchised 21,558 21,496

4 unchanged sentences

Total Systemwide restaurants 40,344 39,160

Company-operated restaurants include 827 restaurants in Russia and Ukraine that were temporarily closed during the first quarter 2022 due to the ongoing military conflict in the region.

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.

1 unchanged sentence

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 for each of the quarters 2021 and 2020, and 5.4 million shares for each of the nine months 2021 and 2020.

Share-based compensation awards that would have been antidilutive, and therefore were not included in the calculation of diluted weighted-average shares, totaled 1.4 million shares and 1.8 million shares for the quarters 2021 and 2020, respectively, and 3.0 million shares and 1.9 million shares for the nine months 2021 and 2020, respectively.

In September 2021, McDonald's Board of Directors declared a 7% increase in the quarterly cash dividend to $ 1.38 per share of

common stock, resulting in $ 1.0 billion of dividends payable in December 2021.

In addition, the Company resumed its

share repurchase program in September 2021.

Diluted weighted-average shares include weighted-average shares outstanding plus the dilutive effect of share-based compensation, calculated using the treasury stock method, of 5.0 million shares and 5.2 million shares for the quarters 2022 and 2021, respectively.

Share-based compensation awards that would have been antidilutive, and therefore were not included in the calculation of diluted weighted-average shares, totaled 1.7 million shares and 3.6 million shares for the quarters 2022 and 2021, respectively.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (“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.

In July 2021, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No.

2021-05, "Leases (Topic 842):

Lessors—Certain Leases with Variable Lease Payments" ("ASU 2021-05").

The pronouncement amends the current guidance on classification for a lease that includes variable lease payments that do not depend on an index or rate.

Under the amended guidance, a lessor must classify as an operating lease any lease that would otherwise be classified as a sales-type or direct financing lease and that would result in the recognition of a selling loss at lease commencement.

ASU 2021-05 is effective for fiscal years beginning after December 15, 2021, including applicable interim periods.

The Company adopted the new standard effective January 1, 2022.

The adoption of the standard did not have a material impact on the Company's condensed consolidated financial statements.

The adoption of this standard did not have a material effect on the Company’s consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

4 unchanged sentences

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 adoption of ASU 2020-04 will not have a material impact on the Company's condensed consolidated financial statements.

The effective income tax rate was 20.1 % and 20.5 % for the quarters ended 2021 and 2020, respectively, and 15.9 % and 22.2 % for the nine months ended 2021 and 2020, respectively.

The tax rate for the nine months ended 2021 included a benefit of $ 364 million related to the remeasurement of deferred taxes as a result of a change in the U.K.

statutory income tax rate.

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 adoption of ASU 2020-04 will not have a material impact on the Company's consolidated financial statements.

Updates to Significant Accounting Policies

Long-lived Assets and Goodwill

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 recent military conflict between Russia and Ukraine has created significant uncertainty and risk in these McDonald’s markets.

As such, the Company conducted an analysis after temporarily suspending operations in Russia and Ukraine during the first quarter of 2022.

The Company continues to monitor the economic uncertainty, while assessing the financial impact and outlook for restaurant operations in these markets.

As a result of the Company's analysis, and in consideration of the totality of events and circumstances, there was no impairment recorded during the first quarter of 2022.

As of March 31, 2022, the Company’s net investment in Russia and Ukraine was approximately $ 600 million, primarily consisting of building and equipment assets.

In addition, there was approximately $ 725 million of cumulative foreign currency translation losses reflected in the AOCI section of the condensed consolidated statement of shareholder’s equity at March 31, 2022.

The effective income tax rate was 28.3 % and 21.3 % for the quarters ended 2022 and 2021, respectively.

The tax rate for the quarter ended 2022 was impacted by the non-deductibility for tax purposes of the $ 500 million of nonoperating expense to reserve for a potential settlement related to an international tax matter.

Excluding the impacts of the $ 500 million of nonoperating expense and current and prior year strategic gains and charges, the effective income tax rate was 21.3 % and 20.9 % for the quarters ended 2022 and 2021, respectively.

Fair Value Measurements

2 unchanged sentences

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, 2021 Annual Report on Form 10-K.

At September 30, 2021, the fair value of the Company’s debt obligations was estimated at $ 39.7 billion, compared to a carrying amount of $ 35.1 billion.

These amounts do not include approximately $ 1.2 billion of additional debt that was issued in October 2021, which will be used to replace upcoming maturities of debt.

The additional debt consists of two €500 million Euro-denominated bonds with interest rates of 0.25 % and 0.875 % and maturity dates of 2028 and 2033, respectively.

At March 31, 2022, the fair value of the Company’s debt obligations was estimated at $ 35.4 billion, compared to a carrying amount of $ 34.0 billion.

The fair value of debt obligations is based upon quoted market prices, Level 2 within the valuation hierarchy.

The carrying amounts of cash and equivalents and notes receivable approximate fair value.

The carrying amount of cash and equivalents and notes receivable approximate fair value.

Financial Instruments and Hedging Activities

4 unchanged sentences

Derivative Assets Derivative Liabilities

In millions Balance Sheet Classification September 30, 2021 December 31, 2020 Balance Sheet Classification September 30, 2021 December 31, 2020

In millions Balance Sheet Classification March 31, 2022 December 31, 2021 Balance Sheet Classification March 31, 2022 December 31, 2021

Derivatives designated as hedging instruments

13 unchanged sentences

Total derivatives $ 282.5 $ 289.6 $ ( 53.1 ) $ ( 7.9 )

The following table presents the pre-tax amounts from derivative instruments affecting income and AOCI for the nine months ended September 30, 2021 and 2020, respectively:

The following table presents the pre-tax amounts from derivative instruments affecting income and AOCI for the quarters ended March 31, 2022 and 2021, respectively:

Location of gain or loss

16 unchanged sentences

Equity Other operating income/expense, net

( 7.8 ) ( 5.6 )

Undesignated derivatives $ ( 26.0 ) $ 18.0

3 unchanged sentences

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, 2021, the carrying amount of fixed-rate debt that was effectively converted was $ 1.5 billion, which included an increase of $ 19.9 million of cumulative hedging adjustments.

For the nine months ended September 30, 2021, the Company recognized a $ 15.9 million loss on the fair value of interest rate swaps, and a corresponding gain on the fair value of the related hedged debt instrument to interest expense.

At March 31, 2022, the carrying amount of fixed-rate debt that was effectively converted was an equivalent notional amount of $ 1.0 billion, which included a decrease of $ 41.3 million of cumulative hedging adjustments.

For the quarter ended March 31, 2022, the Company recognized a $ 46.1 million loss on the fair value of interest rate swaps, and a corresponding gain on the fair value of the related hedged debt instrument to interest expense.

Cash Flow Hedges

1 unchanged sentence

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.

As of September 30, 2021, the Company had derivatives outstanding with an equivalent notional amount of $ 1.3 billion that hedged a portion of forecasted foreign currency denominated cash flows.

Based on market conditions at September 30, 2021, the $ 30.2 million in cumulative cash flow hedging losses, after tax, is not expected to have a significant effect on earnings over the next 12 months.

The hedges cover up to the next 18 months for certain exposures and are denominated in various currencies.

As of March 31, 2022, the Company had foreign currency derivatives outstanding with an equivalent notional amount of $ 1.4 billion that hedged a portion of forecasted foreign currency denominated cash flows.

To protect against the variability of interest rates on anticipated bond issuances, the Company may use treasury locks to hedge a portion of expected future cash flows.

As of March 31, 2022, the Company had derivatives outstanding with a notional amount of $ 500 million that hedge a portion of forecasted cash flows.

Based on market conditions at March 31, 2022, the $ 7.5 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.

The Company uses foreign currency denominated debt (third-party and intercompany) as well as foreign currency derivatives 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, 2021, $ 11.4 billion of the Company's third-party foreign currency denominated debt, $ 1.2 billion of the Company's intercompany foreign currency denominated debt and $ 1.1 billion of derivatives were designated to hedge investments in certain foreign subsidiaries and affiliates.

As of March 31, 2022, $ 12.2 billion of the Company's third-party foreign currency denominated debt, $ 1.5 billion of the Company's intercompany foreign currency denominated debt, and $ 267.4 million of foreign currency derivatives were designated to hedge investments in certain foreign subsidiaries and affiliates.

Undesignated Derivatives

3 unchanged sentences

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 has also used 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.

1 unchanged sentence

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, 2021 and has master agreements that contain netting arrangements.

The Company did not have significant exposure to any individual counterparty at March 31, 2022 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, 2021, neither the Company nor its counterparties were 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.

At March 31, 2022, 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.

Franchise Arrangements

Revenues from franchised restaurants consisted of:

Quarters Ended Nine Months Ended

September 30, September 30,

Quarters Ended

In millions 2022 2021

6 unchanged sentences

- the Company's largest market.

The segment is 95% franchised as of September 30, 2021.

The segment is 95 % franchised as of March 31, 2022.

• International Operated Markets - comprised of markets or countries in which the Company operates and franchises restaurants, including Australia, Canada, France, Germany, Italy, the Netherlands, Russia, Spain and the U.K.

The segment is 84% franchised as of September 30, 2021.

The segment is 83 % franchised as of March 31, 2022.

As of March 31, 2022, all Company-owned restaurants in Russia and Ukraine were temporarily closed due to the ongoing military conflict in the region.

• International Developmental Licensed Markets & Corporate - comprised primarily of developmental licensee and affiliate markets in the McDonald’s System.

Corporate activities are also reported in this segment.

The segment is 98% franchised as of September 30, 2021.

The segment is 98 % franchised as of March 31, 2022.

The following table presents the Company’s revenues and operating income by segment:

Quarters Ended Nine Months Ended

September 30, September 30,

Quarters Ended

In millions 2022 2021

8 unchanged sentences

Total operating income $ 2,312.6 $ 2,281.3

* Results for the quarter and nine months 2021 included $ 106 million and $ 339 million, respectively, of net strategic gains primarily related to the sale of McDonald's Japan stock.

The quarter and nine months 2020 also included $139 million and $125 million, respectively, of net strategic gains, primarily related to the sale of McDonald's Japan stock.

Proceeds were recorded within the other investing activities section of the Condensed Consolidated Statement of Cash Flows.

Subsequent Events

The Company evaluated subsequent events through the date the financial statements were issued and filed with the Securities and Exchange Commission.

There were no subsequent events that required recognition or disclosure.

On April 1, 2022, the Company completed the sale of Dynamic Yield, a technology company acquired in 2019, which specializes in personalization and decision logic technology.

Dynamic Yield’s technology has been deployed to McDonald’s drive thrus and ordering kiosks in several markets globally.

The Company expects to record a pre-tax gain on the sale of approximately $ 260 million and cash proceeds of approximately $ 320 million (subject to final working capital adjustments) in the second quarter of 2022.

There were no other subsequent events that required recognition or disclosure.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements