What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-02 compared with 2021-11-02 · 190 added, 261 removed, 404 unchanged (53% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company franchises and operates McDonald’s restaurants, which serve a locally relevant menu of quality food and beverages in 119 countries.

Of the 39,676 restaurants at September 30, 2021, 36,986 were franchised, which is 93% of McDonald's restaurants.

The Company franchises and operates McDonald’s restaurants, which serve a locally relevant menu of quality food and beverages in communities across 119 countries.

Of the 40,344 McDonald's restaurants at March 31, 2022, 37,552, or 93%, were franchised.

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, we have the International Developmental Licensed Markets & Corporate segment, which includes markets in over 80 countries, as well as Corporate activities.

In addition, there is 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, including our newly defined Global Brand Standards, and is of fundamental importance to overall performance and to protecting the McDonald’s brand.

The business relationship between McDonald’s and its independent franchisees is supported by adhering to standards and policies, including Global Brand Standards defined in 2021, 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.

Directly operating McDonald’s restaurants contributes significantly to the Company's 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.

Having Company-owned and operated restaurants provides 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.

In addition, in Company-owned and operated restaurants, and in collaboration with franchisees, the Company is 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.

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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.

COVID-19 continued to result in some instances of government restrictions on restaurant operating hours, limited dine-in capacity and, in some cases, dining room closures.

The Company has continued to apply appropriate precautionary measures, including following the guidance of expert health authorities, to protect the health and safety of its people and customers and expects some operating restrictions in various markets so long as the COVID-19 pandemic continues.

As of April 1, 2022, the Company completed the sale of Dynamic Yield and will no longer record third-party revenues related to this business.

Conventional Franchise

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In addition, to accelerate implementation of certain initiatives, the Company may co-invest with franchisees to fund improvements to their restaurants or 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.

These investments, developed in collaboration with franchisees, are designed to cater to consumer preferences, improve local business performance and increase the value of the Company's 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.

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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) within the International Developmental Licensed Markets segment as well as a limited number of individual restaurants within the International Operated Markets segment, where the Company also has an equity investment and records its share of net results in equity in earnings of unconsolidated affiliates.

Impact of Russia-Ukraine Military Conflict

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.

There will likely be negative impacts on revenue and income as long as the military conflict continues.

The Company is monitoring the evolving situation, analyzing options and expects to provide direction no later than the end of the second quarter.

Impact of COVID-19 Restrictions on the Business

COVID-19 resurgences continued to result in instances of government restrictions on restaurant operating hours, limited dine-in capacity and, in some cases, dining room closures, particularly in China.

Strategic Direction

In 2020, the Company announced the Accelerating the Arches (the “Strategy”) growth strategy.

The Strategy, which encompasses all aspects of McDonald’s business as the leading global omni-channel restaurant brand, reflects a refreshed purpose, updated values and growth pillars that build on the Company’s competitive advantages.

In late 2020, the Company announced the Accelerating the Arches growth strategy (the “Strategy”).

The Strategy, which encompasses all aspects of McDonald’s business as the leading global omni-channel restaurant brand, reflects a refreshed purpose, values and growth pillars that build on the Company’s competitive advantages.

Purpose, Mission and Values

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Growth Pillars

The growth pillars, rooted in the Company’s identity, MCD, build on historic strengths and articulate areas of further opportunity.

The following growth pillars — MCD — are rooted in the Company’s identity, build on historic strengths and articulate areas of further opportunity.

Under the Strategy, the Company will:

• M aximize our Marketing by investing in new, culturally relevant approaches, such as our Famous Orders platform, to effectively communicate the story of our brand, food and purpose.

This focuses on enhancing 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.

• C ommit to the Core by tapping into customer demand for the familiar and focusing on serving delicious burgers, chicken and coffee.

The Company is prioritizing chicken and beef offerings, as we expect they represent the largest growth opportunities.

The Company recognizes there is significant opportunity to expand its chicken offerings by leveraging line extensions of customer favorites, such as the new Crispy Chicken Sandwich that launched in the U.S.

in February 2021.

The Company is also implementing 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 are leveraging the McCafé brand, experience, value and quality to drive long-term growth.

• M aximize our Marketing by investing in new, culturally relevant approaches, such as the Famous Orders platform, to effectively communicate the story of our brand, food and purpose.

This also includes enhancing digital capabilities that provide a more personal connection with customers.

The Company is committed to a marketing strategy that highlights value at every tier of the menu, as affordability remains a cornerstone of the McDonald’s brand.

• C ommit to the Core menu by tapping into customer demand for the familiar and focusing on serving delicious burgers, chicken and coffee.

The Company continues to prioritize chicken and beef offerings, as we expect they represent the largest growth opportunities.

The Company recognizes there is significant opportunity to expand its chicken offerings by leveraging line extensions of customer favorites, such as the Crispy Chicken Sandwich that launched in the U.S.

in 2021 and the Chicken Big Mac and McSpicy limited time offerings that were featured in several markets around the world in 2021 and 2022.

The Company is implementing a series of operational and formulation changes designed to improve upon the great taste of our burgers.

We also continue to see a significant opportunity with coffee, and markets are leveraging the McCafé brand, experience, value and quality to drive long-term growth.

• D ouble 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.

Digital, Delivery and Drive Thru by leveraging competitive strengths and building a powerful digital experience growth engine to enhance the customer experience.

To unlock further growth, the Company is continuing to accelerate technology innovation so that, however customers choose to interact with McDonald’s, they can enjoy a fast, easy experience that meets their needs.

In the first nine months of 2021, Systemwide sales from digital channels (which are comprised of the mobile app, delivery and kiosk) were about $13 billion, or over 20% of Systemwide sales in our top six markets.

In the first quarter of 2022, digital channels (the mobile app, delivery and kiosk) comprised more than 30% of Systemwide sales in our top six markets, representing more than $5 billion of Systemwide sales and a nearly 60% increase over the prior year:

The Company’s digital experience growth engine — “MyMcDonald’s” — is transforming its offerings across drive thru, takeaway, delivery, curbside pick-up and dine-in with digital enhancements.

Through the digital tools across these platforms, customers can receive tailored offers, participate in a loyalty program and order and receive McDonald's food through the channel of their choice.

The Company already has successful loyalty programs in many markets around the world.

The Company launched its loyalty program, “MyMcDonald’s Rewards,” in the U.S.

and Germany in the third quarter of 2021 and expects to complete the roll-out of loyalty programs across its top six markets in the first half of 2022.

Since its launch in July, the U.S.

loyalty program has enrolled 21 million members, with over 15 million active loyalty members earning rewards.

Over the past three years, the Company has expanded the number of McDonald’s restaurants offering delivery to over 32,000, or approximately 80% of its restaurants, and delivery sales have grown significantly.

The Company is building on this progress and enhancing the delivery experience for customers by adding the ability to order on the McDonald’s app and optimizing operations with a focus on speed and accuracy.

Through the digital tools, customers can access tailored offers, participate in a loyalty program, order through the mobile app and receive McDonald's food through the channel of their choice.

The Company has successful loyalty programs in over 40 markets around the world, including the U.S., France, Germany, Canada and Australia.

The Company expects the U.K.

loyalty program to fully launch later this year, completing the roll-out of loyalty programs across its top six markets.

The Company has continued to expand the number of restaurants offering delivery to over 33,000, representing over 80% of McDonald's restaurants.

Delivery sales have grown significantly over the past few years, and the Company is continuing to build on this progress and enhance the delivery experience for customers by adding the ability to order on the McDonald’s app.

This capability is now available in the U.K., and the Company plans to expand this capability to the U.S., Canada and Australia in 2022.

In addition to existing long-term strategic partnerships with UberEats and DoorDash, the Company entered a long-term strategic partnership with Just Eat Takeaway.com in March 2022.

These partnerships are expected to benefit the Company and its customers and franchisees by optimizing operation efficiencies and creating a seamless customer experience.

◦ Drive Thru:

The Company has drive thru locations in over 25,000 restaurants globally, including nearly 95% of the over 13,000 locations in the U.S.

This channel remains of heightened importance, and we expect that it will become even more critical to meet customers’ demand for flexibility and choice.

The Company is building 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’s Strategy is underpinned by a relentless focus on running great restaurants and leveraging our size, scale and agility to adapt and adjust to operating conditions and consumer demands.

The Company believes this Strategy builds on our inherent strengths by harnessing our competitive advantages and investing in innovations that will enhance the customer experience and deliver long-term growth.

This is aligned with the Company’s capital allocation philosophy of first reinvesting in the business to drive profitable growth and then returning all free cash flow to shareholders over time.

Third Quarter and Nine Months 2021 Financial Performance

Global comparable sales increased 12.7% for the quarter and 18.8% for the nine months.

comparable sales increased 9.6% for the quarter and 16.1% for the nine months.

Comparable sales benefited from strong average check growth driven by larger order sizes and menu price increases.

Strong menu and marketing promotions contributed to the comparable sales growth, as well as growth in digital channels, which benefited from the launch of the Company's loyalty program, "MyMcDonald’s Rewards," during the quarter.

• International Operated Markets segment comparable sales increased 13.9% for the quarter and 23.6% for the nine months.

Results for both periods reflected very strong positive comparable sales in the U.K.

as well as positive comparable sales in Canada and France, driven by strong operating performance and significantly fewer restaurant closures with the easing of COVID-19 restrictions.

Restrictions in the quarter muted comparable sales in Australia.

• International Developmental Licensed Markets segment comparable sales increased 16.7% for the quarter and 17.5% for the nine months.

Both periods reflected strong positive comparable sales in Japan and Latin America.

Results for the nine months were also driven by strong positive comparable sales in China, which were partly offset in the quarter due to the impact of COVID-19 resurgences.

In addition to the comparable sales results, the Company had the following financial results for the quarter and nine months 2021:

• Consolidated revenues increased 14% (13% in constant currencies) for the quarter and 24% (20% in constant currencies) for the nine months.

• Systemwide sales increased 16% (14% in constant currencies) for the quarter and 24% (20% in constant currencies) for the nine months.

• Consolidated operating income increased 18% (17% in constant currencies) to $2,987 million for the quarter and 54% (49% in constant currencies) to $7,959 million for the nine months.

Refer to the Operating Income section on page 27 for additional details.

• Diluted earnings per share was $2.86 for the quarter and $7.86 for the nine months.

Refer to the Net Income and Diluted Earnings per Share section on page 21 for additional details.

This channel remains a competitive advantage, and we expect that it will become even more critical to meet customers’ demand for flexibility and choice.

The Company continues to build on its drive thru advantage, as the vast majority of new restaurant openings in the U.S.

and International Operated Markets segments will include a drive thru.

Foundational to the Accelerating the Arches Strategy is keeping the customer and restaurant crew at the center of everything we do, along with a relentless focus on running great restaurants.

The Company believes this Strategy builds on our inherent strengths by harnessing our competitive advantages while leveraging our size, scale and agility to adapt and adjust to uncertain operating environments and meet consumer demands.

The Company believes the employee experience is critical to its success and, in 2022, implemented Global Brand Standards which are designed to create a culture of safety for both employees and customers in McDonald’s restaurants around the world.

These efforts, coupled with investment in innovation, are designed to enhance the customer experience and deliver long-term profitable growth, which is aligned with the Company’s capital allocation philosophy of investing in new restaurants and opportunities to grow the business, reinvesting in existing restaurants, and returning all free cash flow to shareholders over time through dividends and share repurchases.

First Quarter 2022 Financial Performance

Global comparable sales increased 11.8% for the quarter.

comparable sales increased 3.5%.

Comparable sales growth was driven by strategic menu price increases, strong marketing promotions featuring the core menu and growth in digital channels, which continued to benefit from the prior year launch of the Company's loyalty program — "MyMcDonald’s Rewards."

• International Operated Markets segment comparable sales increased 20.4%.

Strong operating performance and the continued reduction of COVID-related government restrictions in most markets drove positive comparable sales across the segment, led by strong comparable sales in France and the U.K.

• International Developmental Licensed Markets segment comparable sales increased 14.7%.

The quarter reflected strong comparable sales driven by Japan and Brazil, partly offset by negative comparable sales in China due to continued COVID-19 resurgences and related government restrictions.

In addition to the comparable sales results, the Company had the following financial results for the quarter:

• Consolidated revenues increased 11% (14% in constant currencies).

• Systemwide sales increased 10% (14% in constant currencies).

• Consolidated operating income increased 1% (3% in constant currencies).

The Company temporarily suspended operations during the quarter in Russia and Ukraine as a result of the military conflict in the region.

Results included $27 million of costs

related to the continuation of employee salaries, lease and supplier payments, as well as $100 million of costs for inventory in the Company's supply chain that likely will be disposed of due to restaurants being temporarily closed.

Excluding these current year costs and prior year strategic gains of $135 million, primarily related to the sale of McDonald's Japan stock, consolidated operating income increased 14% (18% in constant currencies).

• Diluted earnings per share was $1.48, a decrease of 28% (27% in constant currencies).

Excluding the costs to support the Company's businesses in Russia and Ukraine of $0.13 per share, as well as a nonoperating expense to reserve for a potential settlement related to an international tax matter of $0.67 per share for the quarter 2022, diluted earnings per share for the quarter was $2.28, an increase of 19% (22% in constant currencies) when also excluding strategic gains of $0.13 per share for the quarter 2021.

Management reviews and analyzes business results excluding the effect of foreign currency translation, impairment and other strategic charges and gains, as well as material regulatory and other income tax impacts, and bases incentive compensation plans on these results because the Company believes this better represents underlying business trends.

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• 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 (including restaurants temporarily closed due to COVID-19).

Some of the reasons restaurants may be temporarily closed include reimaging or remodeling, rebuilding, road construction, natural disasters and acts of war, terrorism or other hostilities (including restaurants temporarily closed due to COVID-19, as well as those in Russia and Ukraine).

Comparable sales exclude the impact of currency translation and the sales of any market considered hyper-inflationary (generally identified as those markets whose cumulative inflation rate over a three-year period exceeds 100%), which management believes more accurately reflects the underlying business trends.

Comparable sales are driven by changes in guest counts and average check, the latter of which is affected by changes in pricing and product mix.

• 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.

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Changes in Systemwide sales are primarily driven by comparable sales and net restaurant unit expansion.

• 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 (excluding the effect of impairment and other strategic charges and gains, as well as material regulatory and other income tax impacts), 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.

• 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.

CONSOLIDATED OPERATING RESULTS

Quarter Ended Nine Months Ended

Dollars in millions, except per share data September 30, 2021 September 30, 2021

Quarter Ended

Dollars in millions, except per share data March 31, 2022

Amount Increase/

(Decrease) Amount Increase/

Sales by Company-operated restaurants $ 2,302.4 7 %

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Interest expense 287.3 (4)

Nonoperating (income) expense, net 1.4 n/m 48.6 n/m

Nonoperating (income) expense, net 484.1 n/m

Income before provision for income taxes 1,541.2 (21)

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Benefit/ (Cost)

Quarters Ended September 30, 2021 2020 2021

Revenues $ 6,201.3 $ 5,418.1 $ 87.9

Company-operated margins 490.0 410.1 8.4

Franchised margins 2,917.6 2,476.9 37.6

Selling, general & administrative expenses 643.7 530.5 (4.2)

Operating income 2,986.5 2,526.4 38.6

Net income 2,149.9 1,762.6 24.3

Earnings per share-diluted $ 2.86 $ 2.35 $ 0.04

Benefit/ (Cost)

Nine Months Ended September 30, 2021 2020 2021

Quarters Ended March 31, 2022 2021 2022

Revenues $ 5,665.6 $ 5,124.6 $ (201.9)

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Earnings per share-diluted $ 1.48 $ 2.05 $ (0.02)

• The impact of foreign currency translation on consolidated operating results for both periods in 2021 primarily reflected the strengthening of the British Pound, Euro and Australian Dollar.

• The impact of foreign currency translation on consolidated operating results for the quarter primarily reflected the weakening of the Euro, Australian Dollar, British Pound and Russian Ruble.

Net Income and Diluted Earnings per Share

For the quarter, net income increased 22% (21% in constant currencies) to $2,149.9 million, and diluted earnings per share increased 22% (20% in constant currencies) to $2.86.

Foreign currency translation had a positive impact of $0.04 on diluted earnings per share.

For the nine months, net income increased 76% (71% in constant currencies) to $5,906.4 million, and diluted earnings per share increased 76% (71% in constant currencies) to $7.86.

Foreign currency translation had a positive impact of $0.23 on diluted earnings per share.

For the quarter, net income decreased 28% (27% in constant currencies) to $1,104.4 million, and diluted earnings per share decreased 28% (27% in constant currencies) to $1.48.

Foreign currency translation had a negative impact of $0.02 on diluted earnings per share.

Results for 2022 included the following:

• Net pre-tax strategic gains of $106 million, or $0.10 per share, for the quarter and $339 million, or $0.33 per share, for the nine months, primarily related to the sale of McDonald's Japan stock, which completed the planned partial divestiture of the Company's ownership in McDonald’s Japan

• $364 million, or $0.48 per share, for the nine months of income tax benefits related to the remeasurement of deferred taxes as a result of a change in the U.K.

statutory income tax rate

• $127 million, or $0.13 per share, of pre-tax operating expenses incurred to support the Company's businesses in Russia and Ukraine.

Included in this amount were $27 million related to the continuation of employee salaries, lease and supplier payments as well as $100 million for inventory in the Company's supply chain that likely will be disposed of due to restaurants being temporarily closed

• $500 million, or $0.67 per share, of nonoperating expense to reserve for a potential settlement related to an international tax matter

Results for 2021 included the following:

• Net pre-tax strategic gains of $139 million, or $0.13 per share, for the quarter and $125 million, or $0.12 per share, for the nine months, primarily related to the sale of McDonald's Japan stock

EARNINGS PER SHARE-DILUTED RECONCILIATION

Quarters Ended September 30, Nine Months Ended September 30,

• $135 million of pre-tax strategic gains, or $0.13 per share, primarily related to the sale of McDonald’s Japan stock

NET INCOME AND EARNINGS PER SHARE-DILUTED RECONCILIATION

Quarters Ended March 31,

Net Income Earnings per share - diluted

2022 2021 Inc/ (Dec) Inc/ (Dec)

Translation 2022 2021 Inc/ (Dec) Inc/ (Dec)

GAAP earnings per share-diluted $ 2.86 $ 2.35 22 % 20 % $ 7.86 $ 4.47 76 % 71 %

Strategic gains (0.10) (0.13) (0.33) (0.12)

Income tax benefits — — (0.48) —

Non-GAAP earnings per share-diluted $ 2.76 $ 2.22 24 % 23 % $ 7.05 $ 4.35 62 % 57 %

Excluding the strategic gains, net income for the quarter increased 25% (23% in constant currencies) and diluted earnings per share increased 24% (23% in constant currencies).

For the nine months, net income and diluted earnings per share each increased 62% (57% in constant currencies) after excluding the net strategic gains and income tax benefits.

In the third quarter, the Company paid a quarterly dividend of $1.29 per share, or $964 million, bringing total dividends paid for the nine months to $2.9 billion.

Additionally, the Company declared a 7% increase in its quarterly cash dividend to $1.38 per share, payable on December 15, 2021, and announced the resumption of its share repurchase program.

GAAP $ 1,104.4 $ 1,537.2 (28) % (27) % $ 1.48 $ 2.05 (28) % (27) %

Strategic (gains)/charges 102.1 (98.9) 0.13 (0.13)

Settlement reserve 500.0 — 0.67 —

Non-GAAP $ 1,706.5 $ 1,438.3 19 % 22 % $ 2.28 $ 1.92 19 % 22 %

Excluding strategic charges and gains and a nonoperating expense to reserve for a potential settlement related to an international tax matter, net income and diluted earnings per share for the quarter each increased 19% (22% in constant currencies).

During the quarter, the Company repurchased 6.2 million shares of stock for $1.5 billion.

Additionally, the Company paid a quarterly dividend of $1.38 per share, or $1.0 billion.

The Company's revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees, developmental licensees and affiliates.

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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, 2021.

Franchised restaurants represented 93% of McDonald's restaurants worldwide at March 31, 2022.

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.

COVID-19 continued to result in some instances of government restrictions on restaurant operating hours, limited dine-in capacity and, in some cases, dining room closures.

Dollars in millions

Quarters Ended September 30, 2021 2020 Inc/ (Dec) Inc/ (Dec)

Company-operated sales

$ 655.5 $ 625.9 5 % 5 %

International Operated Markets 1,754.0 1,499.2 17 15

International Developmental Licensed Markets & Corporate 188.9 161.3 17 14

Total $ 2,598.4 $ 2,286.4 14 % 12 %

Franchised revenues

$ 1,562.7 $ 1,425.6 10 % 10 %

International Operated Markets 1,586.1 1,318.1 20 17

International Developmental Licensed Markets & Corporate 361.4 301.1 20 19

Total $ 3,510.2 $ 3,044.8 15 % 14 %

Total Company-operated sales and Franchised revenues

$ 2,218.2 $ 2,051.5 8 % 8 %

International Operated Markets 3,340.1 2,817.3 19 16

International Developmental Licensed Markets & Corporate 550.3 462.4 19 17

Total $ 6,108.6 $ 5,331.2 15 % 13 %

Total Other revenues $ 92.7 $ 86.9 7 % 5 %

Total Revenues $ 6,201.3 $ 5,418.1 14 % 13 %

Nine Months Ended September 30, 2021 2020 Inc/ (Dec) Inc/ (Dec)

Quarters Ended March 31, 2022 2021 Inc/ (Dec) Inc/ (Dec)

Company-operated sales

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Total Revenues $ 5,665.6 $ 5,124.6 11 % 14 %

• Total Company-operated sales and franchised revenues increased 15% (13% in constant currencies) for the quarter and 24% (20% in constant currencies) for the nine months.

Revenues in both periods benefited from strong sales performance across all segments and was driven by the U.K., Russia and France in the International Operated Markets segment and by Latin America and Japan in the International Developmental Licensed Markets segment.

China also had a positive impact on revenue growth in both periods in the International Developmental Licensed Markets segment as a result of restaurant expansion.

• Total Company-operated sales and franchised revenues increased 10% (14% in constant currencies) for the quarter.

Revenues in the quarter benefited from strong sales performance across all segments and were driven by France and the U.K.

in the International Operated Markets segment.

In the International Developmental Licensed Markets segment, the quarter reflected strong sales performance across all geographic regions, with China continuing to be impacted by COVID-19 resurgences and related government restrictions.

Comparable Sales

The following table presents the percent change in comparable sales for the quarters and nine months ended September 30, 2021 and 2020:

The following table presents the percent change in comparable sales for the quarters ended March 31, 2022 and 2021:

Increase/(Decrease)

Quarters Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

9.6 % 4.6 % 16.1 % (1.4) %

Quarters Ended March 31,

International Operated Markets 20.4 0.6

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Systemwide Sales and Franchised Sales

The following table presents the percent change in Systemwide sales for the quarters and nine months ended September 30, 2021:

The following table presents the percent change in Systemwide sales for the quarter ended March 31, 2022:

SYSTEMWIDE SALES*

Quarter Ended September 30, 2021 Nine Months Ended September 30, 2021

Quarter Ended March 31, 2022

Inc/ (Dec) Inc/ (Dec)

Translation Inc/ (Dec) Inc/ (Dec)

9 % 9 % 16 % 16 %

International Operated Markets 16 23

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Dollars in millions

Quarters Ended September 30, 2021 2020 Inc/ (Dec) Inc/ (Dec)

$ 11,155.0 $ 10,180.3 10 % 10 %

International Operated Markets 9,212.8 7,700.5 20 16

International Developmental Licensed Markets & Corporate 6,981.9 5,748.7 21 21

Total $ 27,349.7 $ 23,629.5 16 % 15 %

Ownership type

Conventional franchised $ 20,199.7 $ 17,775.7 14 % 12 %

Developmental licensed 4,078.8 3,126.4 30 30

Foreign affiliated 3,071.2 2,727.4 13 12

Total $ 27,349.7 $ 23,629.5 16 % 15 %

Nine Months Ended September 30, 2021 2020 Inc/ (Dec) Inc/ (Dec)

Quarters Ended March 31, 2022 2021 Inc/ (Dec) Inc/ (Dec)

$ 10,429.1 $ 10,089.8 3 % 3 %

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Amount Inc/ (Dec) Inc/ (Dec)

Quarters Ended September 30, 2021 2020

$ 1,260.1 $ 1,122.1 12 % 12 %

International Operated Markets 1,302.4 1,059.9 23 20

International Developmental Licensed Markets & Corporate 355.1 294.9 21 20

Total $ 2,917.6 $ 2,476.9 18 % 16 %

Company-operated

$ 126.6 $ 118.7 7 % 7 %

International Operated Markets 355.5 289.5 23 20

International Developmental Licensed Markets & Corporate n/m n/m n/m n/m

Total $ 490.0 $ 410.1 19 % 17 %

Total restaurant margins

$ 1,386.7 $ 1,240.8 12 % 12 %

International Operated Markets 1,657.9 1,349.4 23 20

International Developmental Licensed Markets & Corporate n/m n/m n/m n/m

Total $ 3,407.6 $ 2,887.0 18 % 16 %

Amount Inc/ (Dec) Inc/ (Dec)

Nine Months Ended September 30, 2021 2020

Quarters Ended March 31, 2022 2021

$ 1,192.5 $ 1,131.1 5 % 5 %

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• Total restaurant margins increased $520.6 million or 18% (16% in constant currencies) for the quarter and $2,329.6 million or 34% (29% in constant currencies) for the nine months, reflecting strong sales performance across all segments.

Franchised margins represented over 85% of restaurant margin dollars for the quarter and nine months.

franchised margins for both periods in 2021 reflected higher depreciation costs related to investments in restaurant modernization, while the nine months benefited from the comparison to prior year support provided for marketing to accelerate recovery and drive growth.

• Total restaurant margins included $383.2 million and $1,138.8 million of depreciation and amortization expense for the quarter and nine months, respectively.

• Total restaurant margins increased $372.2 million, or 14% (17% in constant currencies), for the quarter, reflecting strong sales performance across all segments.

Franchised margins represented nearly 90% of restaurant margin dollars for the quarter.

franchised margins for the quarter reflected higher depreciation costs related to investments in restaurant modernization.

Company-operated margins for the quarter reflected positive sales performance, which was more than offset by significant inflationary impacts on labor and commodities.

• Total restaurant margins included $385.8 million of depreciation and amortization expense for the quarter.

Selling, General & Administrative Expenses

• Selling, general and administrative expenses increased $113.2 million or 21% (21% in constant currencies) for the quarter and $98.3 million or 6% (4% in constant currencies) for the nine months.

Both periods reflected an increase in incentive-based compensation expense driven by stronger than planned operating results and higher costs for investments in restaurant technology.

Results for the nine months benefited from the comparison to incremental marketing contributions in the prior year.

• Selling, general and administrative expenses as a percent of Systemwide sales was 2.2% and 2.6% for the nine months ended 2021 and 2020, respectively.

• Selling, general and administrative expenses increased $110.6 million, or 20% (21% in constant currencies), for the quarter, primarily reflecting costs related to the Company's 2022 Worldwide Owner/Operator Convention, higher long-term incentive-based compensation expense and higher costs for investments in restaurant technology.

• Selling, general and administrative expenses as a percent of Systemwide sales was 2.4% and 2.2% for the quarters ended 2022 and 2021, respectively.

Other Operating (Income) Expense, Net

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Dollars in millions

Quarters Ended Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

Quarters Ended

Gains on sales of restaurant businesses $ (5.8) $ (17.6)

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Asset dispositions and other (income) expense, net (29.5) 8.5

Impairment and other charges (gains), net (106.4) (138.7) (339.4) (125.4)

Impairment and other strategic charges (gains), net 127.1 (135.2)

Total $ 60.5 $ (179.4)

• Gains on sales of restaurant businesses increased for the quarter and nine months due to an increased number of restaurant sales, primarily in the U.S.

• Equity in earnings of unconsolidated affiliates increased for the quarter and nine months due to recovery from the impact of COVID-19 in the prior year.

Results for both periods were partly offset by lower equity in earnings in Japan as a result of the Company's reduced ownership in McDonald's Japan when compared to 2020.

• Asset dispositions and other (income) expense, net decreased for the quarter and nine months.

Both periods reflected a gain on the strategic sale of restaurant properties and the benefit from comparison to prior year costs related to the closings of certain McDonald's Walmart store locations in the U.S.

The nine months 2020 also reflected a net increase of reserves for bad debts as well as payments to distribution centers for obsolete inventory to support franchisee liquidity.

• Impairment and other charges (gains), net for the quarter and nine months 2021 reflected $106 million and $339 million, respectively, primarily due to strategic gains related to the sale of McDonald’s Japan stock, which reduced the Company's total ownership to 35%.

Results for the quarter and nine months 2020 reflected $139 million of pre-tax strategic gains related to the sale of McDonald's Japan stock.

The nine months 2020 also reflected the write-off of impaired software of $26 million, partly offset by $13 million of income associated with the Company's sale of its business in the India Delhi market.

• Gains on sales of restaurant businesses decreased for the quarter primarily due to lower gains in the U.S.

• Equity in earnings of unconsolidated affiliates decreased for the quarter due to lower equity in earnings in Japan as a result of the Company's reduced ownership in McDonald's Japan when compared to the same period in 2021 as well as the impact of continued COVID-19 resurgences and related government restrictions on operating performance in China.

• Asset dispositions and other (income) expense, net for the quarter reflected the increase to fair value of an existing restaurant joint venture in connection with the buyout of a joint venture partner within the International Operated Markets segment.

• Impairment and other strategic charges (gains), net for the quarter reflected $127 million of pre-tax operating expenses incurred to support the Company's businesses in Russia and Ukraine.

Included in this amount were $27 million related to the continuation of employee salaries, lease and supplier payments, as well as $100 million for inventory in the Company's supply chain that likely will be disposed of due to restaurants being temporarily closed.

Results for the quarter 2021 reflected $135 million of pre-tax strategic gains, primarily related to the sale of McDonald’s Japan stock.

Operating Income

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Dollars in millions

Quarters Ended September 30, 2021 2020 Inc/ (Dec) Inc/ (Dec)

Quarters Ended March 31, 2022 2021 Inc/ (Dec) Inc/ (Dec)

$ 1,151.0 $ 1,125.5 2 % 2 %

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Total $ 2,312.6 $ 2,281.3 1 % 3 %

Nine Months Ended September 30, 2021 2020 Inc/ (Dec) Inc/ (Dec)

$ 3,647.9 $ 2,705.9 35 % 35 %

International Operated Markets 3,745.4 2,311.8 62 51

International Developmental Licensed Markets & Corporate 565.6 163.4 n/m n/m

Total $ 7,958.9 $ 5,181.1 54 % 49 %

Operating margin 40.8 % 44.5 %

Non-GAAP operating margin 43.1 % 41.9 %

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• Operating Income:

Operating income increased $460.1 million or 18% (17% in constant currencies) for the quarter and $2,777.8 million or 54% (49% in constant currencies) for the nine months.

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

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

The operating income increase for the quarter and nine months was driven by strong sales performance and higher gains on sales of restaurant businesses in the current year, while the nine months also reflected the comparison to approximately $100 million of support for marketing to accelerate recovery and drive growth in the prior year.

Operating income increased $31.3 million, or 1% (3% in constant currencies), for the quarter.

Results for the quarter 2022 reflected $127 million of costs incurred to support the Company's businesses in Russia and Ukraine.

Results for the quarter 2021 included $135 million of pre-tax strategic gains, primarily related to the sale of McDonald's Japan stock.

Excluding current and prior year strategic charges and gains, operating income increased 14% (18% in constant currencies).

The operating income increase for the quarter was driven by strong sales performance, partly offset by higher selling, general and administrative costs.

• International Operated Markets:

The operating income increase for the quarter and nine months was driven by strong sales performance, primarily in the U.K.

The nine months also benefited from comparison to over $100 million of support for marketing to accelerate recovery and drive growth and increased reserves for bad debt in the prior year.

The operating income increase for the quarter was driven by strong sales performance, primarily in France and the U.K.

• International Developmental Licensed Markets & Corporate:

Excluding the strategic gains, results for the quarter and nine months reflected strong sales performance across most of the segment and reflected higher Corporate general and administrative expenses due to increased incentive-based compensation expense in the current year.

The nine months also benefited from the comparison to prior year reserves for bad debts.

Excluding prior year strategic gains, the operating income increase for the quarter was driven by strong sales performance, primarily in Japan and Brazil, partly offset by higher Corporate selling, general and administrative expenses.

• Operating Margin:

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Additionally, temporary restaurant closures, which vary by segment, impact the contribution of each segment to the consolidated operating margin.

Excluding the strategic gains, the increase in operating margin percent for the quarter and nine months was due to strong sales-driven restaurant margin growth and higher other operating income.

Excluding costs incurred to support the Company's businesses in Russia and Ukraine and prior year strategic gains, the increase in operating margin percent for the quarter was due to strong sales-driven restaurant margin growth, partly offset by higher Corporate selling, general and administrative expenses.

Interest Expense

• Interest expense decreased 5% (6% in constant currencies) for the quarter and 2% (4% in constant currencies) for the nine months, primarily due to lower average debt balances, partly offset by higher average interest rates and the impact of foreign currency translation.

• Interest expense decreased 4% (3% in constant currencies) for the quarter primarily due to lower average debt balances.

Nonoperating (Income) Expense, Net

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Dollars in millions

Quarters Ended Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

Quarters Ended

Interest income $ (2.6) $ (1.8)

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Total $ 484.1 $ 28.6

• 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.

• Excluding 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 and the tax impact of the strategic gains, the non-GAAP effective income tax rate for the nine months was 20.7%.

• Other expense, net included $500 million of nonoperating expense to reserve for a potential settlement related to an international tax matter.

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

• Excluding the impacts of the $500 million of nonoperating expense to reserve for a potential settlement related to an international tax matter, 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.

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.

Cash provided by operations totaled $6.5 billion and exceeded capital expenditures by $5.1 billion for the nine months 2021.

Cash provided by operations increased $2.2 billion compared with the nine months 2020, primarily due to improved operating results and changes in working capital, partly offset by higher income tax payments.

Cash used for investing activities totaled $1.0 billion for the nine months 2021, a decrease of $139.9 million compared with the nine months 2020.

The decrease was primarily due to higher current year proceeds received from the sale of McDonald's Japan stock, partly offset by higher capital expenditures.

Cash used for financing activities totaled $4.5 billion for the nine months 2021, which included $1.7 billion in debt repayments.

Cash used for financing activities totaled $313.4 million for the nine months 2020 due to 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.

Based on current conditions, the following is provided to assist in forecasting the Company's future results for 2021.

• The Company expects 2021 Systemwide sales growth, in constant currencies, in the high teens, and expects net restaurant unit expansion to contribute about 1% to 2021 Systemwide sales growth.

Cash provided by operations totaled $2.1 billion and exceeded capital expenditures by $1.7 billion for the first quarter 2022.

Cash provided by operations was flat compared with the first quarter 2021, as lower net income was offset by changes in working capital.

Cash used for investing activities totaled $554.5 million for the first quarter 2022, an increase of $309.9 million compared with the first quarter 2021.

The first quarter 2021 reflects proceeds received from the sale of McDonald's Japan stock.

Cash used for financing activities totaled $3.8 billion for the first quarter 2022, an increase of $1.6 billion compared with the first quarter 2021.

The increase is primarily due to higher share repurchases in 2022.

The military conflict between Russia and Ukraine has led to economic and political uncertainty globally.

The below information is provided to assist in forecasting the Company's results for 2022, and the Company plans to provide updates as situations warrant.

• The Company expects net restaurant unit expansion will contribute about 1.5% to 2022 Systemwide sales growth, in constant currencies.

• The Company expects full year 2022 selling, general and administrative expenses of about 2.3% of Systemwide sales.

• The Company expects 2022 operating margin percent to be in the low-to-mid 40% range.

• The Company expects full year 2021 selling, general and administrative expenses of approximately 2.4% of Systemwide sales.

• Based on current interest and foreign currency exchange rates, the Company expects full year 2021 interest expense to decrease about 1% to 3% due primarily to lower average debt balances.

• The Company expects the effective income tax rate for the fourth quarter to be about 21%.

• The Company expects 2021 capital expenditures to be approximately $2.3 billion, nearly half of which will be directed towards new unit expansion across the U.S.

• Based on current interest and foreign currency exchange rates, the Company expects interest expense for the full year 2022 to be relatively flat to 2021.

• The Company expects the effective income tax rate for the full year 2022 to be in the 20% to 22% range.

Some volatility may result in a quarterly tax rate outside of the annual range.

• The Company expects 2022 capital expenditures to be approximately $2.2 to $2.4 billion, about half of which will be directed towards new restaurant unit expansion across the U.S.

and International Operated Markets.

In 2021, about $1.1 billion will be dedicated to our U.S.

business, about $550 million of which will be allocated to about 1,300 restaurant modernization projects.

Globally, the Company expects to open about 1,500 restaurants.

We will open about 425 restaurants in the U.S.

and International Operated Markets segments, and our developmental licensee and affiliates will contribute capital towards approximately 1,075 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 locations.

The Company expects approximately 800 net restaurant additions in 2021.

Over 40% will be dedicated to the U.S.

business, most of which will go towards reinvestment, including the completion of restaurant modernization efforts.

Globally, the Company expects to open approximately 1,700 to 1,800 restaurants.

The Company will open approximately 400 to 500 restaurants in the U.S.

and International Operated Markets segments, and developmental licensees and affiliates will contribute capital towards over 1,300 restaurant openings in their respective markets.

The Company expects approximately 1,300 to 1,400 net restaurant additions in 2022.

• The Company expects to achieve a free cash flow conversion rate greater than 90%.

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Recent accounting pronouncements are discussed in the "Recent Accounting Pronouncements" section in Part I, Item 1 of this report.

Risk Factors and Cautionary Statement Regarding Forward-Looking Statements

Cautionary Statement Regarding Forward-Looking Statements

The information in this report contains forward-looking statements about future events and circumstances and their effects upon revenues, expenses and business opportunities.

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GLOBAL PANDEMIC

The COVID-19 pandemic has adversely affected and is expected to continue to adversely affect our financial results, condition and outlook.

The COVID-19 pandemic has adversely affected and may 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 since early 2020, and has resulted in increased pressure on labor availability and supply chain management.

Local and national governmental mandates or recommendations and public perceptions of the risks associated with the COVID-19 pandemic have caused, and we expect will continue to cause, consumer behavior to change, worsening or volatile economic conditions in certain markets, and increased regulatory complexity and compliance costs, each of which could continue to adversely affect our business.

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, worsening or volatile economic conditions in certain markets, and increased regulatory complexity and compliance costs, each of which could continue to adversely affect our business.

In addition, our global operations have been disrupted to varying degrees in different markets and may continue to be disrupted to varying degrees given the unpredictability of the virus, its resurgences and variants and government responses thereto as well as potentially permanent changes to the industry in which we operate.

While we cannot predict the duration or scope of the COVID-19 pandemic, the resurgence of infections or the emergence of new variants in one or more markets, the availability or acceptance of vaccines or vaccination rates across the globe, the pandemic has negatively impacted our business and is expected to continue to impact our financial results, condition and outlook in a way that may be material.

The COVID-19 pandemic may also heighten other risks disclosed in these Risk Factors, including, but not limited to, those related to consumer behavior, consumer perceptions of our brand, competition, supply chain interruptions, commodity costs and labor availability and cost.

While we cannot predict the duration or scope of the COVID-19 pandemic, the resurgence of infections or the emergence of new variants in one or more markets, the availability, acceptance or effectiveness of vaccines or vaccination rates across the globe, the pandemic has negatively impacted our business and may continue to negatively impact our financial results, condition and outlook in a way that may be material.

The COVID-19 pandemic may also heighten other risks disclosed in these Risk Factors, including, but not limited to, those related to labor availability and costs, supply chain interruptions, commodity costs, consumer behavior, consumer perceptions of our brand and competition.

STRATEGY AND BRAND

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To be successful in the future, we believe we must preserve, enhance and leverage the value of our brand, including our corporate purpose, mission and values.

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 general business practices across the System, including the people practices at McDonald’s restaurants.

Brand value is based in part on consumer perceptions, which 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 general business practices across the System, including the people practices at McDonald’s restaurants.

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.

Our business could also be impacted by business incidents or practices, whether actual or perceived, particularly if they receive considerable publicity or result in litigation, as well as by our position or perceived lack of position on environmental, social responsibility, public policy, geopolitical and similar matters.

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 or our brand, culture, operations, suppliers or franchisees.

If we are unsuccessful in addressing adverse commentary or perceptions, whether or not accurate, our brand and 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 the 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, which could expose us to market, operational, execution and reputational costs or risks.

Our brand trust also depends on how we address social risks, including through our increased focus on human capital initiatives and diversity, equity and inclusion ( “ DEI”).

We expect our DEI strategy to represent a step change in how we view equitable opportunity across our System.

Additionally, we have announced Global Brand Standards that will apply to McDonald’s operations worldwide, including both Company-operated and franchised restaurants.

If we are not effective in addressing social and environmental responsibility matters or achieving relevant social or sustainability goals, our brand trust may suffer.

In particular, business incidents or practices, whether actual or perceived, that erode consumer trust or confidence, particularly if they receive considerable publicity or result in litigation, can significantly reduce our 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.

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 behavior and preferences, including with respect to the use of digital channels and environmental and social responsibility matters, in the IEO segment.

If we are not able to predict, or quickly and effectively respond to, these changes, or if 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.

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 behavior and preferences, as well as shifting economic and competitive conditions.

Existing or future pricing strategies and marketing plans, as well as the value proposition they represent, are expected to continue to be important components of our business strategy.

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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, mobile ordering and payment systems, and enhancing our drive thru technologies, which may not generate expected results.

As part of these investments, we are continuing to place emphasis on improving our service model and strengthening relationships with customers, in part through digital channels and loyalty initiatives, mobile ordering and payment systems, and enhancing our drive thru technologies, which may not generate expected results.

We also continue to offer and refine our delivery initiatives, including through growing awareness and trial.

Utilizing a third-party delivery service may not have the same level of profitability as a non-delivery transaction, and may introduce additional food quality and customer satisfaction risks.

Utilizing a third-party delivery service may not have the same level of profitability as a non-delivery transaction, and may introduce additional food quality, food safety and customer satisfaction risks.

If these customer experience initiatives are not well executed, or if we do not fully realize the intended benefits of these significant investments, our business results may suffer.

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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.

Disruptions in operations or price volatility in a market can also result from governmental actions, such as price, foreign exchange or trade-related tariffs or controls, trade policies and regulations, sanctions and counter sanctions, government-mandated closure of our, our franchisees’ or our suppliers’ operations, and asset seizures.

Such disruptions or volatility can also result from acts of war, terrorism or other hostilities.

For example, in response to the recent military conflict between Russia and Ukraine, we have paused our operations in Russia and Ukraine and experienced increased pressure on our supply chain and commodity costs, which we expect to impact our financial results.

The broader impacts of the conflict and related sanctions, including on macroeconomic conditions, geopolitical tensions and consumer demand, may have an adverse impact on our business and financial results.

Our international success depends in part on the effectiveness of our strategies and brand-building initiatives to reduce our exposure to such actions and events.

Additionally, there are challenges and uncertainties 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.

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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, or if contingency planning is not effective, our costs could increase and it could limit the availability of products critical to our System’s operations.

Supply chain interruptions and related price increases can adversely affect us as well as our suppliers and franchisees, whose performance may have a significant impact on our results.

Such interruptions and price increases could be caused by shortages, unexpected increases in demand, transportation issues, labor issues, weather-related events, natural disasters, acts of war, terrorism or other hostilities, or other factors beyond the control of us or our suppliers or franchisees.

If we experience interruptions in our System’s supply chain, or if contingency planning is not effective, our costs could increase and/or the availability of products critical to our System’s operations could be limited.

Our franchise business model presents a number of risks.

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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 labor market.

If we or our franchisees are unable to adequately staff McDonald’s restaurants, it could negatively impact our operations, including speed of service to customers, and customer satisfaction levels.

The System’s ability to meet its labor needs is generally subject to external factors, including the availability of sufficient workforce in the markets in which we operate, unemployment levels in those markets and prevailing wage rates.

Further, increased costs and competition 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 our restaurants, could have a negative impact on our Company-operated margins.

Similar concerns apply to our franchisees’ profitability.

We and our franchisees have experienced and may continue to experience challenges in adequately staffing certain McDonald’s restaurants, which can negatively impact operations, including speed of service to customers, and customer satisfaction levels.

The System’s ability to meet its labor needs is generally subject to external factors, including the availability of sufficient workforce, unemployment levels and prevailing wages in the markets in which we operate.

Further, increased costs and competition associated with recruiting, motivating and retaining qualified employees, as well as costs associated with promoting awareness of the opportunities of working at McDonald’s restaurants, could have a negative impact on our Company-operated margins and our franchisees’ profitability.

We are also impacted by the costs and other effects of compliance with U.S.

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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 our franchisees and suppliers that are also part of the McDonald’s System and whose performance may have a material impact on our results.

Additionally, economic action, such as boycotts, protests, work stoppages or campaigns by labor organizations, could adversely affect us (including our ability to recruit, motivate and retain talent) or our franchisees and suppliers, whose performance may have a significant impact on our results.

Effective succession planning is important to our continued success.

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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.

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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.

These technology systems contain personal, financial and other information of our customers, employees, franchisees, business customers and other third parties, as well as financial, proprietary and other confidential information related to our business.

Certain of these technology systems contain personal, financial and other information of our customers, employees, franchisees and their employees, business customers and other third parties, as well as financial, proprietary and other confidential information related to our business.

Despite response procedures and measures in place in the event of an incident, a security breach could result in disruptions, shutdowns, or the theft or unauthorized disclosure of such information.

The actual or alleged occurrence of any of these incidents could result in mitigation costs, 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.

We also 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 us or reputational harm.

Despite the implementation of security measures, any of these technology systems could become vulnerable to damage, disability or failures due to theft, fire, power loss, telecommunications failure or other catastrophic events.

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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.

We also are subjected to increased public focus, including by governmental and nongovernmental organizations, regarding environmental and social initiatives.

Our success depends in part on our ability to manage the impact of regulations and other initiatives 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 also are subject to increasing public focus, including by governmental and non-governmental organizations, on environmental, social responsibility and corporate governance (“ESG”) initiatives.

Our success depends in part on our ability to manage the impact of regulations and other initiatives that can affect our business plans and operations, which have increased and may continue to increase 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.

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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, 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.

Volatility in certain commodity prices and fluctuations in labor costs have adversely affected and in the future could adversely affect our operating results by impacting restaurant profitability.

The commodity markets for some of the ingredients we use, such as beef, chicken and pork, are particularly volatile due to factors such as seasonal shifts, climate conditions, industry demand and other macroeconomic conditions, international commodity markets, food safety concerns, product recalls, government regulation, and acts of war, terrorism or other hostilities, all of which are beyond our control and, in many instances, unpredictable.

Our System 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.

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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 most important of these factors, some of which are beyond our control, are the following:

• the unpredictable nature of global economic and market conditions;

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• 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.

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 behavior 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 business is subject to an increasing focus on ESG matters.

In recent years, there has been an increasing focus by stakeholders – including employees, franchisees, customers, suppliers, governmental and non-governmental organizations and investors – on ESG matters.

A failure, whether real or perceived, to address ESG matters or to achieve progress on our ESG initiatives on the anticipated timing or at all, could adversely affect our business, including by heightening other risks disclosed in these Risk Factors, such as those related to consumer behavior, consumer perceptions of our brand, labor availability and costs, supply chain interruptions, commodity costs, and legal and regulatory complexity.

Conversely, our taking a position, whether real or perceived, on ESG, public policy, geopolitical and similar matters could adversely impact our business.

The standards we set for ourselves regarding ESG matters, and our ability to meet such standards, may also impact our business.

For example, we are working to manage risks and costs to our System related to climate change, greenhouse gases, and diminishing energy and water resources, and we have announced initiatives relating to, among other things, environmental sustainability, responsible sourcing and increasing diverse representation across our System.

We may face increased scrutiny related to reporting on and achieving these initiatives, as well as continued public focus on similar matters, such as packaging and waste, animal health and welfare, deforestation and land use.

We may also face increased pressure from stakeholders to provide expanded disclosure and establish additional commitments, targets or goals, and take actions to meet them, which could expose us to additional market, operational, execution and reputational costs and risks.

Moreover, addressing ESG matters requires Systemwide coordination and alignment, and the standards by which certain ESG matters are measured are evolving and subject to assumptions that could change over time.

Events such as severe weather conditions, natural disasters, hostilities, social unrest and climate change, among others, can adversely affect our results and prospects.

Severe weather conditions, natural disasters, acts of war, terrorism or other hostilities, social unrest or climate change (or expectations about them) can adversely affect consumer behavior and confidence levels, supply availability and costs and local operations in impacted markets, all of which can affect our results and prospects.

Climate change may also increase the frequency and severity of such weather-related events and natural disasters.

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Quantitative and Qualitative Disclosures About Market Risk

There were no material changes to the disclosures made in our Annual Report on Form 10-K for the year ended December 31, 2020 regarding these matters.

There were no material changes to the disclosures made in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 regarding these matters.

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 2. Management’s Discussion and Analysis