MCDONALDS CORP 10-Q

Item 1. Financial Statements CONDENSED CONSOLIDATED BALANCE SHEET (unaudited) In millions, except per share data September 30, 2024 December 31, 2023 Assets Current assets Cash and equivalents $ 1,221 $ 4,579 Accounts and notes receivable 2,460 2,488 Inventories, at cost, not in excess of market 54 53 Prepaid expenses and other current assets 1,176 866 Total current assets 4,912 7,986 Other assets Investments in and advances to affiliates 2,960 1,080 Goodwill 3,220 3,040 Miscellaneous 5,673 5,618 Total other assets 11,853 9,738 Lease right-of-use asset, net 13,632 13,514 Property and equipment Property and equipment, at cost 45,178 43,570 Accumulated depreciation and amortization ( 19,403 ) ( 18,662 ) Net property and equipment 25,775 24,908 Total assets $ 56,172 $ 56,147 Liabilities and shareholders’ equity Current liabilities Short-term borrowings and current maturities of long-term debt $ 596 $ 2,192 Accounts payable 944 1,103 Dividend Payable 1,265 — Lease liability 668 688 Income taxes 786 705 Other taxes 263 268 Accrued interest 433 469 Accrued payroll and other liabilities 1,353 1,434 Total current liabilities 6,308 6,859 Long-term debt 38,990 37,153 Long-term lease liability 13,157 13,058 Long-term income taxes 74 363 Deferred revenues - initial franchise fees 800 790 Other long-term liabilities 855 950 Deferred income taxes 1,166 1,681 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 17 17 Additional paid-in capital 9,194 8,893 Retained earnings 64,819 63,480 Accumulated other comprehensive income (loss) ( 2,337 ) ( 2,456 ) Common stock in treasury, at cost; 944.0 and 937.9 million shares ( 76,870 ) ( 74,640 ) Total shareholders’ equity (deficit) ( 5,177 ) ( 4,707 ) Total liabilities and shareholders’ equity (deficit) $ 56,172 $ 56,147 See Notes to condensed consolidated financial statements. 3 Table of Contents CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) Quarters Ended Nine Months Ended September 30, September 30, In millions, except per share data 2024 2023 2024 2023 Revenues Sales by Company-owned and operated restaurants $ 2,656 $ 2,556 $ 7,472 $ 7,267 Revenues from franchised restaurants 4,094 4,047 11,756 11,568 Other revenues 124 89 304 252 Total revenues 6,873 6,692 19,532 19,088 Operating costs and expenses Company-owned and operated restaurant expenses 2,248 2,135 6,358 6,149 Franchised restaurants-occupancy expenses 646 625 1,902 1,842 Other restaurant expenses 104 68 241 188 Selling, general & administrative expenses Depreciation and amortization 111 97 311 291 Other 536 584 1,748 1,704 Other operating (income) expense, net 39 ( 25 ) 129 68 Total operating costs and expenses 3,685 3,484 10,688 10,243 Operating income 3,188 3,208 8,844 8,845 Interest expense 381 341 1,126 1,001 Nonoperating (income) expense, net ( 36 ) ( 56 ) ( 90 ) ( 163 ) Income before provision for income taxes 2,843 2,924 7,807 8,007 Provision for income taxes 588 606 1,600 1,577 Net income $ 2,255 $ 2,317 $ 6,207 $ 6,430 Earnings per common share-basic $ 3.15 $ 3.19 $ 8.63 $ 8.82 Earnings per common share-diluted $ 3.13 $ 3.17 $ 8.59 $ 8.76 Dividends declared per common share $ 3.44 $ 1.52 $ 6.78 $ 4.56 Weighted-average shares outstanding-basic 716.7 727.2 719.1 729.2 Weighted-average shares outstanding-diluted 720.0 731.6 722.7 733.8 See Notes to condensed consolidated financial statements. 4 Table of Contents CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED) Quarters Ended Nine Months Ended September 30, September 30, In millions 2024 2023 2024 2023 Net income $ 2,255 $ 2,317 $ 6,207 $ 6,430 Other comprehensive income (loss), net of tax Foreign currency translation adjustments: Gain (loss) recognized in accumulated other comprehensive income ("AOCI"), including net investment hedges 188 ( 145 ) 101 ( 90 ) Reclassification of (gain) loss to net income ( 6 ) — 35 — Foreign currency translation adjustments-net of tax benefit (expense) of $ 158 , $( 98 ), $ 36 and $( 44 ) 182 ( 145 ) 136 ( 90 ) Cash flow hedges: Gain (loss) recognized in AOCI ( 54 ) 50 ( 14 ) 43 Reclassification of (gain) loss to net income 8 1 7 ( 12 ) Cash flow hedges-net of tax benefit (expense) of $ 15 , $( 14 ), $ 2 and $( 8 ) ( 46 ) 51 ( 7 ) 31 Defined benefit pension plans: Gain (loss) recognized in AOCI ( 11 ) 4 — 10 Reclassification of (gain) loss to net income — — ( 10 ) ( 10 ) Defined benefit pension plans-net of tax benefit (expense) of $ 0 , $ 0 , $ 1 and $ 1 ( 11 ) 4 ( 10 ) — Total other comprehensive income (loss), net of tax 125 ( 90 ) 119 ( 59 ) Comprehensive income $ 2,380 $ 2,227 $ 6,326 $ 6,371 See Notes to condensed consolidated financial statements. 5 Table of Contents CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) Quarters Ended Nine Months Ended September 30, September 30, In millions 2024 2023 2024 2023 Operating activities Net income $ 2,255 $ 2,317 $ 6,207 $ 6,430 Adjustments to reconcile to cash provided by operations Charges and credits: Depreciation and amortization 532 498 1,544 1,481 Deferred income taxes ( 137 ) ( 176 ) ( 501 ) ( 415 ) Share-based compensation 40 43 128 138 Other ( 33 ) ( 106 ) ( 48 ) ( 183 ) Changes in working capital items 79 453 ( 514 ) ( 328 ) Cash provided by operations 2,736 3,029 6,816 7,123 Investing activities Capital expenditures ( 794 ) ( 570 ) ( 1,968 ) ( 1,600 ) Purchases of restaurant businesses ( 433 ) ( 92 ) ( 595 ) ( 304 ) Purchases of equity method investments — — ( 1,837 ) — Sales of restaurant businesses 54 16 156 96 Sales of property 10 14 32 35 Other ( 103 ) ( 301 ) ( 392 ) ( 572 ) Cash used for investing activities ( 1,266 ) ( 933 ) ( 4,604 ) ( 2,345 ) Financing activities Net short-term borrowings (repayments) 474 6 133 ( 137 ) Long-term financing issuances — 1,996 1,731 3,050 Long-term financing repayments — — ( 1,785 ) ( 1,377 ) Treasury stock purchases ( 469 ) ( 1,054 ) ( 2,321 ) ( 2,203 ) Common stock dividends ( 1,197 ) ( 1,105 ) ( 3,602 ) ( 3,325 ) Proceeds from stock option exercises 132 62 253 211 Other ( 27 ) ( 42 ) ( 26 ) ( 7 ) Cash used for financing activities ( 1,087 ) ( 137 ) ( 5,617 ) ( 3,788 ) Effect of exchange rates on cash and cash equivalents 46 ( 89 ) 47 ( 77 ) Cash and equivalents increase (decrease) 429 1,871 ( 3,358 ) 913 Cash and equivalents at beginning of period 792 1,626 4,579 2,584 Cash and equivalents at end of period $ 1,221 $ 3,496 $ 1,221 $ 3,496 See Notes to condensed consolidated financial statements. 6 Table of Contents CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) 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 $ 17 $ 8,547 $ 59,544 $ ( 298 ) $ 31 $ ( 2,219 ) ( 929.3 ) $ ( 71,624 ) $ ( 6,003 ) Net income 6,430 6,430 Other comprehensive income (loss), net of tax — 31 ( 90 ) ( 59 ) Comprehensive income 6,371 Common stock cash dividends ($ 4.56 per share) ( 3,325 ) ( 3,325 ) Treasury stock purchases ( 7.8 ) ( 2,246 ) ( 2,246 ) Share-based compensation 138 138 Stock option exercises and other 140 1.8 71 211 Balance at September 30, 2023 1,660.6 $ 17 $ 8,825 $ 62,649 $ ( 298 ) $ 62 $ ( 2,310 ) ( 935.3 ) $ ( 73,799 ) $ ( 4,855 ) For the nine months ended September 30, 2024 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, 2023 1,660.6 $ 17 $ 8,893 $ 63,480 $ ( 367 ) $ ( 6 ) $ ( 2,083 ) ( 937.9 ) $ ( 74,640 ) $ ( 4,707 ) Net income 6,207 6,207 Other comprehensive income (loss), net of tax ( 10 ) ( 7 ) 136 119 Comprehensive income 6,326 Common stock cash dividends ($ 6.78 per share) ( 4,867 ) ( 4,867 ) Treasury stock purchases ( 8.3 ) ( 2,310 ) ( 2,310 ) Share-based compensation 128 128 Stock option exercises and other 173 2.3 81 254 Balance at September 30, 2024 1,660.6 $ 17 $ 9,194 $ 64,819 $ ( 377 ) $ ( 13 ) $ ( 1,947 ) ( 944.0 ) $ ( 76,870 ) $ ( 5,177 ) See Notes to condensed consolidated financial statements. 7 Table of Contents CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) 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 $ 17 $ 8,736 $ 61,437 $ ( 303 ) $ 11 $ ( 2,164 ) ( 931.9 ) $ ( 72,733 ) $ ( 4,999 ) Net income 2,317 2,317 Other comprehensive income (loss), net of tax 4 51 ( 145 ) ( 90 ) Comprehensive income 2,227 Common stock cash dividends ($ 1.52 per share) ( 1,105 ) ( 1,105 ) Treasury stock purchases ( 3.6 ) ( 1,083 ) ( 1,083 ) Share-based compensation 43 43 Stock option exercises and other 46 0.2 16 62 Balance at September 30, 2023 1,660.6 $ 17 $ 8,825 $ 62,649 $ ( 298 ) $ 62 $ ( 2,310 ) ( 935.3 ) $ ( 73,799 ) $ ( 4,855 ) For the quarter ended September 30, 2024 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, 2024 1,660.6 $ 17 $ 9,055 $ 65,026 $ ( 367 ) $ 33 $ ( 2,129 ) ( 943.3 ) $ ( 76,459 ) $ ( 4,824 ) Net income 2,255 2,255 Other comprehensive income (loss), net of tax ( 11 ) ( 46 ) 182 125 Comprehensive income 2,380 Common stock cash dividends ($ 3.44 per share) ( 2,462 ) ( 2,462 ) Treasury stock purchases ( 1.6 ) ( 443 ) ( 443 ) Share-based compensation 40 40 Stock option exercises and other 100 1.0 33 133 Balance at September 30, 2024 1,660.6 $ 17 $ 9,194 $ 64,819 $ ( 377 ) $ ( 13 ) $ ( 1,947 ) ( 944.0 ) $ ( 76,870 ) $ ( 5,177 ) 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, 2023 Annual Report on Form 10-K. In the opinion of management, all normal recurring adjustments necessary for a fair presentation have been included. The results for the quarter and nine months ended September 30, 2024 do not necessarily indicate the results that may be expected for the full year. Change in Presentation In the first quarter of 2024, the Company changed its rounding presentation to the nearest whole number in millions of reported amounts, except per share data or as otherwise designated. The change in rounding presentation has been applied to all prior year amounts presented. In certain circumstances, this change adjusted previously reported balances, however, these changes were not significant, and no other changes were made to previously reported financial information. Additionally, certain columns and rows within the financial statements and tables presented may not add due to rounding. Percentages have been calculated from the underlying whole-dollar amounts for all periods presented. Restaurant Information The following table presents restaurant information by ownership type: Restaurants at September 30, 2024 2023 Conventional franchised 21,864 21,761 Developmental licensed 9,077 8,450 Foreign affiliated 9,814 8,843 Total Franchised 40,755 39,054 Company-owned and operated 2,064 2,144 Total Systemwide restaurants 42,819 41,198 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. 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 3.3 million shares and 4.4 million shares for the quarters ended 2024 and 2023, respectively, and 3.6 million shares and 4.6 million shares for the nine months ended 2024 and 2023, respectively. Share-based compensation awards that would have been antidilutive, and therefore were not included in the calculation of diluted weighted-average shares, totaled 2.0 million shares and 1.2 million shares for the quarters ended 2024 and 2023, respectively, and 2.0 million shares and 2.1 million shares for the nine months ended 2024 and 2023, respectively. 9 Table of Contents Recent Accounting Pronouncements Recent Accounting Pronouncements Not Yet Adopted Segment Reporting In November 2023, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures" ("ASU 2023-07"). The pronouncement expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for interim periods beginning after December 15, 2024. We are currently in the process of determining the impact that ASU 2023-07 will have on the Company's consolidated financial statement disclosures. Income Taxes In December 2023, the FASB issued ASU No. 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures" ("ASU 2023-09"). The pronouncement expands the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024. We are currently in the process of determining the impact that ASU 2023-09 will have on the Company's consolidated financial statement disclosures. Accelerating the Organization In January 2023, the Company announced an evolution of its successful Accelerating the Arches strategy. Enhancements to the strategy included 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 its customers and people. The Company incurred $ 146 million of restructuring charges related to Accelerating the Organization in the nine months ended September 30, 2024. These charges were recorded in the Other operating (income) expense, net line within the consolidated statement of income, and primarily recorded within the Corporate segment. For the period presented, restructuring charges primarily consisted of professional services costs. 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 Professional Services and Other Costs Total 2024 Accrued Balance at Beginning of Year $ 41 $ 11 $ 7 $ 59 Restructuring Costs Incurred — — 44 44 Cash Payments ( 14 ) ( 5 ) ( 44 ) ( 63 ) Other Non-Cash Items — — ( 1 ) ( 1 ) Accrued Balance at March 31, 2024 $ 27 $ 6 $ 6 $ 39 Restructuring Costs Incurred ( 1 ) — 58 57 Cash Payments ( 5 ) ( 1 ) ( 50 ) ( 56 ) Other Non-Cash Items — — — — Accrued Balance at June 30, 2024 $ 21 $ 5 $ 14 $ 40 Restructuring Costs Incurred ( 1 ) — 47 46 Cash Payments ( 3 ) ( 1 ) ( 41 ) ( 45 ) Other Non-Cash Items — — 1 1 Accrued Balance at September 30, 2024 $ 17 $ 4 $ 21 $ 42 The Company continues to evolve its ways of working by driving efficiency and effectiveness across the organization, primarily led by its Global Business Services organization. Transformation efforts under Accelerating the Organization will continue to result in various restructuring charges as the strategy progresses through its anticipated completion during 2027. The Company expects to incur approximately $ 250 million of restructuring charges in 2024, primarily related to professional services costs. 10 Table of Contents Equity Method Investments The Company has various investments accounted for using the equity method. Under the equity method of accounting, the Company records its proportionate share of the net income or loss of each equity method investee, with a corresponding change to the carrying value of the investment. The carrying value of the investment is also adjusted for any dividends received and the effect of foreign exchange. The Company records its proportionate share of net income or loss within the Other operating (income) expense, net line on the consolidated statement of income. The carrying value of the investments are recorded within the Investments in and advances to affiliates line on the consolidated balance sheet. The Company’s primary equity method investments include partial ownership in Grand Foods Holding, an entity that operates and manages McDonald's business in mainland China, Hong Kong and Macau, and partial ownership in McDonald’s Japan Holdings Co., Ltd, an entity that operates and manages McDonald’s business in Japan. The Company has granted these entities the right to operate the McDonald's business as part of a Master Franchise Agreement. Revenue related to these agreements are accounted for in a manner consistent with the Company’s other franchise arrangements. The following table summarizes the amounts related to the Company’s primary equity method investees during the periods presented. September 30, 2024 December 31, 2023 In Millions Percentage Ownership Fair Value (Level 1) Carrying Amount Percentage Ownership Fair Value (Level 1) Carrying Amount Grand Foods Holding 48 % N/A $ 2,140 20 % N/A $ 238 McDonald's Japan Holdings Co., Ltd 35 % $ 2,236 $ 630 35 % $ 2,034 $ 597 On January 30, 2024, the Company acquired an additional 28 % ownership stake in Grand Foods Holding from the global investment firm Carlyle in exchange for $ 1.8 billion in cash. The acquisition increased the Company's equity ownership to 48 %, but did not result in control of the entity. As such, the Company remains a minority partner and will continue to account for the investment under the equity method. As of September 30, 2024, the aggregate carrying amount of the Company's investments in these equity method investees exceeded its proportionate share of the net assets of these equity method investees by $ 1.4 billion. This difference is not amortized. Management has concluded that there are no indicators of impairment related to these investments. The following table summarizes the amounts recorded related to the Company's primary equity method investments during the nine months ended September 30, 2024 and September 30, 2023, respectively. Nine Months Ended September 30, In Millions 2024 2023 Revenue $ 402 $ 364 Equity in Earnings $ 107 $ 84 Accounts Receivable $ 125 $ 114 Dividends Received $ 13 $ 14 11 Table of Contents Income Taxes The effective income tax rate was 20.7 % and 20.7 % for the quarters ended 2024 and 2023, respectively, and 20.5 % and 19.7 % for the nine months ended 2024 and 2023, respectively. Fair Value Measurements The Company measures certain financial assets and liabilities at fair value. Fair value disclosures are reflected in a three-level hierarchy, maximizing the use of observable inputs and minimizing the use of unobservable inputs. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date and are defined as follows: • Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market. • Level 2 – inputs to the valuation methodology include quoted prices for a similar asset or liability in an active market or model-derived valuations in which all significant inputs are observable for substantially the full term of the asset or liability. • Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability. There were no significant changes to the valuation techniques used to measure fair value as described in the Company's December 31, 2023 Annual Report on Form 10-K. At September 30, 2024, the fair value of the Company’s debt obligations was estimated at $ 38.8 billion, compared to a carrying amount of $ 39.6 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. 12 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 September 30, 2024 December 31, 2023 Balance Sheet Classification September 30, 2024 December 31, 2023 Derivatives designated as hedging instruments Foreign currency Prepaid expenses and other current assets $ 4 $ 9 Accrued payroll and other liabilities $ ( 79 ) $ ( 37 ) Interest rate Prepaid expenses and other current assets $ 4 $ 4 Accrued payroll and other liabilities $ — $ ( 4 ) Foreign currency Miscellaneous other assets $ — $ 2 Other long-term liabilities $ ( 42 ) $ ( 14 ) Interest rate Miscellaneous other assets $ — $ — Other long-term liabilities $ ( 39 ) $ ( 58 ) Total derivatives designated as hedging instruments $ 8 $ 15 $ ( 160 ) $ ( 113 ) Derivatives not designated as hedging instruments Equity Prepaid expenses and other current assets $ 141 $ — Accrued payroll and other liabilities $ — $ — Foreign currency Prepaid expenses and other current assets $ — $ 6 Accrued payroll and other liabilities $ ( 6 ) $ ( 5 ) Equity Miscellaneous other assets $ — $ 189 Total derivatives not designated as hedging instruments $ 141 $ 195 $ ( 6 ) $ ( 5 ) Total derivatives $ 149 $ 210 $ ( 166 ) $ ( 118 ) The following table presents the pre-tax amounts from derivative instruments affecting income and AOCI for the nine months ended September 30, 2024 and 2023, 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 2024 2023 2024 2023 2024 2023 Foreign currency Nonoperating income/expense $ ( 25 ) $ 33 $ ( 10 ) $ 15 Interest rate Interest expense $ 7 $ 22 $ 1 $ 1 Cash flow hedges $ ( 18 ) $ 55 $ ( 9 ) $ 16 Foreign currency denominated debt Nonoperating income/expense $ ( 133 ) $ 157 Foreign currency derivatives Nonoperating income/expense $ ( 18 ) $ 65 Foreign currency derivatives (1) Interest expense $ 32 $ 18 Net investment hedges $ ( 151 ) $ 222 $ 32 $ 18 Foreign currency Nonoperating income/expense $ ( 10 ) $ 7 Equity Selling, general & administrative expenses $ ( 2 ) $ 5 Undesignated derivatives $ ( 12 ) $ 12 (1) The amount of gain (loss) recognized in income related to components excluded from effectiveness testing. 13 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 use of interest rate swaps. At September 30, 2024, the carrying amount of fixed-rate debt that was effectively converted was an equivalent notional amount of $ 795 million, which included a decrease of $ 39 million of cumulative hedging adjustments. For the nine months ended September 30, 2024, the Company recognized a $ 22 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, 2024, the Company had derivatives outstanding with an equivalent notional amount of $ 2.2 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, 2024, 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 September 30, 2024, the $ 12 million in cumulative cash flow hedging losses, 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, 2024, $ 14.3 billion of the Company's third-party foreign currency denominated debt, $ 560 million of the Company's intercompany foreign currency denominated debt and $ 1.8 billion 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. The changes in the fair value of these derivatives are recognized in Nonoperating (income) expense, net, along 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, 2024 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, 2024, the Company was required to post $ 122 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. 14 Table of Contents Franchise Arrangements Revenues from franchised restaurants consisted of: Quarters Ended Nine Months Ended September 30, September 30, In millions 2024 2023 2024 2023 Rents $ 2,609 $ 2,570 $ 7,512 $ 7,348 Royalties 1,463 1,462 4,191 4,175 Initial fees 22 16 53 45 Revenues from franchised restaurants $ 4,094 $ 4,047 $ 11,756 $ 11,568 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, 2024. • International Operated Markets - comprised of markets or countries in which the Company owns and 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, 2024. • International Developmental Licensed Markets & Corporate - comprised primarily of developmental licensee and affiliate markets in the McDonald’s System, including equity method investments in China and Japan. Corporate activities are also reported in this segment. The segment is 99 % franchised as of September 30, 2024. The following table presents the Company’s revenues and operating income by segment: Quarters Ended Nine Months Ended September 30, September 30, In millions 2024 2023 2024 2023 Revenues U.S. $ 2,739 $ 2,704 $ 7,997 $ 7,893 International Operated Markets 3,309 3,300 9,443 9,251 International Developmental Licensed Markets & Corporate 825 688 2,092 1,944 Total revenues $ 6,873 $ 6,692 $ 19,532 $ 19,088 Operating Income U.S. $ 1,493 $ 1,478 $ 4,400 $ 4,268 International Operated Markets 1,602 1,585 4,459 4,295 International Developmental Licensed Markets & Corporate 93 146 ( 15 ) 282 Total operating income $ 3,188 $ 3,208 $ 8,844 $ 8,845 . Subsequent Events The Company evaluated subsequent events through the date the financial statements were issued and filed with the Securities and Exchange Commission ("SEC"). There were no subsequent events that required recognition or disclosure. 15 Table of Contents