MCDONALDS CORP 10-Q

Item 1. Financial Statements CONDENSED CONSOLIDATED BALANCE SHEET (unaudited) In millions, except per share data March 31, 2023 December 31, 2022 Assets Current assets Cash and equivalents $ 3,708.1 $ 2,583.8 Accounts and notes receivable 2,075.5 2,115.0 Inventories, at cost, not in excess of market 51.5 52.0 Prepaid expenses and other current assets 963.6 673.4 Total current assets 6,798.7 5,424.2 Other assets Investments in and advances to affiliates 1,087.6 1,064.5 Goodwill 2,930.6 2,900.4 Miscellaneous 4,794.8 4,707.2 Total other assets 8,813.0 8,672.1 Lease right-of-use asset, net 12,544.2 12,565.7 Property and equipment Property and equipment, at cost 41,487.1 41,037.6 Accumulated depreciation and amortization ( 17,628.6 ) ( 17,264.0 ) Net property and equipment 23,858.5 23,773.6 Total assets $ 52,014.4 $ 50,435.6 Liabilities and shareholders’ equity Current liabilities Short-term borrowings and current maturities of long-term debt $ 524.2 $ — Accounts payable 811.8 980.2 Lease liability 668.7 661.1 Income taxes 795.8 274.9 Other taxes 273.0 255.1 Accrued interest 364.6 393.4 Accrued payroll and other liabilities 1,186.6 1,237.4 Total current liabilities 4,624.7 3,802.1 Long-term debt 36,603.7 35,903.5 Long-term lease liability 12,122.6 12,134.4 Long-term income taxes 737.1 791.9 Deferred revenues - initial franchise fees 760.5 757.8 Other long-term liabilities 1,059.4 1,051.8 Deferred income taxes 1,882.5 1,997.5 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 8,635.5 8,547.1 Retained earnings 60,235.0 59,543.9 Accumulated other comprehensive income (loss) ( 2,489.4 ) ( 2,486.6 ) Common stock in treasury, at cost; 930.5 and 929.3 million shares ( 72,173.8 ) ( 71,624.4 ) Total shareholders’ equity (deficit) ( 5,776.1 ) ( 6,003.4 ) Total liabilities and shareholders’ equity (deficit) $ 52,014.4 $ 50,435.6 See Notes to condensed consolidated financial statements. 3 Table of Contents CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) Quarters Ended March 31, In millions, except per share data 2023 2022 Revenues Sales by Company-operated restaurants $ 2,224.3 $ 2,302.4 Revenues from franchised restaurants 3,587.5 3,262.8 Other revenues 86.0 100.4 Total revenues 5,897.8 5,665.6 Operating costs and expenses Company-operated restaurant expenses 1,923.1 1,959.2 Franchised restaurants-occupancy expenses 598.3 584.0 Other restaurant expenses 62.8 72.3 Selling, general & administrative expenses Depreciation and amortization 99.3 92.7 Other 553.3 584.3 Other operating (income) expense, net 128.6 60.5 Total operating costs and expenses 3,365.4 3,353.0 Operating income 2,532.4 2,312.6 Interest expense 329.7 287.3 Nonoperating (income) expense, net ( 64.3 ) 484.1 Income before provision for income taxes 2,267.0 1,541.2 Provision for income taxes 464.7 436.8 Net income $ 1,802.3 $ 1,104.4 Earnings per common share-basic $ 2.47 $ 1.49 Earnings per common share-diluted $ 2.45 $ 1.48 Dividends declared per common share $ 1.52 $ 1.38 Weighted-average shares outstanding-basic 730.9 742.6 Weighted-average shares outstanding-diluted 735.5 747.6 See Notes to condensed consolidated financial statements. 4 Table of Contents CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED) Quarters Ended March 31, In millions 2023 2022 Net income $ 1,802.3 $ 1,104.4 Other comprehensive income (loss), net of tax Foreign currency translation adjustments: Gain (loss) recognized in accumulated other comprehensive income ("AOCI"), including net investment hedges 15.0 ( 84.2 ) Reclassification of (gain) loss to net income — — Foreign currency translation adjustments-net of tax benefit (expense) of $ 35.6 and $( 59.0 ) 15.0 ( 84.2 ) Cash flow hedges: Gain (loss) recognized in AOCI ( 8.5 ) 27.4 Reclassification of (gain) loss to net income ( 8.2 ) ( 10.1 ) Cash flow hedges-net of tax benefit (expense) of $ 4.5 and $( 5.0 ) ( 16.7 ) 17.3 Defined benefit pension plans: Gain (loss) recognized in AOCI 8.4 0.1 Reclassification of (gain) loss to net income ( 9.5 ) ( 1.4 ) Defined benefit pension plans-net of tax benefit (expense) of $ 1.1 and $ 0.0 ( 1.1 ) ( 1.3 ) Total other comprehensive income (loss), net of tax ( 2.8 ) ( 68.2 ) Comprehensive income $ 1,799.5 $ 1,036.2 See Notes to condensed consolidated financial statements. 5 Table of Contents CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) Quarters Ended March 31, In millions 2023 2022 Operating activities Net income $ 1,802.3 $ 1,104.4 Adjustments to reconcile to cash provided by operations Charges and credits: Depreciation and amortization 490.5 479.7 Deferred income taxes ( 86.1 ) ( 50.5 ) Share-based compensation 49.7 54.3 Other ( 30.8 ) 72.0 Changes in working capital items 195.1 473.4 Cash provided by operations 2,420.7 2,133.3 Investing activities Capital expenditures ( 503.3 ) ( 401.2 ) Purchases of restaurant businesses ( 97.6 ) ( 86.7 ) Sales of restaurant businesses 20.8 16.5 Sales of property 18.0 4.9 Other ( 179.2 ) ( 88.0 ) Cash used for investing activities ( 741.3 ) ( 554.5 ) Financing activities Net short-term borrowings 12.8 6.0 Long-term financing issuances 1,054.3 — Long-term financing repayments — ( 1,350.6 ) Treasury stock purchases ( 578.4 ) ( 1,506.5 ) Common stock dividends ( 1,111.2 ) ( 1,025.1 ) Proceeds from stock option exercises 73.8 58.7 Other ( 9.7 ) ( 12.6 ) Cash used for financing activities ( 558.4 ) ( 3,830.1 ) Effect of exchange rates on cash and cash equivalents 3.3 ( 122.2 ) Cash and equivalents increase (decrease) 1,124.3 ( 2,373.5 ) Cash and equivalents at beginning of period 2,583.8 4,709.2 Cash and equivalents at end of period $ 3,708.1 $ 2,335.7 See Notes to condensed consolidated financial statements. 6 Table of Contents CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) For the quarter ended March 31, 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 1,104.4 1,104.4 Other comprehensive income (loss), net of tax ( 1.3 ) 17.3 ( 84.2 ) ( 68.2 ) Comprehensive income 1,036.2 Common stock cash dividends ($ 1.38 per share) ( 1,025.1 ) ( 1,025.1 ) Treasury stock purchases ( 6.1 ) ( 1,506.5 ) ( 1,506.5 ) Share-based compensation 54.3 54.3 Stock option exercises and other 21.2 0.8 30.1 51.3 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 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, 2022 1,660.6 $ 16.6 $ 8,547.1 $ 59,543.9 $ ( 298.2 ) $ 30.7 $ ( 2,219.1 ) ( 929.3 ) $ ( 71,624.4 ) $ ( 6,003.4 ) Net income 1,802.3 1,802.3 Other comprehensive income (loss), net of tax ( 1.1 ) ( 16.7 ) 15.0 ( 2.8 ) Comprehensive income 1,799.5 Common stock cash dividends ($ 1.52 per share) ( 1,111.2 ) ( 1,111.2 ) Treasury stock purchases ( 2.2 ) ( 584.5 ) ( 584.5 ) Share-based compensation 49.7 49.7 Stock option exercises and other 38.7 1.0 35.1 73.8 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. 7 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, 2022 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 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 March 31, 2023 2022 Conventional franchised 21,701 21,558 Developmental licensed 8,289 7,981 Foreign affiliated 8,427 8,013 Total Franchised 38,417 37,552 Company-operated 2,118 2,792 Total Systemwide restaurants 40,535 40,344 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. 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 5.0 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 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. 8 Table of Contents 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 2023 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. Income Taxes 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 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, 2022 Annual Report on Form 10-K. 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 and notes receivable approximate fair value. 9 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 March 31, 2023 December 31, 2022 Balance Sheet Classification March 31, 2023 December 31, 2022 Derivatives designated as hedging instruments Foreign currency Prepaid expenses and other current assets $ 39.9 $ 53.3 Accrued payroll and other liabilities $ ( 23.0 ) $ ( 17.9 ) Interest rate Prepaid expenses and other current assets — — Accrued payroll and other liabilities ( 1.5 ) — Foreign currency Miscellaneous other assets 32.3 28.7 Other long-term liabilities ( 27.6 ) ( 30.7 ) Interest rate Miscellaneous other assets — — Other long-term liabilities ( 79.0 ) ( 91.5 ) Total derivatives designated as hedging instruments $ 72.2 $ 82.0 $ ( 131.1 ) $ ( 140.1 ) Derivatives not designated as hedging instruments Equity Prepaid expenses and other current assets $ 219.3 $ 200.5 Accrued payroll and other liabilities $ ( 0.1 ) $ ( 1.6 ) Foreign currency Prepaid expenses and other current assets 0.6 — Accrued payroll and other liabilities — — Equity Miscellaneous other assets — — Total derivatives not designated as hedging instruments $ 219.9 $ 200.5 $ ( 0.1 ) $ ( 1.6 ) 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 three months ended March 31, 2023 and 2022, 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 2023 2022 2023 2022 2023 2022 Foreign currency Nonoperating income/expense $ ( 9.2 ) $ 13.5 $ 10.3 $ 14.1 Interest rate Interest expense ( 1.5 ) 21.8 0.1 ( 1.1 ) Cash flow hedges $ ( 10.7 ) $ 35.3 $ 10.4 $ 13.0 Foreign currency denominated debt Nonoperating income/expense $ ( 162.9 ) $ 259.0 $ — Foreign currency derivatives Nonoperating income/expense 7.6 4.4 Foreign currency derivatives (1) Interest expense $ 5.7 $ 2.3 Net investment hedges $ ( 155.3 ) $ 263.4 $ — $ 5.7 $ 2.3 Foreign currency Nonoperating income/expense $ 2.1 $ ( 4.5 ) Equity Selling, general & administrative expenses $ 15.6 $ ( 21.5 ) Undesignated derivatives $ 17.7 $ ( 26.0 ) (1) The amount of gain (loss) recognized in income related to components excluded from effectiveness testing. 10 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 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 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 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 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 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 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 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 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 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. 11 Table of Contents Franchise Arrangements Revenues from franchised restaurants consisted of: Quarters Ended March 31, In millions 2023 2022 Rents $ 2,269.8 $ 2,081.1 Royalties 1,303.0 1,168.7 Initial fees 14.7 13.0 Revenues from franchised restaurants $ 3,587.5 $ 3,262.8 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 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 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 March 31, 2023. The following table presents the Company’s revenues and operating income by segment: Quarters Ended March 31, In millions 2023 2022 Revenues U.S. $ 2,487.6 $ 2,175.6 International Operated Markets 2,794.8 2,922.1 International Developmental Licensed Markets & Corporate 615.4 567.9 Total revenues $ 5,897.8 $ 5,665.6 Operating Income U.S. $ 1,295.1 $ 1,151.0 International Operated Markets 1,192.7 1,129.2 International Developmental Licensed Markets & Corporate 44.6 32.4 Total operating income $ 2,532.4 $ 2,312.6 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. 12 Table of Contents