What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-02 compared with 2023-05-04 · 212 added, 117 removed, 467 unchanged (41% of the section changed)

1 unchanged sentence

The Company franchises and operates McDonald’s restaurants, which serve a locally relevant menu of quality food and beverages in communities across more than 100 countries.

Of the 40,535 McDonald's restaurants at March 31, 2023, 95% were franchised.

Of the 40,801 McDonald's restaurants at June 30, 2023, approximately 95% were franchised.

The Company’s reporting segments are aligned with its strategic priorities and reflect how management reviews and evaluates operating performance.

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In addition, in our 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.

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

Fees vary by type of site, amount of Company investment, if any, and local business conditions.

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• M aximize our Marketing by investing in new, culturally relevant approaches, grounded in fan truths, to effectively communicate the story of the Company’s brand, food and purpose.

This is exemplified by campaigns that elevate the entire brand and continue to be repeated and scaled around the globe, such as the Famous Orders platform and the Raise Your Arches campaign.

This is exemplified by campaigns that elevate the entire brand and continue to be repeated and scaled around the globe, connecting with customers in authentic and relatable ways.

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 and is especially important to customers in uncertain economic environments.

• C ommit to the Core menu by tapping into customer demand for the familiar and focusing on serving the Company’s iconic products, such as its World Famous Fries, the Big Mac, Chicken McNuggets and the McFlurry.

Globally, the Company possesses over 10 of these "billion-dollar brand equities." The Company continues to improve on its classics, including by implementing a series of operational and formulation changes designed to deliver hotter, juicer, tastier burgers across the globe.

While leaning into core icons like Chicken McNuggets, the Company will continue to focus on scaling emerging equities such as the McSpicy and McCrispy Chicken Sandwiches.

This is exemplified by the U.S.

leveraging learnings from the U.K., Canada and Germany to relaunch its Crispy Chicken Sandwich under the McCrispy global equity umbrella.

The Company also continues to see a significant opportunity with coffee, demonstrated by markets leveraging the McCafé brand, customer experience, value and quality to drive long-term growth.

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To unlock further growth, the Company expects to continue to accelerate the pace of restaurant openings and technology innovation so that whenever and however customers choose to interact with McDonald’s, they can enjoy a fast, easy experience that meets their needs.

In the first quarter of 2023, digital channels (the mobile app, delivery and kiosk) comprised almost 40% of Systemwide sales in the Company’s top six markets.

This represented over $7.5 billion in digital Systemwide sales and growth of over $2.0 billion, or 30%, compared to the prior year.

In the second quarter of 2023, digital channels (the mobile app, delivery and kiosk) comprised almost 40% of Systemwide sales in the Company’s top six markets, representing over $8 billion in digital Systemwide sales.

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

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

A recent digital enhancement piloting in the U.S.

enables crew to begin assembling a customer’s mobile order prior to their arrival at the restaurant to expedite service and elevate customer satisfaction.

Additionally, the Company has successful loyalty programs in 50 markets around the world, including all of its top six markets.

The Company’s loyalty customers have proven to be highly engaged, with nearly 50 million active loyalty members across the Company’s top six markets during the first quarter of 2023, including over 28 million in the U.S.

Delivery is now offered in over 35,000 restaurants across about 100 markets, representing over 85% of McDonald’s restaurants.

The Company is continuing to build on and enhance the delivery experience for customers, including by adding the ability to place a delivery order on the McDonald's mobile app (a feature that is now available in some of the Company’s largest markets, including the U.S., the U.K., Canada and Australia).

A digital enhancement piloting in the U.S.

enables crew to begin assembling a customer’s

mobile order prior to their arrival at the restaurant to expedite service and elevate customer satisfaction.

Additionally, the Company has successful loyalty programs in over 50 markets around the world, including all of its top six markets.

The Company’s loyalty customers have proven to be highly engaged, with over 52 million active loyalty members across the Company’s top six markets during the second quarter of 2023, including over 30 million in the U.S.

Delivery is offered in over 35,000 restaurants across about 100 markets, representing over 85% of McDonald’s restaurants.

The Company is continuing to build on and enhance the delivery experience for customers, including by adding the ability to place a delivery order on the McDonald's mobile app (a feature that is available in some of the Company’s largest markets, including the U.S., the U.K., Canada and Australia).

The Company has also put in place long-term strategic partnerships with delivery providers such as UberEats, DoorDash, Just Eat Takeaway.com and Deliveroo.

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

These partnerships continue to benefit the Company, customers and franchisees by optimizing operational efficiencies and creating a seamless customer experience.

◦ Drive Thru:

The Company has drive thru locations in over 27,000 restaurants globally, including nearly 95% of the approximately 13,500 locations in the U.S.

This channel remains a competitive advantage, and the Company expects that it will become even more critical to meeting customers’ demand for flexibility and choice.

This channel remains a competitive advantage in meeting 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.

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The Company believes there is opportunity for further growth in many of its largest markets and to explore new formats under the McDonald’s brand over the coming years.

Foundational to the Strategy is keeping the customer and restaurant crew at the center of everything the Company does, along with a relentless focus on running great restaurants, empowering its people and modernizing ways of working through Accelerating the Organization .

These efforts, coupled with investments in innovation, are designed to enhance the customer experience and deliver long-term profitable growth for all stakeholders.

Foundational to the Strategy is keeping the customer and restaurant crew at the center of everything the Company does, along with a relentless focus on running great restaurants, empowering its people and continuing to modernize our ways of working through Accelerating the Organization .

These efforts, coupled with continued investments in digital, innovation and the Global Business Services organization, are designed to enhance the customer experience and deliver long-term profitable growth for all stakeholders.

The Strategy is aligned with the Company’s capital allocation philosophy of investing in opportunities to grow the business (through new restaurants and reinvesting in existing restaurants) and returning free cash flow to shareholders over time through dividends and share repurchases.

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

The Company believes the Strategy builds on its inherent strengths by harnessing its competitive advantages while leveraging its size, scale and agility to adapt and adjust to an uncertain macroenvironment to meet customer demands.

The Strategy is supported by a strong global senior leadership team aimed at executing against the MCD growth pillars and accelerating the Company’s broad-based business momentum.

First Quarter 2023 Financial Performance

Global comparable sales increased 12.6% for the quarter, reflecting strong comparable sales of 12.6% across each segment.

comparable sales results benefited from strategic menu price increases and positive comparable guest count growth.

Successful operational execution in McDonald’s restaurants, effective marketing campaigns featuring the core menu and continued digital and delivery growth contributed to strong comparable sales results.

• International Operated Markets segment results reflected strong comparable sales across the Big Five* and the majority of other markets.

• International Developmental Licensed Markets segment results reflected strong comparable sales led by Japan, along with all geographic regions.

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

• Consolidated revenues increased 4% (8% in constant currencies).

• Systemwide sales increased 9% (13% in constant currencies).

• Consolidated operating income increased 10% (14% in constant currencies).

• Diluted earnings per share was $2.45, an increase of 66% (72% in constant currencies).

Excluding $0.18 per share of current year restructuring charges related to Accelerating the Organization , diluted earnings per share was $2.63, an increase of 15% (19% in constant currencies) when also excluding prior year charges detailed in the Net Income and Diluted Earnings Per Share section on page 19 of this report.

Second Quarter and Six Months 2023 Financial Performance

Global comparable sales increased 11.7% for the quarter and 12.2% for the six months.

comparable sales increased 10.3% for the quarter and 11.4% for the six months.

Comparable sales results for both periods benefited from strategic menu price increases and positive guest counts.

Successful restaurant level execution, culturally relevant brand and marketing campaigns and continued digital and delivery growth contributed to strong comparable sales results.

• International Operated Markets segment comparable sales increased 11.9% for the quarter and 12.3% for the six months.

Segment performance in both periods was driven by strong comparable sales in most markets, led by the U.K.

• International Developmental Licensed Markets segment comparable sales increased 14.0% for the quarter and 13.3% for the six months.

Both periods reflected strong comparable sales in all geographic regions, led by China.

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

• Consolidated revenues increased 14% (14% in constant currencies) for the quarter and 9% (11% in constant currencies) for the six months.

• Systemwide sales increased 12% (13% in constant currencies) for the quarter and 10% (13% in constant currencies) for the six months.

• Consolidated operating income increased 81% (82% in constant currencies) for the quarter and 40% (43% in constant currencies) for the six months.

Excluding current and prior year charges and gains detailed in the Operating Income and Operating Margin section on page 29 of this report, consolidated operating income increased 20% (21% in constant currencies) for the quarter and 16% (18% in constant currencies) for the six months.

• Diluted earnings per share was $3.15 for the quarter, an increase of 97% (98% in constant currencies) and $5.60 for the six months, an increase of 82% (85% in constant currencies).

Excluding current and prior year items detailed in the Net Income and Diluted Earnings Per Share section on page 22 of this report, diluted earnings per share for the quarter was $3.17, an increase of 24% (25% in constant currencies) and $5.80, an increase of 20% (21% in constant currencies), for the six months.

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.

*Australia, Canada, France, Germany and the U.K.

are collectively referred to as the "Big Five" international markets.

The Following Definitions Apply to these Terms as Used Throughout this Report:

2 unchanged sentences

• Comparable sales and comparable guest counts are compared to the same period in the prior year and represent sales and transactions, respectively, 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, natural disasters and acts of war, terrorism or other hostilities (including restaurants temporarily closed due to COVID-19, as well as those that remain closed in Ukraine).

Some of the reasons restaurants may be temporarily closed include reimaging or remodeling, rebuilding, road construction, natural disasters, pandemics and acts of war, terrorism or other hostilities.

Restaurants in Russia were treated as permanently closed as of April 1, 2022 and therefore excluded from the calculation of comparable sales and comparable guest counts beginning in the second quarter of 2022.

9 unchanged sentences

CONSOLIDATED OPERATING RESULTS

Quarter Ended

Dollars in millions, except per share data March 31, 2023

Quarter Ended Six Months Ended

Dollars in millions, except per share data June 30, 2023 June 30, 2023

Amount Increase/

(Decrease) Amount Increase/

Sales by Company-operated restaurants $ 2,487.0 18 % $ 4,711.3 7 %

13 unchanged sentences

Interest expense 330.2 14 659.9 14

Nonoperating (income) expense, net (64.3) n/m

Nonoperating (income) expense, net (42.8) n/m (107.1) n/m

Income before provision for income taxes 2,816.7 100 5,083.7 72

Provision for income taxes 464.7 6

Provision for income taxes 506.3 n/m 971.0 48

Net income $ 2,310.4 94 % $ 4,112.7 79 %

3 unchanged sentences

Impact of Foreign Currency Translation

The impact of foreign currency translation on consolidated operating results for the quarter continued to reflect the weakening of all major currencies against the U.S.

Dollar, including the Euro, British Pound and Australian Dollar.

The impact of foreign currency translation on consolidated operating results for the six months continued to reflect the weakening of all major currencies against the U.S.

For the quarter, the weakening of most major currencies was mostly offset by the strengthening of the Euro.

While changes in foreign currency exchange rates affect reported results, McDonald's mitigates exposures, where practical, by purchasing goods and services in local currencies, financing in local currencies and hedging certain foreign-denominated cash flows.

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Benefit/ (Cost)

Quarters Ended March 31, 2023 2022 2023

Quarters Ended June 30, 2023 2022 2023

Revenues $ 6,497.5 $ 5,718.4 $ (48.5)

5 unchanged sentences

Earnings per share-diluted $ 3.15 $ 1.60 $ (0.01)

Benefit/ (Cost)

Six Months Ended June 30, 2023 2022 2023

Revenues $ 12,395.3 $ 11,384.0 $ (263.5)

Company-operated margins 696.9 686.2 (17.9)

Franchised margins 6,304.3 5,617.0 (106.9)

Selling, general & administrative expenses 1,315.3 1,381.2 9.6

Operating income 5,636.5 4,024.4 (117.2)

Net income 4,112.7 2,292.4 (74.2)

Earnings per share-diluted $ 5.60 $ 3.08 $ (0.10)

Net Income and Diluted Earnings per Share

Net income increased 63% (69% in constant currencies) to $1,802.3 million, and diluted earnings per share increased 66% (72% constant currencies) to $2.45.

For the quarter, net income increased 94% (95% in constant currencies) to $2,310.4 million, and diluted earnings per share increased 97% (98% in constant currencies) to $3.15.

Foreign currency translation had a negative impact of $0.01 on diluted earnings per share.

For the six months, net income increased 79% (83% in constant currencies) to $4,112.7 million, and diluted earnings per share increased 82% (85% in constant currencies) to $5.60.

Foreign currency translation had a negative impact of $0.10 on diluted earnings per share.

Results for 2023 included the following:

• Pre-tax restructuring charges of $180 million, or $0.18 per share, related to Accelerating the Organization

• Pre-tax restructuring charges of $18 million, or $0.02 per share, for the quarter and $198 million, or $0.20 per share, for the six months, primarily related to Accelerating the Organization

Results for 2022 included the following:

• Pre-tax expenses of $127 million, or $0.13 per share, primarily related to Russia

• $500 million, or $0.67 per share, of nonoperating expense related to the settlement of a tax audit in France

Excluding the above items, results reflected strong operating performance driven primarily by higher sales-driven Franchised margins.

During the quarter, the Company repurchased 2.2 million shares of stock for $584.5 million.

Additionally, the Company paid a quarterly dividend of $1.52 per share, or $1.1 billion.

• Pre-tax charges of $1,153 million, or $1.30 per share, for the quarter and $1,281 million, or $1.43 per share, for the six months, related to the sale of the Company's business in Russia

• Pre-tax gain of $271 million, or $0.40 per share, for the quarter and six months, related to the Company's sale of its Dynamic Yield business

• $37 million, or $0.05 per share, for the quarter and $537 million, or $0.72 per share, for the six months, of nonoperating expense related to the settlement of a tax audit in France

Excluding the above items, results for both periods reflected strong operating performance driven primarily by higher sales-driven Franchised margins.

During the quarter, the Company repurchased 2.0 million shares of stock for $578.6 million, bringing total purchases for the six months to 4.2 million shares, or $1.2 billion.

Additionally, the Company paid a quarterly dividend of $1.52 per share, or $1.1 billion, bringing total dividends paid for the six months to $2.2 billion.

NET INCOME AND EARNINGS PER SHARE-DILUTED RECONCILIATION

Dollars in millions, except per share data

Quarters Ended March 31,

Quarters Ended June 30,

Net Income Earnings per share - diluted

5 unchanged sentences

Non-GAAP $ 2,324.1 $ 1,893.8 23 % 23 % $ 3.17 $ 2.55 24 % 25 %

Six Months Ended June 30,

Net Income Earnings per share - diluted

2023 2022 Inc/ (Dec) Inc/ (Dec)

Translation 2023 2022 Inc/ (Dec) Inc/ (Dec)

GAAP $ 4,112.7 $ 2,292.4 79 % 83 % $ 5.60 $ 3.08 82 % 85 %

(Gains)/charges 148.1 770.7 0.20 1.03

Tax Settlement — 537.2 — 0.72

Non-GAAP $ 4,260.8 $ 3,600.3 18 % 21 % $ 5.80 $ 4.83 20 % 21 %

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, for periods prior to its sale on April 1, 2022, third - party revenues for the Company's Dynamic Yield business.

Franchised restaurants represented 95% of McDonald's restaurants worldwide at March 31, 2023.

Franchised restaurants represented 95% of McDonald's restaurants worldwide at June 30, 2023.

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.

Dollars in millions

Quarters Ended March 31, 2023 2022 Inc/ (Dec) Inc/ (Dec)

Quarters Ended June 30, 2023 2022 Inc/ (Dec) Inc/ (Dec)

Company-operated sales

15 unchanged sentences

Total Revenues $ 6,497.5 $ 5,718.4 14 % 14 %

• Total Company-operated sales and franchised revenues increased 4% (8% in constant currencies), benefiting from strong sales performance across all segments.

Revenue growth in the International Operated Markets segment in constant currencies was partly offset by the impact of the Company's exit from Russia in the second quarter of 2022.

Six Months Ended June 30, 2023 2022 Inc/ (Dec) Inc/ (Dec)

Company-operated sales

$ 1,584.4 $ 1,343.6 18 % 18 %

International Operated Markets 2,731.9 2,703.8 1 5

International Developmental Licensed Markets & Corporate 395.0 367.8 7 13

Total $ 4,711.3 $ 4,415.2 7 % 10 %

Franchised revenues

$ 3,509.3 $ 3,156.9 11 % 11 %

International Operated Markets 3,150.4 2,899.5 9 12

International Developmental Licensed Markets & Corporate 861.1 733.2 17 23

Total $ 7,520.8 $ 6,789.6 11 % 13 %

Total Company-operated sales and Franchised revenues

$ 5,093.7 $ 4,500.5 13 % 13 %

International Operated Markets 5,882.3 5,603.3 5 9

International Developmental Licensed Markets & Corporate 1,256.1 1,101.0 14 19

Total $ 12,232.1 $ 11,204.8 9 % 11 %

Total Other revenues $ 163.2 $ 179.2 (9) % (7) %

Total Revenues $ 12,395.3 $ 11,384.0 9 % 11 %

• Total Company-operated sales and franchised revenues increased 14% (15% in constant currencies) for the quarter and increased 9% (11% in constant currencies) for the six months, with both periods benefiting from strong sales performance across all segments.

Revenue growth in the International Operated Markets segment for the six months was partly offset by the impact of the Company's exit from Russia in the second quarter of 2022.

Comparable Sales

The following table presents the percent change in comparable sales for the quarters ended March 31, 2023 and 2022:

The following table presents the percent change in comparable sales for the quarters and six months ended June 30, 2023 and 2022:

Increase/(Decrease)

Quarters Ended March 31,

Quarters Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

10.3 % 3.7 % 11.4 % 3.6 %

International Operated Markets 11.9 13.0 12.3 16.4

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Systemwide Sales and Franchised Sales

The following table presents the percent change in Systemwide sales for the quarter ended March 31, 2023:

The following table presents the percent change in Systemwide sales for the quarter and six months ended June 30, 2023:

SYSTEMWIDE SALES*

Quarter Ended March 31, 2023

Quarter Ended June 30, 2023 Six Months Ended June 30, 2023

Inc/ (Dec) Inc/ (Dec)

Translation Inc/ (Dec) Inc/ (Dec)

11 % 11 % 12 % 12 %

International Operated Markets 13 13 8 12

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Franchised sales are not recorded as revenues by the Company, but are the basis on which the Company calculates and records franchised revenues and are indicative of the financial health of the franchisee base.

The following table presents Franchised sales and the related increases/(decreases) for the quarters ended March 31, 2023 and 2022:

The following table presents Franchised sales and the related increases/(decreases) for the quarters and six months ended June 30, 2023 and 2022:

FRANCHISED SALES

Dollars in millions

Quarters Ended March 31, 2023 2022 Inc/ (Dec) Inc/ (Dec)

Quarters Ended June 30, 2023 2022 Inc/ (Dec) Inc/ (Dec)

$ 12,788.9 $ 11,598.7 10 % 10 %

7 unchanged sentences

Total $ 30,392.7 $ 27,290.5 11 % 12 %

Six Months Ended June 30, 2023 2022 Inc/ (Dec) Inc/ (Dec)

$ 24,531.0 $ 22,027.8 11 % 11 %

International Operated Markets 18,382.9 16,808.0 9 13

International Developmental Licensed Markets & Corporate 15,529.4 13,942.4 11 17

Total $ 58,443.3 $ 52,778.2 11 % 13 %

Ownership type

Conventional franchised $ 42,757.5 $ 38,595.9 11 % 12 %

Developmental licensed 9,788.8 8,693.2 13 17

Foreign affiliated 5,897.0 5,489.1 7 16

Total $ 58,443.3 $ 52,778.2 11 % 13 %

Restaurant Margins

7 unchanged sentences

Amount Inc/ (Dec) Inc/ (Dec)

Quarters Ended March 31, 2023 2022

Quarters Ended June 30, 2023 2022

$ 1,509.8 $ 1,351.6 12 % 12 %

12 unchanged sentences

Total $ 3,710.8 $ 3,281.2 13 % 14 %

Amount Inc/ (Dec) Inc/ (Dec)

Six Months Ended June 30, 2023 2022

$ 2,871.6 $ 2,544.1 13 % 13 %

International Operated Markets 2,581.2 2,350.2 10 13

International Developmental Licensed Markets & Corporate 851.5 722.7 18 23

Total $ 6,304.3 $ 5,617.0 12 % 14 %

Company-operated

$ 233.9 $ 210.5 11 % 11 %

International Operated Markets 454.7 464.7 (2) 2

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

Total $ 696.9 $ 686.2 2 % 4 %

Total restaurant margins

$ 3,105.5 $ 2,754.6 13 % 13 %

International Operated Markets 3,035.9 2,814.9 8 11

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

Total $ 7,001.2 $ 6,303.2 11 % 13 %

n/m Not meaningful

• Total restaurant margins increased $268.5 million, or 9% (12% in constant currencies).

Franchised margins represented over 90% of restaurant margin dollars.

• Results in all segments reflected strong sales-driven Franchised margins.

• Results in all segments reflected strong sales-driven Franchised margins for both periods.

Franchised margins represented approximately 90% of restaurant margin dollars.

• Company-operated margins in the U.S.

and International Operated Markets segment reflected strong positive sales performance, with results for the International Operated Markets segment more than offset by the impact of the Company's exit from Russia in the second quarter of 2022 and by ongoing inflationary cost pressures.

• Total restaurant margins included depreciation and amortization expense of $391.3 million.

and International Operated Markets segment reflected strong sales performance in both periods, partly offset by ongoing inflationary cost pressures.

Results for the six months in the International Operated Markets segment in constant currencies were mostly offset by the impact of the Company's exit from Russia in the second quarter of 2022.

• Total restaurant margins included depreciation and amortization expense of $396.9 million and $788.2 million for the quarter and six months, respectively.

Selling, General & Administrative Expenses

• Selling, general and administrative expenses decreased $24.4 million, or 4% (2% in constant currencies).

Results primarily reflect the comparison to prior year costs related to the 2022 Worldwide Owner/Operator convention.

• Selling, general and administrative expenses as a percent of Systemwide sales were 2.2% and 2.4% for the quarters ended 2023 and 2022, respectively.

• Selling, general and administrative expenses decreased $41.5 million, or 6% (6% in constant currencies), for the quarter and decreased $65.9 million, or 5% (4% in constant currencies), for the six months.

Results for both periods primarily reflected the comparison to prior year costs related to the 2022 Worldwide Owner/Operator convention and proxy contest, partly offset by higher current year incentive-based compensation expense.

• Selling, general and administrative expenses as a percent of Systemwide sales were 2.1% and 2.4% for the six months ended 2023 and 2022, respectively.

Other Operating (Income) Expense, Net

1 unchanged sentence

Dollars in millions

Quarters Ended

Quarters Ended Six Months Ended

June 30, June 30,

2023 2022 2023 2022

Gains on sales of restaurant businesses $ (25.3) $ (8.9) $ (38.4) $ (14.7)

3 unchanged sentences

Total $ (35.8) $ 886.1 $ 92.8 $ 946.6

• Asset dispositions and other (income) expense, net primarily reflected the comparison to a prior year gain as a result of an 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 charges (gains), net reflected $180 million of pre-tax restructuring charges related to Accelerating the Organization.

Results for the prior year reflected net pre-tax expenses of $127 million, primarily related to Russia.

• Gains on sales of restaurant businesses increased for both periods, primarily due to higher restaurant sales in the International Operated Markets segment and in the U.S.

• Equity in earnings of unconsolidated affiliates increased in both periods, primarily due to recovery from the impact of COVID-19 in China in the prior year.

• Asset dispositions and other (income) expense, net for the quarter primarily reflected the comparison to prior year costs incurred to support the Company’s business in Ukraine.

• Impairment and other charges (gains), net reflected $18 million and $198 million for the quarter and six months, respectively, primarily related to pre-tax restructuring charges related to Accelerating the Organization.

Results for the quarter and six months 2022 reflected $1,153 million and $1,281 million, respectively, of pre-tax charges related to the sale of the Company's business in Russia.

Results for both periods 2022 also reflected a pre-tax gain of $271 million related to the Company's sale of its Dynamic Yield business.

Operating Income

1 unchanged sentence

Dollars in millions

Quarters Ended March 31, 2023 2022 Inc/ (Dec) Inc/ (Dec)

Quarters Ended June 30, 2023 2022 Inc/ (Dec) Inc/ (Dec)

$ 1,494.9 $ 1,319.9 13 % 13 %

International Operated Markets 1,192.7 1,129.2 6 12

International Developmental Licensed Markets & Corporate 44.6 32.4 38 n/m

International Operated Markets 1,517.5 136.3 n/m n/m

International Developmental Licensed Markets & Corporate 91.7 255.6 (64) (58)

Total $ 3,104.1 $ 1,711.8 81 % 82 %

Six Months Ended June 30, 2023 2022 Inc/ (Dec) Inc/ (Dec)

$ 2,790.0 $ 2,470.9 13 % 13 %

International Operated Markets 2,710.2 1,265.5 n/m n/m

International Developmental Licensed Markets & Corporate 136.3 288.0 (53) (38)

Total $ 5,636.5 $ 4,024.4 40 % 43 %

Operating margin 45.5 % 35.4 %

• Operating Income:

Operating income increased $219.8 million, or 10% (14% in constant currencies).

Results reflected $180 million of pre-tax restructuring charges related to Accelerating the Organization .

Results for the prior year reflected $127 million of costs, primarily related to Russia.

Operating income increased $1,392.3 million, or 81% (82% in constant currencies), for the quarter and increased $1,612.1 million, or 40% (43% in constant currencies), for the six months.

Results reflected $18 million for the quarter and $198 million for the six months, primarily related to pre-tax restructuring charges related to Accelerating the Organization.

Results for the quarter and six months 2022 reflected $1,153 million and $1,281 million, respectively, of pre-tax charges related to the sale of the Company's business in Russia.

Results for both periods 2022 also reflected a pre-tax gain of $271 million related to the Company's sale of its Dynamic Yield business.

OPERATING INCOME & OPERATING MARGIN RECONCILIATION*

Dollars in millions

Quarters Ended March 31,

Quarters Ended June 30, Six Months Ended June 30,

2023 2022 Inc/ (Dec) Inc/ (Dec)

Translation 2023 2022 Inc/ (Dec) Inc/ (Dec)

GAAP operating income $3,104.1 $1,711.8 81 % 82 % $5,636.5 $4,024.4 40 % 43 %

(Gains)/charges 180.5 127.1

Restructuring charge 18.0 — 198.5 —

Russia sale charge — 1,153.4 — 1,280.5

Dynamic Yield sale gain — (270.7) — (270.7)

Total (gains)/charges 18.0 882.7 198.5 1,009.8

Non-GAAP operating income $3,122.1 $2,594.5 20 % 21 % $5,835.0 $5,034.2 16 % 18 %

Non-GAAP operating margin 47.1 % 44.2 %

*Refer to the Impairment and other charges (gains), net line within the Other Operating (Income) Expense, Net section on page 23 of this report for details of the charges in this table.

• Excluding the current and prior year charges shown in the table above, operating income increased 11% (15% in constant currencies).

Operating income primarily reflected sales-driven growth in Franchised margins.

• International Operated Markets:

Results reflected strong operating performance across the majority of the segment.

• International Developmental Licensed Markets & Corporate:

Results reflected strong operating performance across the segment, led by Brazil and China.

*Refer to the Impairment and other charges (gains), net line within the Other Operating (Income) Expense, Net section on page 28 for details of the gains and charges in this table.

• Excluding the current and prior year charges and gains shown in the table above, operating income increased 20% (21% in constant currencies), for the quarter and increased 16% (18% in constant currencies), for the six months.

Positive operating results across all segments was due primarily to strong sales-driven growth in Franchised margins.

• 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.

The increase in non-GAAP operating margin was due primarily to sales-driven growth in Franchised margins.

The increase in non-GAAP operating margin was due primarily to sales-driven growth in Franchised margins and lower selling, general and administrative expenses.

Interest Expense

• Interest expense increased 15% (16% in constant currencies), primarily due to higher average interest rates as well as higher average debt balances when compared to the prior year.

• Interest expense increased 14% (14% in constant currencies) for the quarter and 14% (15% in constant currencies) for the six months.

Results for both periods reflected higher average interest rates and higher average debt balances.

Nonoperating (Income) Expense, Net

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Dollars in millions

Quarters Ended

Quarters Ended Six Months Ended

June 30, June 30,

2023 2022 2023 2022

Interest income $ (36.9) $ (4.6) $ (74.8) $ (7.2)

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Total $ (42.8) $ 12.1 $ (107.1) $ 496.2

• Interest income increased, primarily due to higher average interest rates when compared to the prior year.

• Interest income for both periods increased due to higher average interest rates.

• Foreign currency and hedging activity includes net gains or losses on certain hedges that reduce the exposure to variability on certain intercompany foreign currency cash flow streams.

• Other (income) expense, net for the prior year included $500 million of nonoperating expense related to the settlement of a tax audit in France.

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

• Excluding the tax impacts of current and prior year charges (as described within the Operating Income & Operating Margin Reconciliation on page 24 of this report) and the prior year nonoperating expense related to an international tax audit, the effective income tax rate for the quarters ended March 31, 2023 and 2022 was 20.9% and 21.3%, respectively.

• Other (income) expense, net for 2022 included $37 million for the quarter and $537 million for the six months of nonoperating expense related to the settlement of a tax audit in France.

• The effective income tax rate was 18.0% and 15.7% for the quarters ended 2023 and 2022, respectively, and 19.1% and 22.3% for the six months ended 2023 and 2022, respectively.

The effective tax rate for both periods of 2023 reflected a tax benefit of $55 million related to the remeasurement of certain deferred tax liabilities.

Both periods of 2022 reflected approximately $50 million of net tax benefits related to global tax audit progression.

• Excluding the tax impacts of current and prior year charges and gains (as described within the Operating Income & Operating Margin Reconciliation on page 29) and the prior year nonoperating expense related to the settlement of a tax audit in France, the effective income tax rate was 18.0% and 18.7% for the quarters ended 2023 and 2022, respectively, and 19.3% and 19.9% for the six months ended 2023 and 2022, 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 $2.4 billion and exceeded capital expenditures by $1.9 billion.

Cash provided by operations increased $287 million, primarily due to improved operating results.

Cash used for investing activities totaled $741 million, an increase of $187 million.

The increase was primarily due to higher capital expenditures.

Cash used for financing activities totaled $558 million, a decrease of $3.3 billion.

The decrease was primarily due to lower treasury stock purchases and $1.1 billion of debt issuances in the first quarter 2023 compared to $1.4 billion in debt repayments in the first quarter 2022.

Cash provided by operations totaled $4.1 billion and exceeded capital expenditures by $3.1 billion for the six months 2023.

Cash provided by operations increased $1.3 billion compared with the six months 2022, primarily due to improved operating results.

Cash used for investing activities totaled $1.4 billion for the six months 2023, an increase of $538.1 million compared with the six months 2022.

The increase was primarily due to higher capital expenditures in the six months 2023 and proceeds from the sale of Dynamic Yield in the six months 2022.

Cash used for financing activities totaled $3.7 billion for the six months 2023, a decrease of $864.6 million compared with the six months 2022.

The decrease was primarily due to lower treasury stock purchases, partly offset by higher net debt repayments.

Based on current conditions, the following is provided to assist in forecasting the Company's future results for 2023.

• The Company expects net restaurant unit expansion will contribute nearly 1.5% to 2023 Systemwide sales growth, in constant currencies.

• The Company expects net restaurant unit expansion will contribute about 1.5% to 2023 Systemwide sales growth, in constant currencies.

• The Company expects full year 2023 selling, general and administrative expenses of about 2.2% to 2.3% of Systemwide sales.

• The Company expects 2023 operating margin percent to be about 45%.

• Based on current interest and foreign currency exchange rates, the Company expects interest expense for the full year 2023 to increase between 10% and 12%, driven primarily by higher average interest rates.

Excluding restructuring charges related to Accelerating the Organization, adjusted operating margin is expected to be about 46%.

• Based on current interest and foreign currency exchange rates, the Company expects interest expense for the full year 2023 to increase between 10% and 12%, driven by higher average debt balances and higher average interest rates.

• The Company expects the effective income tax rate for the full year 2023 to be in the 19% to 21% range.

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

Recent Accounting Pronouncements

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

Cautionary Statement Regarding Forward-Looking Statements

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The global scope of our business subjects us to risks that could negatively affect our business.

We encounter differing cultural, regulatory, geopolitical and economic environments within and among the more than 100 countries where McDonald’s restaurants operate, and our ability to achieve our business objectives depends on the System’s success in these environments.

environments.

Meeting customer expectations is complicated by the risks inherent in our global operating environment, and our global success is partially dependent on our System’s ability to leverage operating successes across markets and brand perceptions.

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The decision to own restaurants or to operate under franchise or license agreements is driven by many factors whose interrelationship is complex.

The benefits of our more heavily franchised structure depend on various factors, including whether we have effectively selected franchisees, licensees and/or affiliates that meet our rigorous

standards, whether we are able to successfully integrate them into our structure and whether their performance and the resulting ownership mix supports our brand and financial objectives.

The benefits of our more heavily franchised structure depend on various factors, including whether we have effectively selected franchisees, licensees and/or affiliates that meet our rigorous standards, whether we are able to successfully integrate them into our structure and whether their performance and the resulting ownership mix supports our brand and financial objectives.

Challenges with respect to labor, including availability and cost, could impact our business and results of operations.

Our success depends in part on our System’s ability to effectively attract, recruit, develop, motivate and retain qualified individuals to work in McDonald’s restaurants and to maintain appropriately-staffed restaurants in an intensely competitive labor market.

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.

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.

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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.

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.

Despite the implementation of business continuity measures, any of these technology systems could become vulnerable to damage, disability or failures due to 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 subject to increasing public focus, including by governmental and non-governmental organizations, on environmental, social responsibility and corporate governance (“ESG”) matters.

We also are subject to increasing public focus, including by governmental and non-governmental organizations, on environmental, social responsibility and corporate governance matters.

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.

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In assessing the recoverability of our long-lived assets, we consider changes in economic conditions and make assumptions regarding estimated future cash flows and other factors.

These estimates are highly subjective and can be significantly impacted by many factors such as global and local business and economic conditions, operating costs, inflation, interest rate levels, competition, consumer and demographic trends and our restructuring activities.

These estimates are highly subjective and can be significantly impacted by many

factors such as global and local business and economic conditions, operating costs, inflation, interest rate levels, competition, consumer and demographic trends and our restructuring activities.

If our estimates or underlying assumptions change in the future, we may be required to record impairment charges.

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• the unpredictable nature of global economic and market conditions;

• governmental action or inaction in light of key indicators of economic activity or events that can significantly influence financial markets, particularly in the U.S., which is the principal trading market for our common stock, and media reports and commentary about economic, trade or other matters, even when the matter in question does not directly relate to our business;

and commentary about economic, trade or other matters, even when the matter in question does not directly relate to our business;

• trading activity in our common stock, in derivative instruments with respect to our common stock or in our debt securities, which can be affected by:

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• the impact of corporate actions, including changes to our corporate structure, and market and third-party perceptions and assessments of such actions, including those we may take from time to time as we implement our business strategies in light of changing business, legal and tax considerations.

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 also 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, climate action, sustainability, responsible sourcing and increasing diverse representation across our System.

Our business is subject to an increasing focus on environmental and social impact matters.

A failure, whether real or perceived, to address environmental and social impact matters or to achieve progress on our environmental and social impact 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 environmental and social impact, public policy, geopolitical and similar matters could also adversely impact our business.

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

In addition, we are engaging in social impact initiatives, including community engagement and philanthropy;

as well as diversity, equity and inclusion efforts, such as increasing diverse representation in our corporate workforce and our franchisees, and increasing business diversity spend.

We have faced 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 have also experienced 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.

Moreover, addressing environmental and social impact matters requires Systemwide as well as third party coordination and alignment, over which we do not have complete control and which may be unpredictable.

The standards by which certain environmental and social impact matters are measured are also 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.

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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