MCD-9.30.2013-10Q
Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from             to            
Commission File Number 1-5231
McDONALD’S CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
36-2361282
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
One McDonald’s Plaza
Oak Brook, Illinois
 
60523
(Address of Principal Executive Offices)
 
(Zip Code)
(630) 623-3000
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
 
Accelerated filer ¨
 
 
Non-accelerated filer ¨  (do not check if a smaller reporting  company)
 
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No  x

995,030,164
(Number of shares of common stock
outstanding as of September 30, 2013)
 
 
 
 
 

 

Table of Contents

McDONALD’S CORPORATION
___________________________
INDEX
_______
 
 
 
Page Reference
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1A – Risk Factors
 
 
 
 
Item 6 – Exhibits
 
 
All trademarks used herein are the property of their respective owners and are used with permission.

2
Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEET
 
 
 
 
 
 
 
(unaudited)
 
 
 
In millions, except per share data
September 30,
2013
 
December 31,
2012
Assets
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and equivalents
 
$
2,544.3

 
 
$
2,336.1

Accounts and notes receivable
 
1,285.3

 
 
1,375.3

Inventories, at cost, not in excess of market
 
113.1

 
 
121.7

Prepaid expenses and other current assets
 
791.4

 
 
1,089.0

Total current assets
 
4,734.1

 
 
4,922.1

Other assets
 
 
 
 
 
Investments in and advances to affiliates
 
1,262.5

 
 
1,380.5

Goodwill
 
2,853.8

 
 
2,804.0

Miscellaneous
 
1,619.4

 
 
1,602.7

Total other assets
 
5,735.7

 
 
5,787.2

Property and equipment
 
 
 
 
 
Property and equipment, at cost
 
39,487.3

 
 
38,491.1

Accumulated depreciation and amortization
 
(14,405.8
)
 
 
(13,813.9
)
Net property and equipment
 
25,081.5

 
 
24,677.2

Total assets
 
$
35,551.3

 
 
$
35,386.5

Liabilities and shareholders’ equity
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accounts payable
 
$
858.3

 
 
$
1,141.9

Dividends payable
 
803.0

 
 
—

Income taxes
 
321.4

 
 
298.7

Other taxes
 
383.3

 
 
370.7

Accrued interest
 
172.1

 
 
217.0

Accrued payroll and other liabilities
 
1,284.2

 
 
1,374.8

Total current liabilities
 
3,822.3

 
 
3,403.1

Long-term debt
 
13,487.8

 
 
13,632.5

Other long-term liabilities
 
1,556.0

 
 
1,526.2

Deferred income taxes
 
1,520.3

 
 
1,531.1

Shareholders’ equity
 
 
 
 
 
Preferred stock, no par value; authorized—165.0 million shares; issued—none
 
—

 
 
—

Common stock, $.01 par value; authorized—3.5 billion shares; issued 1,660.6 million shares
 
16.6

 
 
16.6

Additional paid-in capital
 
5,962.6

 
 
5,778.9

Retained earnings
 
40,354.6

 
 
39,278.0

Accumulated other comprehensive income
 
516.6

 
 
796.4

Common stock in treasury, at cost; 665.6 and 657.9 million shares
 
(31,685.5
)
 
 
(30,576.3
)
Total shareholders’ equity
 
15,164.9

 
 
15,293.6

Total liabilities and shareholders’ equity
 
$
35,551.3

 
 
$
35,386.5

See Notes to condensed consolidated financial statements.

3
Table of Contents

CONDENSED CONSOLIDATED STATEMENT OF NET INCOME (UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarters Ended
 
 
Nine Months Ended
 
 
September 30,
 
 
September 30,
In millions, except per share data
 
2013
 
 
2012
 
 
2013
 
 
2012
Revenues
 
 
 
 
 
 
 
 
 
 
 
Sales by Company-operated restaurants
 
$
4,923.1

 
 
$
4,838.4

 
 
$
14,129.9

 
 
$
13,944.1

Revenues from franchised restaurants
 
2,400.3

 
 
2,314.0

 
 
6,882.6

 
 
6,670.8

Total revenues
 
7,323.4

 
 
7,152.4

 
 
21,012.5

 
 
20,614.9

Operating costs and expenses
 
 
 
 
 
 
 
 
 
 
 
Company-operated restaurant expenses
 
4,004.4

 
 
3,914.4

 
 
11,649.9

 
 
11,392.6

Franchised restaurants—occupancy expenses
 
408.4

 
 
383.4

 
 
1,202.7

 
 
1,134.3

Selling, general & administrative expenses
 
554.3

 
 
620.9

 
 
1,757.8

 
 
1,830.7

Other operating (income) expense, net
 
(60.4
)
 
 
(53.5
)
 
 
(161.8
)
 
 
(149.5
)
Total operating costs and expenses
 
4,906.7

 
 
4,865.2

 
 
14,448.6

 
 
14,208.1

Operating income
 
2,416.7

 
 
2,287.2

 
 
6,563.9

 
 
6,406.8

Interest expense
 
130.5

 
 
128.1

 
 
388.4

 
 
387.0

Nonoperating (income) expense, net
 
13.6

 
 
5.5

 
 
26.2

 
 
8.8

Income before provision for income taxes
 
2,272.6

 
 
2,153.6

 
 
6,149.3

 
 
6,011.0

Provision for income taxes
 
750.4

 
 
698.6

 
 
1,960.4

 
 
1,942.3

Net income
 
$
1,522.2

 
 
$
1,455.0

 
 
$
4,188.9

 
 
$
4,068.7

Earnings per common share-basic
 
$
1.53

 
 
$
1.45

 
 
$
4.19

 
 
$
4.02

Earnings per common share-diluted
 
$
1.52

 
 
$
1.43

 
 
$
4.16

 
 
$
3.98

Dividends declared per common share
 
$
1.58

 
 
$
1.47

 
 
$
3.12

 
 
$
2.87

Weighted average shares outstanding-basic
 
997.3

 
 
1,006.1

 
 
1,000.5

 
 
1,012.7

Weighted average shares outstanding-diluted
 
1,004.2

 
 
1,015.4

 
 
1,008.2

 
 
1,023.3

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
 
2013
 
 
2012
 
 
2013
 
 
2012
Net income
 
$
1,522.2

 
 
$
1,455.0

 
 
$
4,188.9

 
 
$
4,068.7

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in accumulated other comprehensive
income (AOCI), including net investment hedges
496.4

 
 
316.1

 
 
(253.1
)
 
 
142.0

Foreign currency translation adjustments-net of tax
benefit (expense) of $57.6, $19.4, $5.7 and $3.5
496.4

 
 
316.1

 
 
(253.1
)
 
 
142.0

Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in AOCI
(17.6
)
 
 
5.9

 
 
(47.9
)
 
 
10.8

Reclassification of (gain) loss to net income
8.4

 
 
1.9

 
 
20.7

 
 
5.0

Cash flow hedges-net of tax benefit (expense) of $3.5,
$(2.1), $6.3 and $(5.3)
(9.2
)
 
 
7.8

 
 
(27.2
)
 
 
15.8

Defined benefit pension plans:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in AOCI
0.0

 
 
0.7

 
 
0.1

 
 
0.1

Reclassification of (gain) loss to net income
0.2

 
 
0.1

 
 
0.4

 
 
1.9

Defined benefit pension plans-net of tax benefit (expense)
of $0.0, $0.0, $0.0 and $0.8
0.2

 
 
0.8

 
 
0.5

 
 
2.0

Total other comprehensive income (loss), net of tax
487.4

 
 
324.7

 
 
(279.8
)
 
 
159.8

Comprehensive income
 
$
2,009.6

 
 
$
1,779.7

 
 
$
3,909.1

 
 
$
4,228.5

See Notes to condensed consolidated financial statements.


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Table of Contents

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarters Ended
 
 
Nine Months Ended
 
 
September 30,
 
 
September 30,
In millions
 
2013
 
 
2012
 
 
2013
 
 
2012
Operating activities
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
1,522.2

 
 
$
1,455.0

 
 
$
4,188.9

 
 
$
4,068.7

Adjustments to reconcile to cash provided by operations
 
 
 
 
 
 
 
 
 
 
 
Charges and credits:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
394.5

 
 
371.9

 
 
1,176.5

 
 
1,102.5

Deferred income taxes
 
18.7

 
 
84.3

 
 
13.4

 
 
119.7

Share-based compensation
 
22.7

 
 
22.5

 
 
68.9

 
 
70.2

Other
 
(8.0
)
 
 
32.0

 
 
78.5

 
 
4.3

Changes in working capital items
 
100.4

 
 
33.7

 
 
(279.0
)
 
 
(249.4
)
Cash provided by operations
 
2,050.5

 
 
1,999.4

 
 
5,247.2

 
 
5,116.0

Investing activities
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
(687.1
)
 
 
(753.2
)
 
 
(1,920.7
)
 
 
(2,053.6
)
Sales and purchases of restaurant businesses and property sales
 
77.1

 
 
47.8

 
 
126.7

 
 
110.7

Other
 
24.4

 
 
(18.3
)
 
 
127.8

 
 
(63.8
)
Cash used for investing activities
 
(585.6
)
 
 
(723.7
)
 
 
(1,666.2
)
 
 
(2,006.7
)
Financing activities
 
 
 
 
 
 
 
 
 
 
 
Short-term borrowings and long-term financing issuances and repayments
 
(67.8
)
 
 
(379.3
)
 
 
(91.1
)
 
 
791.1

Treasury stock purchases
 
(501.1
)
 
 
(651.0
)
 
 
(1,273.1
)
 
 
(2,234.2
)
Common stock dividends
 
(767.5
)
 
 
(703.8
)
 
 
(2,310.8
)
 
 
(2,125.4
)
Proceeds from stock option exercises
 
25.2

 
 
83.3

 
 
203.6

 
 
233.0

Excess tax benefit on share-based compensation
 
8.9

 
 
33.0

 
 
82.1

 
 
101.6

Other
 
0.7

 
 
(0.3
)
 
 
(6.2
)
 
 
(9.3
)
Cash used for financing activities
 
(1,301.6
)
 
 
(1,618.1
)
 
 
(3,395.5
)
 
 
(3,243.2
)
Effect of exchange rates on cash and cash equivalents
 
102.6

 
 
36.3

 
 
22.7

 
 
(23.3
)
Cash and equivalents increase (decrease)
 
265.9

 
 
(306.1
)
 
 
208.2

 
 
(157.2
)
Cash and equivalents at beginning of period
 
2,278.4

 
 
2,484.6

 
 
2,336.1

 
 
2,335.7

Cash and equivalents at end of period
 
$
2,544.3

 
 
$
2,178.5

 
 
$
2,544.3

 
 
$
2,178.5

See Notes to condensed consolidated financial statements.


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Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 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, 2012 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, 2013 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,
2013
 
2012
Conventional franchised
20,117

 
19,673

Developmental licensed
4,566

 
4,143

Foreign affiliated
3,598

 
3,654

Total Franchised
28,281

 
27,470

Company-operated
6,642

 
6,540

Systemwide restaurants
34,923

 
34,010

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 condensed consolidated financial statements for the periods prior to purchase and sale.
Per Common Share Information
Diluted earnings per common share is calculated using 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 6.9 million shares and 9.3 million shares for the quarters 2013 and 2012, respectively, and 7.7 million shares and 10.6 million shares for the nine months 2013 and 2012, respectively. Stock options that would have been antidilutive and therefore were not included in the calculation of diluted weighted-average shares totaled 7.7 million shares and 4.7 million shares for the quarters 2013 and 2012, respectively, and 4.7 million shares for the nine months 2013 and 2012, respectively.
In September 2013, McDonald's Board of Directors declared a fourth quarter cash dividend of $0.81 per share of common stock, resulting in $803.0 million of dividends payable in December 2013.
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 Company did not have any significant changes to the valuation techniques used to measure fair value as described in the Company's December 31, 2012 Annual Report on Form 10-K.

•
Certain Financial Assets and Liabilities Measured at Fair Value
The following table presents financial assets and liabilities measured at fair value on a recurring basis:
In millions
Level 1
 
Level 2
 
Carrying
Value
September 30, 2013
 
 
 
 
 
 
 
 
Investments
 
$
189.0

 
 
 
 
 
$
189.0

Derivative assets
 
137.9

 
 
$
73.9

 
 
211.8

Total assets at fair value
 
$
326.9

  
 
$
73.9

 
 
$
400.8

 
 
 
 
 
 
 
 
 
Derivative liabilities
 
 
 
 
$
(158.1
)
 
 
$
(158.1
)
Total liabilities at fair value
 
 
 
 
$
(158.1
)
 
 
$
(158.1
)

•
Certain Financial Assets and Liabilities not Measured at Fair Value
At September 30, 2013, the fair value of the Company’s debt obligations was estimated at $14.6 billion, compared to a carrying amount of $13.5 billion. The fair value was based upon quoted market prices, Level 2, within the valuation hierarchy. The carrying amounts of cash and equivalents and notes receivable approximate fair value.

7
Table of Contents

Financial Instruments and Hedging Activities
The Company is exposed to global market risks, including the effect of changes in foreign currency exchange rates, interest rates, equity prices, and commodity prices. 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 Consolidated balance sheet:
  
Derivative Assets
 
Derivative Liabilities
In millions
September 30,
2013
 
December 31,
2012
 
September 30,
2013
 
December 31,
2012
Total derivatives designated as hedging instruments
 
$
70.1

 
 
$
85.1

 
 
$
(135.1
)
 
 
$
(35.8
)
Total derivatives not designated as hedging instruments
 
141.7

 
 
133.3

 
 
(23.0
)
 
 
(6.8
)
Total derivatives
 
$
211.8

 
 
$
218.4

 
 
$
(158.1
)
 
 
$
(42.6
)

The following table presents the pretax amounts affecting income and other comprehensive income ("OCI") for the nine months ended September 30, 2013 and 2012, respectively:
 
Gain (Loss)
Recognized in
Accumulated OCI
 
Gain (Loss) Reclassified
into Income from
Accumulated OCI
 
Gain (Loss) Recognized in
Income on Derivative(1)
 
 
 
 
 
 
In millions
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Cash Flow Hedges
 
$
(62.3
)
 
 
$
13.9

 
 
$
(28.8
)
 
 
$
(7.2
)
 

$
(7.7
)
 

$
(10.8
)
Net Investment Hedges
 
$
(229.8
)
 
 
$
25.3

 
 
$
—

 
 
$
—

 
 
 
 
 
 
Undesignated derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
$
(31.7
)

 
$
(20.5
)
(1)
Includes amounts excluded from effectiveness testing, ineffectiveness, and undesignated gains (losses).

•
Fair Value Hedges
The Company enters into fair value hedges which convert a portion of its fixed-rate debt into floating-rate debt by use of interest rate swaps. At September 30, 2013, $2.2 billion of the Company's outstanding fixed-rate debt was effectively converted. For the nine months ended September 30, 2013, the Company recognized a $22.8 million loss on fair value interest rate swaps, which was exactly offset by a corresponding gain in the fair value of the hedged debt instruments.
 
•
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 and foreign currency options to hedge a portion of anticipated exposures. The hedges cover the next 19 months for certain exposures and are denominated in various currencies. As of September 30, 2013, the Company had derivatives outstanding with an equivalent notional amount of $713.2 million that hedged a portion of forecasted foreign currency denominated royalties.

The Company uses cross-currency swaps to hedge the risk of cash flows associated with certain foreign currency denominated debt, including forecasted interest payments, and has elected cash flow hedge accounting. The hedges cover periods up to 50 months and have an equivalent notional amount of $338.9 million.

The Company manages its exposure to energy-related transactions in certain markets by entering into commodity forwards and has elected cash flow hedge accounting. The hedges cover periods up to 22 years and have an equivalent gross notional amount of $961.3 million, comprised of offsetting purchases and sales of energy.

Based on market conditions at September 30, 2013, the $8.0 million in cumulative cash flow hedging gains, after tax, is not expected to have a significant effect on earnings over the next 12 months.

8
Table of Contents

•
Net Investment Hedges
The Company primarily uses foreign currency denominated debt (third party and intercompany) 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 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, 2013, $8.1 billion of intercompany foreign currency denominated debt, $4.5 billion of the Company's third party foreign currency denominated debt and $785.3 million of derivatives were designated to hedge investments in certain foreign subsidiaries and affiliates.

•
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, 2013 and has master agreements that contain netting arrangements. For financial reporting purposes, the Company presents gross derivative balances in the financial statements and supplementary data, including for counterparties subject to netting arrangements.
Segment Information
The Company franchises and operates McDonald’s restaurants in the global restaurant industry. The following table presents the Company’s revenues and operating income by geographic segment. The APMEA segment represents operations in Asia/Pacific, Middle East and Africa. Other Countries & Corporate represents operations in Canada and Latin America, as well as Corporate activities.
 
Quarters Ended
 
Nine Months Ended
  
September 30,
 
September 30,
In millions
2013
 
2012
 
2013
 
2012
Revenues
 
 
 
 
 
 
 
U.S.
$
2,289.0

 
$
2,256.5

 
$
6,659.9

 
$
6,601.1

Europe
2,955.3

 
2,793.1

 
8,378.8

 
8,069.8

APMEA
1,683.1

 
1,693.6

 
4,866.3

 
4,798.1

Other Countries & Corporate
396.0

 
409.2

 
1,107.5

 
1,145.9

Total revenues
$
7,323.4

 
$
7,152.4

 
$
21,012.5

 
$
20,614.9

Operating Income
 
 
 
 
 
 
 
U.S.
$
1,021.7

 
$
973.8

 
$
2,834.3

 
$
2,817.2

Europe
944.4

 
848.7

 
2,503.3

 
2,355.2

APMEA
391.8

 
443.2

 
1,128.4

 
1,185.9

Other Countries & Corporate
58.8

 
21.5

 
97.9

 
48.5

Total operating income
$
2,416.7

 
$
2,287.2

 
$
6,563.9

 
$
6,406.8

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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Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company franchises and operates McDonald’s restaurants. Of the 34,923 restaurants in 119 countries at September 30, 2013, 28,281 were licensed to franchisees (including 20,117 franchised to conventional franchisees, 4,566 licensed to developmental licensees and 3,598 licensed to foreign affiliates ("affiliates") – primarily Japan) and 6,642 were operated by the Company. Under our conventional franchise arrangement, franchisees provide a portion of the capital required by initially investing in the equipment, signs, seating and décor of their restaurant businesses, and by reinvesting in the business. The Company owns the land and building or secures long-term leases for both Company-operated and conventional franchised restaurant sites. This maintains long-term occupancy rights, helps control related costs and assists in alignment with franchisees. In certain circumstances, the Company participates in reinvestment for conventional franchised restaurants. Under our developmental license arrangement, licensees provide capital for the entire business, including the real estate interest, and the Company has no capital invested. In addition, the Company has an equity investment in a limited number of affiliates that invest in real estate and operate and/or franchise restaurants within a market.
We view ourselves primarily as a franchisor and believe franchising is important to delivering great, locally-relevant customer experiences and driving profitability. However, directly operating restaurants is paramount to being a credible franchisor and is essential to providing Company personnel with restaurant operations experience. In our Company-operated restaurants, and in collaboration with franchisees, we further develop and refine operating standards, marketing concepts and product and pricing strategies, so that only those that we believe are most beneficial are introduced in the restaurants. We continually review, and as appropriate adjust, our mix of Company-operated and franchised restaurants to help optimize overall performance.
The Company’s revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales along with minimum rent payments and initial fees. Revenues from restaurants licensed to affiliates and developmental licensees include a royalty based on a percent of sales and generally include initial fees. Fees vary by type of site, amount of Company investment, if any, and local business conditions. These fees, along with occupancy and operating rights, are stipulated in franchise/license agreements that generally have 20-year terms.
The business is managed as distinct geographic segments. Significant reportable segments include the United States ("U.S."), Europe, and Asia/Pacific, Middle East and Africa ("APMEA"). In addition, throughout this report we present “Other Countries & Corporate,” which includes operations in Canada and Latin America, as well as Corporate activities. For the nine months ended September 30, 2013, the U.S., Europe and APMEA segments accounted for 32%, 40% and 23% of total revenues, respectively.
Strategic Direction and Financial Performance
The strength of the alignment among the Company, its franchisees and suppliers (collectively referred to as the “System”) has been key to McDonald's success. This business model enables McDonald's to consistently deliver locally-relevant restaurant experiences to customers and be an integral part of the communities we serve. In addition, it facilitates our ability to identify, implement and scale innovative ideas that meet customers' changing needs and preferences.
McDonald's customer-focused Plan to Win ("Plan") provides a common framework for our global business while allowing for local adaptation. Through the execution of multiple initiatives surrounding the five pillars of our Plan (People, Products, Place, Price and Promotion), we have enhanced the restaurant experience for customers worldwide and grown comparable sales and customer visits in each of the last nine years. This Plan, combined with financial discipline, has delivered strong results for our shareholders since its inception.
The Company's global growth priorities under the Plan include: optimizing our menu with compelling food and beverage offerings, modernizing the customer experience by upgrading nearly every aspect of our restaurants from service to designs, and broadening our accessibility through continued convenience, new store expansion and value initiatives. We believe these priorities are relevant, actionable and, combined with our competitive advantages, will drive long-term sustainable profitable growth. We remain committed to pursuing strategies and investments that strengthen our business momentum over the long term.
Global comparable sales increased 0.9% and 0.3% for the quarter and nine months, respectively. The overall challenging environment, namely flat to declining informal eating out markets, diminishing ability to raise menu prices and heightened competitive activity, continued to pressure performance. On a consolidated basis, comparable guest counts decreased 1.4% for the nine months. Comparable sales are driven by changes in guest counts and average check, which are affected by changes in pricing and product mix. Generally, the goal is to achieve a balanced contribution from both guest counts and average check.
Looking ahead, we expect the overall challenging environment to persist, pressuring comparable sales performance and negatively impacting results for the remainder of the year. Despite the challenges inherent in the external environment, we are differentiating the McDonald's experience by uniting consumer insights, innovation and execution.

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U.S. comparable sales increased 0.7% and 0.2% for the quarter and nine months, respectively. New product introductions across the four key growth categories of chicken, beef, breakfast and beverages, and ongoing support for everyday value and McDonald's classic core favorites, contributed to the segment's sales performance. Sales results for the quarter were also positively impacted by the popular Monopoly promotion. Moving forward, U.S. business initiatives are designed to satisfy evolving customer expectations through a balanced approach to value, variety and convenience. Additionally, ongoing restaurant reimaging and customer service initiatives continue to be a priority in enhancing the customer experience.
In Europe, comparable sales increased 0.2% for the quarter and decreased 0.3% for the nine months, respectively, reflecting positive performance in the U.K. and Russia, and continued weak performance in Germany. Solid results in France also contributed to the quarter. Looking ahead, Europe remains focused on reigniting momentum with enhanced premium beverage and menu items and everyday affordability options across all dayparts. In addition, Europe continues to focus on enhancing the customer experience through ongoing restaurant reimaging and technology initiatives.
In APMEA, comparable sales decreased 1.4% and 1.7% for the quarter and nine months, respectively, primarily due to negative results in Japan, China and Australia, partly offset by positive performance in several other markets. APMEA remains focused on driving performance by offering comprehensive value platforms, accelerating growth at breakfast, modernizing the customer experience through ongoing restaurant reimaging, and broadening accessibility through service and convenience initiatives and new restaurant development.
Third Quarter and Nine Months 2013 Operating Results Included:
•
Global comparable sales increased 0.9% for the quarter and 0.3% for the nine months.
•
Consolidated revenues increased 2% (2% in constant currencies) for the quarter and nine months.
•
Consolidated operating income increased 6% (6% in constant currencies) for the quarter and increased 2% (3% in constant currencies) for the nine months.
•
Diluted earnings per share were $1.52 for the quarter and $4.16 for the nine months, up 6% (7% in constant currencies) and 5% (5% in constant currencies), respectively. Foreign currency translation negatively impacted diluted earnings per share by $0.01 for the quarter and $0.03 for the nine months.
•
For the nine months, the Company paid total dividends of $2.3 billion and repurchased 13.3 million shares for $1.3 billion.
•
The quarterly cash dividend increased 5% to $0.81 per share - the equivalent of $3.24 annually - effective for the fourth quarter 2013.
Outlook
The Company expects the dynamics of the current environment to persist, namely flat to declining informal eating out markets, diminishing ability to raise menu prices, ongoing cost pressures and heightened competitive activity. As a result, for the fourth quarter, the Company expects our global comparable sales performance to be in-line with recent quarterly trends while restaurant margin percentages are expected to decline at a level relatively similar to our first quarter results. While the Company does not provide specific guidance on earnings per share, the following information is provided to assist in forecasting the Company's future results.
•
Changes in Systemwide sales are driven by comparable sales and net restaurant unit expansion. The Company expects net restaurant additions to add approximately 2.5 percentage points to 2013 Systemwide sales growth (in constant currencies), most of which will be due to the 1,135 net traditional restaurants added in 2012.
•
The Company does not generally provide specific guidance on changes in comparable sales. However, as a perspective, assuming no change in cost structure, a 1 percentage point increase in comparable sales for either the U.S. or Europe would increase annual diluted earnings per share by about 4 cents.
•
With about 75% of McDonald's grocery bill comprised of 10 different commodities, a basket of goods approach is the most comprehensive way to look at the Company's commodity costs. For the full year 2013, the total basket of goods cost is expected to increase 1.5-2.0% in the U.S. and Europe.
•
The Company expects full-year 2013 selling, general and administrative expenses to decrease between 2-3% in constant currencies.
•
Based on current interest and foreign currency exchange rates, the Company expects interest expense for the full year 2013 to increase approximately 1-2% compared with 2012.
•
A significant part of the Company's operating income is generated outside the U.S., and about 35% of its total debt is denominated in foreign currencies. Accordingly, earnings are affected by changes in foreign currency exchange rates, particularly the Euro, British Pound, Australian Dollar and Canadian Dollar. Collectively, these currencies represent approximately 65% of the Company's operating income outside the U.S. If all four of these currencies moved by 10% in the same direction, the Company's annual diluted earnings per share would change by about 25 cents.

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•
The Company expects the effective income tax rate for the full-year 2013 to be 31% to 33%. Some volatility may be experienced between the quarters resulting in a quarterly tax rate that is outside the annual range.
•
The Company expects capital expenditures for 2013 to be about $3.0 billion. Over half of this amount will be used to open new restaurants. The Company expects to open about 1,500 restaurants including about 500 restaurants in affiliated and developmental licensee markets, such as Japan and Latin America, where the Company does not fund any capital expenditures. The Company expects net additions of about 1,200 traditional restaurants. The remaining capital will be used to reinvest in existing locations, in part through reimaging. More than 1,600 restaurants worldwide are expected to be reimaged, including locations in affiliated and developmental licensee markets that require no capital investment from the Company.
The Following Definitions Apply to these Terms as Used Throughout this Form 10-Q:
•
Information in constant currency is calculated by translating current year results at prior year average exchange rates. Management reviews and analyzes business results excluding the effect of foreign currency translation and bases incentive compensation plans on these results because they believe this better represents the Company’s underlying business trends.
•
Systemwide sales include sales at all restaurants, whether operated by the Company or by franchisees. While franchised sales are not recorded as revenues by the Company, management believes the information is important in understanding the Company’s financial performance because these sales are the basis on which the Company calculates and records franchised revenues and are indicative of the financial health of the franchisee base.
•
Comparable sales represent sales at all restaurants and comparable guest counts represent the number of transactions 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 and natural disasters. Comparable sales exclude the impact of currency translation. Comparable sales are driven by changes in guest counts and average check, which is affected by changes in pricing and product mix. Management reviews the increase or decrease in comparable sales and comparable guest counts compared with the same period in the prior year to assess business trends. The number of weekdays and weekend days, referred to as the calendar shift/trading day adjustment, can impact comparable sales and guest counts. In addition, the timing of holidays can also impact comparable sales and guest counts.

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Table of Contents

CONSOLIDATED OPERATING RESULTS
 
 
 
 
 
 
 
 
 
 
 
Quarter Ended
 
Nine Months Ended
Dollars in millions, except per share data
September 30, 2013
 
September 30, 2013
 
Amount
 
 
Increase/
(Decrease)

 
Amount
 
 
Increase/
(Decrease)

Revenues
 
 
 
 
 
 
 
 
 
Sales by Company-operated restaurants
 
$
4,923.1

 
2
 %
 
 
$
14,129.9

 
1
 %
Revenues from franchised restaurants
 
2,400.3

 
4

 
 
6,882.6

 
3

Total revenues
 
7,323.4

 
2

 
 
21,012.5

 
2

Operating costs and expenses
 
 
 
 
 
 
 
 
 
Company-operated restaurant expenses
 
4,004.4

 
2

 
 
11,649.9

 
2

Franchised restaurants—occupancy expenses
 
408.4

 
6

 
 
1,202.7

 
6

Selling, general & administrative expenses
 
554.3

 
(11
)
 
 
1,757.8

 
(4
)
Other operating (income) expense, net
 
(60.4
)
 
(13
)
 
 
(161.8
)
 
(8
)
Total operating costs and expenses
 
4,906.7

 
1

 
 
14,448.6

 
2

Operating income
 
2,416.7

 
6

 
 
6,563.9

 
2

Interest expense
 
130.5

 
2

 
 
388.4

 
0

Nonoperating (income) expense, net
 
13.6

 
n/m

 
 
26.2

 
n/m

Income before provision for income taxes
 
2,272.6

 
6

 
 
6,149.3

 
2

Provision for income taxes
 
750.4

 
7

 
 
1,960.4

 
1

Net income
 
$
1,522.2

 
5
 %
 
 
$
4,188.9

 
3
 %
Earnings per common share-basic
 
$
1.53

 
6
 %
 
 
$
4.19

 
4
 %
Earnings per common share-diluted
 
$
1.52

 
6
 %
 
 
$
4.16

 
5
 %
n/m Not meaningful

13
Table of Contents

Impact of Foreign Currency Translation
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. Management reviews and analyzes business results excluding the effect of foreign currency translation and bases incentive compensation plans on these results because they believe this better represents the Company's underlying business trends. Results excluding the effect of foreign currency translation (also referred to as constant currency) are calculated by translating current year results at prior year average exchange rates.
IMPACT OF FOREIGN CURRENCY TRANSLATION
 
 
 
 
 
 
 
 
Dollars in millions, except per share data
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency
Translation
Benefit/ (Cost)
 
Quarters Ended September 30,
 
2013

 
 
2012

 
 
2013

Revenues
 
$
7,323.4

 
 
$
7,152.4

 
 
$
0.3

Company-operated margins
 
918.7

 
 
924.0

 
 
(0.8
)
Franchised margins
 
1,991.9

 
 
1,930.6

 
 
(9.7
)
Selling, general & administrative expenses
 
554.3

 
 
620.9

 
 
(1.8
)
Operating income
 
2,416.7

 
 
2,287.2

 
 
(15.3
)
Net income
 
1,522.2

 
 
1,455.0

 
 
(13.7
)
Earnings per share-diluted
 
$
1.52

 
 
$
1.43

 
 
$
(0.01
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency
Translation
(Cost)
 
Nine Months Ended September 30,
 
2013

 
 
2012

 
 
2013

Revenues
 
$
21,012.5

 
 
$
20,614.9

 
 
$
(8.2
)
Company-operated margins
 
2,480.0

 
 
2,551.5

 
 
(2.1
)
Franchised margins
 
5,679.9

 
 
5,536.5

 
 
(30.5
)
Selling, general & administrative expenses
 
1,757.8

 
 
1,830.7

 
 
(3.3
)
Operating income
 
6,563.9

 
 
6,406.8

 
 
(44.4
)
Net income
 
4,188.9

 
 
4,068.7

 
 
(37.8
)
Earnings per share-diluted
 
$
4.16

 
 
$
3.98

 
 
$
(0.03
)
Foreign currency translation had a negative impact on consolidated operating results for the quarter and nine months, due to the stronger Euro, more than offset by the weaker Yen, Australian Dollar and many other foreign currencies.
Net Income and Diluted Earnings per Common Share
For the quarter, net income increased 5% (6% in constant currencies) to $1,522.2 million and diluted earnings per share increased 6% (7% in constant currencies) to $1.52. Foreign currency translation had a negative impact of $0.01 on diluted earnings per share.
For the nine months, net income increased 3% (4% in constant currencies) to $4,188.9 million and diluted earnings per share increased 5% (5% in constant currencies) to $4.16. Foreign currency translation had a negative impact of $0.03 on diluted earnings per share.
For the quarter and nine months, net income and diluted earnings per share growth in constant currencies were positively impacted by higher franchised margin dollars and lower selling, general and administrative expenses. For the nine months, results were also negatively impacted by lower Company-operated margin dollars. A decrease in diluted weighted average shares outstanding contributed to the growth in diluted earnings per share for both periods, more significantly for the nine months.
During the quarter, the Company repurchased 5.2 million shares of its stock for $506.3 million, bringing total purchases for the nine months to 13.3 million shares or $1.3 billion. In addition, the Company paid a quarterly dividend of $0.77 per share or $767.5 million, bringing the total dividends paid for the nine months to $2.3 billion. The Company also declared a fourth quarter 2013 dividend of $0.81 per share, reflecting an increase of 5%, and expects total cash returned to shareholders for the year to range between $4.5 and $5.0 billion.

14
Table of Contents

Revenues
Revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales along with minimum rent payments and initial fees. Revenues from franchised restaurants that are licensed to affiliates and developmental licensees include a royalty based on a percent of sales and generally include initial fees.
REVENUES
 
 
 
 
 
 
 
 
Dollars in millions
 
 
 
 
 
 
 
 
Quarters Ended September 30,
 
2013

 
2012

 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

Company-operated sales
 
 
 
 
 
 
 
 
U.S.
 
$
1,161.9

 
$
1,152.6

 
1
 %
 
1
 %
Europe
 
2,123.7

 
2,029.4

 
5

 
3

APMEA
 
1,420.9

 
1,423.6

 
0

 
1

Other Countries & Corporate
 
216.6

 
232.8

 
(7
)
 
(3
)
Total
 
$
4,923.1

 
$
4,838.4

 
2
 %
 
2
 %
Franchised revenues
 
 
 
 
 
 
 
 
U.S.
 
$
1,127.1

 
$
1,103.9

 
2
 %
 
2
 %
Europe
 
831.6

 
763.7

 
9

 
4

APMEA
 
262.2

 
270.0

 
(3
)
 
8

Other Countries & Corporate
 
179.4

 
176.4

 
2

 
8

Total
 
$
2,400.3

 
$
2,314.0

 
4
 %
 
4
 %
Total revenues
 
 
 
 
 
 
 
 
U.S.
 
$
2,289.0

 
$
2,256.5

 
1
 %
 
1
 %
Europe
 
2,955.3

 
2,793.1

 
6

 
3

APMEA
 
1,683.1

 
1,693.6

 
(1
)
 
2

Other Countries & Corporate
 
396.0

 
409.2

 
(3
)
 
2

Total
 
$
7,323.4

 
$
7,152.4

 
2
 %
 
2
 %
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2013

 
2012

 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

Company-operated sales
 
 
 
 
 
 

 
 
U.S.
 
$
3,397.6

 
$
3,394.6

 
0
 %
 
0
 %
Europe
 
6,044.1

 
5,858.6

 
3

 
3

APMEA
 
4,086.1

 
4,032.5

 
1

 
1

Other Countries & Corporate
 
602.1

 
658.4

 
(9
)
 
(7
)
Total
 
$
14,129.9

 
$
13,944.1

 
1
 %
 
1
 %
Franchised revenues
 
 
 
 
 
 
 
 
U.S.
 
$
3,262.3

 
$
3,206.5

 
2
 %
 
2
 %
Europe
 
2,334.7

 
2,211.2

 
6

 
3

APMEA
 
780.2

 
765.6

 
2

 
8

Other Countries & Corporate
 
505.4

 
487.5

 
4

 
8

Total
 
$
6,882.6

 
$
6,670.8

 
3
 %
 
4
 %
Total revenues
 
 
 
 
 
 
 
 
U.S.
 
$
6,659.9

 
$
6,601.1

 
1
 %
 
1
 %
Europe
 
8,378.8

 
8,069.8

 
4

 
3

APMEA
 
4,866.3

 
4,798.1

 
1

 
2

Other Countries & Corporate
 
1,107.5

 
1,145.9

 
(3
)
 
0

Total
 
$
21,012.5

 
$
20,614.9

 
2
 %
 
2
 %

15
Table of Contents

Consolidated revenues increased 2% (2% in constant currencies) for the quarter and nine months, driven primarily by expansion. Comparable sales and guest counts for both periods were pressured by challenging economic and IEO industry conditions.
•
In the U.S., the increase in revenues for the quarter and nine months was driven by expansion and slightly positive comparable sales performance. Innovative new menu options in key growth categories, ongoing support for everyday value and McDonald's classic core favorites contributed to performance. Sales results for the quarter were also positively impacted by the popular Monopoly promotion.
•
In Europe, the constant currency increase in revenues for the quarter and nine months was driven by expansion, primarily in Russia (which is entirely Company-operated), and to a lesser extent France. Revenue growth also benefited from positive comparable sales in the U.K. and Russia, partly offset by weaker performance in Germany.
•
In APMEA, the constant currency increase in revenues for the quarter and nine months was driven by expansion, partly offset by negative comparable sales, primarily in China. The quarter was also impacted by negative comparable sales in Australia.
The following table presents the percent change in comparable sales for the quarter and nine months ended September 30, 2013 and 2012:
COMPARABLE SALES
 
 
 
 
 
 
Increase/ (Decrease)
 
Quarters Ended
 
Nine Months Ended
  
September 30,
 
September 30, *
 
2013

 
2012

 
2013

 
2012

U.S.
0.7
 %
 
1.2
%
 
0.2
 %
 
4.4
%
Europe
0.2

 
1.8

 
(0.3
)
 
3.4

APMEA
(1.4
)
 
1.4

 
(1.7
)
 
2.5

Other Countries & Corporate
8.6

 
5.5

 
7.0

 
8.5

Total
0.9
 %
 
1.9
%
 
0.3
 %
 
4.1
%
*
On a consolidated basis, comparable guest counts decreased 1.4% and increased 2.2% for the nine months 2013 and 2012, respectively.
The following table presents the percent change in Systemwide sales for the quarter and nine months ended September 30, 2013:
SYSTEMWIDE SALES
 
Quarter Ended
 
Nine Months Ended
  
September 30, 2013
 
September 30, 2013
 
Inc/ (Dec)

Increase
Excluding
Currency
Translation

 
Inc/ (Dec)

Increase
Excluding
Currency
Translation

U.S.
2
 %
2
%
 
1
 %
1
%
Europe
7

3

 
4

2

APMEA
(6
)
4

 
(4
)
3

Other Countries & Corporate
3

12

 
4

10

Total
1
 %
4
%
 
1
 %
3
%

16
Table of Contents

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 health of the franchisee base. The following table presents Franchised sales and the related increases/(decreases):
FRANCHISED SALES
 
 
 
 
 
 
 
 
Dollars in millions
 
 
 
 
 
 
 
 
Quarters Ended September 30,
 
2013

 
2012

 
Inc/ (Dec)

 
Increase
Excluding
Currency
Translation

U.S.
 
$
8,129.9

 
$
7,985.0

 
2
 %
 
2
%
Europe
 
4,677.4

 
4,351.4

 
7

 
3

APMEA
 
3,238.0

 
3,551.2

 
(9
)
 
5

Other Countries & Corporate
 
2,183.7

 
2,090.5

 
4

 
14

Total*
 
$
18,229.0

 
$
17,978.1

 
1
 %
 
4
%
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2013

 
2012

 
Inc/ (Dec)

 
Increase
Excluding
Currency
Translation

U.S.
 
$
23,590.0

 
$
23,282.6

 
1
 %
 
1
%
Europe
 
13,126.8

 
12,577.9

 
4

 
2

APMEA
 
9,574.6

 
10,180.4

 
(6
)
 
4

Other Countries & Corporate
 
6,253.5

 
5,935.0

 
5

 
12

Total*
 
$
52,544.9

 
$
51,975.9

 
1
 %
 
3
%
*
Sales from developmental licensed restaurants or foreign affiliated markets where the Company earns a royalty based on a percent of sales were $3,862.8 million and $4,032.1 million for the quarters 2013 and 2012, respectively, and $11,235.7 million and $11,586.1 million for the nine months 2013 and 2012, respectively. Results were negatively impacted by the weaker Yen, which reduced Japan's sales contribution for both periods in 2013. The remaining balance of franchised sales is derived from conventional franchised restaurants where the Company earns rent and royalties based primarily on a percent of sales.

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Table of Contents

Restaurant Margins
FRANCHISED AND COMPANY-OPERATED RESTAURANT MARGINS
Dollars in millions
 
Percent    
 
Amount    
 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

Quarters Ended September 30,
2013

 
2012

 
2013

 
2012

 
 
Franchised
 
 
 
 
 
 
 
 
 
 
 
U.S.
84.0
%
 
84.1
%
 
$
946.3

 
$
928.8

 
2
 %
 
2
 %
Europe
79.3

 
79.7

 
659.1

 
608.8

 
8

 
4

APMEA
88.1

 
89.1

 
230.8

 
240.7

 
(4
)
 
7

Other Countries & Corporate
86.8

 
86.3

 
155.7

 
152.3

 
2

 
9

Total
83.0
%
 
83.4
%
 
$
1,991.9

 
$
1,930.6

 
3
 %
 
4
 %
Company-operated
 
 
 
 
 
 
 
 
 
 
 
U.S.
18.4
%
 
19.8
%
 
$
214.3

 
$
228.2

 
(6
)%
 
(6
)%
Europe
21.1

 
20.4

 
448.4

 
415.0

 
8

 
7

APMEA
15.3

 
16.9

 
217.7

 
240.2

 
(9
)
 
(7
)
Other Countries & Corporate
17.7

 
17.5

 
38.3

 
40.6

 
(6
)
 
(2
)
Total
18.7
%
 
19.1
%
 
$
918.7

 
$
924.0

 
(1
)%
 
0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Percent
 
Amount
 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

Nine Months Ended September 30,
2013

 
2012

 
2013

 
2012

 
 
Franchised
 
 
 
 
 
 
 
 
 
 
 
U.S.
83.7
%
 
84.0
%
 
$
2,730.2

 
$
2,692.0

 
1
 %
 
1
 %
Europe
78.4

 
79.0

 
1,829.4

 
1,746.7

 
5

 
3

APMEA
87.8

 
88.8

 
685.0

 
680.0

 
1

 
8

Other Countries & Corporate
86.1

 
85.7

 
435.3

 
417.8

 
4

 
9

Total
82.5
%
 
83.0
%
 
$
5,679.9

 
$
5,536.5

 
3
 %
 
3
 %
Company-operated
 
 
 
 
 
 
 
 
 
 
 
U.S.
18.2
%
 
19.5
%
 
$
619.0

 
$
661.1

 
(6
)%
 
(6
)%
Europe
19.2

 
19.1

 
1,159.7

 
1,121.3

 
3

 
3

APMEA
14.7

 
16.3

 
602.6

 
659.2

 
(9
)
 
(8
)
Other Countries & Corporate
16.4

 
16.7

 
98.7

 
109.9

 
(10
)
 
(8
)
Total
17.6
%
 
18.3
%
 
$
2,480.0

 
$
2,551.5

 
(3
)%
 
(3
)%
Franchised margin dollars increased $61.3 million or 3% (4% in constant currencies) for the quarter and increased $143.4 million or 3% (3% in constant currencies) for the nine months.
•
In the U.S., the franchised margin percent decreased for the quarter and nine months due to higher depreciation related to reimaging, partly offset by slightly positive comparable sales performance.
•
In Europe, the franchised margin percent decreased for the quarter and nine months due to higher rent expense.
•
In APMEA, the franchised margin percent decreased for the quarter and nine months primarily due to results in Australia, and the impact of the weaker Yen, which reduced Japan's favorable contribution to the segment's margin percent.


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Company-operated margin dollars decreased $5.3 million or 1% (flat in constant currencies) for the quarter and decreased $71.5 million or 3% (3% in constant currencies) for the nine months, reflecting soft comparable sales performance, which impacted our ability to overcome cost pressures.
•
In the U.S., the Company-operated margin percent for the quarter and nine months decreased primarily due to higher occupancy and other operating costs and commodities, both of which had a more significant impact in the quarter. Higher labor costs also negatively impacted results for the nine months.
•
In Europe, the Company-operated margin percent increased for the quarter and nine months due to positive comparable sales performance in Russia and the U.K. mostly offset by higher commodity and occupancy costs. The margin percent for the quarter also benefited from positive comparable sales in France. Higher labor costs negatively impacted results for the nine months, with limited impact on the quarter.
•
In APMEA, the Company-operated margin percent for the quarter and nine months decreased primarily due to higher labor costs throughout the segment and new restaurant openings, mainly in China. Similar to other markets, new restaurants in China initially open with lower margins that grow significantly over time.
The following table presents Company-operated restaurant margin components as a percent of sales:
CONSOLIDATED COMPANY-OPERATED RESTAURANT EXPENSES AND MARGINS AS A PERCENT OF SALES
 
Quarters Ended
 
Nine Months Ended
  
September 30,
 
September 30,
 
2013

 
2012

 
2013

 
2012

Food & paper
33.7
%
 
33.8
%
 
33.7
%
 
34.1
%
Payroll & employee benefits
24.7

 
24.7

 
25.6

 
25.2

Occupancy & other operating expenses
22.9

 
22.4

 
23.1

 
22.4

Total expenses
81.3
%
 
80.9
%
 
82.4
%
 
81.7
%
Company-operated margins
18.7
%
 
19.1
%
 
17.6
%
 
18.3
%
Selling, General & Administrative Expenses
Selling, general and administrative expenses decreased $66.6 million or 11% (11% in constant currencies) for the quarter and $72.9 million or 4% (4% in constant currencies) for the nine months due to lower incentive-based compensation in 2013 and costs in the prior year related to the 2012 London Olympics, partly offset by higher employee costs. In addition, for the nine months, 2012 included costs related to the Worldwide Owner/Operator Convention.
For the nine months, selling, general and administrative expenses as a percent of revenues decreased to 8.4% for 2013 compared with 8.9% for 2012, and as a percent of Systemwide sales decreased to 2.6% for 2013 compared with 2.8% for 2012.
Other Operating (Income) Expense, Net
OTHER OPERATING (INCOME) EXPENSE, NET
Dollars in millions
 
Quarters Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013

 
2012

 
2013

 
2012

Gains on sales of restaurant businesses
$
(45.4
)
 
$
(38.6
)
 
$
(129.5
)
 
$
(79.6
)
Equity in earnings of unconsolidated affiliates
(23.6
)
 
(37.4
)
 
(67.2
)
 
(111.4
)
Asset dispositions and other (income) expense, net
8.6

 
22.5

 
34.9

 
41.5

Total
$
(60.4
)
 
$
(53.5
)
 
$
(161.8
)
 
$
(149.5
)
Gains on sales of restaurant businesses increased for the nine months primarily in Australia and Europe. The quarter and nine months were also impacted by lower gains on sales of restaurants in China to developmental licensees and higher gains in the U.S. The Company's sales of restaurants to its franchisees are aimed at achieving an optimal ownership mix in each market.
The decrease in equity in earnings of unconsolidated affiliates for the quarter and nine months reflected lower operating results, primarily in Japan, and the impact of the weaker Yen.
 

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Operating Income