10-Q
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, 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

918,229,823
(Number of shares of common stock
outstanding as of September 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.

2
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEET
 
 
 
 
 
 
 
(unaudited)
 
 
 
In millions, except per share data
September 30,
2015
 
December 31,
2014
Assets
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and equivalents
 
$
2,452.5

 
 
$
2,077.9

Accounts and notes receivable
 
1,136.2

 
 
1,214.4

Inventories, at cost, not in excess of market
 
99.3

 
 
110.0

Prepaid expenses and other current assets
 
804.6

 
 
783.2

Total current assets
 
4,492.6

 
 
4,185.5

Other assets
 
 
 
 
 
Investments in and advances to affiliates
 
846.7

 
 
1,004.5

Goodwill
 
2,581.6

 
 
2,735.3

Miscellaneous
 
1,799.2

 
 
1,798.6

Total other assets
 
5,227.5

 
 
5,538.4

Property and equipment
 
 
 
 
 
Property and equipment, at cost
 
37,865.7

 
 
39,126.1

Accumulated depreciation and amortization
 
(14,626.3
)
 
 
(14,568.6
)
Net property and equipment
 
23,239.4

 
 
24,557.5

Total assets
 
$
32,959.5

 
 
$
34,281.4

Liabilities and shareholders’ equity
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accounts payable
 
$
802.6

 
 
$
860.1

Income taxes
 
178.7

 
 
166.8

Other taxes
 
327.0

 
 
330.0

Accrued interest
 
200.0

 
 
233.7

Accrued payroll and other liabilities
 
1,448.2

 
 
1,157.3

Total current liabilities
 
2,956.5

 
 
2,747.9

Long-term debt
 
17,990.5

 
 
14,989.7

Other long-term liabilities
 
2,071.7

 
 
2,065.9

Deferred income taxes
 
1,631.0

 
 
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
 
6,418.1

 
 
6,239.1

Retained earnings
 
44,202.0

 
 
43,294.5

Accumulated other comprehensive income
 
(2,607.5
)
 
 
(1,519.7
)
Common stock in treasury, at cost; 742.4 and 697.7 million shares
 
(39,719.4
)
 
 
(35,177.1
)
Total shareholders’ equity
 
8,309.8

 
 
12,853.4

Total liabilities and shareholders’ equity
 
$
32,959.5

 
 
$
34,281.4

See Notes to condensed consolidated financial statements.

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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
 
2015
 
 
2014
 
 
2015
 
 
2014
Revenues
 
 
 
 
 
 
 
 
 
 
 
Sales by Company-operated restaurants
 
$
4,282.9

 
 
$
4,596.2

 
 
$
12,458.1

 
 
$
13,872.6

Revenues from franchised restaurants
 
2,332.2

 
 
2,390.9

 
 
6,613.6

 
 
6,996.5

Total revenues
 
6,615.1

 
 
6,987.1

 
 
19,071.7

 
 
20,869.1

Operating costs and expenses
 
 
 
 
 
 
 
 
 
 
 
Company-operated restaurant expenses
 
3,607.7

 
 
3,874.7

 
 
10,558.3

 
 
11,611.6

Franchised restaurants—occupancy expenses
 
416.1

 
 
431.2

 
 
1,230.7

 
 
1,275.9

Selling, general & administrative expenses
 
584.0

 
 
575.8

 
 
1,759.2

 
 
1,825.4

Other operating (income) expense, net
 
(23.0
)
 
 
32.9

 
 
258.4

 
 
(41.3
)
Total operating costs and expenses
 
4,584.8

 
 
4,914.6

 
 
13,806.6

 
 
14,671.6

Operating income
 
2,030.3

 
 
2,072.5

 
 
5,265.1

 
 
6,197.5

Interest expense
 
160.9

 
 
149.3

 
 
457.4

 
 
422.7

Nonoperating (income) expense, net
 
(9.0
)
 
 
2.1

 
 
(37.2
)
 
 
(1.1
)
Income before provision for income taxes
 
1,878.4

 
 
1,921.1

 
 
4,844.9

 
 
5,775.9

Provision for income taxes
 
569.2

 
 
852.7

 
 
1,521.8

 
 
2,115.6

Net income
 
$
1,309.2

 
 
$
1,068.4

 
 
$
3,323.1

 
 
$
3,660.3

Earnings per common share-basic
 
$
1.41

 
 
$
1.09

 
 
$
3.51

 
 
$
3.72

Earnings per common share-diluted
 
$
1.40

 
 
$
1.09

 
 
$
3.49

 
 
$
3.69

Dividends declared per common share
 
$
0.85

 
 
$
1.66

 
 
$
2.55

 
 
$
3.28

Weighted average shares outstanding-basic
 
930.3

 
 
978.7

 
 
947.9

 
 
985.2

Weighted average shares outstanding-diluted
 
934.8

 
 
983.8

 
 
952.7

 
 
991.1

See Notes to condensed consolidated financial statements.

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Table of Contents

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarters Ended
 
 
Nine Months Ended
 
 
September 30,
 
 
September 30,
In millions
 
2015
 
 
2014
 
 
2015
 
 
2014
Net income
 
$
1,309.2

 
 
$
1,068.4

 
 
$
3,323.1

 
 
$
3,660.3

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in accumulated other comprehensive
income (AOCI), including net investment hedges
(492.6
)
 
 
(1,168.9
)
 
 
(1,083.1
)
 
 
(1,077.7
)
Reclassification of (gain) loss to net income
—

 
 
—

 
 
0.2

 
 
15.2

Foreign currency translation adjustments-net of tax
benefit (expense) of $0.3, $(110.4), $(92.6) and $(93.2)
(492.6
)
 
 
(1,168.9
)
 
 
(1,082.9
)
 
 
(1,062.5
)
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in AOCI
1.7

 
 
19.5

 
 
13.7

 
 
33.0

Reclassification of (gain) loss to net income
(8.3
)
 
 
(0.1
)
 
 
(23.0
)
 
 
(6.2
)
Cash flow hedges-net of tax benefit (expense) of $3.8, $(11.8), $5.3 and $(14.6)
(6.6
)
 
 
19.4

 
 
(9.3
)
 
 
26.8

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

 
 
—

 
 
(1.4
)
 
 
6.5

Reclassification of (gain) loss to net income
1.7

 
 
1.3

 
 
5.8

 
 
5.3

Defined benefit pension plans-net of tax benefit (expense)
of $0.1, $0.0, $0.7 and $(4.4)
1.7

 
 
1.3

 
 
4.4

 
 
11.8

Total other comprehensive income (loss), net of tax
(497.5
)
 
 
(1,148.2
)
 
 
(1,087.8
)
 
 
(1,023.9
)
Comprehensive income (loss)
 
$
811.7

 
 
$
(79.8
)
 
 
$
2,235.3

 
 
$
2,636.4

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
 
2015
 
 
2014
 
 
2015
 
 
2014
Operating activities
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
1,309.2

 
 
$
1,068.4

 
 
$
3,323.1

 
 
$
3,660.3

Adjustments to reconcile to cash provided by operations
 
 
 
 
 
 
 
 
 
 
 
Charges and credits:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
387.7

 
 
413.4

 
 
1,166.0

 
 
1,237.0

Deferred income taxes
 
(0.1
)
 
 
(104.0
)
 
 
15.2

 
 
(142.8
)
Share-based compensation
 
29.0

 
 
23.3

 
 
76.7

 
 
75.1

Other
 
27.2

 
 
290.0

 
 
289.3

 
 
353.7

Changes in working capital items
 
194.4

 
 
141.8

 
 
290.1

 
 
43.9

Cash provided by operations
 
1,947.4

 
 
1,832.9

 
 
5,160.4

 
 
5,227.2

Investing activities
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
(412.7
)
 
 
(658.9
)
 
 
(1,221.2
)
 
 
(1,817.3
)
Sales and purchases of restaurant businesses and property sales
 
38.2

 
 
71.9

 
 
136.8

 
 
229.8

Other
 
(44.0
)
 
 
(195.6
)
 
 
(29.8
)
 
 
(418.4
)
Cash used for investing activities
 
(418.5
)
 
 
(782.6
)
 
 
(1,114.2
)
 
 
(2,005.9
)
Financing activities
 
 
 
 
 
 
 
 
 
 
 
Net short-term borrowings
 
170.2

 
 
153.6

 
 
131.4

 
 
390.0

Long-term financing issuances
 
1.4

 
 
0.0

 
 
4,229.2

 
 
1,536.4

Long-term financing repayments
 
(6.2
)
 
 
(6.0
)
 
 
(1,052.9
)
 
 
(547.1
)
Treasury stock purchases
 
(2,392.3
)
 
 
(944.4
)
 
 
(4,554.1
)
 
 
(2,087.4
)
Common stock dividends
 
(789.1
)
 
 
(793.0
)
 
 
(2,416.4
)
 
 
(2,395.3
)
Proceeds from stock option exercises
 
35.7

 
 
39.6

 
 
170.9

 
 
201.3

Excess tax benefit on share-based compensation
 
4.6

 
 
11.0

 
 
30.0

 
 
67.5

Other
 
(2.9
)
 
 
(3.2
)
 
 
(22.4
)
 
 
(11.9
)
Cash used for financing activities
 
(2,978.6
)
 
 
(1,542.4
)
 
 
(3,484.3
)
 
 
(2,846.5
)
Effect of exchange rates on cash and cash equivalents
 
(96.3
)
 
 
(352.7
)
 
 
(187.3
)
 
 
(347.7
)
Cash and equivalents increase (decrease)
 
(1,546.0
)
 
 
(844.8
)
 
 
374.6

 
 
27.1

Cash and equivalents at beginning of period
 
3,998.5

 
 
3,670.6

 
 
2,077.9

 
 
2,798.7

Cash and equivalents at end of period
 
$
2,452.5

 
 
$
2,825.8

 
 
$
2,452.5

 
 
$
2,825.8

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 nine months ended September 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 September 30,
2015
 
2014
Conventional franchised
21,009

 
20,573

Developmental licensed
5,348

 
5,059

Foreign affiliated
3,494

 
3,540

Total Franchised
29,851

 
29,172

Company-operated
6,554

 
6,692

Systemwide restaurants
36,405

 
35,864

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 4.5 million shares and 5.1 million shares for the quarters 2015 and 2014, respectively, and 4.8 million shares and 5.9 million shares for the nine 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 9.1 million shares and 9.2 million shares for the quarters 2015 and 2014, respectively, and 9.4 million shares and 5.3 million shares for the nine 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 September 30, 2015, the fair value of the Company’s debt obligations was estimated at $18.9 billion, compared to a carrying amount of $18.0 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.

7
Table of Contents

Financial Instruments and Hedging Activities
The Company is exposed to global market risks, including the effect of changes in interest rates and foreign currency fluctuations. The Company uses foreign currency denominated debt and derivative instruments to mitigate the impact of these changes. The Company does not hold or issue derivatives for trading purposes.
The following table presents the fair values of derivative instruments included on the condensed consolidated balance sheet:
  
Derivative Assets
 
Derivative Liabilities
In millions
September 30,
2015
 
December 31,
2014
 
September 30,
2015
 
December 31,
2014
Total derivatives designated as hedging instruments
 
$
75.9

 
 
$
108.2

 
 
$
(42.0
)
 
 
$
(42.3
)
Total derivatives not designated as hedging instruments
 
141.8

 
 
137.9

 
 
(9.8
)
 
 
(7.9
)
Total derivatives
 
$
217.7

 
 
$
246.1

 
 
$
(51.8
)
 
 
$
(50.2
)
The following table presents the pretax amounts affecting income and other comprehensive income ("OCI") for the nine months ended September 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
 
$
19.7

 
 
$
50.4

 
 
$
34.3

 
 
$
9.0

 

$
22.9

 

$
0.7

Net Investment Hedges
 
$
493.5

 
 
$
698.4

 
 
$
(0.2
)
 
 
$
(15.2
)
 
 
 
 
 
 
Undesignated derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
$
19.5


 
$
14.8

(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 September 30, 2015, $2.2 billion of the Company's outstanding fixed-rate debt was effectively converted. For the nine months ended September 30, 2015, the Company recognized a $14.3 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 16 months for certain exposures and are denominated in various currencies. As of September 30, 2015, the Company had derivatives outstanding with an equivalent notional amount of $412.5 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 18 months and have an equivalent notional amount of $133.5 million.
Based on market conditions at September 30, 2015, the $21.7 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 September 30, 2015, $5.5 billion of the Company's third party foreign currency denominated debt, $3.5 billion of intercompany foreign currency denominated debt and $296.2 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, 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. In connection with the Company's announcement in early May 2015 to restructure its global business, the Company changed its reporting segments, effective July 1, 2015, from a geographic focus to segments each of which combines markets with similar characteristics and opportunities for growth. The following new reporting segments reflect how management now reviews and evaluates operating performance:
•
U.S. - the Company’s largest segment. This segment did not change as a result of the new reporting structure.
•
International Lead Markets - established markets including Australia, Canada, France, Germany, the U.K. and related markets, which the Company believes operate within similar economic and competitive dynamics, and offer similar growth opportunities.
•
High Growth Markets - markets the Company believes have relatively higher restaurant expansion and franchising potential including China, Italy, Korea, Poland, Russia, Spain, Switzerland, the Netherlands and related markets.
•
Foundational Markets and Corporate - the remaining markets in the McDonald’s system, each of which the Company believes has the potential to operate under a largely franchised model. Corporate activities are also reported within this segment.
On September 18, 2015, the Company issued segment summary financial information and segment historical data in accordance with its new reporting structure for the previously reported years ended 2010 through 2014 and quarters ended March 31, 2014 through June 30, 2015.
The Company has evaluated the change to its new reporting segments and determined that it is still appropriate for reporting units to be defined as each individual country when testing goodwill for impairment.
The following table presents the Company’s revenues and operating income by segment.
 
Quarters Ended
 
Nine Months Ended
  
September 30,
 
September 30,
In millions
2015
 
2014
 
2015
 
2014
Revenues
 
 
 
 
 
 
 
U.S.
$
2,189.3

 
$
2,202.1

 
$
6,341.6

 
$
6,505.2

International Lead Markets
1,971.6

 
2,224.3

 
5,699.3

 
6,450.8

High Growth Markets
1,645.2

 
1,722.6

 
4,714.4

 
5,306.4

Foundational Markets & Corporate
809.0

 
838.1

 
2,316.4

 
2,606.7

Total revenues
$
6,615.1

 
$
6,987.1

 
$
19,071.7

 
$
20,869.1

Operating Income
 
 
 
 
 
 
 
U.S.
$
902.1

 
$
914.4

 
$
2,559.7

 
$
2,715.7

International Lead Markets
739.5

 
830.6

 
2,011.6

 
2,299.4

High Growth Markets
297.3

 
214.3

 
639.3

 
775.2

Foundational Markets & Corporate
91.4

 
113.2

 
54.5

 
407.2

Total operating income
$
2,030.3

 
$
2,072.5

 
$
5,265.1

 
$
6,197.5


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 36,405 restaurants in 119 countries at September 30, 2015, 29,851 were licensed to franchisees (comprised of 21,009 franchised to conventional franchisees, 5,348 licensed to developmental licensees and 3,494 licensed to foreign affiliates ("affiliates") – primarily in Japan) and 6,554 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.
Through June 30, 2015, the Company was managed as distinct geographic segments, comprised of the U.S., Europe, Asia/Pacific, Middle East and Africa and Other Countries & Corporate, which included Canada and Latin America. Beginning July 1, 2015, McDonald’s started operating under a new organizational structure with the following segments that combine markets with similar characteristics and opportunities for growth:
•
U.S. - the Company's largest segment. This segment did not change as a result of the new reporting structure.
•
International Lead Markets - established markets including Australia, Canada, France, Germany, the U.K. and related markets, which we believe operate within similar economic and competitive dynamics, and offer similar growth opportunities.
•
High Growth Markets - markets we believe have relatively higher restaurant expansion and franchising potential including China, Italy, Korea, Poland, Russia, Spain, Switzerland, the Netherlands and related markets.
•
Foundational Markets & Corporate - the remaining markets in the McDonald's system, each of which we believe has the potential to operate under a largely franchised model. Corporate activities are also reported within this segment.
On September 18, 2015, the Company issued segment summary financial information and segment historical data in accordance with its new reporting structure for the previously reported years ended 2010 through 2014 and quarters ended March 31, 2014 through June 30, 2015.
For the nine months ended September 30, 2015, the U.S., International Lead Markets and High Growth Markets segments accounted for 33%, 30% 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.
In early May 2015, the Company announced the initial steps to reset and turn around its business. To reposition McDonald's as a modern, progressive burger company and increase its relevance with customers, the Company outlined its priorities as threefold - driving

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operational growth, returning excitement to the brand and enhancing financial value by optimizing the Company’s restaurant ownership mix, delivering cost savings and accelerating cash returned to shareholders. The Company expects to host a previously announced Investor Meeting on November 10, 2015 and expects to discuss its turnaround efforts and other matters at such time.
The immediate priority for our business is to restore growth under a new organizational structure designed to provide greater focus on the customer, improve our operating fundamentals and drive a recommitment to running great restaurants. Effective July 1, 2015, the Company completed a worldwide restructuring. As described above, this resulted in a reorganization of its business from a geographically-focused structure to segments that combine markets with similar characteristics and opportunities for growth. From an operations perspective, this new structure brings similar markets together to leverage their collective insights and expertise to deliver a better overall experience for our customers. From a reporting perspective, the new segment structure provides greater visibility into the key markets driving the vast majority of the Company's underlying financial performance and reflects how management now reviews and evaluates operating performance.
Following the Company's reorganization, our turnaround efforts will be governed by strong financial discipline, faster decision making and clear management accountability.
Financial Performance
While still in the early stages, we believe our turnaround plan is starting to generate the change needed to reposition McDonald's as a modern, progressive burger company. Our third quarter operating performance reflected an increase in global comparable sales of 4.0%, with positive comparable sales across all segments and positive guest counts in all segments, except the U.S. Results partly benefited from sales recovery following the 2014 China supplier issue. As we begin the fourth quarter, comparable sales are expected to be positive in all segments.
For the nine months, global comparable sales increased 0.4%, reflecting negative comparable guest counts of 3.1%, largely impacted by the U.S. and Japan. 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.
In the U.S., third quarter comparable sales increased 0.9% and decreased 1.2% for the nine months. The shift to positive comparable sales in the quarter, the first increase in two years, reflects the initial steps we've taken in the areas that matter most to our customers - great-tasting, high-quality food, convenience and value. The introduction of the new Premium Buttermilk Crispy Chicken Deluxe sandwich and breakfast, including a return to the classic recipe ingredients for McDonald's iconic Egg McMuffin, contributed to the quarter's performance. Moving forward, rebuilding customer traffic remains a top priority for the segment. This includes enhancing the taste of our products and improving consumer perceptions of quality, net simplification of the menu and menu boards and restoring a more sustained national value platform.
In the International Lead Markets segment, comparable sales increased 4.6% for the quarter and 3.2% for the nine months led by strong performance in Australia, the U.K. and Canada and positive results in Germany. Positive consumer response to multiple menu, service and value initiatives throughout most of the segment contributed to performance.
In the High Growth Markets segment, comparable sales increased 8.9% for the quarter and 1.4% for the nine months. Both periods benefited from strong sales recovery in China following the prior year supplier issue, reflecting the restoration of brand trust through the successful execution of strong recovery plans. The quarter also benefited from positive performance in most other markets.
The following third quarter and nine month results included a benefit from comparison to the 2014 China supplier issue:
•
Global comparable sales increase of 4.0% for the quarter, reflecting positive comparable sales in all segments, and an increase of 0.4% for the nine months
•
Consolidated revenues decrease of 5% (increase of 7% in constant currencies) for the quarter and decrease of 9% (increase of 2% in constant currencies) for the nine months
•
Consolidated operating income decrease of 2% (increase of 10% in constant currencies) for the quarter. For the nine months, operating income decreased 15% (decreased 5% in constant currencies), reflecting the negative impact of approximately $240 million of strategic charges incurred during the first half of 2015
•
Diluted earnings per share of $1.40 for the quarter and $3.49 for the nine months, an increase of 28% (increase of 44% in constant currencies) and a decrease of 5% (increase of 5% in constant currencies), respectively. Both periods benefited from comparison to the prior year's increase in tax reserves related to certain foreign tax matters and the China supplier issue. These items had a negative impact on diluted earnings per share of $0.41 in the third quarter 2014. In constant currencies, strategic charges incurred during the first half of 2015 had a negative impact on diluted earnings per share of $0.21 for the nine months
The Company returned $3.1 billion to shareholders through share repurchases and dividends for the quarter. This brings the year-to-date return to shareholders to $7.1 billion against our targeted return of $8-9 billion in 2015.


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Outlook
The Company's Outlook will be provided in conjunction with its November 10, 2015 Investor Meeting.

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
 
Nine Months Ended
Dollars in millions, except per share data
September 30, 2015
 
September 30, 2015
 
Amount
 
 
Increase/
(Decrease)

 
Amount
 
 
Increase/
(Decrease)

Revenues
 
 
 
 
 
 
 
 
 
Sales by Company-operated restaurants
 
$
4,282.9

 
(7
)%
 
 
$
12,458.1

 
(10
)%
Revenues from franchised restaurants
 
2,332.2

 
(2
)
 
 
6,613.6

 
(5
)
Total revenues
 
6,615.1

 
(5
)
 
 
19,071.7

 
(9
)
Operating costs and expenses
 
 
 
 
 
 
 
 
 
Company-operated restaurant expenses
 
3,607.7

 
(7
)
 
 
10,558.3

 
(9
)
Franchised restaurants—occupancy expenses
 
416.1

 
(3
)
 
 
1,230.7

 
(4
)
Selling, general & administrative expenses
 
584.0

 
1

 
 
1,759.2

 
(4
)
Other operating (income) expense, net
 
(23.0
)
 
n/m

 
 
258.4

 
n/m

Total operating costs and expenses
 
4,584.8

 
(7
)
 
 
13,806.6

 
(6
)
Operating income
 
2,030.3

 
(2
)
 
 
5,265.1

 
(15
)
Interest expense
 
160.9

 
8

 
 
457.4

 
8

Nonoperating (income) expense, net
 
(9.0
)
 
n/m

 
 
(37.2
)
 
n/m

Income before provision for income taxes
 
1,878.4

 
(2
)
 
 
4,844.9

 
(16
)
Provision for income taxes
 
569.2

 
(33
)
 
 
1,521.8

 
(28
)
Net income
 
$
1,309.2

 
23
 %
 
 
$
3,323.1

 
(9
)%
Earnings per common share-basic
 
$
1.41

 
29
 %
 
 
$
3.51

 
(6
)%
Earnings per common share-diluted
 
$
1.40

 
28
 %
 
 
$
3.49

 
(5
)%
n/m Not meaningful

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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 September 30,
 
2015

 
 
2014

 
 
2015

Revenues
 
$
6,615.1

 
 
$
6,987.1

 
 
$
(837.6
)
Company-operated margins
 
675.2

 
 
721.5

 
 
(110.8
)
Franchised margins
 
1,916.1

 
 
1,959.7

 
 
(181.1
)
Selling, general & administrative expenses
 
584.0

 
 
575.8

 
 
42.6

Operating income
 
2,030.3

 
 
2,072.5

 
 
(246.9
)
Net income
 
1,309.2

 
 
1,068.4

 
 
(159.4
)
Earnings per share-diluted
 
$
1.40

 
 
$
1.09

 
 
$
(0.17
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency
Translation
Benefit/ (Cost)
 
Nine Months Ended September 30,
 
2015

 
 
2014

 
 
2015

Revenues
 
$
19,071.7

 
 
$
20,869.1

 
 
$
(2,285.4
)
Company-operated margins
 
1,899.8

 
 
2,261.0

 
 
(270.9
)
Franchised margins
 
5,382.9

 
 
5,720.6

 
 
(496.0
)
Selling, general & administrative expenses
 
1,759.2

 
 
1,825.4

 
 
124.5

Operating income
 
5,265.1

 
 
6,197.5

 
 
(617.2
)
Net income
 
3,323.1

 
 
3,660.3

 
 
(374.7
)
Earnings per share-diluted
 
$
3.49

 
 
$
3.69

 
 
$
(0.39
)
The impact of foreign currency translation on consolidated operating results for the quarter and nine 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 increased 23% (37% in constant currencies) to $1,309.2 million, and diluted earnings per share increased 28% (44% in constant currencies) to $1.40. Foreign currency translation had a negative impact of $0.17 on diluted earnings per share.
For the nine months, net income decreased 9% (increased 1% in constant currencies) to $3,323.1 million, and diluted earnings per share decreased 5% (increased 5% in constant currencies) to $3.49. Foreign currency translation had a negative impact of $0.39 on diluted earnings per share.
For the quarter and nine months, results benefited from comparison to the prior year's increase in tax reserves related to certain foreign tax matters and the China supplier issue. These items had a negative impact on diluted earnings per share of $0.41 in the third quarter 2014. In addition, both periods benefited from improved franchised margins throughout the international segments.
Results for the nine months were also negatively impacted by approximately $240 million of pre-tax strategic charges incurred during the first half of this year, primarily related to store closing costs, restructuring charges and other asset write-offs as part of the refranchising initiative, and weaker operating performance in the U.S. and Japan.
Diluted earnings per share for both periods benefited from a decrease in diluted weighted average shares outstanding due to share repurchases.
During the quarter, the Company repurchased 24.2 million shares of its stock for $2.3 billion, bringing total purchases for the nine months to 48.2 million shares or $4.7 billion. In addition, the Company paid a quarterly dividend of $0.85 per share or $789.1 million, bringing the total dividends paid for the nine months to $2.4 billion.

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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 structure. The shift to a greater percentage of franchised restaurants negatively impacts consolidated revenues as Company-operated sales are replaced by franchised sales, where the Company receives rent and/or royalty revenue based on a percentage of sales.
REVENUES
 
 
 
 
 
 
 
 
Dollars in millions
 
 
 
 
 
 
 
 
Quarters Ended September 30,
 
2015

 
2014

 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

Company-operated sales
 
 
 
 
 
 
 
 
U.S.
 
$
1,062.2

 
$
1,097.3

 
(3
)%
 
(3
)%
International Lead Markets
 
1,233.0

 
1,405.3

 
(12
)
 
2

High Growth Markets
 
1,450.9

 
1,526.7

 
(5
)
 
15

Foundational Markets & Corporate
 
536.8

 
566.9

 
(5
)
 
13

Total
 
$
4,282.9

 
$
4,596.2

 
(7
)%
 
7
 %
Franchised revenues
 
 
 
 
 
 
 
 
U.S.
 
$
1,127.1

 
$
1,104.8

 
2
 %
 
2
 %
International Lead Markets
 
738.6

 
819.0

 
(10
)
 
7

High Growth Markets
 
194.3

 
195.9

 
(1
)
 
15

Foundational Markets & Corporate
 
272.2

 
271.2

 
0

 
20

Total
 
$
2,332.2

 
$
2,390.9

 
(2
)%
 
7
 %
Total revenues
 
 
 
 
 
 
 
 
U.S.
 
$
2,189.3

 
$
2,202.1

 
(1
)%
 
(1
)%
International Lead Markets
 
1,971.6

 
2,224.3

 
(11
)
 
4

High Growth Markets
 
1,645.2

 
1,722.6

 
(4
)
 
15

Foundational Markets & Corporate
 
809.0

 
838.1

 
(3
)
 
15

Total
 
$
6,615.1

 
$
6,987.1

 
(5
)%
 
7
 %


15
Table of Contents

Nine Months Ended September 30,
 
2015

 
2014

 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

Company-operated sales
 
 
 
 
 
 

 
 
U.S.
 
$
3,126.6

 
$
3,271.6

 
(4
)%
 
(4
)%
International Lead Markets
 
3,605.9

 
4,107.2

 
(12
)
 
2

High Growth Markets
 
4,170.5

 
4,722.5

 
(12
)
 
5

Foundational Markets & Corporate
 
1,555.1

 
1,771.3

 
(12
)
 
4

Total
 
$
12,458.1

 
$
13,872.6

 
(10
)%
 
2
 %
Franchised revenues
 
 
 
 
 
 
 
 
U.S.
 
$
3,215.0

 
$
3,233.6

 
(1
)%
 
(1
)%
International Lead Markets
 
2,093.4

 
2,343.6

 
(11
)
 
5

High Growth Markets
 
543.9

 
583.9

 
(7
)
 
8

Foundational Markets & Corporate
 
761.3

 
835.4

 
(9
)
 
9

Total
 
$
6,613.6

 
$
6,996.5

 
(5
)%
 
3
 %
Total revenues
 
 
 
 
 
 
 
 
U.S.
 
$
6,341.6

 
$
6,505.2

 
(3
)%
 
(3
)%
International Lead Markets
 
5,699.3

 
6,450.8

 
(12
)
 
3

High Growth Markets
 
4,714.4

 
5,306.4

 
(11
)
 
6

Foundational Markets & Corporate
 
2,316.4

 
2,606.7

 
(11
)
 
6

Total
 
$
19,071.7

 
$
20,869.1

 
(9
)%
 
2
 %
•
Revenues: Revenues decreased 5% (increased 7% in constant currencies) for the quarter and decreased 9% (increased 2% in constant currencies) for the nine months. The constant currency results reflected the positive impact from expansion, as well as the benefit from solid comparable sales performance in the quarter.
•
U.S.: The decrease in revenues for the quarter and nine months was partly due to the impact from refranchising. Results in the quarter benefited from slightly positive comparable sales, whereas negative comparable sales impacted results in the first half of the year.
•
International Lead Markets: The constant currency revenues increased for the quarter and nine months reflecting strong comparable sales performance, primarily in Australia, the U.K., and Canada, partly offset by the impact of refranchising, primarily in Germany.
•
High Growth Markets: The constant currency increase in revenues for the quarter and nine months benefited from expansion and strong comparable sales in the quarter largely due to sales recovery from the 2014 China supplier issue.
The following table presents the percent change in comparable sales for the quarters and nine months ended September 30, 2015 and 2014:
COMPARABLE SALES
 
 
 
 
 
 
Increase/ (Decrease)
 
Quarters Ended
 
Nine Months Ended
  
September 30,
 
September 30,*
 
2015

 
2014

 
2015

 
2014

U.S.
0.9
%
 
(3.3
)%
 
(1.2
)%
 
(2.2
)%
International Lead Markets
4.6

 
0.4

 
3.2

 
0.6

High Growth Markets
8.9

 
(9.6
)
 
1.4

 
(2.3
)
Foundational Markets & Corporate
6.1

 
(4.0
)
 
(0.9
)
 
(0.1
)
Total
4.0
%
 
(3.3
)%
 
0.4
 %
 
(1.0
)%
*
On a consolidated basis, comparable guest counts (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) decreased 3.1% and 3.7% for the nine months 2015 and 2014, respectively.

16
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The following table presents the percent change in Systemwide sales for the quarter and nine months ended September 30, 2015:
SYSTEMWIDE SALES
 
 
 
 
Quarter Ended
 
Nine Months Ended
  
September 30, 2015
 
September 30, 2015
 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

 
Inc/ (Dec)

Inc/ (Dec)
Excluding
Currency
Translation

U.S.
1
 %
 
1
%
 
0
 %
0
%
International Lead Markets
(10
)
 
6

 
(11
)
5

High Growth Markets
(2
)
 
15

 
(8
)
7

Foundational Markets & Corporate
(10
)
 
9

 
(15
)
2

Total
(4
)%
 
6
%
 
(7
)%
2
%
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,
 
2015

 
2014

 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

U.S.
 
$
8,139.9

 
$
7,975.1

 
2
 %
 
2
%
International Lead Markets
 
4,290.5

 
4,735.5

 
(9
)
 
8

High Growth Markets
 
1,216.6

 
1,208.7

 
1

 
15

Foundational Markets & Corporate
 
3,592.7

 
4,006.7

 
(10
)
 
8

Total*
 
$
17,239.7

 
$
17,926.0

 
(4
)%
 
6
%
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2015

 
2014

 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

U.S.
 
$
23,389.7

 
$
23,371.5

 
0
 %
 
0
%
International Lead Markets
 
12,158.6

 
13,545.0

 
(10
)
 
6

High Growth Markets
 
3,407.9

 
3,546.2

 
(4
)
 
10

Foundational Markets & Corporate
 
10,247.3

 
12,113.8

 
(15
)
 
1

Total*
 
$
49,203.5

 
$
52,576.5

 
(6
)%
 
3
%
*
Sales from developmental licensed restaurants and foreign affiliated markets where the Company earns a royalty based on a percent of sales totaled $3,177.4 million and $3,492.4 million for the quarters 2015 and 2014, respectively, and $9,110.1 million and $10,610.8 million for the nine 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.

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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,
2015

 
2014

 
2015

 
2014

 
 
Franchised
 
 
 
 
 
 
 
 
 
 
 
U.S.
83.1
%
 
83.4
%
 
$
937.0

 
$
921.3

 
2
 %
 
2
 %
International Lead Markets
80.8

 
80.8

 
596.7

 
661.3

 
(10
)
 
7

High Growth Markets
72.3

 
71.5

 
140.4

 
140.1

 
0

 
16

Foundational Markets & Corporate
88.8

 
87.4

 
242.0

 
237.0

 
2

 
22

Total
82.2
%
 
82.0
%
 
$
1,916.1

 
$
1,959.7

 
(2
)%
 
7
 %
Company-operated
 
 
 
 
 
 
 
 
 
 
 
U.S.
12.4
%
 
16.7
%
 
$
132.2

 
$
182.9

 
(28
)%
 
(28
)%
International Lead Markets
20.8

 
20.6

 
256.8

 
289.9

 
(11
)
 
3

High Growth Markets
14.3

 
12.3

 
207.5

 
187.1

 
11

 
39

Foundational Markets & Corporate
14.7

 
10.9

 
78.7

 
61.6

 
28

 
54

Total
15.8
%
 
15.7
%
 
$
675.2

 
$
721.5

 
(6
)%
 
9
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Percent
 
Amount
 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

Nine Months Ended September 30,
2015

 
2014

 
2015

 
2014

 
 
Franchised
 
 
 
 
 
 
 
 
 
 
 
U.S.
82.5
%
 
83.2
%
 
$
2,652.1

 
$
2,691.8

 
(1
)%
 
(1
)%
International Lead Markets
79.9

 
80.1

 
1,673.0

 
1,877.1

 
(11
)
 
5

High Growth Markets
71.0

 
71.7

 
385.9

 
418.8

 
(8
)
 
7

Foundational Markets & Corporate
88.3

 
87.8

 
671.9

 
732.9

 
(8
)
 
9

Total
81.4
%
 
81.8
%
 
$
5,382.9

 
$
5,720.6

 
(6
)%
 
3
 %
Company-operated
 
 
 
 
 
 
 
 
 
 
 
U.S.
14.7
%
 
17.5
%
 
$
460.5

 
$
570.9

 
(19
)%
 
(19
)%
International Lead Markets
20.0

 
19.8

 
719.9

 
814.2

 
(12
)
 
3

High Growth Markets
12.6

 
14.0

 
526.6

 
662.2

 
(20
)
 
(2
)
Foundational Markets & Corporate
12.4

 
12.1

 
192.8

 
213.7

 
(10
)
 
6

Total
15.2
%
 
16.3
%
 
$
1,899.8

 
$
2,261.0

 
(16
)%
 
(4
)%
•
Franchised: Franchised margin dollars decreased $43.6 million or 2% (increased 7% in constant currencies) for the quarter and decreased $337.7 million or 6% (increased 3% in constant currencies) for the nine months. The constant currency increase for both periods benefited from expansion and refranchising, as well as positive comparable sales performance in the quarter.
•
U.S.: The franchised margin percent decreased for the quarter and nine months primarily due to higher occupancy costs. The nine months was also impacted by negative comparable sales in the first half of the year.
•
International Lead Markets: The franchised margin percent was flat for the quarter and decreased slightly for the nine months reflecting the benefit from positive comparable sales performance and the negative impact from refranchising and higher lease expense.
•
High Growth Markets: The franchised margin percent increased for the quarter and decreased for the nine months. Both periods benefited from China's sales recovery and were negatively impacted by refranchising and higher occupancy costs.
Refranchising generally has a dilutive effect on the franchised margin percent, but results in higher franchised margin dollars.
•
Company-operated: Company-operated margin dollars decreased $46.3 million or 6% (increased 9% in constant currencies) for the quarter and decreased $361.2 million or 16% (4% in constant currencies) for the nine months. The constant currency increase for the quarter was driven by China's sales recovery.
•
U.S.: The Company-operated margin percent decreased for the quarter and nine months primarily due to our incremental investment in wages and benefits for all eligible Company-operated restaurant employees, effective July 1, 2015, designed to improve restaurant performance and enhance our employer brand. The impact of negative comparable guest counts and higher commodity and occupancy costs was offset by a higher average check.

18
Table of Contents

•
International Lead Markets: The Company-operated margin percent increased slightly for the quarter and nine months as the benefit from positive comparable sales offset higher labor and occupancy costs. In addition, refranchising in Germany had a positive impact.
•
High Growth Markets: The Company-operated margin percent increased for the quarter and decreased for the nine months. Both periods benefited from sales recovery in China and were negatively impacted by currency and inflationary pressures in Russia, as well as higher labor and occupancy costs across the segment.
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,
 
2015

 
2014

 
2015

 
2014

Food & paper
33.7
%
 
33.6
%
 
33.8
%
 
33.6
%
Payroll & employee benefits
26.5

 
26.3

 
26.5

 
26.1

Occupancy & other operating expenses
24.0

 
24.4

 
24.5

 
24.0

Total expenses
84.2
%
 
84.3
%
 
84.8
%
 
83.7
%
Company-operated margins
15.8
%
 
15.7
%
 
15.2
%
 
16.3
%
Selling, General & Administrative Expenses
•
Selling, general and administrative expenses increased $8.2 million or 1% (9% in constant currencies) for the quarter and decreased $66.2 million or 4% (increased 3% in constant currencies) for the nine months. The constant currency increase for both periods reflected higher incentive-based compensation costs. For the nine months, the constant currency increase also reflected higher technology and marketing costs, offset by lower employee costs resulting from the Company's recent restructuring initiatives and the benefit from comparison to prior year costs, which included the Winter Olympics in the first quarter and the Worldwide Convention in the second quarter.
•
For the nine months, selling, general and administrative expenses as a percent of revenues increased to 9.2% for 2015 compared with 8.7% for 2014, and as a percent of Systemwide sales increased to 2.9% for 2015 compared with 2.7% for 2014, partly reflecting weaker foreign currencies that are having a larger impact on revenues and sales.
•
In connection with the Company's change in reporting segments, effective July 1, 2015, the Company provided historical segment summary financial information in accordance with its new reporting structure. As a result of the re-categorization of all markets from the prior geographic segments into the new segments, historical market support expenses outside the U.S. were reallocated from the prior geographic segments into the new international segments.
Beginning July 1, 2015, the Company centralized certain market support expenses previously incurred by the geographic segments into Corporate. As a result, these expenses were included in the segment results prior to July 1, 2015 and in Corporate results subsequent to that date. This reallocation, net of costs that have been eliminated, resulted in a reduction for the quarter of approximately $30 million of segment-level selling, general and administrative expenses, evenly allocated between the International Lead Markets and High Growth Markets segments, and a corresponding increase in Corporate expenses.
Other Operating (Income) Expense, Net
OTHER OPERATING (INCOME) EXPENSE, NET
 
 
 
 
Dollars in millions
 
Quarters Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015

 
2014

 
2015

 
2014

Gains on sales of restaurant businesses
$
(20.2
)
 
$
(26.1
)
 
$
(84.1
)
 
$
(77.0
)
Equity in earnings of unconsolidated affiliates
8.2

 
25.2

 
95.9

 
(5.7
)
Asset dispositions and other (income) expense, net
(11.0
)
 
33.8

 
246.6

 
41.4

Total
$
(23.0
)
 
$
32.9

 
$
258.4

 
$
(41.3
)
•
Equity in earnings of unconsolidated affiliates decreased for the nine months due to results in Japan, reflecting negative operating performance and the impact of closing under-performing restaurants in the first quarter. For the third quarter, Japan's results benefited from comparison to the 2014 supplier issue.

19
Table of Contents

•
Asset dispositions and other expense increased for the nine months, primarily due to strategic charges incurred during the first half of this year, which included asset write-offs resulting from the decision to close under-performing restaurants, mostly in the U.S. and China, restructuring charges, and other asset write-offs as part of the refranchising initiative. The quarter benefited from comparison to the charges related to the 2014 supplier issue.
Operating Income
OPERATING INCOME
Dollars in millions
Quarters Ended September 30,
2015

 
2014

 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

U.S.
$
902.1

 
$
914.4

 
(1
)%