Item 1. Financial Statements
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
In millions, except per share data September 30,
2023 December 31,
2022
Assets
Current assets
Cash and equivalents $ 3,496.3 $ 2,583.8
Accounts and notes receivable 2,247.1 2,115.0
Inventories, at cost, not in excess of market 47.6 52.0
Prepaid expenses and other current assets 1,059.0 673.4
Total current assets 6,850.0 5,424.2
Other assets
Investments in and advances to affiliates 1,037.9 1,064.5
Goodwill 2,965.2 2,900.4
Miscellaneous 5,062.6 4,707.2
Total other assets 9,065.7 8,672.1
Lease right-of-use asset, net 12,249.5 12,565.7
Property and equipment
Property and equipment, at cost 41,967.0 41,037.6
Accumulated depreciation and amortization ( 18,042.9 ) ( 17,264.0 )
Net property and equipment 23,924.1 23,773.6
Total assets $ 52,089.3 $ 50,435.6
Liabilities and shareholders’ equity
Current liabilities
Accounts payable $ 862.4 $ 980.2
Lease liability 668.1 661.1
Income taxes 535.3 274.9
Other taxes 242.2 255.1
Accrued interest 346.4 393.4
Accrued payroll and other liabilities 1,348.3 1,237.4
Total current liabilities 4,002.7 3,802.1
Long-term debt 37,274.6 35,903.5
Long-term lease liability 11,807.2 12,134.4
Long-term income taxes 490.6 791.9
Deferred revenues - initial franchise fees 767.6 757.8
Other long-term liabilities 984.2 1,051.8
Deferred income taxes 1,617.2 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 8,824.5 8,547.1
Retained earnings 62,649.0 59,543.9
Accumulated other comprehensive income (loss) ( 2,545.7 ) ( 2,486.6 )
Common stock in treasury, at cost; 935.3 and 929.3 million shares
( 73,799.2 ) ( 71,624.4 )
Total shareholders’ equity (deficit) ( 4,854.8 ) ( 6,003.4 )
Total liabilities and shareholders’ equity (deficit) $ 52,089.3 $ 50,435.6
See Notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Quarters Ended Nine Months Ended
September 30, September 30,
In millions, except per share data 2023 2022 2023 2022
Revenues
Sales by Company-operated restaurants $ 2,556.2 $ 2,124.8 $ 7,267.5 $ 6,540.0
Revenues from franchised restaurants 4,047.1 3,671.2 11,567.9 10,460.8
Other revenues 88.9 76.1 252.1 255.3
Total revenues 6,692.2 5,872.1 19,087.5 17,256.1
Operating costs and expenses
Company-operated restaurant expenses 2,135.0 1,779.6 6,149.4 5,508.6
Franchised restaurants-occupancy expenses 625.4 589.0 1,841.9 1,761.6
Other restaurant expenses 68.1 57.4 187.9 187.6
Selling, general & administrative expenses
Depreciation and amortization 96.7 93.3 291.2 279.0
Other 583.5 576.4 1,704.3 1,771.9
Other operating (income) expense, net ( 24.8 ) 12.5 68.0 959.1
Total operating costs and expenses 3,483.9 3,108.2 10,242.7 10,467.8
Operating income 3,208.3 2,763.9 8,844.8 6,788.3
Interest expense 340.7 306.2 1,000.6 884.1
Nonoperating (income) expense, net ( 55.9 ) ( 78.5 ) ( 163.0 ) 417.7
Income before provision for income taxes 2,923.5 2,536.2 8,007.2 5,486.5
Provision for income taxes 606.4 554.6 1,577.4 1,212.5
Net income $ 2,317.1 $ 1,981.6 $ 6,429.8 $ 4,274.0
Earnings per common share-basic $ 3.19 $ 2.70 $ 8.82 $ 5.79
Earnings per common share-diluted $ 3.17 $ 2.68 $ 8.76 $ 5.75
Dividends declared per common share $ 1.52 $ 1.38 $ 4.56 $ 4.14
Weighted-average shares outstanding-basic 727.2 734.9 729.2 738.3
Weighted-average shares outstanding-diluted 731.6 739.5 733.8 743.0
See Notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Quarters Ended Nine Months Ended
September 30, September 30,
In millions 2023 2022 2023 2022
Net income $ 2,317.1 $ 1,981.6 $ 6,429.8 $ 4,274.0
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments:
Gain (loss) recognized in accumulated other comprehensive
income ("AOCI"), including net investment hedges
( 145.3 ) ( 369.5 ) ( 90.5 ) ( 644.3 )
Reclassification of (gain) loss to net income — — — 504.1
Foreign currency translation adjustments-net of tax
benefit (expense) of $( 97.5 ), $( 198.7 ), $( 43.7 ) and $( 435.7 )
( 145.3 ) ( 369.5 ) ( 90.5 ) ( 140.2 )
Cash flow hedges:
Gain (loss) recognized in AOCI 50.0 101.4 43.1 231.8
Reclassification of (gain) loss to net income 0.5 ( 42.5 ) ( 12.1 ) ( 70.9 )
Cash flow hedges-net of tax benefit (expense) of $( 13.7 ), $( 16.9 ), $( 8.4 ) and $( 46.2 )
50.5 58.9 31.0 160.9
Defined benefit pension plans:
Gain (loss) recognized in AOCI 4.7 ( 0.7 ) 9.9 ( 0.6 )
Reclassification of (gain) loss to net income — ( 2.0 ) ( 9.5 ) ( 6.1 )
Defined benefit pension plans-net of tax benefit (expense)
of $ 0.1 , $ 0.0 , $ 1.2 and $ 0.1
4.7 ( 2.7 ) 0.4 ( 6.7 )
Total other comprehensive income (loss), net of tax ( 90.1 ) ( 313.3 ) ( 59.1 ) 14.0
Comprehensive income $ 2,227.0 $ 1,668.3 $ 6,370.7 $ 4,288.0
See Notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Quarters Ended Nine Months Ended
September 30, September 30,
In millions 2023 2022 2023 2022
Operating activities
Net income $ 2,317.1 $ 1,981.6 $ 6,429.8 $ 4,274.0
Adjustments to reconcile to cash provided by operations
Charges and credits:
Depreciation and amortization 498.0 465.6 1,480.7 1,407.5
Deferred income taxes ( 176.2 ) ( 196.3 ) ( 414.8 ) ( 383.1 )
Share-based compensation 42.9 38.3 137.8 130.9
Other ( 105.9 ) ( 45.6 ) ( 183.1 ) 260.6
Changes in working capital items 453.1 190.3 ( 327.4 ) ( 504.6 )
Cash provided by operations 3,029.0 2,433.9 7,123.0 5,185.3
Investing activities
Capital expenditures ( 570.3 ) ( 531.2 ) ( 1,600.1 ) ( 1,370.3 )
Purchases of restaurant businesses ( 91.9 ) ( 152.3 ) ( 303.5 ) ( 349.5 )
Sales of restaurant and other businesses 15.8 33.1 95.8 401.3
Sales of property 13.6 11.1 35.3 22.3
Other ( 300.5 ) ( 93.8 ) ( 572.6 ) ( 310.6 )
Cash used for investing activities ( 933.3 ) ( 733.1 ) ( 2,345.1 ) ( 1,606.8 )
Financing activities
Net short-term borrowings 6.9 ( 305.4 ) ( 137.4 ) 10.7
Long-term financing issuances 1,996.1 1,500.0 3,050.4 3,374.5
Long-term financing repayments ( 0.5 ) ( 0.4 ) ( 1,377.4 ) ( 2,201.8 )
Treasury stock purchases ( 1,054.4 ) ( 869.2 ) ( 2,202.5 ) ( 3,406.9 )
Common stock dividends ( 1,104.7 ) ( 1,014.7 ) ( 3,324.7 ) ( 3,056.7 )
Proceeds from stock option exercises 62.2 62.4 210.9 168.3
Other ( 41.8 ) 80.9 ( 7.7 ) 48.7
Cash used for financing activities ( 136.2 ) ( 546.4 ) ( 3,788.4 ) ( 5,063.2 )
Effect of exchange rates on cash and cash equivalents ( 88.8 ) ( 198.6 ) ( 77.0 ) ( 396.2 )
Cash and equivalents increase (decrease) 1,870.7 955.8 912.5 ( 1,880.9 )
Cash and equivalents at beginning of period 1,625.6 1,872.5 2,583.8 4,709.2
Cash and equivalents at end of period $ 3,496.3 $ 2,828.3 $ 3,496.3 $ 2,828.3
See Notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
For the nine months ended September 30, 2022
Common stock
issued Accumulated other
comprehensive income (loss) Common stock in
treasury Total
shareholders’
equity (deficit)
Additional
paid-in
capital Retained
earnings Pensions Cash flow
hedges Foreign
currency
translation
In millions, except per share data Shares Amount Shares Amount
Balance at December 31, 2021 1,660.6 $ 16.6 $ 8,231.6 $ 57,534.7 $ ( 179.5 ) $ ( 24.8 ) $ ( 2,369.4 ) ( 915.8 ) $ ( 67,810.2 ) $ ( 4,601.0 )
Net income 4,274.0 4,274.0
Other comprehensive income (loss),
net of tax ( 6.7 ) 160.9 ( 140.2 ) 14.0
Comprehensive income 4,288.0
Common stock cash dividends
($ 4.14 per share)
( 3,056.7 ) ( 3,056.7 )
Treasury stock purchases ( 14.1 ) ( 3,486.8 ) ( 3,486.8 )
Share-based compensation 130.9 130.9
Stock option exercises and other 97.6 1.7 61.8 159.4
Balance at September 30, 2022 1,660.6 $ 16.6 $ 8,460.1 $ 58,752.0 $ ( 186.2 ) $ 136.1 $ ( 2,509.6 ) ( 928.2 ) $ ( 71,235.2 ) $ ( 6,566.2 )
For the nine months ended September 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 6,429.8 6,429.8
Other comprehensive income (loss),
net of tax 0.4 31.0 ( 90.5 ) ( 59.1 )
Comprehensive income 6,370.7
Common stock cash dividends
($ 4.56 per share)
( 3,324.7 ) ( 3,324.7 )
Treasury stock purchases ( 7.8 ) ( 2,246.1 ) ( 2,246.1 )
Share-based compensation 137.8 137.8
Stock option exercises and other 139.6 1.8 71.3 210.9
Balance at September 30, 2023 1,660.6 $ 16.6 $ 8,824.5 $ 62,649.0 $ ( 297.8 ) $ 61.7 $ ( 2,309.6 ) ( 935.3 ) $ ( 73,799.2 ) $ ( 4,854.8 )
See Notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
For the quarter ended September 30, 2022
Common stock
issued Accumulated other
comprehensive income (loss) Common stock in
treasury Total
shareholders’
equity (deficit)
Additional
paid-in
capital Retained
earnings Pensions Cash flow
hedges Foreign
currency
translation
In millions, except per share data Shares Amount Shares Amount
Balance at June 30, 2022 1,660.6 $ 16.6 $ 8,378.7 $ 57,785.1 $ ( 183.5 ) $ 77.2 $ ( 2,140.1 ) ( 924.9 ) $ ( 70,303.8 ) $ ( 6,369.8 )
Net income 1,981.6 1,981.6
Other comprehensive income (loss),
net of tax ( 2.7 ) 58.9 ( 369.5 ) ( 313.3 )
Comprehensive income 1,668.3
Common stock cash dividends
($ 1.38 per share)
( 1,014.7 ) ( 1,014.7 )
Treasury stock purchases ( 3.7 ) ( 949.1 ) ( 949.1 )
Share-based compensation 38.3 38.3
Stock option exercises and other 43.1 0.4 17.7 60.8
Balance at September 30, 2022 1,660.6 $ 16.6 $ 8,460.1 $ 58,752.0 $ ( 186.2 ) $ 136.1 $ ( 2,509.6 ) ( 928.2 ) $ ( 71,235.2 ) $ ( 6,566.2 )
For the quarter ended September 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 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 )
Net income 2,317.1 2,317.1
Other comprehensive income (loss),
net of tax 4.7 50.5 ( 145.3 ) ( 90.1 )
Comprehensive income 2,227.0
Common stock cash dividends
($ 1.52 per share)
( 1,104.7 ) ( 1,104.7 )
Treasury stock purchases ( 3.6 ) ( 1,083.1 ) ( 1,083.1 )
Share-based compensation 42.9 42.9
Stock option exercises and other 45.8 0.2 16.4 62.2
Balance at September 30, 2023 1,660.6 $ 16.6 $ 8,824.5 $ 62,649.0 $ ( 297.8 ) $ 61.7 $ ( 2,309.6 ) ( 935.3 ) $ ( 73,799.2 ) $ ( 4,854.8 )
See Notes to condensed consolidated financial statements.
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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 nine months ended September 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 September 30, 2023 2022
Conventional franchised 21,761 21,641
Developmental licensed 8,450 8,144
Foreign affiliated 8,843 8,145
Total Franchised 39,054 37,930
Company-operated 2,144 2,050
Total Systemwide restaurants 41,198 39,980
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 4.4 million shares and 4.6 million shares for the quarters ended 2023 and 2022, respectively, and 4.6 million shares and 4.7 million shares for the nine 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 1.5 million shares for the quarters ended 2023 and 2022, respectively, and 2.1 million shares and 1.5 million shares for the nine 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 nine months ended September 30, 2023 that are of significance or potential significance to the Company.
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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 about $ 250 million of costs related to Accelerating the Organization in 2023, of which $ 220 million was incurred in the nine months ended September 30, 2023. These costs were recorded in the Other operating (income) expense, net line within the consolidated statement of income. Restructuring costs 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
Restructuring Costs Incurred ( 0.9 ) — 21.4 20.5
Cash Payments ( 13.0 ) ( 7.4 ) ( 15.3 ) ( 35.7 )
Other Non-Cash Items ( 2.5 ) — 0.1 ( 2.4 )
Accrued Balance at September 30, 2023 $ 55.9 $ 12.0 $ 7.7 $ 75.6
Of the $ 220 million of restructuring costs incurred in the nine months ended September 30, 2023, $ 62 million was recorded in the U.S., $ 71 million was recorded in the International Operated Markets segment and $ 87 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 September 30, 2023, related to the Company’s Accelerating the Organization initiative, is expected to be paid out over the next twelve months.
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. The Company has started to incur costs associated with this strategy and 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.
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Income Taxes
The effective income tax rate was 20.7 % and 21.9 % for the quarters ended 2023 and 2022, respectively, and 19.7 % and 22.1 % for the nine months ended 2023 and 2022, respectively.
The effective tax rate for the nine months 2022 reflected $ 239 million of net tax benefits related to the sale of the Company’s Russia and Dynamic Yield businesses and the unfavorable impact of 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 September 30, 2023, the fair value of the Company’s debt obligations was estimated at $ 34.0 billion, compared to a carrying amount of $ 37.3 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.
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Financial Instruments and Hedging Activities
The Company is exposed to global market risks, including the effect of changes in interest rates and foreign currency fluctuations. The Company uses foreign currency denominated debt and derivative instruments to mitigate the impact of these changes. The Company does not hold or issue derivatives for trading purposes.
The following table presents the fair values of derivative instruments included on the condensed consolidated balance sheet:
Derivative Assets Derivative Liabilities
In millions Balance Sheet Classification September 30, 2023 December 31, 2022 Balance Sheet Classification September 30, 2023 December 31, 2022
Derivatives designated as hedging instruments
Foreign currency Prepaid expenses and other current assets $ 47.2 $ 53.3 Accrued payroll and other liabilities $ ( 4.9 ) $ ( 17.9 )
Interest rate Prepaid expenses and other current assets 11.7 — Accrued payroll and other liabilities ( 5.8 ) —
Foreign currency Miscellaneous other assets 19.7 28.7 Other long-term liabilities ( 0.1 ) ( 30.7 )
Interest rate Miscellaneous other assets
— — Other long-term liabilities ( 80.0 ) ( 91.5 )
Total derivatives designated as hedging instruments $ 78.6 $ 82.0 $ ( 90.8 ) $ ( 140.1 )
Derivatives not designated as hedging instruments
Equity Prepaid expenses and other current assets
$ — $ 200.5 Accrued payroll and other liabilities $ — $ —
Foreign currency Prepaid expenses and other current assets
5.1 — Accrued payroll and other liabilities — ( 1.6 )
Equity Miscellaneous other assets 166.5 —
Total derivatives not designated as hedging instruments $ 171.6 $ 200.5 $ — $ ( 1.6 )
Total derivatives $ 250.2 $ 282.5 $ ( 90.8 ) $ ( 141.7 )
The following table presents the pre-tax amounts from derivative instruments affecting income and AOCI for the nine months ended September 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 $ 32.8 $ 214.5 $ 14.9 $ 94.4
Interest rate Interest expense 22.0 83.9 0.5 ( 3.0 )
Cash flow hedges $ 54.8 $ 298.4 $ 15.4 $ 91.4
Foreign currency denominated debt Nonoperating income/expense $ 157.2 $ 1,917.0
Foreign currency derivatives Nonoperating income/expense 64.9 37.1
Foreign currency derivatives (1)
Interest expense $ 18.4 $ 6.6
Net investment hedges $ 222.1 $ 1,954.1 $ 18.4 $ 6.6
Foreign currency Nonoperating income/expense $ 6.7 $ 15.9
Equity Selling, general & administrative expenses $ 4.6 $ ( 50.4 )
Undesignated derivatives $ 11.3 $ ( 34.5 )
(1) The amount of gain (loss) recognized in income related to components excluded from effectiveness testing.
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Fair Value Hedges
The Company enters into fair value hedges to reduce the exposure to changes in fair values of certain liabilities. The Company enters into fair value hedges that convert a portion of its fixed rate debt into floating rate debt by the use of interest rate swaps. At September 30, 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 $ 85.8 million of cumulative hedging adjustments. For the nine months ended September 30, 2023, the Company recognized a $ 5.7 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 September 30, 2023, the Company had foreign currency derivatives outstanding with an equivalent notional amount of $ 1.6 billion that hedged a portion of forecasted foreign currency denominated cash flows.
To protect against the variability of interest rates on anticipated bond issuances, the Company may use treasury locks to hedge a portion of expected future cash flows. As of September 30, 2023, the Company had derivatives outstanding with a notional amount of $150.0 million that hedge a portion of forecasted cash flows.
Based on market conditions at September 30, 2023, the $ 61.7 million in cumulative cash flow hedging gains, after tax, is not expected to have a significant effect on the Company's earnings over the next 12 months.
Net Investment Hedges
The Company uses foreign currency denominated debt (third-party and intercompany) and foreign currency derivatives to hedge its investments in certain foreign subsidiaries and affiliates. Realized and unrealized translation adjustments from these hedges are included in shareholders' equity in the foreign currency translation component of Other comprehensive income ("OCI") and offset translation adjustments on the underlying net assets of foreign subsidiaries and affiliates, which also are recorded in OCI. As of September 30, 2023, $ 12.7 billion of the Company's third-party foreign currency denominated debt, $ 359.6 million of the Company's intercompany foreign currency denominated debt and $ 572.6 million of foreign currency derivatives were designated to hedge investments in certain foreign subsidiaries and affiliates.
Undesignated Hedges
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. The Company may also use certain investments to hedge changes in these liabilities. Changes in the fair value of these derivatives or investments are recorded in Selling, general & administrative expenses together with the changes in the supplemental benefit plan liabilities. In addition, the Company uses foreign currency forwards to mitigate the change in fair value of certain foreign currency denominated assets and liabilities. Changes in the fair value of these derivatives are recognized in Nonoperating (income) expense, net, together with the currency gain or loss from the hedged balance sheet position.
Credit Risk
The Company is exposed to credit-related losses in the event of non-performance by its derivative counterparties. The Company did not have significant exposure to any individual counterparty at September 30, 2023 and has master agreements that contain netting arrangements. For financial reporting purposes, the Company presents gross derivative balances in its financial statements and supplementary data, including for counterparties subject to netting arrangements. Some of these agreements also require each party to post collateral if credit ratings fall below, or aggregate exposures exceed, certain contractual limits. At September 30, 2023, the Company was required to post $103.6 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.
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Franchise Arrangements
Revenues from franchised restaurants consisted of:
Quarters Ended Nine Months Ended
September 30, September 30,
In millions 2023 2022 2023 2022
Rents $ 2,569.6 $ 2,357.5 $ 7,348.2 $ 6,713.8
Royalties 1,461.9 1,300.7 4,175.2 3,709.0
Initial fees 15.6 13.0 44.5 38.0
Revenues from franchised restaurants $ 4,047.1 $ 3,671.2 $ 11,567.9 $ 10,460.8
Segment Information
The Company operates under an organizational structure with the following global business segments reflecting how management reviews and evaluates operating performance:
• U.S. - the Company's largest market. The segment is 95 % franchised as of September 30, 2023.
• International Operated Markets - comprised of markets or countries in which the Company operates and franchises restaurants, including Australia, Canada, France, Germany, Italy, Poland, Spain and the U.K. The segment is 89 % franchised as of September 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 September 30, 2023.
The following table presents the Company’s revenues and operating income by segment:
Quarters Ended Nine Months Ended
September 30, September 30,
In millions 2023 2022 2023 2022
Revenues
U.S. $ 2,704.0 $ 2,456.6 $ 7,892.9 $ 7,042.2
International Operated Markets 3,300.5 2,817.8 9,250.8 8,487.4
International Developmental Licensed Markets & Corporate 687.7 597.7 1,943.8 1,726.5
Total revenues $ 6,692.2 $ 5,872.1 $ 19,087.5 $ 17,256.1
Operating Income
U.S. $ 1,477.8 $ 1,326.6 $ 4,267.8 $ 3,797.5
International Operated Markets 1,584.5 1,374.4 4,294.7 2,639.9
International Developmental Licensed Markets & Corporate 146.0 62.9 282.3 350.9
Total operating income* $ 3,208.3 $ 2,763.9 $ 8,844.8 $ 6,788.3
* Results for the quarter and nine months 2023 reflected pre-tax charges of $ 26 million and $ 224 million, respectively, primarily related to restructuring costs associated with Accelerating the Organization . Results for the nine months 2022 reflected $ 1,281 million of pre-tax charges related to the sale of the Company's business in Russia and a pre-tax gain of $ 271 million related to the Company's sale of its Dynamic Yield business.
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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.
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Table of Contents
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