MCD-6.30.2015-10Q
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 June 30, 2015
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

941,810,237
(Number of shares of common stock
outstanding as of June 30, 2015)
 
 
 
 
 

 

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.

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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEET
 
 
 
 
 
 
 
(unaudited)
 
 
 
In millions, except per share data
June 30,
2015
 
December 31,
2014
Assets
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and equivalents
 
$
3,998.5

 
 
$
2,077.9

Accounts and notes receivable
 
1,178.6

 
 
1,214.4

Inventories, at cost, not in excess of market
 
102.3

 
 
110.0

Prepaid expenses and other current assets
 
692.8

 
 
783.2

Total current assets
 
5,972.2

 
 
4,185.5

Other assets
 
 
 
 
 
Investments in and advances to affiliates
 
860.3

 
 
1,004.5

Goodwill
 
2,627.5

 
 
2,735.3

Miscellaneous
 
1,796.7

 
 
1,798.6

Total other assets
 
5,284.5

 
 
5,538.4

Property and equipment
 
 
 
 
 
Property and equipment, at cost
 
38,391.9

 
 
39,126.1

Accumulated depreciation and amortization
 
(14,700.7
)
 
 
(14,568.6
)
Net property and equipment
 
23,691.2

 
 
24,557.5

Total assets
 
$
34,947.9

 
 
$
34,281.4

Liabilities and shareholders’ equity
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accounts payable
 
$
840.1

 
 
$
860.1

Income taxes
 
62.4

 
 
166.8

Other taxes
 
348.6

 
 
330.0

Accrued interest
 
168.2

 
 
233.7

Accrued payroll and other liabilities
 
1,341.5

 
 
1,157.3

Total current liabilities
 
2,760.8

 
 
2,747.9

Long-term debt
 
17,901.6

 
 
14,989.7

Other long-term liabilities
 
2,112.4

 
 
2,065.9

Deferred income taxes
 
1,612.2

 
 
1,624.5

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
 
6,363.2

 
 
6,239.1

Retained earnings
 
43,681.6

 
 
43,294.5

Accumulated other comprehensive income
 
(2,110.0
)
 
 
(1,519.7
)
Common stock in treasury, at cost; 718.8 and 697.7 million shares
 
(37,390.5
)
 
 
(35,177.1
)
Total shareholders’ equity
 
10,560.9

 
 
12,853.4

Total liabilities and shareholders’ equity
 
$
34,947.9

 
 
$
34,281.4

See Notes to condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENT OF NET INCOME (UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarters Ended
 
 
Six Months Ended
 
 
June 30,
 
 
June 30,
In millions, except per share data
 
2015
 
 
2014
 
 
2015
 
 
2014
Revenues
 
 
 
 
 
 
 
 
 
 
 
Sales by Company-operated restaurants
 
$
4,261.1

 
 
$
4,785.9

 
 
$
8,175.2

 
 
$
9,276.4

Revenues from franchised restaurants
 
2,236.6

 
 
2,395.8

 
 
4,281.4

 
 
4,605.6

Total revenues
 
6,497.7

 
 
7,181.7

 
 
12,456.6

 
 
13,882.0

Operating costs and expenses
 
 
 
 
 
 
 
 
 
 
 
Company-operated restaurant expenses
 
3,596.3

 
 
3,969.8

 
 
6,950.6

 
 
7,736.9

Franchised restaurants—occupancy expenses
 
411.0

 
 
427.6

 
 
814.6

 
 
844.7

Selling, general & administrative expenses
 
592.4

 
 
629.2

 
 
1,175.2

 
 
1,249.6

Other operating (income) expense, net
 
48.7

 
 
(33.9
)
 
 
281.4

 
 
(74.2
)
Total operating costs and expenses
 
4,648.4

 
 
4,992.7

 
 
9,221.8

 
 
9,757.0

Operating income
 
1,849.3

 
 
2,189.0

 
 
3,234.8

 
 
4,125.0

Interest expense
 
149.2

 
 
137.9

 
 
296.5

 
 
273.4

Nonoperating (income) expense, net
 
(12.3
)
 
 
(20.4
)
 
 
(28.2
)
 
 
(3.2
)
Income before provision for income taxes
 
1,712.4

 
 
2,071.5

 
 
2,966.5

 
 
3,854.8

Provision for income taxes
 
510.0

 
 
684.4

 
 
952.6

 
 
1,262.9

Net income
 
$
1,202.4

 
 
$
1,387.1

 
 
$
2,013.9

 
 
$
2,591.9

Earnings per common share-basic
 
$
1.26

 
 
$
1.40

 
 
$
2.10

 
 
$
2.62

Earnings per common share-diluted
 
$
1.26

 
 
$
1.40

 
 
$
2.09

 
 
$
2.61

Dividends declared per common share
 
$
0.85

 
 
$
0.81

 
 
$
1.70

 
 
$
1.62

Weighted average shares outstanding-basic
 
953.2

 
 
987.4

 
 
956.9

 
 
988.5

Weighted average shares outstanding-diluted
 
957.6

 
 
993.2

 
 
961.7

 
 
994.6

See Notes to condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarters Ended
 
 
Six Months Ended
 
 
June 30,
 
 
June 30,
In millions
 
2015
 
 
2014
 
 
2015
 
 
2014
Net income
 
$
1,202.4

 
 
$
1,387.1

 
 
$
2,013.9

 
 
$
2,591.9

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in accumulated other comprehensive
income (AOCI), including net investment hedges
389.2

 
 
113.5

 
 
(590.5
)
 
 
91.2

Reclassification of (gain) loss to net income
0.2

 
 
2.1

 
 
0.2

 
 
15.2

Foreign currency translation adjustments-net of tax
benefit (expense) of $67.0, $(0.2), $(92.9) and $17.2
389.4

 
 
115.6

 
 
(590.3
)
 
 
106.4

Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in AOCI
(10.2
)
 
 
(16.7
)
 
 
12.0

 
 
13.5

Reclassification of (gain) loss to net income
(9.4
)
 
 
7.3

 
 
(14.7
)
 
 
(6.1
)
Cash flow hedges-net of tax benefit (expense) of $11.0, $4.4, $1.5 and $(2.8)
(19.6
)
 
 
(9.4
)
 
 
(2.7
)
 
 
7.4

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

 
 
—

 
 
(1.4
)
 
 
6.5

Reclassification of (gain) loss to net income
2.2

 
 
1.4

 
 
4.1

 
 
4.0

Defined benefit pension plans-net of tax benefit (expense)
of $0.0, $0.0, $0.6 and $(4.4)
2.2

 
 
1.4

 
 
2.7

 
 
10.5

Total other comprehensive income (loss), net of tax
372.0

 
 
107.6

 
 
(590.3
)
 
 
124.3

Comprehensive income (loss)
 
$
1,574.4

 
 
$
1,494.7

 
 
$
1,423.6

 
 
$
2,716.2

See Notes to condensed consolidated financial statements.

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Table of Contents

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarters Ended
 
 
Six Months Ended
 
 
June 30,
 
 
June 30,
In millions
 
2015
 
 
2014
 
 
2015
 
 
2014
Operating activities
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
1,202.4

 
 
$
1,387.1

 
 
$
2,013.9

 
 
$
2,591.9

Adjustments to reconcile to cash provided by operations
 
 
 
 
 
 
 
 
 
 
 
Charges and credits:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
392.2

 
 
413.2

 
 
778.3

 
 
823.6

Deferred income taxes
 
2.8

 
 
(14.8
)
 
 
15.3

 
 
(38.8
)
Share-based compensation
 
27.7

 
 
26.5

 
 
47.7

 
 
51.8

Other
 
19.2

 
 
9.0

 
 
262.1

 
 
63.7

Changes in working capital items
 
(130.8
)
 
 
(334.0
)
 
 
95.7

 
 
(97.9
)
Cash provided by operations
 
1,513.5

 
 
1,487.0

 
 
3,213.0

 
 
3,394.3

Investing activities
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
(415.9
)
 
 
(589.6
)
 
 
(808.5
)
 
 
(1,158.4
)
Sales and purchases of restaurant businesses and property sales
 
51.0

 
 
79.2

 
 
98.6

 
 
157.9

Other
 
18.4

 
 
(104.7
)
 
 
14.2

 
 
(222.8
)
Cash used for investing activities
 
(346.5
)
 
 
(615.1
)
 
 
(695.7
)
 
 
(1,223.3
)
Financing activities
 
 
 
 
 
 
 
 
 
 
 
Net short-term borrowings
 
(293.8
)
 
 
(68.3
)
 
 
(38.8
)
 
 
236.4

Long-term financing issuances
 
4,227.3

 
 
1,536.1

 
 
4,227.8

 
 
1,536.4

Long-term financing repayments
 
(501.4
)
 
 
(1.0
)
 
 
(1,046.7
)
 
 
(541.1
)
Treasury stock purchases
 
(1,555.4
)
 
 
(703.5
)
 
 
(2,161.8
)
 
 
(1,143.0
)
Common stock dividends
 
(811.0
)
 
 
(800.6
)
 
 
(1,627.3
)
 
 
(1,602.3
)
Proceeds from stock option exercises
 
36.6

 
 
75.3

 
 
135.2

 
 
161.7

Excess tax benefit on share-based compensation
 
6.0

 
 
21.5

 
 
25.4

 
 
56.5

Other
 
(20.7
)
 
 
(8.5
)
 
 
(19.5
)
 
 
(8.7
)
Cash provided by (used for) financing activities
 
1,087.6

 
 
51.0

 
 
(505.7
)
 
 
(1,304.1
)
Effect of exchange rates on cash and cash equivalents
 
109.1

 
 
3.9

 
 
(91.0
)
 
 
5.0

Cash and equivalents increase
 
2,363.7

 
 
926.8

 
 
1,920.6

 
 
871.9

Cash and equivalents at beginning of period
 
1,634.8

 
 
2,743.8

 
 
2,077.9

 
 
2,798.7

Cash and equivalents at end of period
 
$
3,998.5

 
 
$
3,670.6

 
 
$
3,998.5

 
 
$
3,670.6

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, 2014 Annual Report on Form 10‑K. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. The results for the quarter and six months ended June 30, 2015 do not necessarily indicate the results that may be expected for the full year.

Restaurant Information
The following table presents restaurant information by ownership type:
Restaurants at June 30,
2015
 
2014
Conventional franchised
20,903

 
20,481

Developmental licensed
5,293

 
4,943

Foreign affiliated
3,516

 
3,570

Total Franchised
29,712

 
28,994

Company-operated
6,656

 
6,689

Systemwide restaurants
36,368

 
35,683

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 4.4 million shares and 5.8 million shares for the quarters 2015 and 2014, respectively, and 4.8 million shares and 6.1 million shares for the six months 2015 and 2014, respectively. Stock options that would have been antidilutive and therefore were not included in the calculation of diluted weighted-average shares totaled 9.5 million shares and 4.8 million shares for the quarters 2015 and 2014, respectively, and 10.0 million shares and 5.9 million shares for the six months 2015 and 2014, 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 Company did not have any significant changes to the valuation techniques used to measure fair value as described in the Company's December 31, 2014 Annual Report on Form 10-K.
At June 30, 2015, the fair value of the Company’s debt obligations was estimated at $18.7 billion, compared to a carrying amount of $17.9 billion. The fair value was based upon quoted market prices, Level 2 within the valuation hierarchy. The carrying amounts of cash and equivalents, short-term investments and notes receivable approximate fair value.

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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 Consolidated balance sheet:
  
Derivative Assets
 
Derivative Liabilities
In millions
June 30,
2015
 
December 31,
2014
 
June 30,
2015
 
December 31,
2014
Total derivatives designated as hedging instruments
 
$
82.2

 
 
$
108.2

 
 
$
(41.0
)
 
 
$
(42.3
)
Total derivatives not designated as hedging instruments
 
119.3

 
 
137.9

 
 
(7.3
)
 
 
(7.9
)
Total derivatives
 
$
201.5

 
 
$
246.1

 
 
$
(48.3
)
 
 
$
(50.2
)
The following table presents the pretax amounts affecting income and other comprehensive income ("OCI") for the six months ended June 30, 2015 and 2014, 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
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Cash Flow Hedges
 
$
19.3

 
 
$
19.1

 
 
$
23.4

 
 
$
8.9

 

$
20.3

 

$
2.0

Net Investment Hedges
 
$
491.2

 
 
$
(15.0
)
 
 
$
(0.2
)
 
 
$
(15.2
)
 
 
 
 
 
 
Undesignated derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
$
0.5


 
$
3.8

(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 June 30, 2015, $2.2 billion of the Company's outstanding fixed-rate debt was effectively converted. For the six months ended June 30, 2015, the Company recognized a $2.9 million gain on fair value interest rate swaps, which was exactly offset by a corresponding loss 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 17 months for certain exposures and are denominated in various currencies. As of June 30, 2015, the Company had derivatives outstanding with an equivalent notional amount of $422.6 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 21 months and have an equivalent notional amount of $141.8 million.
Based on market conditions at June 30, 2015, the $28.3 million in cumulative cash flow hedging gains, after tax, is not expected to have a significant effect on earnings over the next 12 months.
•
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 June 30, 2015, $6.5 billion of the Company's third party foreign currency denominated debt, $3.6 billion of intercompany foreign currency denominated debt and $296.4 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 June 30, 2015 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.

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Table of Contents

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
 
Six Months Ended
  
June 30,
 
June 30,
In millions
2015
 
2014
 
2015
 
2014
Revenues
 
 
 
 
 
 
 
U.S.
$
2,174.2

 
$
2,249.0

 
$
4,152.3

 
$
4,303.1

Europe
2,412.6

 
2,913.3

 
4,576.8

 
5,625.5

APMEA
1,574.0

 
1,664.3

 
3,098.7

 
3,283.1

Other Countries & Corporate
336.9

 
355.1

 
628.8

 
670.3

Total revenues
$
6,497.7

 
$
7,181.7

 
$
12,456.6

 
$
13,882.0

Operating Income
 
 
 
 
 
 
 
U.S.
$
925.8

 
$
980.5

 
$
1,657.6

 
$
1,801.3

Europe
685.9

 
853.6

 
1,286.8

 
1,606.1

APMEA
258.7

 
348.3

 
327.2

 
693.4

Other Countries & Corporate
(21.1
)
 
6.6

 
(36.8
)
 
24.2

Total operating income
$
1,849.3

 
$
2,189.0

 
$
3,234.8

 
$
4,125.0

On May 4, 2015, the Company announced a worldwide business restructuring that will combine markets with similar characteristics, challenges, and opportunities for growth into four segments effective July 1, 2015, as follows:
•
U.S. - the Company’s largest segment, accounting for more than 40% of the Company’s 2014 operating income;
•
International Lead Markets - established markets including Australia, Canada, France, Germany and the UK, which operate within similar economic and competitive dynamics, offer similar growth opportunities and collectively represented about 40% of the Company’s 2014 operating income;
•
High-Growth Markets - markets with relatively higher restaurant expansion and franchising potential including China, Italy, Poland, Russia, Korea, Spain, Switzerland and the Netherlands. Together these markets accounted for about 10% of the Company’s 2014 operating income; and
•
Foundational Markets and Corporate - the remaining markets in the McDonald’s system, each of which has the potential to operate under a largely franchised model. Corporate activities will also be reported within this segment.

Recently Issued Accounting Standards
Revenue Recognition
In May 2014, the Financial Accounting Standards Board ("FASB") issued guidance codified in ASC 606, "Revenue Recognition - Revenue from Contracts with Customers," which amends the guidance in former ASC 605, "Revenue Recognition." In July 2015, the FASB made a decision to defer by one year the effective date of its new standard to January 1, 2018, although early adoption is permitted as of January 1, 2017. The Company is currently evaluating the impact of the provisions of ASC 606.
Simplifying the Presentation of Debt Issuance Costs
In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs." This update requires that debt issuance costs be recorded in the balance sheet as a direct reduction of the debt liability rather than as an asset and amortization of debt issuance costs be recorded as interest expense. The provisions of this update are effective as of January 1, 2016, although early adoption is permitted for financial statements that have not been previously issued. This update is not expected to significantly impact the Company.

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 36,368 restaurants in 119 countries at June 30, 2015, 29,712 were licensed to franchisees (including 20,903 franchised to conventional franchisees, 5,293 licensed to developmental licensees and 3,516 licensed to foreign affiliates ("affiliates") – primarily Japan) and 6,656 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 business, and by reinvesting in the business over time. 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 enabling restaurant performance levels that are among the highest in the industry. In certain circumstances, the Company participates in reinvestment for conventional franchised restaurants in an effort to accelerate implementation of certain initiatives and grow the business.
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 or franchise restaurants within a market.
We view ourselves primarily as a franchisor and believe franchising is paramount to both delivering great, locally-relevant customer experiences and driving profitability. Franchising enables an individual to own a restaurant business and maintain control over personnel, purchasing, marketing and pricing decisions, while also benefiting from the financial strength and global experience of McDonald's. However, directly operating restaurants is important 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 (conventional franchised, developmental licensed and foreign affiliated) 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 was managed as distinct geographic segments through June 30, 2015. Significant reportable segments included the United States ("U.S."), Europe, and Asia/Pacific, Middle East and Africa ("APMEA"). In addition, throughout this report we present “Other Countries & Corporate” that includes operations in Canada and Latin America, as well as Corporate activities. For the six months ended June 30, 2015, the U.S., Europe and APMEA segments accounted for 33%, 37% and 25% of total revenues, respectively.
Strategic Direction
The strength of the alignment among the Company, its franchisees and suppliers (collectively referred to as the "System") has been key to McDonald's long-term success. By leveraging our System, we have been able to identify, implement and scale ideas that meet customers' changing needs and preferences. In addition, our business model enables McDonald's to consistently deliver locally-relevant restaurant experiences to customers and be an integral part of the communities we serve.
Our recent results remain disappointing and we are focused on the urgent need to reset and turn around the business. In our effort to shape McDonald's future as a modern, progressive burger company and increase our relevance with customers, our priorities are threefold - driving operational growth, returning excitement to our brand and unlocking financial value.
The immediate priority for our business is restoring growth under a new organizational structure and ownership mix designed to provide greater focus on the customer, improve our operating fundamentals and drive a recommitment to running great restaurants. As we turn around our business, we will look to create more excitement around the brand and ensure that we build on our rich heritage of positively impacting the communities we serve.
Beginning July 1, 2015, McDonald’s will operate under the new organizational structure with the following four segments that combine markets with similar characteristics, challenges, and opportunities for growth:
•
U.S. - the Company’s largest segment, accounting for more than 40% of the Company’s 2014 operating income;
•
International Lead Markets - established markets including Australia, Canada, France, Germany, and the UK, which operate within similar economic and competitive dynamics, offer similar growth opportunities and collectively represented about 40% of the Company’s 2014 operating income;

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•
High-Growth Markets - markets with relatively higher restaurant expansion and franchising potential including China, Italy, Poland, Russia, Korea, Spain, Switzerland and the Netherlands. Together these markets accounted for about 10% of the Company’s 2014 operating income; and
•
Foundational Markets and Corporate - the remaining markets in the McDonald’s system, each of which has the potential to operate under a largely franchised model. Corporate activities will also be reported within this segment.
As we restructure our organization and instill greater customer focus, the turnaround effort will be governed by stronger financial discipline, faster decision making and clear management accountability. The enhancements to McDonald’s operating approach will be accompanied by plans to further optimize the Company’s restaurant ownership mix, deliver savings on selling, general and administrative expenses and accelerate cash returned to shareholders. Under the initial steps of our turnaround plan, the Company previously announced its intention to:
•
Accelerate the pace of refranchising by increasing the global franchised percentage to about 90% by the end of 2018 through refranchising about 3,500 restaurants. In conjunction with our refranchising plans, we will take a market-by-market approach, set higher financial screens for markets operating company-operated restaurants, and leverage both conventional and developmental licensee structures across the segments. Our new, more heavily-franchised business model will generate more stable and predictable revenue and cash flow streams and will require a less resource-intensive support structure;
•
Deliver approximately $300 million in net annual savings on selling, general and administrative expenses, which will be realized by the end of 2017, in connection with the Company's organizational restructure, refranchising strategy, and more stringent discipline around spending throughout the organization; and
•
Return $8 to $9 billion to shareholders in 2015 and to reach the top end of its 3-year $18 to $20 billion cash return to shareholders target by the end of 2016.
We continue to evaluate additional ideas to further drive shareholder value through actions that deliver sustainable long-term growth.
Financial Performance
Our overall financial performance continues to be largely reflective of our top-line results. Global comparable sales decreased 0.7% for the quarter and 1.5% for the six months, reflecting negative guest traffic in all major segments, with the largest impact coming from the U.S. and Japan. On a consolidated basis, comparable guest counts decreased 4.4% for the six months. Comparable sales are driven by changes in guest counts and average check, which is affected by changes in pricing and product mix. Typically, pricing has a greater impact on average check than product mix. The goal is to achieve a relatively balanced contribution from both guest counts and average check.
U.S. comparable sales decreased 2.0% for the quarter and 2.3% for the six months, reflecting negative guest traffic as the featured products and promotions did not achieve expected consumer response amid ongoing competitive activity. The U.S. is focused on creating a better experience for customers by concentrating on value, service and menu. This includes efforts to develop a long-term national value platform, simplify the menu and menu boards, and enhance the quality of our menu offerings.
In Europe, comparable sales increased 1.2% for the quarter and 0.3% for the six months driven by solid performance in the U.K. and Germany, partly offset by negative results in France. The Company continues to target opportunities to improve critical aspects of its business amidst ongoing macro-economic headwinds across parts of the segment.
In APMEA, comparable sales decreased 4.5% for the quarter and 6.3% for the six months primarily due to the impact of prolonged, broad-based consumer perception issues in Japan along with negative performance in China and other Asian markets, partly offset by strong performance in Australia. The Company continues to aggressively execute brand recovery efforts related to the 2014 supplier issue. We expect China to return to a normalized level of performance for the second half of the year, but we expect results in Japan will be challenged for the foreseeable future.
Second Quarter and Six Months 2015 Operating Results Included:
•
Global comparable sales decrease of 0.7% for the quarter and 1.5% for the six months, reflecting negative guest traffic in all major segments
•
Consolidated revenues decrease of 10% (increase of 1% in constant currencies) for the quarter and decrease of 10% (flat in constant currencies) for the six months
•
Consolidated operating income decrease of 16% (6% in constant currencies) for the quarter and decrease of 22% (13% in constant currencies) for the six months, partly reflecting the impact of first and second quarter strategic charges of $195 million and $45 million, respectively
•
Diluted earnings per share of $1.26 for the quarter and $2.09 for the six months, a decrease of 10% (1% in constant currencies) and 20% (11% in constant currencies), respectively. In constant currencies and excluding the impact of the first and second quarter strategic charges, earnings per share for the six months would have decreased $0.08 or 3%

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•
Returned $2.5 billion to shareholders through share repurchases and dividends, bringing the year-to-date return to shareholders to $3.9 billion in connection with our 3-year target to return $18-20 billion to shareholders by the end of 2016.
Outlook
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. 
Looking ahead to third quarter, we expect positive global comparable sales led by growth in our newly-created International Lead Markets segment and China's continuing recovery from the 2014 APMEA supplier issue.
2015
•
Changes in Systemwide sales are driven by comparable sales and net restaurant unit expansion. The Company expects net restaurant additions to add approximately 2 percentage points to 2015 Systemwide sales growth (in constant currencies), most of which will be due to the 829 net restaurants (981 net traditional openings less 152 net satellite closings) added in 2014.
•
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 change in comparable sales for the U.S. would change 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 2015, the total basket of goods cost is expected to increase 1.5%-2.5% in the U.S.
•
The Company expects full-year 2015 selling, general and administrative expenses to increase approximately 2%-4% in constant currencies. Fluctuations between quarters may occur.
•
Based on current interest and foreign currency exchange rates, the Company expects interest expense for the full-year 2015 to increase about 10% compared with 2014 due to higher average debt balances.
•
A significant part of the Company's operating income is generated outside the U.S., and about 40% 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 70% 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.
•
The Company expects the effective income tax rate for the full-year 2015 to be at the high end of the existing 31%-33% range. Some volatility may be experienced between the quarters resulting in a quarterly tax rate outside of the annual range.
•
The Company expects capital expenditures for 2015 to be approximately $2.0 billion. About half of this amount will be used to open new restaurants. The Company expects to open more than 1,000 restaurants including about 450 restaurants in affiliated and developmental licensee markets where the Company does not fund any capital expenditures. The Company expects net additions of about 300 restaurants, reflecting 700 restaurant closings. The remaining capital will be used to reinvest in existing locations.
Long-term
Under the initial steps of its global turnaround plan, the Company expects to:
•
return $8 to $9 billion to shareholders in 2015 and to reach the top end of its 3-year $18 to $20 billion cash return to shareholders target by the end of 2016 through a combination of dividends and share repurchases.
•
refranchise about 3,500 restaurants with franchised restaurants accounting for approximately 90% of global restaurants by the end of 2018.
•
achieve net annual savings on selling, general and administrative expenses of about $300 million, which will be realized by the end of 2017, in connection with the Company's organizational restructure, refranchising strategy, and more stringent discipline around spending throughout the organization.

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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. Typically, pricing has a greater impact on average check than 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.

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CONSOLIDATED OPERATING RESULTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter Ended
 
Six Months Ended
Dollars in millions, except per share data
June 30, 2015
 
June 30, 2015
 
Amount
 
 
Increase/
(Decrease)

 
Amount
 
 
Increase/
(Decrease)

Revenues
 
 
 
 
 
 
 
 
 
Sales by Company-operated restaurants
 
$
4,261.1

 
(11
)%
 
 
$
8,175.2

 
(12
)%
Revenues from franchised restaurants
 
2,236.6

 
(7
)
 
 
4,281.4

 
(7
)
Total revenues
 
6,497.7

 
(10
)
 
 
12,456.6

 
(10
)
Operating costs and expenses
 
 
 
 
 
 
 
 
 
Company-operated restaurant expenses
 
3,596.3

 
(9
)
 
 
6,950.6

 
(10
)
Franchised restaurants—occupancy expenses
 
411.0

 
(4
)
 
 
814.6

 
(4
)
Selling, general & administrative expenses
 
592.4

 
(6
)
 
 
1,175.2

 
(6
)
Other operating (income) expense, net
 
48.7

 
n/m

 
 
281.4

 
n/m

Total operating costs and expenses
 
4,648.4

 
(7
)
 
 
9,221.8

 
(5
)
Operating income
 
1,849.3

 
(16
)
 
 
3,234.8

 
(22
)
Interest expense
 
149.2

 
8

 
 
296.5

 
8

Nonoperating (income) expense, net
 
(12.3
)
 
40

 
 
(28.2
)
 
n/m

Income before provision for income taxes
 
1,712.4

 
(17
)
 
 
2,966.5

 
(23
)
Provision for income taxes
 
510.0

 
(25
)
 
 
952.6

 
(25
)
Net income
 
$
1,202.4

 
(13
)%
 
 
$
2,013.9

 
(22
)%
Earnings per common share-basic
 
$
1.26

 
(10
)%
 
 
$
2.10

 
(20
)%
Earnings per common share-diluted
 
$
1.26

 
(10
)%
 
 
$
2.09

 
(20
)%
n/m Not meaningful


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Supplemental Information
In May 2015, the Company announced the initial steps of its turnaround plan, including a restructuring of its business from geographic segments into four segments that combine markets with similar characteristics, challenges, and opportunities for growth, effective July 1, 2015. Recast summary financial information for the years 2010 to 2014 and quarters ended March 31, 2014 to June 30, 2015 will be provided prior to release of the Company’s results for the quarter and nine months ended September 30, 2015.
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 the Company believes this better represents its 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 June 30,
 
2015

 
 
2014

 
 
2015

Revenues
 
$
6,497.7

 
 
$
7,181.7

 
 
$
(747.1
)
Company-operated margins
 
664.8

 
 
816.1

 
 
(88.9
)
Franchised margins
 
1,825.6

 
 
1,968.2

 
 
(172.5
)
Selling, general & administrative expenses
 
592.4

 
 
629.2

 
 
42.0

Operating income
 
1,849.3

 
 
2,189.0

 
 
(213.0
)
Net income
 
1,202.4

 
 
1,387.1

 
 
(130.7
)
Earnings per share-diluted
 
$
1.26

 
 
$
1.40

 
 
$
(0.13
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency Translation Benefit/ (Cost)
 
Six Months Ended June 30,
 
2015

 
 
2014

 
 
2015

Revenues
 
$
12,456.6

 
 
$
13,882.0

 
 
$
(1,447.8
)
Company-operated margins
 
1,224.6

 
 
1,539.5

 
 
(160.1
)
Franchised margins
 
3,466.8

 
 
3,760.9

 
 
(314.9
)
Selling, general & administrative expenses
 
1,175.2

 
 
1,249.6

 
 
81.9

Operating income
 
3,234.8

 
 
4,125.0

 
 
(370.3
)
Net income
 
2,013.9

 
 
2,591.9

 
 
(215.3
)
Earnings per share-diluted
 
$
2.09

 
 
$
2.61

 
 
$
(0.23
)
The impact of foreign currency translation on consolidated operating results for the quarter and six months reflected the strengthening of the U.S. dollar against the Euro, Australian Dollar, Russian Ruble and most other currencies.
Net Income and Diluted Earnings per Common Share
For the quarter, net income decreased 13% (4% in constant currencies) to $1,202.4 million, and diluted earnings per share decreased 10% (1% in constant currencies) to $1.26. Foreign currency translation had a negative impact of $0.13 on diluted earnings per share.
For the six months, net income decreased 22% (14% in constant currencies) to $2,013.9 million, and diluted earnings per share decreased 20% (11% in constant currencies) to $2.09. Foreign currency translation had a negative impact of $0.23 on diluted earnings per share.
For the quarter and six months, results were negatively impacted by lower Company-operated margins, weaker results in Japan, and approximately $45 million of restructuring charges incurred to optimize the Company's global operating structure in connection with the Company's turnaround plan announced in early May. The six months was also negatively impacted by strategic charges of $195 million recognized in the first quarter.
Results for the quarter and six months benefited from a lower effective tax rate recognized in the quarter. In addition, diluted earnings per share for both periods benefited from a decrease in diluted weighted average shares outstanding due to share repurchases.

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In constant currencies and excluding the impact of the first and second quarter strategic charges, earnings per share for the six months would have decreased $0.08 or 3%.
During the quarter, the Company repurchased 17.4 million shares of its stock for $1.7 billion, bringing total purchases for the six months to 24.0 million shares or $2.3 billion. In addition, the Company paid a quarterly dividend of $0.85 per share or $811.0 million, bringing the total dividends paid for the six months to $1.6 billion.
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.
The Company is accelerating the pace of refranchising to optimize its restaurant ownership mix, generate more stable and predictable revenue and cash flow streams, and operate with a less resource-intensive support structure. The shift to a greater percentage of franchised restaurants negatively impacts consolidated revenues as Company-operated sales shift to franchised sales, where the Company receives rent and/or royalty revenue based on a percentage of sales.
REVENUES
 
 
 
 
 
 
 
 
Dollars in millions
 
 
 
 
 
 
 
 
Quarters Ended June 30,
 
2015

 
2014

 
(Decrease)

 
Inc/ (Dec) Excluding Currency Translation

Company-operated sales
 
 
 
 
 
 
 
 
U.S.
 
$
1,074.2

 
$
1,133.4

 
(5
)%
 
(5
)%
Europe
 
1,688.3

 
2,074.2

 
(19
)
 
3

APMEA
 
1,313.8

 
1,387.1

 
(5
)
 
(1
)
Other Countries & Corporate
 
184.8

 
191.2

 
(3
)
 
9

Total
 
$
4,261.1

 
$
4,785.9

 
(11
)%
 
0
 %
Franchised revenues
 
 
 
 
 
 
 
 
U.S.
 
$
1,100.0

 
$
1,115.6

 
(1
)%
 
(1
)%
Europe
 
724.3

 
839.1

 
(14
)
 
4

APMEA
 
260.2

 
277.2

 
(6
)
 
7

Other Countries & Corporate
 
152.1

 
163.9

 
(7
)
 
10

Total
 
$
2,236.6

 
$
2,395.8

 
(7
)%
 
2
 %
Total revenues
 
 
 
 
 
 
 
 
U.S.
 
$
2,174.2

 
$
2,249.0

 
(3
)%
 
(3
)%
Europe
 
2,412.6

 
2,913.3

 
(17
)
 
3

APMEA
 
1,574.0

 
1,664.3

 
(5
)
 
1

Other Countries & Corporate
 
336.9

 
355.1

 
(5
)
 
9

Total
 
$
6,497.7

 
$
7,181.7

 
(10
)%
 
1
 %


16
Table of Contents

Six Months Ended June 30,
 
2015

 
2014

 
(Decrease)

 
Inc/ (Dec) Excluding Currency Translation

Company-operated sales
 
 
 
 
 
 

 
 
U.S.
 
$
2,064.4

 
$
2,174.3

 
(5
)%
 
(5
)%
Europe
 
3,183.0

 
4,000.0

 
(20
)
 
2

APMEA
 
2,587.8

 
2,744.0

 
(6
)
 
(1
)
Other Countries & Corporate
 
340.0

 
358.1

 
(5
)
 
7

Total
 
$
8,175.2

 
$
9,276.4

 
(12
)%
 
(1
)%
Franchised revenues
 
 
 
 
 
 
 
 
U.S.
 
$
2,087.9

 
$
2,128.8

 
(2
)%
 
(2
)%
Europe
 
1,393.8

 
1,625.5

 
(14
)
 
3

APMEA
 
510.9

 
539.1

 
(5
)
 
6

Other Countries & Corporate
 
288.8

 
312.2

 
(8
)
 
10

Total
 
$
4,281.4

 
$
4,605.6

 
(7
)%
 
2
 %
Total revenues
 
 
 
 
 
 
 
 
U.S.
 
$
4,152.3

 
$
4,303.1

 
(4
)%
 
(4
)%
Europe
 
4,576.8

 
5,625.5

 
(19
)
 
2

APMEA
 
3,098.7

 
3,283.1

 
(6
)
 
0

Other Countries & Corporate
 
628.8

 
670.3

 
(6
)
 
8

Total
 
$
12,456.6

 
$
13,882.0

 
(10
)%
 
0
 %
Consolidated revenues decreased 10% (increased 1% in constant currencies) for the quarter and decreased 10% (flat in constant currencies) for the six months. The constant currency results reflected the impact of expansion, mostly offset by negative comparable sales and the impact of refranchising.
•
In the U.S., revenues decreased for the quarter and six months due to negative comparable sales, reflecting negative comparable guest counts, and the impact of refranchising.
•
In Europe, the constant currency revenues increased for the quarter and six months reflecting a benefit from expansion, primarily in Russia, and positive comparable sales in the U.K. and Germany. This was partly offset by negative comparable sales in France and Russia and the impact of refranchising.
•
In APMEA, the constant currency revenues for the quarter and six months benefited from expansion in the segment and strong comparable sales in Australia. This benefit was mostly offset by negative comparable sales, primarily in China and Japan due to the ongoing impact from the 2014 supplier issue, and the impact of refranchising.    
The following table presents the percent change in comparable sales for the quarters and six months ended June 30, 2015 and 2014:
COMPARABLE SALES
 
 
 
 
 
 
Increase/ (Decrease)
 
Quarters Ended
 
Six Months Ended
  
June 30,
 
June 30,*
 
2015

 
2014

 
2015

 
2014

U.S.
(2.0
)%
 
(1.5
)%
 
(2.3
)%
 
(1.6
)%
Europe
1.2

 
(1.0
)
 
0.3

 
0.2

APMEA
(4.5
)
 
1.1

 
(6.3
)
 
1.0

Other Countries & Corporate
6.9

 
5.6

 
6.6

 
5.8

Total
(0.7
)%
 
(0.1
)%
 
(1.5
)%
 
0.2
 %
*
On a consolidated basis, comparable guest counts decreased 4.4% and 3.0% for the six months 2015 and 2014, respectively.

17
Table of Contents

The following table presents the percent change in Systemwide sales for the quarter and six months ended June 30, 2015:
SYSTEMWIDE SALES
 
 
 
 
Quarter Ended
 
Six Months Ended
  
June 30, 2015
 
June 30, 2015
 
(Decrease)

 
Inc/ (Dec)
Excluding
Currency
Translation

 
(Decrease)

Inc/ (Dec)
Excluding
Currency
Translation

U.S.
(1
)%
 
(1
)%
 
(1
)%
(1
)%
Europe
(15
)
 
4

 
(16
)
3

APMEA
(10
)
 
(1
)
 
(11
)
(3
)
Other Countries & Corporate
(10
)
 
9

 
(11
)
9

Total
(8
)%
 
1
 %
 
(9
)%
1
 %
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 June 30,
 
2015

 
2014

 
(Decrease)

 
Inc/ (Dec)
Excluding
Currency
Translation

U.S.
 
$
8,002.4

 
$
8,058.3

 
(1
)%
 
(1
)%
Europe
 
4,084.2

 
4,730.0

 
(14
)
 
4

APMEA
 
2,772.0

 
3,171.3

 
(13
)
 
(1
)
Other Countries & Corporate
 
1,756.6

 
1,974.2

 
(11
)
 
9

Total*
 
$
16,615.2

 
$
17,933.8

 
(7
)%
 
2
 %
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2015

 
2014

 
(Decrease)

 
Inc/ (Dec)
Excluding
Currency
Translation

U.S.
 
$
15,249.8

 
$
15,396.4

 
(1
)%
 
(1
)%
Europe
 
7,864.2

 
9,132.2

 
(14
)
 
3

APMEA
 
5,445.2

 
6,280.1

 
(13
)
 
(3
)
Other Countries & Corporate
 
3,404.6

 
3,841.8

 
(11
)
 
9

Total*
 
$
31,963.8

 
$
34,650.5

 
(8
)%
 
1
 %
*
Sales from developmental licensed restaurants and foreign affiliated markets where the Company earns a royalty based on a percent of sales totaled $2,989.4 million and $3,569.9 million for the quarters 2015 and 2014, respectively, and $5,932.7 million and $7,118.4 million for the six months 2015 and 2014, respectively. Results for both periods were impacted by negative comparable sales and the weaker Yen in Japan, and many weaker currencies in Latin America. 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.

18
Table of Contents

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

 
Inc/ (Dec) Excluding Currency Translation

Quarters Ended June 30,
2015

 
2014

 
2015

 
2014

 
 
Franchised
 
 
 
 
 
 
 
 
 
 
 
U.S.
82.9
%
 
83.8
%
 
$
911.6

 
$
934.4

 
(2
)%
 
(2
)%
Europe
77.6

 
78.0

 
561.8

 
654.6

 
(14
)
 
4

APMEA
85.3

 
86.1

 
221.9

 
238.6

 
(7
)
 
6

Other Countries & Corporate
85.6

 
85.7

 
130.3

 
140.6

 
(7
)
 
10

Total
81.6
%
 
82.2
%
 
$
1,825.6

 
$
1,968.2

 
(7
)%
 
2
 %
Company-operated
 
 
 
 
 
 
 
 
 
 
 
U.S.
16.5
%
 
18.3
%
 
$
177.2

 
$
207.9

 
(15
)%
 
(15
)%
Europe
18.1

 
18.6

 
306.3

 
385.7

 
(21
)
 
(1
)
APMEA
11.6

 
13.7

 
152.2

 
190.7

 
(20
)
 
(14
)
Other Countries & Corporate
15.7

 
16.6

 
29.1

 
31.8

 
(8
)
 
3

Total
15.6
%
 
17.1
%
 
$
664.8

 
$
816.1

 
(19
)%
 
(8
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Percent
 
Amount
 
(Decrease)

 
Inc/ (Dec) Excluding Currency Translation

Six Months Ended June 30,
2015

 
2014

 
2015

 
2014

 
 
Franchised
 
 
 
 
 
 
 
 
 
 
 
U.S.
82.1
%
 
83.2
%
 
$
1,715.1

 
$
1,770.5

 
(3
)%
 
(3
)%
Europe
76.8

 
77.5

 
1,070.9

 
1,259.4

 
(15
)
 
2

APMEA
85.1

 
86.2

 
434.7

 
464.7

 
(6
)
 
5

Other Countries & Corporate
85.2

 
85.3

 
246.1

 
266.3

 
(8
)
 
10

Total
81.0
%
 
81.7
%
 
$
3,466.8

 
$
3,760.9

 
(8
)%
 
1
 %
Company-operated
 
 
 
 
 
 
 
 
 
 
 
U.S.
15.9
%
 
17.8
%
 
$
328.3

 
$
388.0

 
(15
)%
 
(15
)%
Europe
17.3

 
17.8

 
550.1

 
713.7

 
(23
)
 
(4
)
APMEA
11.4

 
13.9

 
295.6

 
381.2

 
(22
)
 
(17
)
Other Countries & Corporate
14.9

 
15.8

 
50.6

 
56.6

 
(11
)
 
1

Total
15.0
%
 
16.6
%
 
$
1,224.6

 
$
1,539.5

 
(20
)%
 
(10
)%
Franchised margin dollars decreased $142.6 million or 7% (increased 2% in constant currencies) for the quarter and decreased $294.1 million or 8% (increased 1% in constant currencies) for the six months.
•
In the U.S., the franchised margin percent decreased for the quarter and six months primarily due to higher lease expense and negative comparable sales.
•
In Europe, the franchised margin percent decreased for the quarter and six months primarily due to the impact of refranchising and higher lease expense. The quarter also benefited from positive comparable sales performance.
•
In APMEA, the franchised margin percent decreased for the quarter and six months partly due to weaker operating performance in Japan, which reduced Japan's favorable contribution to the segment's margin percent. In addition, higher lease expense and refranchising negatively impacted the margin percent, partly offset by strong comparable sales performance in Australia.
Refranchising activity for both periods had a dilutive effect on the franchised margin percent, but resulted in higher franchised margin dollars.
Company-operated margin dollars decreased $151.3 million or 19% (8% in constant currencies) for the quarter and decreased $314.9 million or 20% (10% in constant currencies) for the six months.
•
In the U.S., the Company-operated margin percent decreased for the quarter and six months due to the impact of negative comparable guest counts and higher labor and, to a lesser extent, commodity costs. These pressures were partly offset by a higher average check.

19
Table of Contents

•
In Europe, the Company-operated margin percent decreased for the quarter and six months primarily due to weaker results in Russia, reflecting the impact of currency and inflationary pressures on commodity costs.
•
In APMEA, the Company-operated margin percent decreased for the quarter and six months primarily due to higher commodity and labor costs in China and other Asian markets. The ongoing, but lessening, impact from the 2014 supplier issue continued to pressure sales in China.
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
 
Six Months Ended
  
June 30,
 
June 30,
 
2015

 
2014

 
2015

 
2014

Food & paper
33.9
%
 
33.6
%
 
33.9
%
 
33.6
%
Payroll & employee benefits
26.3

 
25.8

 
26.6

 
26.0

Occupancy & other operating expenses
24.2

 
23.5

 
24.5

 
23.8

Total expenses
84.4
%
 
82.9
%
 
85.0
%
 
83.4
%
Company-operated margins
15.6
%
 
17.1
%
 
15.0
%
 
16.6
%
Selling, General & Administrative Expenses
Selling, general and administrative expenses decreased $36.8 million or 6% (increased 1% in constant currencies) for the quarter and decreased $74.4 million or 6% (increased 1% in constant currencies) for the six months. The constant currency increase reflects higher incentive-based compensation, marketing and technology costs, mostly offset by the benefit from comparison to prior year costs related to the first quarter 2014 Winter Olympics and the second quarter 2014 Worldwide Convention.
For the six months, selling, general and administrative expenses as a percent of revenues increased to 9.4% for 2015 compared with 9.0% for 2014, and as a percent of Systemwide sales increased to 2.9% for 2015 compared with 2.8% for 2014, as weaker foreign currencies are having a bigger impact on revenues and sales.
Other Operating (Income) Expense, Net
OTHER OPERATING (INCOME) EXPENSE, NET
 
 
 
 
Dollars in millions
 
Quarters Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015

 
2014

 
2015

 
2014

Gains on sales of restaurant businesses
$
(39.3
)
 
$
(21.9
)
 
$
(63.9
)
 
$
(50.9
)
Equity in earnings of unconsolidated affiliates
24.3

 
(14.4
)
 
87.7

 
(30.9
)
Asset dispositions and other (income) expense, net
63.7

 
2.4

 
257.6

 
7.6

Total
$
48.7

 
$
(33.9
)
 
$
281.4

 
$
(74.2
)
Gains on sales of restaurant businesses increased for the quarter and six months, primarily in the U.S.
Equity in earnings of unconsolidated affiliates decreased for the quarter and six months primarily due to results in Japan, reflecting negative operating performance and the impact of closing under-performing restaurants in the first quarter.
Asset dispositions and other expense increased for the quarter primarily due to restructuring charges of approximately $45 million. In addition, the six months included first quarter strategic charges of $195 million related to asset write-offs resulting from the decision to close under-performing restaurants, mostly in the U.S. and China, other asset write-offs as part of the refranchising initiative and U.S. restructur