What changed in this filing

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Item 1. Financial Statements

2023-05-04 compared with 2022-11-07 · 59 added, 133 removed, 289 unchanged (40% of the section changed)

1 unchanged sentence

CONDENSED CONSOLIDATED BALANCE SHEET

In millions, except per share data September 30,

In millions, except per share data March 31,

2023 December 31,

17 unchanged sentences

Current liabilities

Short-term borrowings and current maturities of long-term debt $ 524.2 $ —

Accounts payable 811.8 980.2

28 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

Quarters Ended Nine Months Ended

September 30, September 30,

Quarters Ended

In millions, except per share data 2023 2022

25 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

Quarters Ended Nine Months Ended

September 30, September 30,

Quarters Ended

In millions 2023 2022

24 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

Quarters Ended Nine Months Ended

September 30, September 30,

Quarters Ended

In millions 2023 2022

12 unchanged sentences

Purchases of restaurant businesses ( 97.6 ) ( 86.7 )

Sales of restaurant and other businesses 33.1 60.1 401.3 141.9

Sales of restaurant businesses 20.8 16.5

Sales of property 18.0 4.9

16 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)

For the nine months ended September 30, 2021

For the quarter ended March 31, 2022

issued Accumulated other

18 unchanged sentences

Stock option exercises and other 21.2 0.8 30.1 51.3

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

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)

For the nine months ended September 30, 2022

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

For the quarter ended March 31, 2023

issued Accumulated other

18 unchanged sentences

Stock option exercises and other 38.7 1.0 35.1 73.8

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.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)

For the quarter ended September 30, 2021

issued Accumulated other

comprehensive income (loss) Common stock in

treasury Total

shareholders’

equity (deficit)

capital Retained

earnings Pensions Cash flow

hedges Foreign

In millions, except per share data Shares Amount Shares Amount

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

Net income 2,149.9 2,149.9

Other comprehensive income (loss),

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

Comprehensive income 2,057.9

Common stock cash dividends

($ 2.67 per share)

( 1,991.2 ) ( 1,991.2 )

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

issued Accumulated other

comprehensive income (loss) Common stock in

treasury Total

shareholders’

equity (deficit)

capital Retained

earnings Pensions Cash flow

hedges Foreign

In millions, except per share data Shares Amount Shares Amount

Balance at June 30, 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 )

Balance at March 31, 2023 1,660.6 $ 16.6 $ 8,635.5 $ 60,235.0 $ ( 299.3 ) $ 14.0 $ ( 2,204.1 ) ( 930.5 ) $ ( 72,173.8 ) $ ( 5,776.1 )

See Notes to condensed consolidated financial statements.

4 unchanged sentences

In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included.

The results for the quarter and nine months ended September 30, 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.

The results for the quarter ended March 31, 2023 do not necessarily indicate the results that may be expected for the full year.

Restaurant Information

The following table presents restaurant information by ownership type:

Restaurants at September 30, 2022 2021

Restaurants at March 31, 2023 2022

Conventional franchised 21,701 21,558

4 unchanged sentences

Total Systemwide restaurants 40,535 40,344

*Reflects the sale of over 850 restaurants in Russia in the second quarter of 2022, most of which were Company-operated.

Restaurant information reflects the sale of over 850 restaurants in conjunction with the exit of our business 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.

1 unchanged sentence

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.

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 5.0 million shares for the quarters 2023 and 2022, respectively.

Share-based compensation awards that would have been antidilutive, and therefore were not included in the calculation of diluted weighted-average shares, totaled 2.3 million shares and 1.7 million shares for the quarters 2023 and 2022, respectively.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

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.

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.

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:

Balance at January 1

Decreases for positions taken in prior years

Increases for positions taken in prior years

Increases for positions in the current year

Decreases due to settlements with taxing authorities

Decreases due to the lapsing of statutes of limitations

Balance at September 30

There have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 31, 2023 that are of significance or potential significance to the Company.

Accelerating the Organization

In January 2023, the Company announced an evolution of its successful Accelerating the Arches strategy.

Enhancements to the strategy include the addition of Restaurant Development to the Company’s growth pillars and an internal effort to modernize ways of working, Accelerating the Organization , both of which are aimed at elevating the Company’s performance.

Accelerating the Organization is designed to unlock further growth as the Company modernizes the way it works by focusing on becoming faster, more innovative and more efficient at solving problems for its customers and people.

The Company expects to incur between $ 200 million and $ 250 million of expenses related to this strategic initiative in 2023, of which $ 180 million was incurred in the three months ended March 31, 2023.

These expenses were recorded in the Other operating (income) expense, net line within the consolidated statement of income.

Restructuring expenses primarily consist of employee termination benefits, costs to terminate contracts, including lease terminations, and professional services and other costs.

Professional services and other costs primarily relate to expenses incurred for legal and consulting activities.

There were no significant non-cash impairment charges included in the amounts listed in the table below.

The following table summarizes the balance of accrued expenses related to this strategic initiative (in millions):

Employee Termination Benefits Costs to Terminate Contracts Other Related Costs Total

Beginning Balance $ — $ — $ — $ —

Restructuring Costs Incurred 110.3 26.9 43.3 180.5

Cash Payments ( 1.5 ) ( 1.4 ) ( 0.3 ) ( 3.2 )

Other Non-Cash Items — — ( 14.1 ) ( 14.1 )

Accrued Balance at End of Period $ 108.8 $ 25.5 $ 28.9 $ 163.2

Of the $ 180 million of restructuring costs incurred in the three months ended March 31, 2023, $ 58 million was recorded in the U.S., $ 71 million was recorded in the International Operated Markets segment and $ 51 million was recorded in the International Developmental Licensed Markets & Corporate segment, the majority of which was recorded at Corporate.

Substantially all of the accrued restructuring balance recorded at March 31, 2023, related to the Company’s Accelerating the Organization initiative, is expected to be paid out by the end of 2023.

As part of Accelerating the Organization, the Company is also in the initial stages of developing a strategy that will utilize an enterprise-wide Global Business Services model to deliver business services at scale with greater efficiency.

Additional costs will be incurred as the strategy progresses;

however, at this point in time these future costs cannot be estimated.

The expectation is that the Company will complete the majority of its Global Business Services strategy by the end of 2027.

The effective income tax rate was 20.5 % and 28.3 % for the quarters ended March 31, 2023 and 2022, respectively.

The tax rate for the quarter ended March 31, 2022 was impacted by the non-deductibility for tax purposes of $ 500 million of nonoperating expense related to a tax audit in France.

Excluding the impacts of the $ 500 million of nonoperating expense, current year restructuring charges related to Accelerating the Organization and prior year charges, primarily related to Russia, the effective income tax rate was 20.9 % and 21.3 % for the quarters ended March 31, 2023 and 2022, respectively.

Fair Value Measurements

2 unchanged sentences

There were no significant changes to the valuation techniques used to measure fair value as described in the Company's December 31, 2022 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.

At March 31, 2023, the fair value of the Company’s debt obligations was estimated at $ 35.6 billion, compared to a carrying amount of $ 37.1 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.

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

Financial Instruments and Hedging Activities

4 unchanged sentences

Derivative Assets Derivative Liabilities

In millions Balance Sheet Classification September 30, 2022 December 31, 2021 Balance Sheet Classification September 30, 2022 December 31, 2021

In millions Balance Sheet Classification March 31, 2023 December 31, 2022 Balance Sheet Classification March 31, 2023 December 31, 2022

Derivatives designated as hedging instruments

13 unchanged sentences

Total derivatives $ 292.1 $ 282.5 $ ( 131.2 ) $ ( 141.7 )

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:

The following table presents the pre-tax amounts from derivative instruments affecting income and AOCI for the three months ended March 31, 2023 and 2022, respectively:

Location of gain or loss

15 unchanged sentences

Equity Selling, general & administrative expenses $ 15.6 $ ( 21.5 )

Equity Other operating income/expense, net

Undesignated derivatives $ 17.7 $ ( 26.0 )

3 unchanged sentences

The Company enters into fair value hedges that convert a portion of its fixed rate debt into floating rate debt by 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.

At March 31, 2023, the carrying amount of fixed-rate debt that was effectively converted was an equivalent notional amount of $ 1.2 billion, which included a decrease of $ 79 million of cumulative hedging adjustments.

For the three months ended March 31, 2023, the Company recognized a $ 12.5 million gain on the fair value of interest rate swaps, and a corresponding loss on the fair value of the related hedged debt instrument to interest expense.

Cash Flow Hedges

2 unchanged sentences

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.

As of March 31, 2023, the Company had foreign currency derivatives outstanding with an equivalent notional amount of $ 1.6 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.

As of March 31, 2023, the Company had derivatives outstanding with a notional amount of $500 million that hedge a portion of forecasted cash flows.

Based on market conditions at March 31, 2023, the $ 14 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

1 unchanged sentence

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.

As of March 31, 2023, $ 13.9 billion of the Company's third-party foreign currency denominated debt, $ 1.0 billion of the Company's intercompany foreign currency denominated debt and $ 662 million of foreign currency derivatives were designated to hedge investments in certain foreign subsidiaries and affiliates.

Undesignated Derivatives

6 unchanged sentences

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.

The Company did not have significant exposure to any individual counterparty at March 31, 2023 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.

At March 31, 2023, the Company was required to post $120 million 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.

1 unchanged sentence

Revenues from franchised restaurants consisted of:

Quarters Ended Nine Months Ended

September 30, September 30,

Quarters Ended

In millions 2023 2022

6 unchanged sentences

- the Company's largest market.

The segment is 95 % franchised as of September 30, 2022.

The segment is 95 % franchised as of March 31, 2023.

• 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.

The segment is 89 % franchised as of March 31, 2023.

During the second quarter of 2022, the Company completed the sale of its business in Russia, resulting in a total exit from the market.

• 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 segment is 98 % franchised as of March 31, 2023.

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

Quarters Ended Nine Months Ended

September 30, September 30,

Quarters Ended

In millions 2023 2022

8 unchanged sentences

Total operating income $ 2,532.4 $ 2,312.6

*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

2 unchanged sentences

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

What changed 10-Q

Item 1. Financial Statements