Item 1. Financial Statements
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
In millions, except per share data September 30,
2022 December 31,
2021
Assets
Current assets
Cash and equivalents 2,828.3 4,709.2
Accounts and notes receivable 1,889.9 1,872.4
Inventories, at cost, not in excess of market 43.4 55.6
Prepaid expenses and other current assets 979.2 511.3
Total current assets 5,740.8 7,148.5
Other assets
Investments in and advances to affiliates 963.8 1,201.2
Goodwill 2,651.3 2,782.5
Miscellaneous 4,254.6 4,449.5
Total other assets 7,869.7 8,433.2
Lease right-of-use asset, net 12,192.8 13,552.0
Property and equipment
Property and equipment, at cost 39,096.8 41,916.6
Accumulated depreciation and amortization ( 16,398.5 ) ( 17,196.0 )
Net property and equipment 22,698.3 24,720.6
Total assets $ 48,501.6 $ 53,854.3
Liabilities and shareholders’ equity
Current liabilities
Accounts payable 794.8 1,006.8
Lease liability 654.9 705.5
Income taxes 386.3 360.7
Other taxes 203.6 236.7
Accrued interest 318.4 363.3
Accrued payroll and other liabilities 1,128.1 1,347.0
Total current liabilities 3,486.1 4,020.0
Long-term debt 34,866.2 35,622.7
Long-term lease liability 11,766.8 13,020.9
Long-term income taxes 1,085.0 1,896.8
Deferred revenues - initial franchise fees 727.8 738.3
Other long-term liabilities 990.8 1,081.0
Deferred income taxes 2,145.1 2,075.6
Shareholders’ equity (deficit)
Preferred stock, no par value; authorized – 165.0 million shares; issued – none
— —
Common stock, $0 .01 par value; authorized – 3.5 billion shares; issued – 1,660.6 million shares
16.6 16.6
Additional paid-in capital 8,460.1 8,231.6
Retained earnings 58,752.0 57,534.7
Accumulated other comprehensive income (loss) ( 2,559.7 ) ( 2,573.7 )
Common stock in treasury, at cost; 928.2 and 915.8 million shares
( 71,235.2 ) ( 67,810.2 )
Total shareholders’ equity (deficit) ( 6,566.2 ) ( 4,601.0 )
Total liabilities and shareholders’ equity (deficit) $ 48,501.6 $ 53,854.3
See Notes to condensed consolidated financial statements.
3
Table of Contents
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Quarters Ended Nine Months Ended
September 30, September 30,
In millions, except per share data 2022 2021 2022 2021
Revenues
Sales by Company-operated restaurants $ 2,124.8 $ 2,598.4 $ 6,540.0 $ 7,248.6
Revenues from franchised restaurants 3,671.2 3,510.2 10,460.8 9,693.8
Other revenues 76.1 92.7 255.3 271.4
Total revenues 5,872.1 6,201.3 17,256.1 17,213.8
Operating costs and expenses
Company-operated restaurant expenses 1,779.6 2,108.4 5,508.6 5,947.0
Franchised restaurants-occupancy expenses 589.0 592.6 1,761.6 1,743.2
Other restaurant expenses 57.4 68.9 187.6 204.4
Selling, general & administrative expenses
Depreciation and amortization 93.3 84.1 279.0 243.2
Other 576.4 559.6 1,771.9 1,622.4
Other operating (income) expense, net 12.5 ( 198.8 ) 959.1 ( 505.3 )
Total operating costs and expenses 3,108.2 3,214.8 10,467.8 9,254.9
Operating income 2,763.9 2,986.5 6,788.3 7,958.9
Interest expense 306.2 293.7 884.1 890.2
Nonoperating (income) expense, net ( 78.5 ) 1.4 417.7 48.6
Income before provision for income taxes 2,536.2 2,691.4 5,486.5 7,020.1
Provision for income taxes 554.6 541.5 1,212.5 1,113.7
Net income $ 1,981.6 $ 2,149.9 $ 4,274.0 $ 5,906.4
Earnings per common share-basic $ 2.70 $ 2.88 $ 5.79 $ 7.91
Earnings per common share-diluted $ 2.68 $ 2.86 $ 5.75 $ 7.86
Dividends declared per common share $ 1.38 $ 2.67 $ 4.14 $ 5.25
Weighted-average shares outstanding-basic 734.9 747.1 738.3 746.5
Weighted-average shares outstanding-diluted 739.5 752.6 743.0 751.9
See Notes to condensed consolidated financial statements.
4
Table of Contents
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Quarters Ended Nine Months Ended
September 30, September 30,
In millions 2022 2021 2022 2021
Net income $ 1,981.6 $ 2,149.9 $ 4,274.0 $ 5,906.4
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments:
Gain (loss) recognized in accumulated other comprehensive
income ("AOCI"), including net investment hedges
( 369.5 ) ( 132.8 ) ( 644.3 ) ( 172.7 )
Reclassification of (gain) loss to net income — 14.3 504.1 34.7
Foreign currency translation adjustments-net of tax
benefit (expense) of $( 198.7 ), $( 66.1 ), $( 435.7 ) and $( 133.7 )
( 369.5 ) ( 118.5 ) ( 140.2 ) ( 138.0 )
Cash flow hedges:
Gain (loss) recognized in AOCI 101.4 26.8 231.8 48.7
Reclassification of (gain) loss to net income ( 42.5 ) 4.0 ( 70.9 ) 32.4
Cash flow hedges-net of tax benefit (expense) of $( 16.9 ), $( 9.2 ), $( 46.2 ) and $( 24.1 )
58.9 30.8 160.9 81.1
Defined benefit pension plans:
Gain (loss) recognized in AOCI ( 0.7 ) 0.1 ( 0.6 ) 0.9
Reclassification of (gain) loss to net income ( 2.0 ) ( 4.4 ) ( 6.1 ) ( 20.4 )
Defined benefit pension plans-net of tax benefit (expense)
of $ 0.0 , $ 0.0 , $ 0.1 and $ 0.1
( 2.7 ) ( 4.3 ) ( 6.7 ) ( 19.5 )
Total other comprehensive income (loss), net of tax ( 313.3 ) ( 92.0 ) 14.0 ( 76.4 )
Comprehensive income $ 1,668.3 $ 2,057.9 $ 4,288.0 $ 5,830.0
See Notes to condensed consolidated financial statements.
5
Table of Contents
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Quarters Ended Nine Months Ended
September 30, September 30,
In millions 2022 2021 2022 2021
Operating activities
Net income $ 1,981.6 $ 2,149.9 $ 4,274.0 $ 5,906.4
Adjustments to reconcile to cash provided by operations
Charges and credits:
Depreciation and amortization 465.6 469.2 1,407.5 1,386.5
Deferred income taxes ( 196.3 ) ( 45.8 ) ( 383.1 ) ( 416.2 )
Share-based compensation 38.3 34.1 130.9 97.9
Other ( 45.6 ) ( 163.6 ) 260.6 ( 364.8 )
Changes in working capital items 190.3 174.0 ( 504.6 ) ( 134.8 )
Cash provided by operations 2,433.9 2,617.8 5,185.3 6,475.0
Investing activities
Capital expenditures ( 531.2 ) ( 501.5 ) ( 1,370.3 ) ( 1,352.8 )
Purchases of restaurant businesses ( 152.3 ) ( 28.6 ) ( 349.5 ) ( 116.7 )
Sales of restaurant and other businesses 33.1 60.1 401.3 141.9
Sales of property 11.1 41.3 22.3 97.9
Other ( 93.8 ) 43.8 ( 310.6 ) 186.7
Cash used for investing activities ( 733.1 ) ( 384.9 ) ( 1,606.8 ) ( 1,043.0 )
Financing activities
Net short-term borrowings ( 305.4 ) ( 0.3 ) 10.7 7.6
Long-term financing issuances 1,500.0 — 3,374.5 —
Long-term financing repayments ( 0.4 ) ( 0.4 ) ( 2,201.8 ) ( 1,739.4 )
Treasury stock purchases ( 869.2 ) ( 17.7 ) ( 3,406.9 ) ( 42.2 )
Common stock dividends ( 1,014.7 ) ( 963.9 ) ( 3,056.7 ) ( 2,889.5 )
Proceeds from stock option exercises 62.4 66.6 168.3 198.6
Other 80.9 ( 11.7 ) 48.7 ( 32.7 )
Cash used for financing activities ( 546.4 ) ( 927.4 ) ( 5,063.2 ) ( 4,497.6 )
Effect of exchange rates on cash and cash equivalents ( 198.6 ) ( 49.1 ) ( 396.2 ) ( 77.7 )
Cash and equivalents increase (decrease) 955.8 1,256.4 ( 1,880.9 ) 856.7
Cash and equivalents at beginning of period 1,872.5 3,049.4 4,709.2 3,449.1
Cash and equivalents at end of period $ 2,828.3 $ 4,305.8 $ 2,828.3 $ 4,305.8
See Notes to condensed consolidated financial statements.
6
Table of Contents
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
For the nine months ended September 30, 2021
Common stock
issued Accumulated other
comprehensive income (loss) Common stock in
treasury Total
shareholders’
equity (deficit)
Additional
paid-in
capital Retained
earnings Pensions Cash flow
hedges Foreign
currency
translation
In millions, except per share data Shares Amount Shares Amount
Balance at December 31, 2020 1,660.6 16.6 7,903.6 53,908.1 ( 287.6 ) ( 111.3 ) ( 2,187.9 ) ( 915.2 ) ( 67,066.4 ) ( 7,824.9 )
Net income 5,906.4 5,906.4
Other comprehensive income (loss),
net of tax ( 19.5 ) 81.1 ( 138.0 ) ( 76.4 )
Comprehensive income 5,830.0
Common stock cash dividends
($ 5.25 per share)
( 3,916.8 ) ( 3,916.8 )
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 )
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
For the nine months ended September 30, 2022
Common stock
issued Accumulated other
comprehensive income (loss) Common stock in
treasury Total
shareholders’
equity (deficit)
Additional
paid-in
capital Retained
earnings Pensions Cash flow
hedges Foreign
currency
translation
In millions, except per share data Shares Amount Shares Amount
Balance at December 31, 2021 1,660.6 $ 16.6 $ 8,231.6 $ 57,534.7 $ ( 179.5 ) $ ( 24.8 ) $ ( 2,369.4 ) ( 915.8 ) $ ( 67,810.2 ) $ ( 4,601.0 )
Net income 4,274.0 4,274.0
Other comprehensive income (loss),
net of tax ( 6.7 ) 160.9 ( 140.2 ) 14.0
Comprehensive income 4,288.0
Common stock cash dividends
($ 4.14 per share)
( 3,056.7 ) ( 3,056.7 )
Treasury stock purchases ( 14.1 ) ( 3,486.8 ) ( 3,486.8 )
Share-based compensation 130.9 130.9
Stock option exercises and other 97.6 1.7 61.8 159.4
Balance at September 30, 2022 1,660.6 $ 16.6 $ 8,460.1 $ 58,752.0 $ ( 186.2 ) $ 136.1 $ ( 2,509.6 ) ( 928.2 ) $ ( 71,235.2 ) $ ( 6,566.2 )
See Notes to condensed consolidated financial statements.
7
Table of Contents
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
For the quarter ended September 30, 2021
Common stock
issued Accumulated other
comprehensive income (loss) Common stock in
treasury Total
shareholders’
equity (deficit)
Additional
paid-in
capital Retained
earnings Pensions Cash flow
hedges Foreign
currency
translation
In millions, except per share data Shares Amount Shares Amount
Balance at June 30, 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 )
Treasury stock purchases ( 0.1 ) ( 34.5 ) ( 34.5 )
Share-based compensation 34.1 34.1
Stock option exercises and other 45.7 0.5 21.0 66.7
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 )
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
For the quarter ended September 30, 2022
Common stock
issued Accumulated other
comprehensive income (loss) Common stock in
treasury Total
shareholders’
equity (deficit)
Additional
paid-in
capital Retained
earnings Pensions Cash flow
hedges Foreign
currency
translation
In millions, except per share data Shares Amount Shares Amount
Balance at June 30, 2022 1,660.6 $ 16.6 $ 8,378.7 $ 57,785.1 $ ( 183.5 ) $ 77.2 $ ( 2,140.1 ) ( 924.9 ) $ ( 70,303.8 ) $ ( 6,369.8 )
Net income 1,981.6 1,981.6
Other comprehensive income (loss),
net of tax ( 2.7 ) 58.9 ( 369.5 ) ( 313.3 )
Comprehensive income 1,668.3
Common stock cash dividends
($ 1.38 per share)
( 1,014.7 ) ( 1,014.7 )
Treasury stock purchases ( 3.7 ) ( 949.1 ) ( 949.1 )
Share-based compensation 38.3 38.3
Stock option exercises and other 43.1 0.4 17.7 60.8
Balance at September 30, 2022 1,660.6 $ 16.6 $ 8,460.1 $ 58,752.0 $ ( 186.2 ) $ 136.1 $ ( 2,509.6 ) ( 928.2 ) $ ( 71,235.2 ) $ ( 6,566.2 )
See Notes to condensed consolidated financial statements.
8
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
McDonald’s Corporation, the registrant, together with its subsidiaries, is referred to herein as the "Company." The Company, its franchisees and suppliers, are referred to herein as the "System."
Basis of Presentation
The accompanying condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements contained in the Company’s December 31, 2021 Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. The results for the quarter and nine months ended September 30, 2022 do not necessarily indicate the results that may be expected for the full year.
In the first quarter of 2022, the Company temporarily closed restaurants in Russia and Ukraine due to the ongoing war in the region. Beginning in September 2022, the Company began reopening certain restaurants in Ukraine.
In June 2022, the Company completed the sale of its Russian business, resulting in a total exit from the market. The Company recorded a charge of $ 1,281 million for the nine months, comprised primarily of the write-off of the Company’s net investment in Russia, along with related cumulative foreign currency translation losses.
Restaurant Information
The following table presents restaurant information by ownership type:
Restaurants at September 30, 2022 2021
Conventional franchised 21,641 21,552
Developmental licensed 8,144 7,795
Foreign affiliated 8,145 7,639
Total Franchised 37,930 36,986
Company-operated 2,050 2,690
Total Systemwide restaurants 39,980 * 39,676
*Reflects the sale of over 850 restaurants in Russia in the second quarter of 2022, most of which were Company-operated.
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 accompanying condensed consolidated financial statements for the periods prior to purchase and sale.
Per Common Share Information
Diluted earnings per common share is calculated as 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 4.6 million shares and 5.5 million shares for the quarters 2022 and 2021, respectively, and 4.7 million shares and 5.4 million shares for the nine months 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 1.5 million shares and 1.4 million shares for the quarters 2022 and 2021, respectively, and 1.5 million shares and 3.0 million shares for the nine months 2022 and 2021, respectively.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Leases
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 this standard did not have a material effect on the Company’s consolidated financial statements.
9
Table of Contents
Recent Accounting Pronouncements Not Yet Adopted
Reference Rate Reform
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" (“ASU 2020-04”). The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The 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. During the first quarter of 2022, the Company temporarily closed restaurants in Russia and Ukraine due to the ongoing war in the region. Restaurants remained closed in Russia through the Company's sale of its Russian business in the second quarter 2022. Beginning in September 2022, the Company began reopening certain restaurants in Ukraine. While the Company continues to monitor economic uncertainty resulting from the ongoing war and to assess the financial impact on restaurant operations in certain regions of Ukraine, based on its analysis and in consideration of the totality of events and circumstances, there were no indicators of impairment during the third quarter of 2022.
As of September 30, 2022, the Company’s net investment in Ukraine was approximately $ 75 million, primarily consisting of building and equipment assets. In addition, there was approximately $ 150 million of cumulative foreign currency translation losses reflected in the AOCI section of the condensed consolidated statement of shareholder’s equity at September 30, 2022.
Income Taxes
The effective income tax rate was 21.9 % and 20.1 % for the quarters 2022 and 2021, respectively, and 22.1 % and 15.9 % for the nine months 2022 and 2021, respectively. The effective tax rate for the nine months 2022 reflected the tax impacts of current year pre-tax charges of $ 1,281 million related to the sale of the Company's business in Russia and a pre-tax gain of $ 271 million related to the Company's sale of its Dynamic Yield business. The nine months 2022 also reflected $ 537 million of nonoperating expense related to the settlement of a tax audit in France.
The effective tax rates for the quarter and nine months 2021 reflected the tax impacts of net pre-tax gains of $ 106 million and $ 339 million, respectively, primarily related to the sale of McDonald's Japan stock as well as a benefit of $ 364 million in the nine months related to the remeasurement of deferred taxes as a result of a change in the U.K. statutory income tax rate.
As of September 30, 2022 and December 31, 2021, the Company’s gross unrecognized tax benefits totaled $ 616.4 million and $ 1,504.9 million, respectively. The Company continues to engage with various tax jurisdictions to resolve tax audits. During the nine months 2022, the Company finalized and settled certain tax examinations and remeasured other income tax reserves based on audit progression. The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax benefits:
In millions
2022
Balance at January 1
$ 1,504.9
Decreases for positions taken in prior years
( 575.6 )
Increases for positions taken in prior years
64.3
Increases for positions in the current year
30.3
Decreases due to settlements with taxing authorities
( 407.5 )
Decreases due to the lapsing of statutes of limitations
—
Balance at September 30
$ 616.4
10
Table of Contents
Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value. Fair value disclosures are reflected in a three-level hierarchy, maximizing the use of observable inputs and minimizing the use of unobservable inputs. There were no 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, 2022, the fair value of the Company’s debt obligations was estimated at $ 31.9 billion, compared to a carrying amount of $ 34.9 billion. The fair value of debt obligations is based upon quoted market prices, classified as Level 2 within the valuation hierarchy. The carrying amount of cash and equivalents a pproximate fair value.
11
Table of Contents
Financial Instruments and Hedging Activities
The Company is exposed to global market risks, including the effect of changes in interest rates and foreign currency fluctuations. The Company uses foreign currency denominated debt and derivative instruments to mitigate the impact of these changes. The Company does not hold or issue derivatives for trading purposes.
The following table presents the fair values of derivative instruments included on the condensed consolidated balance sheet:
Derivative Assets Derivative Liabilities
In millions Balance Sheet Classification September 30, 2022 December 31, 2021 Balance Sheet Classification September 30, 2022 December 31, 2021
Derivatives designated as hedging instruments
Foreign currency Prepaid expenses and other current assets $ 141.3 $ 42.4 Accrued payroll and other liabilities $ — $ ( 3.3 )
Interest rate Prepaid expenses and other current assets — 0.3 Accrued payroll and other liabilities — —
Foreign currency Miscellaneous other assets 76.7 28.0 Other long-term liabilities — ( 0.5 )
Interest rate Miscellaneous other assets
— 8.6 Other long-term liabilities ( 92.0 ) ( 4.1 )
Total derivatives designated as hedging instruments $ 218.0 $ 79.3 $ ( 92.0 ) $ ( 7.9 )
Derivatives not designated as hedging instruments
Equity Prepaid expenses and other current assets
$ 173.8 $ 9.5 Accrued payroll and other liabilities $ ( 14.3 ) $ —
Foreign currency Prepaid expenses and other current assets
16.4 0.5 Accrued payroll and other liabilities — —
Equity Miscellaneous other assets — 200.3
Total derivatives not designated as hedging instruments $ 190.2 $ 210.3 $ ( 14.3 ) $ —
Total derivatives $ 408.2 $ 289.6 $ ( 106.3 ) $ ( 7.9 )
The following table presents the pre-tax amounts from derivative instruments affecting income and AOCI for the nine months ended September 30, 2022 and 2021, respectively:
Location of gain or loss
recognized in income on
derivative Gain (loss)
recognized in AOCI Gain (loss)
reclassified into income from AOCI Gain (loss) recognized in
income on derivative
In millions 2022 2021 2022 2021 2022 2021
Foreign currency Nonoperating income/expense $ 214.5 $ 63.1 $ 94.4 $ ( 37.4 )
Interest rate Interest expense 83.9 — ( 3.0 ) ( 4.7 )
Cash flow hedges $ 298.4 $ 63.1 $ 91.4 $ ( 42.1 )
Foreign currency denominated debt Nonoperating income/expense $ 1,917.0 $ 574.3 $ 47.1
Foreign currency derivatives Nonoperating income/expense 37.1 31.4
Foreign currency derivatives (1)
Interest expense $ 6.6 $ 11.0
Net investment hedges $ 1,954.1 $ 605.7 $ 47.1 $ 6.6 $ 11.0
Foreign currency Nonoperating income/expense $ 15.9 $ 10.4
Equity Selling, general & administrative expenses ( 50.4 ) 54.4
Equity Other operating income/expense, net
— ( 7.8 )
Undesignated derivatives $ ( 34.5 ) $ 57.0
(1) The amount of gain (loss) recognized in income related to components excluded from effectiveness testing.
12
Table of Contents
Fair Value Hedges
The Company enters into fair value hedges to reduce the exposure to changes in fair values of certain liabilities. The Company enters into fair value hedges that convert a portion of its fixed rate debt into floating rate debt by the use of interest rate swaps. At September 30, 2022, the carrying amount of fixed-rate debt that was effectively converted was an equivalent notional amount of $ 952.1 million, which included a decrease of $ 92.0 million of cumulative hedging adjustments. For the nine months ended September 30, 2022, the Company recognized a $ 96.8 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
The Company enters into cash flow hedges to reduce the exposure to variability in certain expected future cash flows. To protect against the reduction in value of forecasted foreign currency cash flows (such as royalties denominated in foreign currencies), the Company uses foreign currency forwards to hedge a portion of anticipated exposures. The hedges cover up to the next 18 months for certain exposures and are denominated in various currencies. As of September 30, 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 September 30, 2022, the Company did no t have any of these derivatives outstanding.
Based on market conditions at September 30, 2022, the $ 136.1 million in cumulative cash flow hedging gains, after tax, is not expected to have a significant effect on the Company's earnings over the next 12 months.
Net Investment Hedges
The Company uses foreign currency denominated debt (third-party and intercompany) and 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, 2022, $ 11.7 billion of the Company's third-party foreign currency denominated debt, $ 826.5 million of the Company's intercompany foreign currency denominated debt and $ 224.9 million of foreign currency derivatives were designated to hedge investments in certain foreign subsidiaries and affiliates.
Undesignated Derivatives
The Company enters into certain derivatives that are not designated for hedge accounting. Therefore, the changes in the fair value of these derivatives are recognized immediately in earnings together with the gain or loss from the hedged balance sheet position. As an example, the Company enters into equity derivative contracts, including total return swaps, to hedge market-driven changes in certain of its supplemental benefit plan liabilities. Changes in the fair value of these derivatives are recorded in Selling, general & administrative expenses together with the changes in the supplemental benefit plan liabilities. In addition, the Company uses foreign currency forwards to mitigate the change in fair value of certain foreign currency denominated assets and liabilities. Changes in the fair value of these derivatives are recognized in Nonoperating (income) expense, net, together with the currency gain or loss from the hedged balance sheet position.
Credit Risk
The Company is exposed to credit-related losses in the event of non-performance by its derivative counterparties. The Company did not have significant exposure to any individual counterparty at September 30, 2022 and has master agreements that contain netting arrangements. For financial reporting purposes, the Company presents gross derivative balances in its 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, 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.
13
Table of Contents
Franchise Arrangements
Revenues from franchised restaurants consisted of:
Quarters Ended Nine Months Ended
September 30, September 30,
In millions 2022 2021 2022 2021
Rents $ 2,357.5 $ 2,254.1 $ 6,713.8 $ 6,205.9
Royalties 1,300.7 1,243.1 3,709.0 3,449.6
Initial fees 13.0 13.0 38.0 38.3
Revenues from franchised restaurants $ 3,671.2 $ 3,510.2 $ 10,460.8 $ 9,693.8
Segment Information
The Company operates under an organizational structure with the following global business segments reflecting how management reviews and evaluates operating performance:
• U.S. - the Company's largest market. The segment is 95 % franchised as of September 30, 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, Spain and the U.K. The segment is 89 % franchised as of September 30, 2022. During the second quarter of 2022, the Company completed the sale of its business in Russia.
• 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, 2022.
The following table presents the Company’s revenues and operating income by segment:
Quarters Ended Nine Months Ended
September 30, September 30,
In millions 2022 2021 2022 2021
Revenues
U.S. $ 2,456.6 $ 2,260.7 $ 7,042.2 $ 6,615.0
International Operated Markets 2,817.8 3,372.7 8,487.4 9,007.6
International Developmental Licensed Markets & Corporate 597.7 567.9 1,726.5 1,591.2
Total revenues $ 5,872.1 $ 6,201.3 $ 17,256.1 $ 17,213.8
Operating Income
U.S. $ 1,326.6 $ 1,254.9 $ 3,797.5 $ 3,647.9
International Operated Markets 1,374.4 1,519.6 2,639.9 3,745.4
International Developmental Licensed Markets & Corporate 62.9 212.0 350.9 565.6
Total operating income* $ 2,763.9 $ 2,986.5 $ 6,788.3 $ 7,958.9
*Results for the nine months 2022 included pre-tax charges of $ 1,281 million related to the sale of the Company's business in Russia, as well as $ 271 million of gains related to the Company's sale of its Dynamic Yield business. The quarter and nine months 2021 reflected $ 106 million and $ 339 million, respectively, of net gains, primarily related to the sale of McDonald's Japan stock.
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.
14
Table of Contents
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.