MCDONALDS CORP 10-Q

Item 1. Financial Statements CONDENSED CONSOLIDATED BALANCE SHEET (unaudited) In millions, except per share data June 30, 2023 December 31, 2022 Assets Current assets Cash and equivalents $ 1,625.6 $ 2,583.8 Accounts and notes receivable 2,193.6 2,115.0 Inventories, at cost, not in excess of market 52.4 52.0 Prepaid expenses and other current assets 1,073.8 673.4 Total current assets 4,945.4 5,424.2 Other assets Investments in and advances to affiliates 1,038.8 1,064.5 Goodwill 2,968.6 2,900.4 Miscellaneous 4,869.0 4,707.2 Total other assets 8,876.4 8,672.1 Lease right-of-use asset, net 12,518.7 12,565.7 Property and equipment Property and equipment, at cost 42,131.0 41,037.6 Accumulated depreciation and amortization ( 18,029.5 ) ( 17,264.0 ) Net property and equipment 24,101.5 23,773.6 Total assets $ 50,442.0 $ 50,435.6 Liabilities and shareholders’ equity Current liabilities Accounts payable $ 806.6 $ 980.2 Lease liability 687.2 661.1 Income taxes 385.4 274.9 Other taxes 245.0 255.1 Accrued interest 342.8 393.4 Accrued payroll and other liabilities 1,206.7 1,237.4 Total current liabilities 3,673.7 3,802.1 Long-term debt 35,710.1 35,903.5 Long-term lease liability 12,074.2 12,134.4 Long-term income taxes 552.7 791.9 Deferred revenues - initial franchise fees 769.1 757.8 Other long-term liabilities 1,041.8 1,051.8 Deferred income taxes 1,619.5 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 8,735.8 8,547.1 Retained earnings 61,436.6 59,543.9 Accumulated other comprehensive income (loss) ( 2,455.6 ) ( 2,486.6 ) Common stock in treasury, at cost; 931.9 and 929.3 million shares ( 72,732.5 ) ( 71,624.4 ) Total shareholders’ equity (deficit) ( 4,999.1 ) ( 6,003.4 ) Total liabilities and shareholders’ equity (deficit) $ 50,442.0 $ 50,435.6 See Notes to condensed consolidated financial statements. 3 Table of Contents CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) Quarters Ended Six Months Ended June 30, June 30, In millions, except per share data 2023 2022 2023 2022 Revenues Sales by Company-operated restaurants $ 2,487.0 $ 2,112.8 $ 4,711.3 $ 4,415.2 Revenues from franchised restaurants 3,933.3 3,526.8 7,520.8 6,789.6 Other revenues 77.2 78.8 163.2 179.2 Total revenues 6,497.5 5,718.4 12,395.3 11,384.0 Operating costs and expenses Company-operated restaurant expenses 2,091.3 1,769.8 4,014.4 3,729.0 Franchised restaurants-occupancy expenses 618.2 588.6 1,216.5 1,172.6 Other restaurant expenses 57.0 57.9 119.8 130.2 Selling, general & administrative expenses Depreciation and amortization 95.2 93.0 194.5 185.7 Other 567.5 611.2 1,120.8 1,195.5 Other operating (income) expense, net ( 35.8 ) 886.1 92.8 946.6 Total operating costs and expenses 3,393.4 4,006.6 6,758.8 7,359.6 Operating income 3,104.1 1,711.8 5,636.5 4,024.4 Interest expense 330.2 290.6 659.9 577.9 Nonoperating (income) expense, net ( 42.8 ) 12.1 ( 107.1 ) 496.2 Income before provision for income taxes 2,816.7 1,409.1 5,083.7 2,950.3 Provision for income taxes 506.3 221.1 971.0 657.9 Net income $ 2,310.4 $ 1,188.0 $ 4,112.7 $ 2,292.4 Earnings per common share-basic $ 3.17 $ 1.61 $ 5.63 $ 3.10 Earnings per common share-diluted $ 3.15 $ 1.60 $ 5.60 $ 3.08 Dividends declared per common share $ 1.52 $ 1.38 $ 3.04 $ 2.76 Weighted-average shares outstanding-basic 729.6 737.5 730.3 740.0 Weighted-average shares outstanding-diluted 734.3 742.0 734.9 744.8 See Notes to condensed consolidated financial statements. 4 Table of Contents CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED) Quarters Ended Six Months Ended June 30, June 30, In millions 2023 2022 2023 2022 Net income $ 2,310.4 $ 1,188.0 $ 4,112.7 $ 2,292.4 Other comprehensive income (loss), net of tax Foreign currency translation adjustments: Gain (loss) recognized in accumulated other comprehensive income ("AOCI"), including net investment hedges 39.8 ( 190.6 ) 54.8 ( 274.8 ) Reclassification of (gain) loss to net income — 504.1 — 504.1 Foreign currency translation adjustments-net of tax benefit (expense) of $ 18.2 , $( 178.0 ), $ 53.8 and $( 237.0 ) 39.8 313.5 54.8 229.3 Cash flow hedges: Gain (loss) recognized in AOCI 1.6 103.0 ( 6.9 ) 130.4 Reclassification of (gain) loss to net income ( 4.4 ) ( 18.3 ) ( 12.6 ) ( 28.4 ) Cash flow hedges-net of tax benefit (expense) of $ 0.8 , $( 24.3 ), $ 5.3 and $( 29.3 ) ( 2.8 ) 84.7 ( 19.5 ) 102.0 Defined benefit pension plans: Gain (loss) recognized in AOCI ( 3.2 ) — 5.2 0.1 Reclassification of (gain) loss to net income — ( 2.7 ) ( 9.5 ) ( 4.1 ) Defined benefit pension plans-net of tax benefit (expense) of $ 0.0 , $ 0.1 , $ 1.1 and $ 0.1 ( 3.2 ) ( 2.7 ) ( 4.3 ) ( 4.0 ) Total other comprehensive income (loss), net of tax 33.8 395.5 31.0 327.3 Comprehensive income $ 2,344.2 $ 1,583.5 $ 4,143.7 $ 2,619.7 See Notes to condensed consolidated financial statements. 5 Table of Contents CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) Quarters Ended Six Months Ended June 30, June 30, In millions 2023 2022 2023 2022 Operating activities Net income $ 2,310.4 $ 1,188.0 $ 4,112.7 $ 2,292.4 Adjustments to reconcile to cash provided by operations Charges and credits: Depreciation and amortization 492.2 462.2 982.7 941.9 Deferred income taxes ( 152.5 ) ( 136.3 ) ( 238.6 ) ( 186.8 ) Share-based compensation 45.2 38.3 94.9 92.6 Other ( 46.4 ) 234.2 ( 77.2 ) 306.2 Changes in working capital items ( 975.6 ) ( 1,168.3 ) ( 780.5 ) ( 694.9 ) Cash provided by operations 1,673.3 618.1 4,094.0 2,751.4 Investing activities Capital expenditures ( 526.5 ) ( 437.9 ) ( 1,029.8 ) ( 839.1 ) Purchases of restaurant businesses ( 114.0 ) ( 110.5 ) ( 211.6 ) ( 197.2 ) Sales of restaurant and other businesses 59.2 351.7 80.0 368.2 Sales of property 3.7 6.3 21.7 11.2 Other ( 92.9 ) ( 128.8 ) ( 272.1 ) ( 216.8 ) Cash used for investing activities ( 670.5 ) ( 319.2 ) ( 1,411.8 ) ( 873.7 ) Financing activities Net short-term borrowings ( 157.1 ) 310.1 ( 144.3 ) 316.1 Long-term financing issuances — 1,874.5 1,054.3 1,874.5 Long-term financing repayments ( 1,376.9 ) ( 850.8 ) ( 1,376.9 ) ( 2,201.4 ) Treasury stock purchases ( 569.7 ) ( 1,031.2 ) ( 1,148.1 ) ( 2,537.7 ) Common stock dividends ( 1,108.8 ) ( 1,016.9 ) ( 2,220.0 ) ( 2,042.0 ) Proceeds from stock option exercises 74.9 47.2 148.7 105.9 Other 43.8 ( 19.6 ) 34.1 ( 32.2 ) Cash used for financing activities ( 3,093.8 ) ( 686.7 ) ( 3,652.2 ) ( 4,516.8 ) Effect of exchange rates on cash and cash equivalents 8.5 ( 75.4 ) 11.8 ( 197.6 ) Cash and equivalents increase (decrease) ( 2,082.5 ) ( 463.2 ) ( 958.2 ) ( 2,836.7 ) Cash and equivalents at beginning of period 3,708.1 2,335.7 2,583.8 4,709.2 Cash and equivalents at end of period $ 1,625.6 $ 1,872.5 $ 1,625.6 $ 1,872.5 See Notes to condensed consolidated financial statements. 6 Table of Contents CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) For the six months ended June 30, 2022 Common stock issued Accumulated other comprehensive income (loss) Common stock in treasury Total shareholders’ equity (deficit) Additional paid-in capital Retained earnings Pensions Cash flow hedges Foreign currency translation In millions, except per share data Shares Amount Shares Amount Balance at December 31, 2021 1,660.6 $ 16.6 $ 8,231.6 $ 57,534.7 $ ( 179.5 ) $ ( 24.8 ) $ ( 2,369.4 ) ( 915.8 ) $ ( 67,810.2 ) $ ( 4,601.0 ) Net income 2,292.4 2,292.4 Other comprehensive income (loss), net of tax ( 4.0 ) 102.0 229.3 327.3 Comprehensive income 2,619.7 Common stock cash dividends ($ 2.76 per share) ( 2,042.0 ) ( 2,042.0 ) Treasury stock purchases ( 10.4 ) ( 2,537.7 ) ( 2,537.7 ) Share-based compensation 92.6 92.6 Stock option exercises and other 54.5 1.3 44.1 98.6 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 ) For the six months ended June 30, 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 4,112.7 4,112.7 Other comprehensive income (loss), net of tax ( 4.3 ) ( 19.5 ) 54.8 31.0 Comprehensive income 4,143.7 Common stock cash dividends ($ 3.04 per share) ( 2,220.0 ) ( 2,220.0 ) Treasury stock purchases ( 4.2 ) ( 1,163.0 ) ( 1,163.0 ) Share-based compensation 94.9 94.9 Stock option exercises and other 93.8 1.6 54.9 148.7 Balance at June 30, 2023 1,660.6 $ 16.6 $ 8,735.8 $ 61,436.6 $ ( 302.5 ) $ 11.2 $ ( 2,164.3 ) ( 931.9 ) $ ( 72,732.5 ) $ ( 4,999.1 ) See Notes to condensed consolidated financial statements. 7 Table of Contents CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) For the quarter ended June 30, 2022 Common stock issued Accumulated other comprehensive income (loss) Common stock in treasury Total shareholders’ equity (deficit) Additional paid-in capital Retained earnings Pensions Cash flow hedges Foreign currency translation In millions, except per share data Shares Amount Shares Amount Balance at 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 ) Net income 1,188.0 1,188.0 Other comprehensive income (loss), net of tax ( 2.7 ) 84.7 313.5 395.5 Comprehensive income 1,583.5 Common stock cash dividends ($ 1.38 per share) ( 1,016.9 ) ( 1,016.9 ) Treasury stock purchases ( 4.3 ) ( 1,031.2 ) ( 1,031.2 ) Share-based compensation 38.3 38.3 Stock option exercises and other 33.3 0.5 14.0 47.3 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 ) For the quarter ended June 30, 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 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 ) Net income 2,310.4 2,310.4 Other comprehensive income (loss), net of tax ( 3.2 ) ( 2.8 ) 39.8 33.8 Comprehensive income 2,344.2 Common stock cash dividends ($ 1.52 per share) ( 1,108.8 ) ( 1,108.8 ) Treasury stock purchases ( 2.0 ) ( 578.5 ) ( 578.5 ) Share-based compensation 45.2 45.2 Stock option exercises and other 55.1 0.6 19.8 74.9 Balance at June 30, 2023 1,660.6 $ 16.6 $ 8,735.8 $ 61,436.6 $ ( 302.5 ) $ 11.2 $ ( 2,164.3 ) ( 931.9 ) $ ( 72,732.5 ) $ ( 4,999.1 ) See Notes to condensed consolidated financial statements. 8 Table of Contents NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) McDonald’s Corporation, the registrant, together with its subsidiaries, is referred to herein as the "Company." The Company, its franchisees and suppliers, are referred to herein as the "System." Basis of Presentation The accompanying condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements contained in the Company’s December 31, 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 and six months ended June 30, 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 June 30, 2023 2022 Conventional franchised 21,719 21,621 Developmental licensed 8,357 7,918 Foreign affiliated 8,598 8,125 Total Franchised 38,674 37,664 Company-operated 2,127 2,032 Total Systemwide restaurants 40,801 39,696 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 4.7 million shares and 4.5 million shares for the quarters ended 2023 and 2022, respectively, and 4.6 million shares and 4.8 million shares for the six months ended 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 1.2 million shares and 1.6 million shares for the quarters ended 2023 and 2022, respectively, and 2.1 million shares and 1.6 million shares for the six months ended 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 quarter and six months ended June 30, 2023 that are of significance or potential significance to the Company. 9 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 focuses on becoming faster, more innovative and more efficient for the benefit of our customers and people. The Company expects to incur up to $ 250 million of expenses related to this strategic initiative in 2023, of which $ 199 million was incurred in the six months ended June 30, 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 March 31, 2023 $ 108.8 $ 25.5 $ 28.9 $ 163.2 Restructuring Costs Incurred ( 8.8 ) 5.6 21.9 18.7 Cash Payments ( 27.7 ) ( 11.7 ) ( 46.8 ) ( 86.2 ) Other Non-Cash Items — — ( 2.5 ) ( 2.5 ) Accrued Balance at June 30, 2023 $ 72.3 $ 19.4 $ 1.5 $ 93.2 Of the $ 199 million of restructuring costs incurred in the six months ended June 30, 2023, $ 62 million was recorded in the U.S., $ 72 million was recorded in the International Operated Markets segment and $ 65 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 June 30, 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. 10 Table of Contents Income Taxes 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 2023 reflected a tax benefit of $ 55 million related to the remeasurement of certain deferred tax liabilities. The six months 2023 also reflected a tax benefit of $ 50 million on restructuring charges related to Accelerating the Organization . The effective tax rate for the quarter and six months 2022 reflected $ 214 million and $ 239 million, respectively, of net tax benefits related to the sale of the Company’s Russia and Dynamic Yield businesses, as well as approximately $ 50 million of net tax benefits related to global tax audit progression. The six months 2022 were also unfavorably impacted by the non-deductible $ 537 million of nonoperating expense related to the settlement of a tax audit in France. 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 June 30, 2023, the fair value of the Company’s debt obligations was estimated at $ 33.6 billion, compared to a carrying amount of $ 35.7 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 a pproximate fair value. 11 Table of Contents Financial Instruments and Hedging Activities The Company is exposed to global market risks, including the effect of changes in interest rates and foreign currency fluctuations. The Company uses foreign currency denominated debt and derivative instruments to mitigate the impact of these changes. The Company does not hold or issue derivatives for trading purposes. The following table presents the fair values of derivative instruments included on the condensed consolidated balance sheet: Derivative Assets Derivative Liabilities In millions Balance Sheet Classification June 30, 2023 December 31, 2022 Balance Sheet Classification June 30, 2023 December 31, 2022 Derivatives designated as hedging instruments Foreign currency Prepaid expenses and other current assets $ 12.4 $ 53.3 Accrued payroll and other liabilities $ ( 29.9 ) $ ( 17.9 ) Interest rate Prepaid expenses and other current assets 13.6 — Accrued payroll and other liabilities ( 7.7 ) — Foreign currency Miscellaneous other assets 12.0 28.7 Other long-term liabilities ( 7.6 ) ( 30.7 ) Interest rate Miscellaneous other assets — — Other long-term liabilities ( 81.1 ) ( 91.5 ) Total derivatives designated as hedging instruments $ 38.0 $ 82.0 $ ( 126.3 ) $ ( 140.1 ) Derivatives not designated as hedging instruments Equity Prepaid expenses and other current assets $ 231.3 $ 200.5 Accrued payroll and other liabilities $ — $ — Foreign currency Prepaid expenses and other current assets 1.3 — Accrued payroll and other liabilities — ( 1.6 ) Equity Miscellaneous other assets — — Total derivatives not designated as hedging instruments $ 232.6 $ 200.5 $ — $ ( 1.6 ) Total derivatives $ 270.6 $ 282.5 $ ( 126.3 ) $ ( 141.7 ) The following table presents the pre-tax amounts from derivative instruments affecting income and AOCI for the six months ended June 30, 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 $ ( 22.3 ) $ 101.8 $ 15.8 $ 38.8 Interest rate Interest expense 13.6 66.1 0.3 ( 2.2 ) Cash flow hedges $ ( 8.7 ) $ 167.9 $ 16.1 $ 36.6 Foreign currency denominated debt Nonoperating income/expense $ ( 293.5 ) $ 1,015.2 Foreign currency derivatives Nonoperating income/expense 45.8 27.4 Foreign currency derivatives (1) Interest expense $ 11.1 $ 4.4 Net investment hedges $ ( 247.7 ) $ 1,042.6 $ 11.1 $ 4.4 Foreign currency Nonoperating income/expense $ 2.9 $ 6.5 Equity Selling, general & administrative expenses $ 31.1 $ ( 23.3 ) Undesignated derivatives $ 34.0 $ ( 16.8 ) (1) The amount of gain (loss) recognized in income related to components excluded from effectiveness testing. 12 Table of Contents Fair Value Hedges The Company enters into fair value hedges to reduce the exposure to changes in fair values of certain liabilities. The Company enters into fair value hedges that convert a portion of its fixed rate debt into floating rate debt by the use of interest rate swaps. At June 30, 2023, the carrying amount of fixed-rate debt that was effectively converted was an equivalent notional amount of $ 1.0 billion, which included a decrease of $ 88.8 million of cumulative hedging adjustments. For the six months ended June 30, 2023, the Company recognized a $ 2.7 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 June 30, 2023, the Company had foreign currency derivatives outstanding with an equivalent notional amount of $ 1.7 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 June 30, 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 June 30, 2023, the $ 11.3 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 June 30, 2023, $ 13.4 billion of the Company's third-party foreign currency denominated debt, $ 1.0 billion of the Company's intercompany foreign currency denominated debt and $ 652 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 June 30, 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 June 30, 2023, the Company was required to post $99 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. 13 Table of Contents Franchise Arrangements Revenues from franchised restaurants consisted of: Quarters Ended Six Months Ended June 30, June 30, In millions 2023 2022 2023 2022 Rents $ 2,508.8 $ 2,275.2 $ 4,778.6 $ 4,356.3 Royalties 1,410.3 1,239.6 2,713.3 2,408.3 Initial fees 14.2 12.0 28.9 25.0 Revenues from franchised restaurants $ 3,933.3 $ 3,526.8 $ 7,520.8 $ 6,789.6 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 June 30, 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 June 30, 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 June 30, 2023. The following table presents the Company’s revenues and operating income by segment: Quarters Ended Six Months Ended June 30, June 30, In millions 2023 2022 2023 2022 Revenues U.S. $ 2,701.2 $ 2,410.0 $ 5,188.8 $ 4,585.6 International Operated Markets 3,155.6 2,747.5 5,950.4 5,669.6 International Developmental Licensed Markets & Corporate 640.7 560.9 1,256.1 1,128.8 Total revenues $ 6,497.5 $ 5,718.4 $ 12,395.3 $ 11,384.0 Operating Income U.S. $ 1,494.9 $ 1,319.9 $ 2,790.0 $ 2,470.9 International Operated Markets 1,517.5 136.3 2,710.2 1,265.5 International Developmental Licensed Markets & Corporate 91.7 255.6 136.3 288.0 Total operating income* $ 3,104.1 $ 1,711.8 $ 5,636.5 $ 4,024.4 * Results for the quarter and six months 2023 reflected $ 18 million and $ 198 million, respectively, primarily related to pre-tax restructuring charges related to Accelerating the Organization. Results for 2022 included pre-tax charges of $ 1,153 million for the quarter and $ 1,281 million for the six months related to the sale of the Company's business in Russia, as well as $ 271 million of pre-tax gains in both periods related to the Company's sale of its Dynamic Yield business. . Subsequent Events The Company evaluated subsequent events through the date the financial statements were issued and filed with the Securities and Exchange Commission. There were no subsequent events that required recognition or disclosure. 14 Table of Contents