Edgar Filing: MCDONALDS CORP

10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549




FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

¨ 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 (State or other jurisdiction of incorporation or organization)		36-2361282 (I.R.S. Employer Identification No.)

One McDonald’s Plaza Oak Brook, Illinois (Address of principal executive offices)		60523 (Zip code)



Registrant’s telephone number, including area code: (630) 623-3000


Securities registered pursuant to Section 12(b) of the Act:



Title of each class		Name of each exchange on which registered
Common stock, $.01 par value		New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
	None
	(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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

The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2015 was $89,518,453,614.

The number of shares outstanding of the registrant’s common stock as of January 31, 2016 was 901,607,888.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Form 10-K incorporates information by reference from the registrant’s 2016 definitive proxy statement, which will be filed no later than 120 days after December 31, 2015.

McDONALD’S CORPORATION

INDEX



Page reference

Part I.
	Item 1	Business	1
	Item 1A	Risk Factors and Cautionary Statement Regarding Forward-Looking Statements	3
	Item 1B	Unresolved Staff Comments	7
	Item 2	Properties	7
	Item 3	Legal Proceedings	8
	Item 4	Mine Safety Disclosures	8
	Additional Item	Executive Officers of the Registrant	9

Part II.
	Item 5	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	10
	Item 6	Selected Financial Data	12
	Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
	Item 7A	Quantitative and Qualitative Disclosures About Market Risk	29
	Item 8	Financial Statements and Supplementary Data	29
	Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	51
	Item 9A	Controls and Procedures	51
	Item 9B	Other Information	51

Part III.
	Item 10	Directors, Executive Officers and Corporate Governance	51
	Item 11	Executive Compensation	51
	Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	51
	Item 13	Certain Relationships and Related Transactions, and Director Independence	52
	Item 14	Principal Accountant Fees and Services	52

Part IV.
	Item 15	Exhibits and Financial Statement Schedules	52

Signatures			55

Exhibits

All trademarks used herein are the property of their respective owners.

PART I

ITEM 1. Business

McDonald’s Corporation, the registrant, together with its sub-sidiaries, is referred to herein as the “Company.”

a. General

Through June 30, 2015, the Company was managed as distinct geographic segments, comprised of the U.S., Europe, Asia/Pacific, Middle East and Africa ("APMEA") and Other Countries & Corporate, which included Canada and Latin America. Beginning July 1, 2015, McDonald’s started operating under a new organizational structure that combines markets with similar characteristics and opportunities for growth. Information about the Company's new segments is provided in the Overview section of Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7, page 13 of this Form 10-K.

b. Financial information about segments

Segment data for the years ended December 31, 2015, 2014, and 2013 are included in Part II, Item 8, page 44 of this Form 10-K.

c. Narrative description of business


▪	General

The Company operates and franchises McDonald’s restaurants, which serve a locally-relevant menu of quality food and drinks sold at various price points in more than 100 countries. McDonald’s global system is comprised of both Company-owned and franchised restaurants. McDonald’s franchised restaurants are owned and operated under one of the following structures - conventional franchise, developmental license or affiliate. The optimal ownership structure for an individual restaurant, trading area or market (country) is based on a variety of factors, including the availability of individuals with the entrepreneurial experience and financial resources, as well as the local legal and regulatory environment in critical areas such as property ownership and franchising. We continually review our mix of Company-owned and franchised restaurants to help optimize overall performance, with a goal to be 95% franchised over the long term. The business relationship between McDonald’s and its independent franchisees is of fundamental importance to overall performance and to the McDonald’s Brand. This business relationship is supported by an agreement that requires adherence to standards and policies essential to protecting our brand.

The Company is primarily a franchisor, with more than 80% of McDonald's restaurants owned and operated by independent franchisees. Franchising enables an individual to own a restaurant business and maintain control over staffing, purchasing, marketing and pricing decisions, while also benefiting from the strength of McDonald’s global brand, operating system and financial resources. One of the strengths of this model is that the expertise gained from operating Company-owned restaurants allows McDonald’s to improve the operations and success of all restaurants while innovations from franchisees can be tested and, when viable, efficiently implemented across relevant restaurants.

Directly operating McDonald’s restaurants contributes significantly to our ability to act as a credible franchisor. Having Company-owned restaurants provides Company personnel with a venue for restaurant operations training experience. In addition, in our Company-owned and operated restaurants, and in collaboration with franchisees, we are able to further develop and refine operating standards, marketing concepts and product and pricing strategies that will ultimately benefit relevant McDonald’s restaurants.

Under a conventional franchise arrangement, the Company owns the land and building or secures a long-term lease for the restaurant location and the franchisee pays for equipment, signs, seating and décor. The Company believes that ownership of real estate, combined with the co-investment by franchisees, enables us to achieve restaurant performance levels that are among the highest in the industry.

Franchisees are also responsible for reinvesting capital in their businesses over time. In addition, to accelerate implementation of certain initiatives, the Company frequently co-invests with franchisees to fund improvements to their restaurants or their operating systems. These investments, developed with input from McDonald’s with the aim of improving local business performance, increase the value of our Brand through the development of modernized, more attractive and higher revenue generating restaurants.

The Company’s typical franchise term is 20 years. The Company requires franchisees to meet rigorous standards and generally does not work with passive investors. The business relationship with franchisees is designed to assure consistency and high quality at all McDonald’s restaurants. Conventional franchisees contribute to the Company’s revenue through the payment of rent and royalties based upon a percent of sales, with specified minimum rent payments, along with initial fees paid upon the opening of a new restaurant or grant of a new franchise. This structure enables McDonald’s to generate significant levels of cash flow.

Under a developmental license arrangement, licensees provide capital for the entire business, including the real estate interest. The Company does not invest any capital under a developmental license arrangement. The Company receives a royalty based upon a percent of sales as well as initial fees upon the opening of a new restaurant or grant of a new license. We use the developmental license ownership structure in over 70 countries with a total of approximately 5,500 restaurants. The largest developmental licensee operates approximately 2,100 restaurants in 19 countries in Latin America and the Caribbean.

Finally, the Company also has an equity investment in a limited number of foreign affiliated markets, referred to as “affiliates.” In these markets, the Company receives a royalty based on a percent of sales and records its share of net results in Equity in earnings of unconsolidated affiliates. The largest of these affiliates is Japan, where there are nearly 3,000 restaurants.


▪	Supply Chain and Quality Assurance

The Company and its franchisees purchase food, packaging, equipment and other goods from numerous independent suppliers. The Company has established and enforces high quality standards and product specifications. The Company has quality centers around the world designed to ensure that its high standards are consistently met. The quality assurance process not only involves ongoing product reviews, but also on-site supplier visits. A Food Safety Advisory Council, composed of the Company’s technical, safety and supply chain specialists, as well as suppliers and outside academia, provides strategic global leadership for all aspects of food safety. In addition, the Company works closely with suppliers to encourage innovation, assure best practices and drive continuous improvement. Leveraging scale, supply chain infrastructure and risk management strategies, the Company also collaborates with suppliers toward a goal of achieving competitive, predictable food and paper costs over the long term.

Independently owned and operated distribution centers, approved by the Company, distribute products and supplies to McDonald’s restaurants. In addition, restaurant personnel are trained in the proper storage, handling and preparation of products.

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▪	Products

McDonald’s restaurants offer a substantially uniform menu, although there are geographic variations to suit local consumer preferences and tastes. In addition, McDonald’s tests new products on an ongoing basis.

McDonald’s menu includes hamburgers and cheeseburgers, Big Mac, Quarter Pounder with Cheese, Filet-O-Fish, several chicken sandwiches, Chicken McNuggets, wraps, french fries, salads, oatmeal, shakes, McFlurry desserts, sundaes, soft serve cones, pies, soft drinks, coffee, McCafé beverages and other beverages. In addition, the restaurants sell a variety of other products during limited-time promotions.

McDonald’s restaurants in the U.S. and many international markets offer a full or limited breakfast menu. Breakfast offerings may include Egg McMuffin, Sausage McMuffin with Egg, McGriddles, biscuit and bagel sandwiches and hotcakes.

Quality, choice and nutrition are increasingly important to our customers and we are continuously evolving our menu to meet our customers' needs.


▪	Marketing

McDonald’s global brand is well known. Marketing, promotional and public relations activities are designed to promote McDonald’s brand and differentiate the Company from competitors. Marketing and promotional efforts focus on value, quality, food taste, menu choice, nutrition, convenience and the customer experience.


▪	Intellectual property

The Company owns or is licensed to use valuable intellectual property including trademarks, service marks, patents, copyrights, trade secrets and other proprietary information. The Company considers the trademarks “McDonald’s” and “The Golden Arches Logo” to be of material importance to its business. Depending on the jurisdiction, trademarks and service marks generally are valid as long as they are used and/or registered. Patents, copyrights and licenses are of varying durations.


▪	Seasonal operations

The Company does not consider its operations to be seasonal to any material degree.


▪	Working capital practices

Information about the Company’s working capital practices is incorporated herein by reference to Management’s Discussion and Analysis of Financial Condition and Results of Operations for the years ended December 31, 2015, 2014, and 2013 in Part II, Item 7, pages 13 through 28, and the Consolidated statement of cash flows for the years ended December 31, 2015, 2014, and 2013 in Part II, Item 8, page 33 of this Form 10-K.


▪	Customers

The Company’s business is not dependent upon either a single customer or small group of customers.


▪	Backlog

Company-operated restaurants have no backlog orders.


▪	Government contracts

No material portion of the business is subject to renegotiation of profits or termination of contracts or subcontracts at government election.


▪	Competition

McDonald’s restaurants compete with international, national, regional and local retailers of food products. The Company competes on the basis of price, convenience, service, menu variety and product quality in a highly fragmented global restaurant industry.

In measuring the Company’s competitive position, management reviews data compiled by Euromonitor International, a leading source of market data with respect to the global restaurant industry. The Company’s primary competition, which is referred to as the informal eating out ("IEO") segment, includes the following restaurant categories defined by Euromonitor International: quick-service eating establishments, casual dining full-service restaurants, street stalls or kiosks, cafés,100% home delivery/takeaway providers, specialist coffee shops, self-service cafeterias and juice/smoothie bars. The IEO segment excludes establishments that primarily serve alcohol and full-service restaurants other than casual dining.

Based on data from Euromonitor International, the global IEO segment was composed of approximately 8 million outlets and generated $1.2 trillion in annual sales in 2014, the most recent year for which data is available. McDonald’s Systemwide 2014 restaurant business accounted for 0.5% of those outlets and 7.2% of the sales.

Management also on occasion benchmarks McDonald’s against the entire restaurant industry, including the IEO segment defined above and all other full-service restaurants. Based on data from Euromonitor International, the restaurant industry was composed of approximately 17 million outlets and generated $2.4 trillion in annual sales in 2014. McDonald’s Systemwide restaurant business accounted for 0.2% of those outlets and 3.6% of the sales.


▪	Research and development

The Company operates research and development facilities in the U.S., Europe and Asia. While research and development activities are important to the Company’s business, these expenditures are not material. Independent suppliers also conduct research activities that benefit the Company, its franchisees and suppliers (collectively referred to as the "System").


▪	Environmental matters

The Company continuously endeavors to improve its social responsibility and environmental practices to achieve long-term sustainability, which benefits McDonald’s and the communities it serves.

Increased focus by U.S. and overseas governmental authorities on environmental matters is likely to lead to new governmental initiatives, particularly in the area of climate change. While we cannot predict the precise nature of these initiatives, we expect that they may impact our business both directly and indirectly. Although the impact would likely vary by world region and/or market, we believe that adoption of new regulations may increase costs for the Company. Also, there is a possibility that governmental initiatives, or actual or perceived effects of changes in weather patterns, climate, or water resources could have a direct impact on the operations of the System in ways which we cannot predict at this time.

The Company monitors developments related to environmental matters and plans to respond to governmental initiatives in a timely and appropriate manner. At this time, the Company has already begun to undertake its own initiatives relating to preservation of the environment, including the implementation of more energy efficient equipment and management of energy use and more sustainable sourcing practices in many of its markets.

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▪	Number of employees

The Company’s number of employees worldwide, including Company-operated restaurant employees, was approximately 420,000 as of year-end 2015.

d. Financial information about geographic areas

Financial information about geographic areas is incorporated herein by reference to Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7, pages 13 through 29 and Segment and geographic information in Part II, Item 8, page 44 of this Form 10-K.

e. Available information

The Company is subject to the informational requirements of the Securities Exchange Act of 1934 ("Exchange Act"). The Company therefore files periodic reports, proxy statements and other information with the U.S. Securities and Exchange Commission ("SEC"). Such reports may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, DC 20549, or by calling the SEC at (800) SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements and other information.

Financial and other information can also be accessed on the investor section of the Company’s website at www.aboutmcdonalds.com. The Company makes available, free of charge, copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. Copies of financial and other information are also available free of charge by calling (800) 228-9623 or by sending a request to McDonald’s Corporation Shareholder Services, Department 720, One McDonald’s Plaza, Oak Brook, Illinois 60523.

Also posted on McDonald’s website are the Company’s Corporate Governance Principles; the charters for each of the Committees of the Board of Directors, including the Audit Committee, Compensation Committee and Governance Committee; the Code of Conduct for the Board of Directors; and the Company’s Standards of Business Conduct, which applies to all officers and employees. Copies of these documents are also available free of charge by calling (800) 228-9623 or by sending a request to McDonald’s Corporation Shareholder Services, Department 720, One McDonald’s Plaza, Oak Brook, Illinois 60523.

Information on the Company’s website is not incorporated into this Form 10-K or the Company’s other securities filings and is not a part of them.

ITEM 1A. Risk Factors and Cautionary Statement Regarding Forward-Looking Statements

The information in this report includes forward-looking statements about future events and circumstances and their effects upon revenues, expenses and business opportunities. Generally speaking, any statement in this report not based upon historical fact is a forward-looking statement. Forward-looking statements can also be identified by the use of forward-looking words, such as “may,” “will,” “expect,” “believe” and “plan” or similar expressions. In particular, statements regarding our plans, strategies, prospects and expectations regarding our business and industry are forward-looking statements. They reflect our expectations, are not guarantees of performance and speak only as of the date of this report. Except as required by law, we do not undertake to update them. Our expectations (or the underlying assumptions) may

change or not be realized, and you should not rely unduly on forward-looking statements. Our business results are subject to a variety of risks, including those that are reflected in the following considerations and factors, as well as elsewhere in our filings with the SEC. If any of these considerations or risks materialize, our expectations may change and our performance may be adversely affected.

If we do not successfully design and execute our business strategies, we may not be able to increase revenues or market share.

To drive future results, our business strategies must be effective in achieving market share gains while at the same time delivering operating income growth. Whether we successfully execute these strategies depends mainly on our System’s ability to:


▪	Continue to innovate and differentiate in all aspects of the McDonald’s experience in a way that balances value to our customers with profitability;


▪	Reinvest in our restaurants and identify and develop restaurant sites consistent with our System’s plans for net growth of System-wide restaurants;


▪	Provide clean and friendly environments that deliver a consistent McDonald's experience and demonstrate high service levels;


▪	Drive restaurant improvements that achieve optimal capacity, particularly during peak mealtime hours; and


▪	Manage the complexity of our restaurant operations.

If we are delayed or unsuccessful in executing our strategies, or if our strategies do not yield the desired results, our business, financial condition and results of operations may suffer.

The implementation of our turnaround plan may intensify the risks we face and may not be successful in driving improved performance.

Our turnaround plan includes restructuring market segments, optimizing restaurant ownership mix through accelerated refranchising, delivering cost savings and enhancing financial value through increased leverage. Implementing those actions will intensify the existing risks we face in our business, including risks associated with franchising and risks associated with our credit ratings. Further, if those actions are not successful, take longer to complete than initially projected, or are not executed effectively, our business operations, financial results and results of operations could be adversely affected.

We face intense competition in our markets, which could hurt our business.

We compete primarily in the “informal eating out” (IEO) segment, which is highly competitive. We are facing sustained, intense competition from both traditional and other competitors, which include many non-traditional market participants such as convenience stores and coffee shops. In addition, in recent periods we have experienced emerging and growing competition from the fast casual category of restaurants. We expect our environment to continue to be highly competitive and in any particular reporting period our results may be impacted by new actions of our competitors, which may have a short- or long-term impact on our results.

We compete on the basis of product choice, quality, affordability, service and location. In particular, we believe our ability to compete successfully in the current market environment depends on our ability to improve existing products, develop new products, price our products appropriately, manage the complexity of our restaurant operations and respond effectively to our

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competitors’ actions. Recognizing these dependencies, we have intensified our focus in recent periods on strategies to achieve these goals, including the turnaround plan described above, and we will likely continue to modify our strategies and implement new strategies in the future. There can be no assurance these strategies will be effective, and some strategies may be effective at improving some metrics while adversely affecting other metrics.

If we do not anticipate and address evolving consumer preferences, our business could suffer.

Our continued success depends on our System’s ability to anticipate and respond effectively to continuously shifting consumer demographics, trends in food sourcing, food preparation and consumer preferences in the IEO segment. We must continuously adapt to deliver a relevant experience for our customers amidst a highly competitive, value-driven operating environment. We continue to implement initiatives to address these shifts at an aggressive pace. There is no assurance that these initiatives will be successful and, if they are not, our financial results could be adversely impacted.

If our pricing, promotional and marketing plans are not effective, our results may be negatively impacted.

Our results depend on the impact of our pricing, promotional and marketing plans and our System’s ability to adjust these plans to respond quickly to economic and competitive conditions. Our existing or future pricing strategies and the value proposition they represent will continue to be important components of our overall plan, may not be successful and could negatively impact sales and margins. The promotion of our menu offerings may yield results below desired levels.

Additionally, we operate in an increasingly complex and costly advertising environment. Our marketing and advertising programs may not be successful and we may fail to attract and retain customers. We have increased our emphasis on digital offerings and customer loyalty initiatives, and our success depends in part on whether we can effectively execute such offerings and initiatives in a way that will enhance customer engagement. If our pricing, promotional and marketing plans are not successful, or are not as successful as those of our competitors, our sales, guest counts and market share could decrease.

Failure to preserve the value and relevance of our brand could have a negative impact on our financial results.

To be successful in the future, we believe we must preserve, enhance and leverage the value of our brand. Brand value is based in part on consumer perceptions on a variety of factors, including the nutritional content and preparation of our food, our business practices and the manner in which we source the commodities we use. Consumer acceptance of our offerings is subject to change for a variety of reasons. For example, nutritional, health and other scientific studies and conclusions, which constantly evolve and often have contradictory implications, drive popular opinion, litigation and regulation (including initiatives intended to drive consumer behavior) in ways that affect the IEO segment or perceptions of our brand and could be material to our business. Perceptions may also be affected by third parties presenting or promoting adverse commentary or perceptions of the quick-service category of the IEO segment, our brand and/or our operations, our suppliers or our franchisees. If we are unsuccessful in addressing such adverse commentary or perceptions, our brand and our financial results may suffer.

Additionally, the ongoing relevance of our brand may depend on the success of our sustainability initiatives to support our brand ambition of good food, good people and good neighbor, which will require System-wide coordination and alignment. If we are not effective in achieving our stated sustainability goals and

addressing these and other matters of social responsibility in a way that inspires trust and confidence, trust in our brand could suffer. In particular, business incidents that erode consumer trust, particularly if such incidents receive considerable publicity or result in litigation, can significantly reduce brand value and have a negative impact on our financial results.

Unfavorable general economic conditions could adversely affect our business and financial results.

Our results of operations are substantially affected by economic conditions, which can vary significantly by market and can impact consumer disposable income levels and spending habits. Economic conditions can also be impacted by a variety of factors including hostilities, epidemics and actions taken by governments to manage national economic matters, whether through austerity or stimulus measures and initiatives intended to control wages, unemployment, credit availability, inflation, taxation and other economic drivers. Many major economies, both advanced and developing, continue to face weak economies, high unemployment rates and other ongoing economic issues. Continued adverse economic conditions or adverse changes in economic conditions in our markets could pressure our operating performance, and our business and financial results may suffer.

Supply chain interruptions may increase costs or reduce revenues.

We depend on the effectiveness of our supply chain management to assure reliable and sufficient product supply, including on favorable terms. The products we sell are sourced from a wide variety of suppliers in countries around the world. Supply chain interruptions, including due to lack of supply or price increases, can adversely affect us or the suppliers and franchisees that are also part of our System and whose performance has a significant impact on our results. Such shortages or disruptions could be caused by factors beyond the control of our suppliers or us, including inclement weather, natural disasters, increased demand, problems in production or distribution, disruptions in third party logistics or transportation systems, the inability of our suppliers to obtain credit, or food safety warnings or advisories. If we experience interruptions in our supply chain, our costs could increase and it could limit the availability of products critical to our operations.

Food safety concerns may have an adverse effect on our business.

Our ability to increase sales and profits depends on our System’s ability to meet expectations for safe food and on our ability to manage the potential impact on McDonald’s of food-borne illnesses and food or product safety issues that may arise in the future. Food safety is a top priority, and we dedicate substantial resources to ensure that our customers enjoy safe food products. However, food safety events, including instances of food-borne illness, have occurred in the food industry in the past, and could occur in the future. In 2014, food quality issues were discovered at a supplier to McDonald’s and other food companies in China. As a consequence of this issue, results in China, Japan and certain other markets were negatively impacted due to lost sales and profitability, including expenses associated with rebuilding customer trust. Any future instances of food tampering, food contamination or food-borne illness, whether actual or perceived, could adversely affect our brand and reputation as well as our revenues and profits.

Our franchise business model presents a number of risks.

Our success relies in part on the financial success and cooperation of our franchisees, yet we have limited influence over their operations. Our restaurant margins arise from two sources:

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company-operated restaurants and franchised restaurants. Our franchisees manage their businesses independently, and therefore are responsible for the day-to-day operation of their restaurants. The revenues we realize from franchised restaurants are largely dependent on the ability of our franchisees to grow their sales. Our franchisees may not experience sales growth, and our revenues and margins could be negatively affected as a result. If sales trends worsen for franchisees, their financial results may deteriorate, which could result in, among other things, restaurant closures or delayed or reduced payments to us. Our refranchising effort will increase that dependence and the effect of those factors.

Our success also depends on the willingness and ability of our independent franchisees to implement major initiatives, which may include financial investment, and to remain aligned with us on operating, promotional and capital-intensive reinvestment plans. The ability of our franchisees to contribute to the achievement of our plans is dependent in large part on the availability of funding at reasonable interest rates and may be negatively impacted by the financial markets in general or by the creditworthiness of our franchisees or the Company. Our operating performance could also be negatively affected if our franchisees experience food safety or other operational problems or project a brand image inconsistent with our values, particularly if our contractual and other rights and remedies are limited, costly to exercise or subject to litigation. If franchisees do not successfully operate restaurants in a manner consistent with our required standards, the brand’s image and reputation could be harmed, which in turn could hurt our business and operating results.

Our ownership mix also affects our results and financial condition. The decision to own restaurants or to operate under franchise or license agreements is driven by many factors whose interrelationship is complex and changing. Our ability to achieve the benefits of our refranchising strategy, which involves a shift to a greater percentage of franchised restaurants, in a timely manner or at all, will depend on various factors, including our ability to timely and effectively identify franchisees that meet our rigorous standards, the performance of our existing franchisees, whether the resulting ownership mix supports our financial objectives and our ability to manage risks associated with our refranchising strategy.

Changes in commodity and other operating costs could adversely affect our results of operations.

The profitability of our company-operated restaurants depends in part on our ability to anticipate and react to changes in commodity costs, including food, paper, supply, fuel, utilities, distribution and other operating costs. Any volatility in certain commodity prices could adversely affect our operating results by impacting restaurant profitability. The commodity market for some of the ingredients we use, such as beef and chicken, is particularly volatile and is subject to significant price fluctuations due to seasonal shifts, climate conditions, industry demand, international commodity markets, food safety concerns, product recalls, government regulation and other factors, all of which are beyond our control and, in many instances, unpredictable. We can only partially address future price risk through hedging and other activities, and therefore increases in commodity costs could have an adverse impact on our profitability.

The global scope of our business subjects us to risks that could negatively affect our business.

We face differing cultural, regulatory and economic environments that exist within and among the more than 100 countries where McDonald’s restaurants operate, and our ability to achieve our business objectives depends on our success in these environments. Meeting customer expectations is complicated by the risks inherent in our global operating environment, and our

global success is partially dependent on our System’s ability to leverage operating successes across markets. Our initiatives may not have broad appeal with our customer base and could drive unanticipated changes in customer perceptions and guest counts.

Disruptions in our operations or price volatility in a market can also result from governmental actions, such as price, foreign exchange or import-export controls, increased tariffs, government-mandated closure of our or our suppliers’ operations and asset seizures. The cost and disruption of responding to governmental investigations or actions, whether or not they have merit, may impact our results. Our international success depends in part on the effectiveness of our strategies and brand-building initiatives to reduce our exposure to such governmental actions. Our results of operations and financial condition are also affected by fluctuations in currency exchange rates, which may adversely affect reported earnings.

Additionally, we face challenges and uncertainties associated with operating in developing markets, which may entail a relatively higher risk of political instability, economic volatility, crime, corruption and social and ethnic unrest. Such challenges are exacerbated in many cases by a lack of an independent and experienced judiciary and uncertainties in how local law is applied and enforced, including in areas most relevant to commercial transactions and foreign investment. If we are unable to effectively manage the risks associated with our international operations, it could have a material adverse effect on our business and financial condition.

Challenges with respect to talent management could harm our business.

Our success depends in part on our System’s ability to recruit and retain qualified personnel to work in our restaurants. Increased costs associated with recruiting and retaining such qualified personnel, whether because of the trend toward higher statutory minimum wages and social expenses or because of voluntary increases in wages necessitated by labor market conditions, could have a negative impact on the margins of our company-operated restaurants. Additionally, economic action, such as boycotts, protests, work stoppages or campaigns by labor organizations, could adversely affect (including the ability to recruit and retain talent) us or the franchisees and suppliers that are also part of the McDonald’s System and whose performance may have a material impact on our results.

We are also impacted by the costs and other effects of compliance with U.S. and international regulations affecting our workforce, which includes our staff and employees working in our company-operated restaurants. These regulations are increasingly focused on employment issues including wage and hour, healthcare, immigration, retirement and other employee benefits and unlawful workplace discrimination. Our potential exposure to reputational and other harm regarding our workplace practices or conditions or those of our independent franchisees or suppliers (or perceptions thereof) could have a negative impact on our business.

Information technology system failures or interruptions or breaches of network security may interrupt our operations.

We are increasingly reliant on technological systems (e.g., point-of-sale and other in-store systems or platforms) to conduct our business, including technology-enabled solutions provided to us by third parties; and any failure of these systems could significantly impact our operations and customer perceptions. Despite the implementation of security measures, those technology systems and solutions could become vulnerable to damage, disability or failures due to theft, fire, power loss, telecommunications failure or other catastrophic events. The third

McDonald's Corporation 2015 Annual Report 5

party solutions also present the risks faced by the third party’s business. If those systems or solutions were to fail or otherwise be unavailable, and we were unable to recover in a timely way, we could experience an interruption in our operations. We may also not fully realize the benefits of the significant investments we are making to enhance the customer experience through digital engagement and social media. Furthermore, security breaches involving our systems or those of third party providers may occur, such as unauthorized access, denial of service, computer viruses and other disruptive problems caused by hackers. Our information technology systems contain personal, financial and other information that is entrusted to us by our customers and employees as well as financial, proprietary and other confidential information related to our business. An actual or alleged security breach could result in system disruptions, shutdowns, theft or unauthorized disclosure of confidential information. The occurrence of any of these incidents could result in adverse publicity, loss of consumer confidence, reduced sales and profits, and criminal penalties or civil liabilities.

Increasing regulatory complexity may adversely affect restaurant operations and our financial results.

Our regulatory environment worldwide exposes us to complex compliance and similar risks that could affect our operations and results in material ways. In many of our markets, including the United States and countries in Europe, we are subject to increasing regulation, which has increased our cost of doing business. We are affected by the cost, compliance and other risks associated with the often conflicting and highly prescriptive regulations we face, including where inconsistent standards imposed by multiple governmental authorities can adversely affect our business and increase our exposure to litigation or governmental investigations or proceedings.

Our success depends in part on our ability to manage the impact of new, potential or changing regulations that can affect our business plans. These regulations may relate to, among others, product packaging, marketing and the nutritional content and safety of our food and other products, labeling and other disclosure practices, ordinary variations in food preparation among our own restaurants, and the need to rely on the accuracy and completeness of information from third-party suppliers (particularly given varying requirements and practices for testing and disclosure).

Additionally, we are keenly aware of and working to manage the risks and costs to us, our franchisees and our supply chain of the effects of climate change, greenhouse gases, energy and water resources. The increased public focus, including by governmental and nongovernmental organizations, on these and other environmental sustainability matters (e.g., packaging and waste, animal health and welfare, deforestation and land use) and the increased pressure to make commitments, set targets or establish additional goals and take actions to meet them, could expose us to market, operational and execution costs or risks. If we are unable to effectively manage the risks associated with our complex regulatory environment, it could have a material adverse effect on our business and financial condition.

We are subject to increasing legal complexity and could be party to litigation that could adversely affect us.

Increasing legal complexity will continue to affect our operations and results in material ways. We could be subject to legal proceedings that may adversely affect our business, including class actions, administrative proceedings, government investigations, employment and personal injury claims, landlord/tenant disputes, disputes with current or former suppliers, claims by current or former franchisees, and intellectual property claims (including claims that we infringed another party’s trademarks,

copyrights, or patents). Inconsistent standards imposed by governmental authorities can adversely affect our business and increase our exposure to litigation.

Litigation involving our relationship with franchisees and the legal distinction between our franchisees and us for employment law purposes, if determined adversely, could increase costs, negatively impact the business prospects of our franchisees and subject us to incremental liability for their actions. Similarly, although our commercial relationships with our suppliers remain independent, there may be attempts to challenge that independence, which, if determined adversely, could also increase costs, negatively impact the business prospects of our suppliers, and subject us to incremental liability for their actions. We are also subject to the legal and compliance risks associated with privacy, data collection, protection and management, in particular as it relates to information we collect when we provide optional technology-related services to franchisees.

Our operating results could also be affected by the following:


▪	The relative level of our defense costs, which vary from period to period depending on the number, nature and procedural status of pending proceedings;


▪	The cost and other effects of settlements, judgments or consent decrees, which may require us to make disclosures or take other actions that may affect perceptions of our brand and products;


▪	Adverse results of pending or future litigation, including litigation challenging the composition and preparation of our products, or the appropriateness or accuracy of our marketing or other communication practices; and


▪	The scope and terms of insurance or indemnification protections that we may have.

A judgment significantly in excess of any applicable insurance coverage could materially adversely affect our financial condition or results of operations. Further, adverse publicity resulting from these claims may hurt our business.

We may not be able to adequately protect our intellectual property or adequately ensure that we are not infringing the intellectual property of others, which could harm the value of the McDonald’s brand and our business.

The success of our business depends on our continued ability to use our existing trademarks and service marks in order to increase brand awareness and further develop our branded products in both domestic and international markets. We rely on a combination of trademarks, copyrights, service marks, trade secrets, patents and other intellectual property rights to protect our brand and branded products. We also license our intellectual property to franchisees and other third parties and we cannot assure you that they will not take actions that hurt the value of our intellectual property.

We have registered certain trademarks and have other trademark registrations pending in the United States and certain foreign jurisdictions. The trademarks that we currently use have not been registered in all of the countries outside of the United States in which we do business or may do business in the future and may never be registered in all of these countries. The steps we have taken to protect our intellectual property in the United States and foreign countries may not be adequate. In addition, the steps we have taken may not adequately ensure that we do not infringe the intellectual property of others and third parties may claim infringement by us in the future. In particular, we may be involved in intellectual property claims, including often aggressive or opportunistic attempts to enforce patents used in information technology systems, which might affect our operations and results. Any claim of infringement, whether or not it has merit, could be

6 McDonald's Corporation 2015 Annual Report

time-consuming, could result in costly litigation and could harm our business.

Changes in tax laws and unanticipated tax liabilities could adversely affect the taxes we pay and our profitability.

We are subject to income and other taxes in the United States and foreign jurisdictions, and our operations, plans and results are affected by tax and other initiatives around the world. In particular, we are affected by the impact of changes to tax laws or related authoritative interpretations, particularly if corporate tax reform becomes a key component of budgetary initiatives in the United States and elsewhere. We are also impacted by settlements of pending or any future adjustments proposed by the IRS or other taxing authorities in connection with our tax audits, all of which will depend on their timing, nature and scope. Any increases in income tax rates, changes in income tax laws or unfavorable resolution of tax matters could have a material adverse impact on our financial results.

Changes in accounting standards or the recognition of impairment or other charges may adversely affect our future operations and results.

New accounting standards or changes in financial reporting requirements, accounting principles or practices, including with respect to our critical accounting estimates, could adversely affect our future results. We may also be affected by the nature and timing of decisions about underperforming markets or assets, including decisions that result in impairment or other charges that reduce our earnings. In assessing the recoverability of our long-lived assets, we consider changes in economic conditions and make assumptions regarding estimated future cash flows and other factors. These estimates are highly subjective and can be significantly impacted by many factors such as global and local business and economic conditions, operating costs, inflation, competition, and consumer and demographic trends. If our estimates or underlying assumptions change in the future, we may be required to record impairment charges. If we experience any such changes, they could have a significant adverse effect on our reported results for the affected periods.

A decrease in our credit ratings or an increase in our funding costs could adversely affect our profitability.

We may be negatively affected by the impact of changes in our debt levels or our results of operations on our credit ratings, interest expense, availability of acceptable counterparties, ability to obtain funding on favorable terms or our operating or financial flexibility, especially if lenders impose new operating or financial covenants. In particular, our credit rating was lowered as a result of our decision to increase our leverage and the pace of the return of cash to our shareholders.

Our operations may also be impacted by regulations affecting capital flows, financial markets or financial institutions, which can limit our ability to manage and deploy our liquidity or increase our funding costs. If any of these events were to occur, they could have a material adverse effect on our business and financial condition.

Trading volatility and price of our common stock may be adversely affected by many factors.

Many factors affect the volatility and price of our common stock in addition to our operating results and prospects. The most important of these factors, some of which are outside our control, are the following:


▪	The continuing unpredictable global economic and market conditions;


▪	Governmental action or inaction in light of key indicators of economic activity or events that can significantly influence financial markets, particularly in the United States which is the principal trading market for our common stock, and media reports and commentary about economic or other matters, even when the matter in question does not directly relate to our business;

▪

Trading activity in our common stock or trading activity in derivative instruments with respect to our common stock or debt securities, which can be affected by market commentary (including commentary that may be unreliable or incomplete); unauthorized disclosures about our performance, plans or expectations about our business; our actual performance and creditworthiness; investor confidence generally; actions by shareholders and others seeking to influence our business strategies; portfolio transactions in our stock by significant shareholders; or trading activity that results from the ordinary course rebalancing of stock indices in which McDonald’s may be included, such as the S&P 500 Index and the Dow Jones Industrial Average;


▪	The impact of our stock repurchase program or dividend rate; and


▪	The impact on our results of corporate actions and market and third-party perceptions and assessments of such actions, such as those we may take from time to time as we review our corporate structure and strategies in light of business, legal and tax considerations.

Our results and prospects can be adversely affected by events such as severe weather conditions, natural disasters, hostilities and social unrest, among others.

Severe weather conditions, natural disasters, hostilities and social unrest, terrorist activities, health epidemics or pandemics (or expectations about them) can adversely affect consumer spending and confidence levels or other factors that affect our results and prospects, such as commodity costs. Our receipt of proceeds under any insurance we maintain with respect to certain of these risks may be delayed or the proceeds may be insufficient to offset our losses fully.

ITEM 1B. Unresolved Staff Comments

None.

ITEM 2. Properties

The Company owns and leases real estate primarily in connection with its restaurant business. The Company identifies and develops sites that offer convenience to customers and long-term sales and profit potential to the Company. To assess potential, the Company analyzes traffic and walking patterns, census data and other relevant data. The Company’s experience and access to advanced technology aid in evaluating this information. The Company generally owns the land and building or secures long-term leases for conventional franchised and Company-operated restaurant sites, which ensures long-term occupancy rights and helps control related costs. Restaurant profitability for both the Company and franchisees is important; therefore, ongoing efforts are made to control average development costs through construction and design efficiencies, standardization and by leveraging the Company’s global sourcing network. Additional information about the Company’s properties is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7, pages 13 through 29 and in Financial statements and supplementary data in Part II, Item 8, pages 29 through 47 of this Form 10-K.

McDonald's Corporation 2015 Annual Report 7

ITEM 3. Legal Proceedings

The Company has pending a number of lawsuits that have been filed in various jurisdictions. These lawsuits cover a broad variety of allegations spanning the Company’s entire business. The following is a brief description of the more significant types of claims and lawsuits. In addition, the Company is subject to various national and local laws and regulations that impact various aspects of its business, as discussed below. While the Company does not believe that any such claims, lawsuits or regulations will have a material adverse effect on its financial condition or results of operations, unfavorable rulings could occur. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on net income for the period in which the ruling occurs or for future periods.


▪	Franchising

A substantial number of McDonald’s restaurants are franchised to independent owner/operators under contractual arrangements with the Company. In the course of the franchise relationship, occasional disputes arise between the Company and its current or former franchisees relating to a broad range of subjects including, but not limited to, quality, service and cleanliness issues, contentions regarding grants or terminations of franchises, delinquent payments of rents and fees, and franchisee claims for additional franchises or rewrites of franchises. Additionally, occasional disputes arise between the Company and individuals who claim they should have been granted a McDonald’s franchise or who challenge the legal distinction between the Company and its franchisees for employment law purposes.


▪	Suppliers

The Company and its affiliates and subsidiaries generally do not supply food, paper or related items to any McDonald’s restaurants. The Company relies upon numerous independent suppliers, including service providers, that are required to meet and maintain the Company’s high standards and specifications. On occasion, disputes arise between the Company and its suppliers (or former suppliers) which include, for example, compliance with product specifications and the Company’s business relationship with suppliers. In addition, disputes occasionally arise on a number of issues between the Company and individuals or entities who claim that they should be (or should have been) granted the opportunity to supply products or services to the Company’s restaurants.


▪	Employees

Hundreds of thousands of people are employed by the Company and in restaurants owned and operated by subsidiaries of the Company. In addition, thousands of people from time to time seek employment in such restaurants. In the ordinary course of business, disputes arise regarding hiring, termination, promotion and pay practices, including wage and hour disputes, alleged discrimination and compliance with labor and employment laws.


▪	Customers

Restaurants owned by subsidiaries of the Company regularly serve a broad segment of the public. In so doing, disputes arise as to products, service, incidents, advertising, nutritional and other disclosures, as well as other matters common to an extensive restaurant business such as that of the Company.


▪	Intellectual Property

The Company has registered trademarks and service marks, patents and copyrights, some of which are of material importance to the Company’s business. From time to time, the Company may become involved in litigation to protect its intellectual property and defend against the alleged use of third party intellectual property.


▪	Government Regulations

Local and national governments have adopted laws and regulations involving various aspects of the restaurant business including, but not limited to, advertising, franchising, health, safety, environment, zoning, employment and taxes. The Company strives to comply with all applicable existing statutory and administrative rules and cannot predict the effect on its operations from the issuance of additional requirements in the future.

ITEM 4. Mine Safety Disclosures

Not applicable.

8 McDonald's Corporation 2015 Annual Report

Executive Officers of the Registrant

The following are the Executive Officers of our Company (as of the date of this filing):

Michael D. Andres, 58, is President, McDonald’s USA, a position he has held since October 2014. Mr. Andres returned to the Company in September 2014 after serving as President, Chief Executive Officer and Chairman of LRI Holdings, Inc., the parent company of Logan’s Roadhouse, Inc., a steakhouse restaurant chain, since February 2013. From February 2010 to September 2012, Mr. Andres served as Central Division President of McDonald’s USA. Except for the period he was with Logan’s Roadhouse, Mr. Andres has served the Company for 31 years.

Peter J. Bensen, 53, is Chief Administrative Officer, a position he has held since March 2015. From May 2014 through February 2015, Mr. Bensen served as Corporate Senior Executive Vice President and Chief Financial Officer. Prior to that time, Mr. Bensen served as Corporate Executive Vice President and Chief Financial Officer from January 2008 through April 2014. He has served the Company for 19 years.

Ian F. Borden, 47, is President - Foundational Markets, a position he has held since July 2015. From January 2014 through June 2015, Mr. Borden served as Vice President and Chief Financial Officer - McDonald’s APMEA. Prior to that time, Mr. Borden served as Regional Vice President of Europe’s East Division from April 2011 to December 2013 and as Managing Director - McDonald’s Ukraine from December 2007 to December 2013. He has served the Company for 21 years.

Stephen J. Easterbrook, 48, is President and Chief Executive Officer, a position he has held since March 2015. Mr. Easterbrook was also elected a Director of the Company effective March 2015. From May 2014 through February 2015, Mr. Easterbrook served as Corporate Senior Executive Vice President and Global Chief Brand Officer. From June 2013 through April 2014, Mr. Easterbrook served as Corporate Executive Vice President and Global Chief Brand Officer. From September 2012 through May 2013, Mr. Easterbrook served as the Chief Executive Officer of Wagamama Limited, a pan-Asian restaurant chain, and from September 2011 to September 2012, he served as the Chief Executive Officer of PizzaExpress Limited, an Italian restaurant brand. From December 2010 to September 2011, he held the position of President, McDonald’s Europe. Prior to that, Mr. Easterbrook served in a number of roles with the Company. Except for the period he was with PizzaExpress and Wagamama, Mr. Easterbrook has served the Company for 22 years.

David O. Fairhurst, 47, is Corporate Executive Vice President & Chief People Officer, a position he has held since October 2015. Mr. Fairhurst served as Corporate Senior Vice President, International Human Resources and Strategy from April 2015 to September 2015. Prior to that time, he served as Europe Vice President - Chief People Officer from January 2011 to March 2015 and as Senior Vice President, Chief People Officer - Northern Europe from 2007 to December 2010. Mr. Fairhurst has served the Company for 10 years.

Robert L. Gibbs, 44, is Corporate Executive Vice President - Corporate Relations and Chief Communications Officer, a position he has held since June 2015. Mr. Gibbs joined the Company from The Incite Agency, a strategic communications advisory firm that he co-founded in 2013. Prior to that, Mr. Gibbs held several senior advisory roles in the White House, serving as the White House Press Secretary beginning in 2009, then as Senior Advisor in the 2012 re-election campaign.

Douglas M. Goare, 63, is President, Lead International Markets, a position he has held since July 2015. From October 2011 through June 2015, Mr. Goare served as President, McDonald’s Europe. Prior to that time, Mr. Goare served as Corporate Executive Vice President of Supply Chain and

Development from February 2011 through September 2011 and as Corporate Senior Vice President of Supply Chain from June 2007 through November 2010. In addition, Mr. Goare assumed responsibility for Development in December 2010 and served as Corporate Senior Vice President of Supply Chain and Development through January 2011. Mr. Goare has served the Company for 37 years.

David L. Hoffmann, 48, is President, High Growth Markets, a position he has held since July 2015. From July 2012 through June 2015, Mr. Hoffman served as President of APMEA. From January 2012 through June 2012, he held the position of Senior Vice President and Restaurant Support Officer for APMEA. Prior to that time, he held the position of Vice President of Strategy, Insights and Development for APMEA from May 2011 through December 2011. From November 2008 through April 2011, he held the position of Executive Vice President of McDonald’s Japan. Mr. Hoffman has served the Company for 19 years.

Christopher Kempczinski, 47, is Corporate Executive Vice President - Strategy, Business Development and Innovation, a position he has held since October 2015. Mr. Kempczinski joined the Company from Kraft Heinz, a manufacturer and marketer of food and beverage products, where he most recently served as Executive Vice President of Growth Initiatives and President of Kraft International from December 2014 to September 2015. Prior to that, Mr. Kempczinski served as President of Kraft Canada from July 2012 through December 2014 and as Senior Vice President - U.S. Grocery from 2008 to July 2012.

Silvia Lagnado, 52, is Corporate Executive Vice President, Global Chief Marketing Officer, a position she has held since August 2015. Ms. Lagnado served as Chief Marketing Officer of Bacardi Limited, a spirits company, from September 2010 to October 2012. Prior to that, Ms. Lagnado served more than twenty years in positions of increased responsibility at Unilever.

Brian J. Mullens, 44, is Corporate Senior Vice President - Controller, a position he has held since March 2015. From September 2014 through February 2015, Mr. Mullens served as Corporate Vice President-Finance. Prior to that time, Mr. Mullens served as Corporate Vice President and Assistant Controller from December 2012 to September 2014 and as Chief Financial Officer of McDonald's U.K. and Northern Division, Europe from December 2007 to November 2012. Mr. Mullens has been with the Company for 19 years.

Kevin M. Ozan, 52, is Corporate Executive Vice President and Chief Financial Officer, a position he has held since March 2015. From February 2008 through February 2015, Mr. Ozan served as Corporate Senior Vice President - Controller. Mr. Ozan has served the Company for 18 years.

Gloria Santona, 65, is Corporate Executive Vice President, General Counsel and Secretary, a position she has held since July 2003. Ms. Santona has been with the Company for 38 years.

Jim R. Sappington, 57, is Corporate Executive Vice President, Operations and Technology Systems, a position he has held since March 2015. From January 2013 through February 2015, Mr. Sappington served as Corporate Senior Vice President-Chief Information Officer. Prior to that time, Mr. Sappington served as U.S. Vice President - General Manager for the Northwest Region from September 2010 to December 2012. Mr. Sappington has been with the Company for 28 years.

McDonald's Corporation 2015 Annual Report 9

PART II

ITEM 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

MARKET INFORMATION AND DIVIDEND POLICY

The Company’s common stock trades under the symbol MCD and is listed on the New York Stock Exchange in the U.S. The following table sets forth the common stock price ranges on the New York Stock Exchange and dividends declared per common share:



	2015			2014
Dollars per share	High	Low	Dividend	High	Low	Dividend
Quarter:
First	101.09	88.77	0.85	99.07	92.22	0.81
Second	101.08	94.02	0.85	103.78	96.52	0.81
Third	101.88	87.50	0.85	101.36	90.53	1.66	*
Fourth	120.23	97.13	0.89	97.50	87.62
Year	120.23	87.50	3.44	103.78	87.62	3.28


*	Includes a $0.81 per share dividend declared and paid in third quarter, and a $0.85 per share dividend declared in third quarter and paid in fourth quarter.

The number of shareholders of record and beneficial owners of the Company’s common stock as of January 31, 2016 was estimated to be 1,579,000.

Given the Company’s returns on equity, incremental invested capital and assets, management believes it is prudent to reinvest in the business in markets with acceptable returns and/or opportunity for long-term growth and use excess cash flow to return cash to shareholders through dividends and share repurchases. The Company has paid dividends on common stock for 40 consecutive years through 2015 and has increased the dividend amount at least once every year. As in the past, future dividend amounts will be considered after reviewing profitability expectations and financing needs, and will be declared at the discretion of the Company’s Board of Directors.

ISSUER PURCHASES OF EQUITY SECURITIES

The following table presents information related to repurchases of common stock the Company made during the quarter ended December 31, 2015*:



Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs⁽¹⁾	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs⁽¹⁾
October 1-31, 2015	2,499,205	102.66	2,499,205		$	3,164,474,231
November 1-30, 2015	5,016,418	112.97	5,016,418		2,597,749,457
December 1-31, 2015	6,103,069	116.70	6,103,069		1,885,526,160
Total	13,618,692	112.75	13,618,692


*	Subject to applicable law, the Company may repurchase shares directly in the open market, in privately negotiated transactions, or pursuant to derivative instruments and plans complying with Rule 10b5-1, among other types of transactions and arrangements.

(1)

On May 21, 2014, the Company's Board of Directors approved a share repurchase program, effective July 1, 2014 ("2014 Program"), that authorized the purchase of up to $10 billion of the Company's outstanding common stock with no specified expiration date. On December 3, 2015, the Company's Board of Directors terminated the 2014 Program, effective December 31, 2015, and replaced it with a new share repurchase program, effective January 1, 2016 ("2016 Program"), that authorizes the purchase of up to $15 billion of the Company's outstanding common stock with no specified expiration date. As of December 31, 2015, no further share repurchases may be made under the 2014 Program; future share repurchases will be made pursuant to the 2016 Program.

On February 12, 2016, the Company paid $2.7 billion under an Accelerated Share Repurchase agreement and received an initial delivery of 18.5 million shares, which represents 80% of the total shares the Company expects to receive based on the market price at the time of initial delivery. The final number of shares delivered upon settlement of the agreement, between April 1, 2016 and May 13, 2016, will be determined with reference to the volume weighted average price per share of the Company's common stock over the term of the agreement, less a negotiated discount.

10 McDonald's Corporation 2015 Annual Report

Stock Performance Graph

At least annually, we consider which companies comprise a readily identifiable investment peer group. McDonald's is included in published restaurant indices; however, unlike most other companies included in these indices, which have no or limited international operations, McDonald's does business in more than 100 countries and a substantial portion of our revenues and income is generated outside the U.S. In addition, because of our size, McDonald's inclusion in those indices tends to skew the results. Therefore, we believe that such a comparison is not meaningful.

Our market capitalization, trading volume and importance in an industry that is vital to the U.S. economy have resulted in McDonald's inclusion in the Dow Jones Industrial Average (DJIA) since 1985. Like McDonald's, many DJIA companies generate meaningful revenues and income outside the U.S. and some manage global brands. Thus, we believe that the use of the DJIA companies as the group for comparison purposes is appropriate.

The following performance graph shows McDonald's cumulative total shareholder returns (i.e., price appreciation and reinvestment of dividends) relative to the Standard & Poor's 500 Stock Index (S&P 500 Index) and to the DJIA companies for the five-year period ended December 31, 2015. The graph assumes that the value of an investment in McDonald's common stock, the S&P 500 Index and the DJIA companies (including McDonald's) was $100 at December 31, 2010. For the DJIA companies, returns are weighted for market capitalization as of the beginning of each period indicated. These returns may vary from those of the Dow Jones Industrial Average Index, which is not weighted by market capitalization, and may be composed of different companies during the period under consideration.



Company/Index	Dec '10	Dec '11	Dec '12	Dec '13	Dec '14	Dec '15
McDonald's Corporation	100	135	122	139	139	181
S&P 500 Index	100	102	118	157	178	181
Dow Jones Industrials	100	108	119	155	170	171

Source: S&P Capital IQ

McDonald's Corporation 2015 Annual Report 11



ITEM 6. Selected Financial Data


6-Year Summary

Dollars in millions, except per share data	2015			2014	2013	2012	2011	2010
Company-operated sales	$	16,488		18,169	18,875	18,603	18,293	16,233
Franchised revenues	$	8,925		9,272	9,231	8,964	8,713	7,842
Total revenues	$	25,413		27,441	28,106	27,567	27,006	24,075
Operating income	$	7,146		7,949	8,764	8,605	8,530	7,473
Net income	$	4,529		4,758	5,586	5,465	5,503	4,946
Cash provided by operations	$	6,539		6,730	7,121	6,966	7,150	6,342
Cash used for investing activities	$	1,420		2,305	2,674	3,167	2,571	2,056
Capital expenditures	$	1,814		2,583	2,825	3,049	2,730	2,135
Cash used for (provided by) financing activities	$	(735	)	4,618	4,043	3,850	4,533	3,729
Treasury stock purchases⁽¹⁾	$	6,182		3,175	1,810	2,605	3,373	2,648
Common stock cash dividends	$	3,230		3,216	3,115	2,897	2,610	2,408
Financial position at year end:
Total assets	$	37,939		34,227	36,626	35,386	32,990	31,975
Total debt	$	24,122		14,936	14,130	13,633	12,500	11,505
Total shareholders’ equity	$	7,088		12,853	16,010	15,294	14,390	14,634
Shares outstanding in millions	907			963	990	1,003	1,021	1,054
Per common share:
Earnings-diluted	$	4.80		4.82	5.55	5.36	5.27	4.58
Dividends declared	$	3.44		3.28	3.12	2.87	2.53	2.26
Market price at year end	$	118.14		93.70	97.03	88.21	100.33	76.76
Company-operated restaurants	6,444			6,714	6,738	6,598	6,435	6,399
Franchised restaurants	30,081			29,544	28,691	27,882	27,075	26,338
Total Systemwide restaurants	36,525			36,258	35,429	34,480	33,510	32,737
Franchised sales⁽²⁾	$	66,226		69,617	70,251	69,687	67,648	61,147


(1)	Represents treasury stock purchases as reflected in Shareholders' equity.

(2)

While franchised sales are not recorded as revenues by the Company, management believes they are 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. Franchised restaurants represent more than 80% of McDonald's restaurants worldwide.

12 McDonald's Corporation 2015 Annual Report

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

DESCRIPTION OF THE BUSINESS

The Company franchises and operates McDonald’s restaurants. Of the 36,525 restaurants in 119 countries at year-end 2015, 30,081 were franchised (reflects 21,147 franchised to conventional franchisees, 5,529 licensed to developmental licensees and 3,405 licensed to foreign affiliates ("affiliates")—primarily Japan) and 6,444 were operated by the Company.

Under McDonald's 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 the reinvestment for conventional franchised restaurants in an effort to accelerate implementation of certain initiatives.

Under McDonald's 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.

McDonald's is primarily a franchisor and believes franchising is paramount to delivering great-tasting food, locally-relevant customer experiences and driving profitability. Franchising enables an individual to own a restaurant business and maintain control over staffing, 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 provides Company personnel with restaurant operations experience. In Company-operated restaurants, and in collaboration with franchisees, McDonald's further develops and refines operating standards, marketing concepts and product and pricing strategies, so that only those that the Company believes are most beneficial are introduced in the restaurants. McDonald's continually reviews its mix of Company-operated and franchised restaurants to help optimize overall performance, with a goal to be 95% franchised over the long term.

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.


•	High Growth Markets - markets believed to 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 is believed to have the potential to operate under a largely franchised model. Corporate activities are also reported within this segment.

In September 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 segment information included herein is presented in accordance with the change in reporting structure for all periods presented.

For the year ended December 31, 2015, the U.S., International Lead Markets and High Growth Markets segments accounted for 34%, 30% and 24% of total revenues, respectively.

In analyzing business trends, management reviews results on a constant currency basis and considers a variety of performance and financial measures, including comparable sales and comparable guest count growth, Systemwide sales growth, operating income growth and returns.


▪	Constant currency results exclude the effects of foreign currency translation and are calculated by translating current year results at prior year average exchange rates. Management reviews and analyzes business results in constant currencies and bases most incentive compensation plans on these results because the Company believes this better represents its underlying business trends.

▪

Comparable sales and comparable guest counts are key performance indicators used within the retail industry and are indicative of the impact of the Company’s initiatives as well as local economic and consumer trends. Increases or decreases in comparable sales and comparable guest counts represent the percent change in sales and transactions, respectively, from the same period in the prior year for all restaurants, whether operated by the Company or 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. The goal is to achieve a relatively balanced contribution from both guest counts and average check.


▪	Systemwide sales include sales at all restaurants. 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.

McDonald's Corporation 2015 Annual Report 13

▪

Return on incremental invested capital ("ROIIC") is a measure reviewed by management over one-year and three-year time periods to evaluate the overall profitability of the markets, the effectiveness of capital deployed and the future allocation of capital. The return is calculated by dividing the change in operating income plus depreciation and amortization (numerator) by the cash used for investing activities (denominator), primarily capital expenditures. The calculation uses a constant average foreign exchange rate over the periods included in the calculation.

STRATEGIC DIRECTION AND FINANCIAL PERFORMANCE

The strength of the alignment among the Company, its franchisees and suppliers (collectively referred to as the "System") has been key to McDonald's long-term success. By leveraging the System, McDonald’s is able to identify, implement and scale ideas that meet customers' changing needs and preferences. In addition, the Company’s business model enables the System to consistently deliver locally-relevant restaurant experiences to customers and be an integral part of the communities it serves.

In 2015, the Company and its Board of Directors took steps to reset its business and restore growth, which included the election of a new CEO in the first quarter. In May, management announced the initial steps of the Company's turnaround plan, beginning with a worldwide restructuring in July. This resulted in a reorganization from a geographically-focused structure to segments that combine markets with similar characteristics and opportunities for growth. This new operating structure is designed to sharpen the Company's focus on the customer, drive greater accountability, and remove distractions and bureaucracy. Management expects the new structure to enable faster decision-making and an increased ability to move proven initiatives quickly across markets.

The System is focused on the fundamentals of running great restaurants by providing customers with what matters most to them - hot and fresh food, fast and friendly service, and a contemporary restaurant experience at the value of McDonald’s. In addition, McDonald’s is building on its competitive advantages of convenience, scale, geographic diversification and System alignment that have been created over time.

McDonald’s aspires to be viewed by its customers as a modern and progressive burger company delivering a contemporary customer experience. The priorities of the turnaround plan are threefold: drive operational growth, create brand excitement and enhance financial value.

To drive operational growth, the Company is working to enhance the quality, choice and variety of its menu. In addition, the Company is building upon investments it has already made in reimaging and technology to innovate the way customers can order and how they are served, which represent elements of the Experience of the Future. While execution and timing of these elements may be different in each market, Experience of the Future is designed to fundamentally enhance McDonald's relationship with customers and their experience with the brand.

The Company’s brand efforts aim to reach customers in ways that drive greater excitement and are meaningful to them, such as fun, engaging marketing campaigns and focused support of communities. Enhancements to the quality of McDonald's menu, more local sourcing of ingredients, and commitments around sustainability efforts are all designed to improve consumer confidence in the Brand.

The modifications to McDonald’s operating approach are accompanied by strategies to enhance financial value. In 2015, management announced plans to optimize the Company’s restaurant ownership mix by refranchising about 4,000 restaurants through 2018, deliver net annual G&A savings of about $500 million, the vast majority of which is expected to be realized by the

end of 2017, and return about $30 billion to shareholders for the three-year period ending 2016.

McDonald’s maintains a strong financial foundation supported by industry-leading unit volumes that enable the Company to pursue growth through business and economic cycles while returning significant amounts of cash to shareholders each year. Cash from operations benefits from a heavily franchised business model as the rent and royalty income received from franchisees provides a stable revenue stream that has relatively low costs and enables co-investment, either through capital expenditures or rent incentives, with franchisees on key initiatives, such as reimaging. In addition, the franchise business model is less capital intensive as franchisees invest in the costs of going into business and most future reinvestment.

The Company’s substantial cash flow, strong investment grade credit rating and continued access to credit provides McDonald’s flexibility to fund capital expenditures as well as return cash to shareholders. After a thorough evaluation of financial opportunities, management announced plans to optimize the Company’s capital structure and increased the cash return to shareholders target to about $30 billion for the three-year period ending 2016 - a $10 billion increase over the previous target with incremental debt funding the vast majority of the increase. This proactive move in the Company’s leverage metrics and credit ratings still enables McDonald’s to efficiently and cost effectively access capital globally, while allowing for continued investment in the business. These actions, together with the decision of the Board of Directors to raise the dividend in 2015, reflect the Board and management’s confidence in McDonald's future.

The Company’s financial results for 2015 reflect two distinct performance periods. During the first half of the year, the Company took bold and urgent action to reset the business and refocus the System on its customers; however, operating performance was weak. The second half of the year was about execution, with results turning positive and providing tangible evidence that the turnaround plan is working.

In McDonald’s heavily franchised business model, growing comparable sales is important to increasing operating income and returns. Global comparable sales increased 1.5% in 2015, driven by positive performance across all segments in the third and fourth quarters. Consolidated guest counts were negative for the year.

U.S. comparable sales increased 0.5% and comparable guest counts declined 3.0%, though performance improved sequentially throughout the year with positive comparable sales in the third and fourth quarters.

Comparable sales in the International Lead markets grew 3.4% and comparable guest counts increased 1.0%. All major markets contributed to the positive comparable sales performance except France, which was impacted by macro-economic headwinds.

In the High Growth markets, comparable sales increased 1.8% and comparable guest counts declined 2.2%. The increase in comparable sales was driven primarily by solid performance in China as the market successfully executed strong recovery plans following the prior year supplier issue.

Comparable sales in the Foundational markets increased 0.7% and comparable guest counts declined 3.7%. Solid performance in many markets across Asia, Europe, Latin America and the Middle East were offset by negative comparable sales and guest counts in Japan.

14 McDonald's Corporation 2015 Annual Report

RESULTS FOR THE YEAR:


•	Global comparable sales increased 1.5%, reflecting an increase in all segments. Comparable guest counts declined 2.3%, as positive guest traffic in the International Lead markets was more than offset by negative guest traffic in all other segments.


▪	Systemwide sales, a non-GAAP measure that includes franchised sales, decreased 6% (increased 3% in constant currencies).


▪	Consolidated revenues decreased 7% (increased 3% in constant currencies).


▪	Consolidated operating income decreased 10% (flat in constant currencies).


▪	Diluted earnings per share was flat (increased 10% in constant currencies) at $4.80. Results and comparisons were impacted by the following current and prior year items outside normal operations:


*	Strategic charges, primarily related to goodwill impairment and other asset write-offs in conjunction with the Company's refranchising initiatives, restructuring activities and incremental restaurant closings primarily in China, Japan and the U.S., were partly offset by a gain on sale of property in the U.S. These items had a negative net impact on diluted earnings per share of $0.18 in 2015.


*	Charges related to certain foreign tax matters and the China supplier issue had a negative impact on diluted earnings per share of $0.54 in 2014.

Excluding the impact of these current and prior year items, earnings per share in constant currencies would have reflected an increase of $0.12 or 2% in 2015.


▪	Cash provided by operations was $6.5 billion.


▪	One-year ROIIC was 1.5% and three-year ROIIC was negative 3.7% for the period ended December 31, 2015 (see reconciliation on page 28).


▪	The Company increased the quarterly cash dividend per share 5% to $0.89 for the fourth quarter, equivalent to an annual dividend of $3.56 per share.


▪	The Company returned $9.4 billion to shareholders through dividends and share repurchases for the year. This brings the cumulative return to shareholders to $15.8 billion for the two-year period ending 2015 versus the targeted return of about $30 billion for the three-year period ending 2016.


▪	Capital expenditures of $1.8 billion were split fairly evenly between new restaurant openings and reinvestment in existing restaurants. Across the System, about 1,000 restaurants were opened and over 1,000 existing locations were reimaged.

AREAS OF FOCUS BY SEGMENT

U.S.

As the Company's largest segment, the U.S. remains critical to the Company's turnaround given its significant contribution to consolidated results. While results in the first half of 2015 were weak, the steps taken to enhance menu quality, simplify restaurant operations and offer more convenience to customers led to a meaningful shift in momentum starting in the third quarter.

Menu initiatives in the U.S. include enhancing the taste of core products through new cooking procedures and continuing to evolve its menu and ingredients, including the introduction of the

Artisan Grilled Chicken and Premium Buttermilk Crispy Chicken Deluxe sandwiches. The October launch of All Day Breakfast built on the positive momentum experienced during the third quarter. McDonald’s ability to move from one test market in April to a national launch in October in over 13,000 restaurants is a testament to the cultural changes the Company is making to become more relevant to customers.

The U.S. is placing a renewed emphasis on running great restaurants. This includes simplifying the menu and operations and making it easier for guests to order and interact with the Brand. Customer feedback systems are showing improvements in many important aspects of the customer visit, including food quality, order accuracy, speed and friendliness.

The recent launch of McDonald’s mobile app in the U.S. is designed to capture additional demand and engage with customers in more fun, personal and relevant ways.

Given the importance of value to its customers, the U.S. is working to establish a consistent national value offering. The goal is to provide customers more choice and flexibility, including the opportunity to bundle their own meals at compelling price points.

International Lead Markets

The International Lead markets remain relentlessly focused on customers and using data insights to better understand and respond to their changing needs and expectations.

These markets are focused on food quality, which includes modernizing cooking and service platforms to serve hotter, fresher food. Local market initiatives include new recipes and quality ingredients, such as a range of new Signature Beef products in the U.K.

The International Lead markets are working to improve the restaurant experience with a focus on customizing the menu for individual tastes, and offering customers different ways to order, pay for or receive their food. Markets continue to test solutions like self-order kiosks, table service and curbside delivery that help restaurant teams better connect with and serve customers because they simplify operations. These solutions also enable restaurants to accommodate more customers during busy peak times, thereby driving overall business performance.

Markets are at different stages, but all are making steady progress towards enhancing the customer experience. France is the furthest along with digital, web ordering, self-order kiosks and table service in the majority of restaurants. Australia's platform focuses on personalization and customization of premium burgers, chicken sandwiches and salads ordered through self-order kiosks. Canada and the U.K. have a number of Experience of the Future restaurants in place today and have plans to deploy more broadly in 2016.

The International Lead markets continue to focus on sustainability and social responsibility to become an even more relevant and trusted brand.

High Growth Markets

McDonald's High Growth markets are focused on creating customer excitement through menu, promotions and value, and implementing a digital strategy with specific mobile solutions and actions to build the business and brand trust.

In addition to driving operational growth in existing restaurants, targeted new restaurant development and refranchising initiatives are top priorities.

New restaurant openings totaled over 400 in 2015, while net additions were over 200. Between 400-500 total openings are planned for 2016, primarily in China, with a strong emphasis on freestanding restaurants with drive-thru’s. The High Growth markets include about half of the System’s planned global openings for 2016.

McDonald's Corporation 2015 Annual Report 15

Foundational Markets

The Foundational markets span over 80 countries across Asia, Europe, Latin America, Middle East and Africa. This diverse group of markets share common goals of enhancing the critical elements that differentiate McDonald’s - the menu and the customer experience. Menu efforts include emphasizing core favorites and ensuring strong everyday value platforms are in place, complemented by exciting new menu news tailored to local tastes and flavor preferences. The markets are placing a renewed commitment on running great restaurants and increasing convenience to customers, including drive-thru and delivery.

The segment is pursuing refranchising opportunities, including the sale of certain markets to developmental licensees. McDonald's is also exploring the sale of a portion of the Company’s ownership in McDonald’s Japan to a strategic investor who could help advance Japan’s turnaround efforts, unlock the market’s growth potential, and enhance value for all stakeholders.

OUTLOOK FOR 2016

As McDonald's continues to execute its turnaround plan in 2016, the Company is confident that these strategies will transform customer perceptions of McDonald's as a modern and progressive burger company delivering a contemporary experience.

Although some larger markets face challenging headwinds as the Company enters 2016, McDonald's expects continued positive top-line momentum across all segments. McDonald's System is committed to elevating every aspect of the customer experience with the essential imperative of running great restaurants.

While the Company does not provide specific guidance on earnings per share, the following global and certain segment-specific information is provided to assist in forecasting the Company’s future results.


•	Changes in Systemwide sales are driven by comparable sales and net restaurant unit expansion. The Company expects net restaurant additions to add approximately 1 percentage point to 2016 Systemwide sales growth (in constant currencies).


•	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 either the U.S. or the International Lead Markets segment 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 2016, costs for the total basket of goods are expected to decrease about 1-2% in the U.S. and remain relatively flat in the International Lead Markets segment.


•	The Company expects full-year 2016 selling, general and administrative expenses to decrease about 1-2% in constant currencies, with fluctuations expected between the quarters. This includes expenses associated with our Worldwide Owner/Operator Convention in second quarter 2016 and sponsorship of the Summer Olympic games in third quarter 2016.


•	Based on current interest and foreign currency exchange rates, the Company expects interest expense for the full-year 2016 to increase about 40-45% compared with 2015 due to higher average debt balances.

•

A significant part of the Company's operating income is generated outside the U.S., and about 30% 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 up to 25 cents.


•	The Company expects the effective income tax rate for the full-year 2016 to be in the 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 2016 to be approximately $2.0 billion, about half of which will be used to open new restaurants. The Company expects to open about 1,000 restaurants, including about 400 restaurants in affiliated and developmental-licensee markets where the Company does not fund any capital expenditures. The Company expects net additions of about 500 restaurants. The remaining capital will be used to reinvest in existing locations, including about 400 to 500 reimages in the U.S.

•

The Company plans to optimize its capital structure and expects to return about $30 billion to shareholders for the three-year period ending 2016. The cumulative return for the two years ended 2015 was nearly $16 billion, leaving about $14 billion to be completed in 2016. Some of this remaining amount will be funded by issuing additional debt, of which approximately $6 billion was issued in the fourth quarter 2015.

Long-term


•	The Company expects to refranchise about 4,000 restaurants in the four-year period ending 2018 with a long-term goal to become 95% franchised. The majority of the refranchising will take place in the High Growth and Foundational markets. During 2015, we refranchised about 470 restaurants.

•

The Company expects to realize net annual G&A savings of about $500 million from our G&A base of $2.6 billion at the beginning of 2015, the vast majority of which is expected to be realized by the end of 2017. These savings will be realized through our refranchising efforts, streamlining resources across corporate, segment and market organizations, primarily in non-customer facing functions, and realizing greater efficiencies in the Company's Global Business Services platform. This target excludes the impact of foreign currency changes. We expect to realize a cumulative total of about $150 million in savings by the end of 2016, with about half of these savings already achieved in 2015.


•	In connection with executing against our refranchising and G&A targets, we may incur incremental strategic charges associated with asset dispositions and restructuring.

16 McDonald's Corporation 2015 Annual Report

Consolidated Operating Results



Operating results
				2015				2014		2013
Dollars and shares in millions, except per share data	Amount			Increase/ (decrease)		Amount		Increase/ (decrease)		Amount
Revenues
Sales by Company-operated restaurants	$	16,488		(9	%)	$	18,169	(4	%)	$	18,875
Revenues from franchised restaurants	8,925			(4	)	9,272		0		9,231
Total revenues	25,413			(7	)	27,441		(2	)	28,106
Operating costs and expenses
Company-operated restaurant expenses	13,977			(9	)	15,288		(2	)	15,579
Franchised restaurants-occupancy expenses	1,647			(3	)	1,697		4		1,624
Selling, general & administrative expenses	2,434			(2	)	2,488		4		2,386
Other operating (income) expense, net	209			n/m		19		n/m		(247		)
Total operating costs and expenses	18,267			(6	)	19,492		1		19,342
Operating income	7,146			(10	)	7,949		(9	)	8,764
Interest expense	638			11		576		9		528
Nonoperating (income) expense, net	(48		)	n/m		1		n/m		32
Income before provision for income taxes	6,556			(11	)	7,372		(10	)	8,204
Provision for income taxes	2,027			(22	)	2,614		0		2,618
Net income	$	4,529		(5	%)	$	4,758	(15	%)	$	5,586
Earnings per common share—diluted	$	4.80		0	%	$	4.82	(13	%)	$	5.55
Weighted-average common shares outstanding— diluted	944.6			(4	%)	986.3		(2	%)	1,006.0

n/m Not meaningful

IMPACT OF FOREIGN CURRENCY TRANSLATION ON REPORTED RESULTS

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.

Foreign currency translation had a negative impact on consolidated operating results in each of the last three years. In 2015, results were negatively impacted by the strengthening of the U.S. Dollar against the Euro, Australian Dollar, Russian Ruble and most other currencies. In 2014, results were negatively impacted by the weaker Russian Ruble, Australian Dollar and certain other currencies, partly offset by the stronger British Pound. In 2013, results were negatively impacted by the weaker Australian Dollar, Japanese Yen and many other foreign currencies, partly offset by the stronger Euro.

Impact of foreign currency translation on reported results



			Reported amount							Currency translation benefit/(cost)
In millions, except per share data	2015		2014		2013		2015			2014			2013
Revenues	$	25,413	$	27,441	$	28,106	$	(2,829	)	$	(570	)	$	(29	)
Company-operated margins	2,511		2,881		3,296		(331		)	(60		)	(7		)
Franchised margins	7,278		7,575		7,607		(626		)	(119		)	(43		)
Selling, general & administrative expenses	2,434		2,488		2,386		158			21			(5		)
Operating income	7,146		7,949		8,764		(771		)	(152		)	(66		)
Net income	4,529		4,758		5,586		(473		)	(114		)	(52		)
Earnings per common share—diluted	4.80		4.82		5.55		(0.50		)	(0.12		)	(0.05		)

NET INCOME AND DILUTED EARNINGS PER COMMON SHARE

In 2015, net income decreased 5% (increased 5% in constant currencies) to $4.5 billion and diluted earnings per common share was flat (increased 10% in constant currencies) at $4.80. Foreign currency translation had a negative impact of $0.50 on diluted earnings per share.

In 2014, net income decreased 15% (13% in constant currencies) to $4.8 billion and diluted earnings per common share decreased 13% (11% in constant currencies) to $4.82. Foreign currency translation had a negative impact of $0.12 on diluted earnings per share.

Results in 2015 benefited from higher franchised margins and a gain on sale of property in the U.S., partly offset by strategic charges, primarily related to goodwill impairment and other asset

write-offs in conjunction with the Company's refranchising initiatives, restructuring and incremental restaurant closings. The strategic charges and gain on sale of property in the U.S. had a negative net impact on diluted earnings per share of $0.18 in 2015.

Results in 2014 were negatively impacted by the following items that had a negative impact of $0.54 on diluted earnings per share:


•	$0.31 per share due to an increase in tax reserves for 2003-2010 resulting from an unfavorable lower tax court ruling in a foreign tax jurisdiction, as well as an increase in tax reserves related to audit progression in other foreign tax jurisdictions.

McDonald's Corporation 2015 Annual Report 17


•	$0.23 per share due to the estimated impact of a supplier issue in China. As a consequence, results in China, Japan and certain other markets were negatively impacted due to lost sales and profitability, including expenses associated with customer recovery efforts.

Excluding the impact of these current and prior year items, in 2015 earnings per share in constant currencies would have reflected an increase of $0.12 or 2%. In 2014, diluted earnings per share would have reflected a decrease of 3% (1% in constant currencies) excluding the 2014 charges related to certain foreign

tax matters and the China supplier issue. This supplemental information is provided to assist investors in understanding the impact of significant items outside of normal operations.

The Company repurchased 61.8 million shares of its stock for $6.2 billion in 2015 and 33.1 million shares of its stock for $3.2 billion in 2014, driving reductions in weighted-average shares outstanding on a diluted basis in both periods, which positively benefited earnings per share.

REVENUES

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.

In 2015, constant currency revenue growth was driven by positive comparable sales and the benefit from expansion. In 2014, constant currency revenue was flat compared to the prior year, reflecting the impact of negative comparable sales, partially offset by expansion.



Revenues
	Amount						Increase/(decrease)				Increase/(decrease) excluding currency translation
Dollars in millions	2015		2014		2013		2015		2014		2015		2014
Company-operated sales:
U.S.	$	4,198	$	4,351	$	4,512	(4	%)	(4	%)	(4	%)	(4	%)
International Lead Markets	4,798		5,443		5,513		(12	)	(1	)	1		(1	)
High Growth Markets	5,442		6,071		6,322		(10	)	(4	)	6		1
Foundational Markets & Corporate	2,050		2,304		2,528		(11	)	(9	)	5		(3	)
Total	$	16,488	$	18,169	$	18,875	(9	%)	(4	%)	2	%	(1	%)
Franchised revenues:
U.S.	$	4,361	$	4,300	$	4,339	1	%	(1	%)	1	%	(1	%)
International Lead Markets	2,817		3,101		3,023		(9	)	3		6		4
High Growth Markets	731		774		721		(5	)	7		9		7
Foundational Markets & Corporate	1,016		1,097		1,148		(7	)	(4	)	10		4
Total	$	8,925	$	9,272	$	9,231	(4	%)	0	%	5	%	2	%
Total revenues:
U.S.	$	8,559	$	8,651	$	8,851	(1	%)	(2	%)	(1	%)	(2	%)
International Lead Markets	7,615		8,544		8,536		(11	)	0		3		1
High Growth Markets	6,173		6,845		7,043		(10	)	(3	)	6		1
Foundational Markets & Corporate	3,066		3,401		3,676		(10	)	(7	)	7		(1	)
Total	$	25,413	$	27,441	$	28,106	(7	%)	(2	%)	3	%	0	%


•	US: In 2015, the decrease in revenues reflected the impact from refranchising. In 2014, the decrease was due to negative comparable sales, reflecting negative comparable guest counts.

•

International Lead Markets: In 2015, the increase in constant currency revenues was due to positive comparable sales performance, primarily in the U.K., Australia and Canada, partly offset by the impact of refranchising. In 2014, the constant currency increase was driven primarily by positive comparable sales and the benefit from expansion in the U.K., mostly offset by negative comparable sales and the impact of refranchising in Germany.


•	High Growth Markets: In 2015, the increase in constant currency revenues was due to expansion and positive comparable sales, primarily driven by Russia and China. In 2014, the constant currency increase reflected a benefit from expansion, primarily in Russia and China, partly offset by negative comparable sales, reflecting the impact from the supplier issue in China and weaker results in Russia.

18 McDonald's Corporation 2015 Annual Report

The following tables present comparable sales, comparable guest counts and Systemwide sales increases/(decreases):



Comparable sales and guest count increases/(decreases)

	2015				2014				2013
	Sales		Guest Counts		Sales		Guest Counts		Sales		Guest Counts
U.S.	0.5	%	(3.0	%)	(2.1	%)	(4.1	%)	(0.2	%)	(1.6	%)
International Lead Markets	3.4		1.0		0.8		(1.2	)	0.2		(1.1	)
High Growth Markets	1.8		(2.2	)	(2.8	)	(2.9	)	(0.6	)	(2.2	)
Foundational Markets & Corporate	0.7		(3.7	)	(0.1	)	(4.8	)	1.5		(3.0	)
Total	1.5	%	(2.3	%)	(1.0	%)	(3.6	%)	0.2	%	(1.9	%)



Systemwide sales increases/(decreases)

					Increase/(decrease) excluding currency translation
	2015		2014		2015		2014
U.S.	1	%	(1	%)	1	%	(1	%)
International Lead Markets	(10	)	2		5		3
High Growth Markets	(7	)	1		8		4
Foundational Markets & Corporate	(13	)	(7	)	3		3
Total	(6	%)	(2	%)	3	%	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 financial health of the franchisee base. The following table presents franchised sales and the related increases/(decreases):

Franchised sales



	Amount						Increase/(decrease)				Increase/(decrease) excluding currency translation
Dollars in millions	2015		2014		2013		2015		2014		2015		2014
U.S.	$	31,639	$	31,096	$	31,344	2	%	(1	%)	2	%	(1	%)
International Lead Markets	16,313		17,921		17,507		(9	)	2		6		4
High Growth Markets	4,525		4,678		4,305		(3	)	9		10		8
Foundational Markets & Corporate	13,749		15,922		17,095		(14	)	(7	)	3		4
Total	$	66,226	$	69,617	$	70,251	(5	%)	(1	%)	4	%	2	%

McDonald's Corporation 2015 Annual Report 19

FRANCHISED MARGINS

Franchised margin dollars represent revenues from franchised restaurants less the Company’s occupancy costs (rent and depreciation) associated with those sites. Franchised margin dollars represented about 70% of the combined restaurant margins in 2015, 2014 and 2013.

In 2015, franchised margin dollars decreased $297 million or 4% (increased 4% in constant currencies). The constant currency increase was due to positive comparable sales performance, expansion and refranchising. In 2014, franchised margin dollars decreased $32 million or 0% (increased 1% in constant currencies), reflecting a benefit from expansion and refranchising, offset by negative comparable sales performance.

In connection with the Company's long-term financial targets, the Company plans to refranchise about 4,000 restaurants for the four-year period ending 2018. While this refranchising activity may have a dilutive effect on the franchised margin percent, it typically results in higher franchised margin dollars.

Franchised margins



	Amount		% of Revenue		Amount		% of Revenue		Amount		% of Revenue		Increase/(decrease)				Increase/(decrease) excluding currency translation
Dollars in millions	2015				2014				2013				2015		2014		2015		2014
U.S.	$	3,606	82.7	%	$	3,572	83.1	%	$	3,626	83.6	%	1	%	(1	%)	1	%	(1	%)
International Lead Markets	2,254		80.0		2,486		80.1		2,430		80.4		(9	)	2		6		4
High Growth Markets	520		71.1		555		71.7		531		73.6		(6	)	4		7		4
Foundational Markets & Corporate	898		88.3		962		87.7		1,020		88.9		(7	)	(6	)	11		3
Total	$	7,278	81.5	%	$	7,575	81.7	%	$	7,607	82.4	%	(4	%)	0	%	4	%	1	%


•	US: In 2015, the decrease in the franchised margin percent was due to higher occupancy costs. In 2014, the decrease was primarily due to negative comparable sales and higher occupancy costs.


•	International Lead Markets: In 2015, the franchised margin percent reflected the benefit from positive comparable sales performance and the negative impact from higher lease expense and refranchising. In 2014, the decrease was due to weaker results in Germany and the negative impact from refranchising, primarily in Germany and Australia, partly offset by positive results in the U.K.


•	High Growth Markets: In 2015, the decrease in the franchised margin percent was primarily due to the impact from refranchising. In 2014, the decrease was primarily due to negative comparable sales across the segment.

The franchised margin percent in Foundational Markets & Corporate is higher relative to the other segments due to a larger proportion of developmental licensed and/or affiliated restaurants where the Company receives royalty income with no corresponding occupancy costs.

COMPANY-OPERATED MARGINS

Company-operated margin dollars represent sales by Company-operated restaurants less the operating costs of these restaurants. In 2015, Company-operated margin dollars decreased $370 million or 13% (1% in constant currencies). In 2014, Company-operated margin dollars decreased $415 million or 13% (11% in constant currencies), reflecting weak results across all segments.

Company-operated margins



	Amount		% of Revenue		Amount		% of Revenue		Amount		% of Revenue		Increase/(decrease)				Increase/(decrease) excluding currency translation
Dollars in millions	2015				2014				2013				2015		2014		2015		2014
U.S.	$	632	15.1	%	$	756	17.4	%	$	830	18.4	%	(16	%)	(9	%)	(16	%)	(9	%)
International Lead Markets	961		20.0		1,080		19.8		1,079		19.6		(11	)	0		2		1
High Growth Markets	659		12.1		780		12.9		1,019		16.1		(16	)	(23	)	3		(19	)
Foundational Markets & Corporate	259		12.7		265		11.5		368		14.6		(2	)	(28	)	15		(25	)
Total	$	2,511	15.2	%	$	2,881	15.9	%	$	3,296	17.5	%	(13	%)	(13	%)	(1	%)	(11	%)

•

U.S.: In 2015, the decrease in the Company-operated margin percent was primarily due to the incremental investment in wages and benefits for eligible Company-operated restaurant employees, effective July 1, 2015, designed to improve restaurant performance and enhance our employment proposition. In 2014, the decrease was due to the impact of negative comparable guest counts and higher commodity and labor costs, partly offset by higher average check.


•	International Lead Markets: In 2015, the increase in the Company-operated margin percent was due to higher comparable sales and the result of refranchising efforts, partly offset by higher labor and occupancy costs. In 2014, the increase was primarily due to positive results in France, partly offset by weaker results in Germany.

•

High Growth Markets: In 2015, the decrease in the Company-operated margin percent was primarily due to the negative impact from currency and inflationary pressures in Russia, and higher labor and occupancy costs across the segment. This was partly offset by the benefit from recovery in China from the 2014 supplier issue. In 2014, the decrease was primarily due to the negative impact of the supplier issue in China and weaker results in Russia.

20 McDonald's Corporation 2015 Annual Report

SELLING, GENERAL & ADMINISTRATIVE EXPENSES

Consolidated selling, general and administrative expenses decreased 2% (increased 4% in constant currencies) in 2015 and increased 4% (5% in constant currencies) in 2014. The constant currency increase in 2015 was due to higher incentive-based compensation costs reflecting improved performance, partly offset by lower employee-related costs resulting from the Company's recent restructuring initiatives. The increase in 2014 was primarily due to higher employee and other costs, the 2014 Winter Olympics and the Worldwide Owner/Operator Convention, partly offset by a reduction in incentive-based compensation.

Selling, general & administrative expenses



	Amount						Increase/(decrease)				Increase/(decrease) excluding currency translation
Dollars in millions	2015		2014		2013		2015		2014		2015		2014
U.S.	$	766	$	772	$	740	(1	%)	4	%	(1	%)	4	%
International Lead Markets	534		621		586		(14	)	6		(1	)	7
High Growth Markets	326		389		352		(16	)	11		(5	)	13
Foundational Markets & Corporate⁽¹⁾	808		706		708		15		0		20		0
Total	$	2,434	$	2,488	$	2,386	(2	%)	4	%	4	%	5	%


(1)	Included in Foundational Markets & Corporate are home office support costs in areas such as facilities, finance, human resources, information technology, legal, marketing, restaurant operations, supply chain and training.

Selling, general and administrative expenses as a percent of revenues was 9.6% in 2015, 9.1% in 2014 and 8.5% in 2013. Selling, general and administrative expenses as a percent of Systemwide sales was 2.9% in 2015, 2.8% in 2014 and 2.7% in 2013. Management believes that analyzing selling, general and administrative expenses as a percent of Systemwide sales, as well as revenues, is meaningful because these costs are incurred to support the overall McDonald's business.

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 for all periods presented. 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.

OTHER OPERATING (INCOME) EXPENSE, NET

Other operating (income) expense, net



In millions	2015			2014			2013
Gains on sales of restaurant businesses	$	(146	)	$	(137	)	$	(199	)
Equity in (earnings) losses of unconsolidated affiliates	147			9			(78		)
Asset dispositions and other (income) expense, net	(27		)	108			30
Impairment and other charges	235			39			0
Total	$	209		$	19		$	(247	)


▪	Gains on sales of restaurant businesses

In 2015, the Company realized higher gains on sales of restaurant businesses, primarily in the U.S., mostly offset by lower gains in China and Australia. In 2014, the decrease in results reflected lower gains, primarily in Australia, China and the U.S.


▪	Equity in (earnings) losses of unconsolidated affiliates

Equity in earnings of unconsolidated affiliates decreased in 2015 and 2014, primarily due to weaker results in Japan, including the decision to close under-performing restaurants in 2015 and the supplier issue in 2014.


▪	Asset dispositions and other (income) expense, net

In 2015, results included a $135 million gain on the sale of property in the U.S., mostly offset by asset write-offs resulting from the decision to close under-performing restaurants, primarily in the U.S. and China. In 2014, the increase in asset dispositions and other expense was primarily due to higher asset write-offs and lower other income items in the U.S.


▪	Impairment and other charges

In 2015, the Company recorded strategic charges related to goodwill and other asset write-offs in conjunction with its refranchising initiative in certain Foundational markets and global restructuring activities. In 2014, impairment and other charges primarily reflected certain costs associated with the supplier issue in China.

McDonald's Corporation 2015 Annual Report 21

OPERATING INCOME

Operating income



	Amount							Increase/(decrease)				Increase/(decrease) excluding currency translation
Dollars in millions	2015			2014		2013		2015		2014		2015		2014
U.S.	$	3,612		$	3,523	$	3,779	3	%	(7	%)	3	%	(7	%)
International Lead Markets	2,713			3,034		3,029		(11	)	0		4		1
High Growth Markets	841			934		1,250		(10	)	(25	)	9		(23	)
Foundational Markets & Corporate	(20		)	458		706		n/m		(35	)	(74	)	(22	)
Total	$	7,146		$	7,949	$	8,764	(10	%)	(9	%)	0	%	(8	%)

•

U.S.: In 2015, the increase in operating income was due primarily to a gain on sale of property and higher franchised margin dollars, partly offset by lower Company-operated margin dollars reflecting higher costs associated with the incremental investment in wages and benefits for eligible Company-operated restaurant employees, effective July 1, 2015. In addition, 2015 results were negatively impacted by restructuring and restaurant closing charges. In 2014, the decrease in results was due to lower restaurant margin dollars, lower other operating income and higher selling, general and administrative expenses.


•	International Lead Markets: In 2015, the constant currency operating income increase was due primarily to higher franchised margin dollars, benefiting from positive comparable sales performance. In 2014, the constant currency increase was due primarily to higher franchised margin dollars, partly offset by higher selling, general and administrative expenses.


•	High Growth Markets: In 2015, the constant currency operating income increase reflected recovery from the 2014 supplier issue in China and higher franchised margin dollars, partly offset by restaurant closing charges. In 2014, the decrease reflected the negative impact of the supplier issue and lower Company-operated margin dollars in Russia.

•

Foundational Markets and Corporate: In 2015, the constant currency operating income decrease was due to strategic charges across the segment and weaker results in Japan, as well as higher Corporate selling, general and administrative expenses, including the centralization of certain costs. In 2014, the decrease primarily reflected lower Company-operated margin dollars and weaker operating results in Japan, due in part to the supplier issue.


•	Operating margin

Operating margin is defined as operating income as a percent of total revenues. Operating margin was 28.1% in 2015, 29.0% in 2014 and 31.2% in 2013.

INTEREST EXPENSE

Interest expense increased 11% (16% in constant currencies) and increased 9% (9% in constant currencies) in 2015 and 2014, respectively, primarily due to higher average debt balances. Results were partly offset in 2015 by lower interest rates.

NONOPERATING (INCOME) EXPENSE, NET

Nonoperating (income) expense, net



In millions	2015				2014				2013
Interest income		$	(9	)		$	(20	)		$	(15	)
Foreign currency and hedging activity		(56		)		20				8
Other expense		17				1				39
Total		$	(48	)		$	1			$	32

Foreign currency and hedging activity includes net gains or losses on certain hedges that reduce the exposure to variability on certain intercompany foreign currency cash flow streams.

22 McDonald's Corporation 2015 Annual Report

PROVISION FOR INCOME TAXES

In 2015, 2014 and 2013, the reported effective income tax rates were 30.9%, 35.5% and 31.9%, respectively.

In 2014, the higher effective income tax rate was primarily due to a change in tax reserves for 2003-2010 resulting from an unfavorable lower tax court ruling in a foreign tax jurisdiction, as well as the impact of changes in tax reserves related to audit progression in multiple foreign tax jurisdictions. These items had a negative impact of 4.1% on the effective tax rate.

In 2013, the effective income tax rate included a tax benefit of nearly $50 million, reflecting the retroactive impact of certain tax benefits as a result of the American Taxpayer Relief Act of 2012.

Consolidated net deferred tax liabilities included tax assets, net of valuation allowance, of $1.8 billion in 2015 and $1.6 billion in 2014. Substantially all of the net tax assets are expected to be realized in the U.S. and other profitable markets.

RECENTLY ISSUED ACCOUNTING STANDARDS

Revenue Recognition

In May 2014, the Financial Accounting Standards Board ("FASB") issued guidance codified in Accounting Standards Codification ("ASC") 606, "Revenue Recognition - Revenue from Contracts with Customers," which amends the guidance in 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 new standard allows for either a full retrospective or modified retrospective transition approach. The Company does not believe that the standard will impact its recognition of revenue from company-operated restaurants or its recognition of royalties from restaurants operated by franchisees or licensed to affiliates and developmental licensees, which are based on a percent of sales. The Company is continuing to evaluate the impact the adoption of this standard will have on the recognition of other less significant revenue transactions, such as initial fees from franchisees for new restaurant openings or new franchise terms.

Cash Flows

The Company generates significant cash from its operations and has substantial credit availability and capacity to fund operating and discretionary spending such as capital expenditures, debt repayments, dividends and share repurchases.

Cash provided by operations totaled $6.5 billion and exceeded capital expenditures by $4.7 billion in 2015, while cash provided by operations totaled $6.7 billion and exceeded capital expenditures by $4.1 billion in 2014. In 2015, cash provided by operations decreased $191 million or 3% compared with 2014, primarily due to lower operating results, including the impact from weaker foreign currencies, and other operating activity. This was partly offset by changes in working capital. In 2014, cash provided by operations decreased $390 million or 5% compared with 2013 primarily due to lower operating results, partly offset by lower income tax payments.

Cash used for investing activities totaled $1.4 billion in 2015, a decrease of $885 million compared with 2014. The decrease primarily reflected lower capital expenditures. Cash used for investing activities totaled $2.3 billion in 2014, a decrease of $369 million compared with 2013. The decrease primarily reflected lower capital expenditures, a decrease in other investing activities related to short-term time deposits and higher proceeds from sales of restaurant businesses.

Cash provided by financing activities totaled $735 million in 2015, an increase of $5.4 billion compared with 2014, primarily due to an increase in net borrowings, partly offset by higher

treasury stock purchases. Cash used for financing activities totaled $4.6 billion in 2014, an increase of $575 million compared with 2013, primarily due to higher treasury stock purchases, partly offset by an increase in net borrowings.

The Company’s cash and equivalents balance was $7.7 billion and $2.1 billion at year end 2015 and 2014, respectively. The increase in 2015 was due to higher net borrowings to be used primarily for share repurchases in 2016. In addition to cash and equivalents on hand and cash provided by operations, the Company can meet short-term funding needs through its continued access to commercial paper borrowings and line of credit agreements.

RESTAURANT DEVELOPMENT AND CAPITAL EXPENDITURES

In 2015, the Company opened 989 restaurants and closed 722 restaurants. In 2014, the Company opened 1,316 restaurants and closed 487 restaurants. The increase in restaurant closings in 2015 reflected a strategic review that resulted in additional closures of under-performing restaurants. The Company closes restaurants for a variety of reasons, such as existing sales and profit performance or loss of real estate tenure.

Systemwide restaurants at year end



	2015	2014	2013
U.S.	14,259	14,350	14,278
International Lead Markets	6,802	6,717	6,604
High Growth Markets	5,266	5,031	4,639
Foundational Markets & Corporate	10,198	10,160	9,908
Total	36,525	36,258	35,429

Approximately 82% of the restaurants at year-end 2015 were franchised, including 90% in the U.S., 82% in International Lead markets, 46% in High Growth markets and 90% in Foundational markets.

Capital expenditures decreased $769 million or 30% in 2015, primarily due to fewer new restaurant openings and lower reinvestment at existing restaurants. Capital expenditures decreased $242 million or 9% in 2014, primarily due to lower reinvestment in existing restaurants. In both years, the lower reinvestment primarily reflected fewer reimages.

Capital expenditures invested in the U.S., International Lead markets and High Growth markets represented about 90% of the total in 2015, 2014 and 2013.

Capital expenditures



In millions	2015		2014		2013
New restaurants	$	892	$	1,435	$	1,473
Existing restaurants	842		1,044		1,244
Other⁽¹⁾	80		104		108
Total capital expenditures	$	1,814	$	2,583	$	2,825
Total assets	$	37,939	$	34,227	$	36,626


(1)	Primarily corporate equipment and other office-related expenditures.

New restaurant investments in all years were concentrated in markets with strong returns or opportunities for long-term growth. Average development costs vary widely by market depending on the types of restaurants built and the real estate and construction costs within each market. These costs, which include land, buildings and equipment, are managed through the use of optimally-sized restaurants, construction and design efficiencies, and leveraging best practices. Although the Company is not responsible for all costs for every restaurant opened, total development costs (consisting of land, buildings and equipment)

McDonald's Corporation 2015 Annual Report 23

for new traditional McDonald’s restaurants in the U.S. averaged approximately $3.3 million in 2015.

The Company owned approximately 45% of the land and about 70% of the buildings for restaurants in its consolidated markets at year-end 2015 and 2014.

SHARE REPURCHASES AND DIVIDENDS

In 2015, the Company returned approximately $9.4 billion to shareholders through a combination of shares repurchased and dividends paid. This brings the cumulative two-year return to shareholders to $15.8 billion versus our targeted return of about $30 billion for the three-year period ending 2016.

Shares repurchased and dividends



In millions, except per share data	2015		2014		2013
Number of shares repurchased	61.8		33.1		18.7
Shares outstanding at year end	907		963		990
Dividends declared per share	$	3.44	$	3.28	$	3.12

Treasury stock purchases (in Shareholders' equity)	$	6,182	$	3,175	$	1,810
Dividends paid	3,230		3,216		3,115
Total returned to shareholders	$	9,412	$	6,391	$	4,925

In May 2014, the Company’s Board of Directors approved a $10 billion share repurchase program with no specified expiration date ("2014 Program"). In 2015, approximately 61.8 million shares were repurchased for $6.2 billion, bringing total purchases under the program to $8.1 billion. In December 2015, the Company's Board of Directors terminated the 2014 program and replaced it with a new share repurchase program, effective January 1, 2016, that authorizes the purchase of up to $15 billion of the Company's outstanding common stock with no specified expiration date.

On February 12, 2016, the Company paid $2.7 billion under an Accelerated Share Repurchase agreement and received an initial delivery of 18.5 million shares, which represents 80% of the total shares the Company expects to receive based on the market price at the time of initial delivery. The final number of shares delivered upon settlement of the agreement, between April 1, 2016 and May 13, 2016, will be determined with reference to the volume weighted average price per share of the Company’s common stock over the term of the agreement, less a negotiated discount.

The Company has paid dividends on its common stock for 40 consecutive years and has increased the dividend amount every year. The 2015 full year dividend of $3.44 per share reflects the quarterly dividend paid for each of the first three quarters of $0.85 per share, with an increase to $0.89 per share paid in the fourth quarter. This 5% increase in the quarterly dividend equates to a $3.56 per share annual dividend and reflects the Company’s confidence in the ongoing strength and reliability of its cash flow. As in the past, future dividend amounts will be considered after reviewing profitability expectations and financing needs, and will be declared at the discretion of the Company’s Board of Directors.

Financial Position and Capital Resources

TOTAL ASSETS AND RETURNS

Total assets increased $3.7 billion or 11% in 2015. Excluding the effect of changes in foreign currency exchange rates, total assets increased $5.8 billion in 2015 primarily due to higher cash and equivalents. Nearly 75% of total assets were in the U.S., International Lead markets and High Growth markets at year-end 2015. Net property and equipment decreased $1.4 billion in 2015, primarily due to the impact of depreciation and foreign currency translation, partly offset by capital expenditures, and represented about 60% of total assets at year end.

Operating income is used to compute return on average assets, while net income is used to calculate return on average common equity. Month-end balances are used to compute both average assets and average common equity.

Returns on assets and equity



	2015		2014		2013
Return on average assets	20.9	%	21.8	%	24.8	%
Return on average common equity	45.1		31.3		35.8

In 2015, return on average assets decreased primarily due to the negative impact of foreign currency translation on operating income, partly offset by lower average assets, while return on average common equity increased primarily due to lower average common equity as a result of higher treasury stock purchases. In 2014, return on average assets and return on average common equity decreased, reflecting lower operating results. Operating income does not include interest income; however, cash balances are included in average assets. The inclusion of cash balances in average assets reduced return on average assets by about two percentage points for all years presented.

FINANCING AND MARKET RISK

The Company generally borrows on a long-term basis and is exposed to the impact of interest rate changes and foreign currency fluctuations. Debt obligations at December 31, 2015 totaled $24.1 billion, compared with $15.0 billion at December 31, 2014. The net increase in 2015 was primarily due to net long-term issuances of $9.7 billion in connection with the Company's plans to optimize its capital structure.

Debt highlights⁽¹⁾



	2015		2014		2013
Fixed-rate debt as a percent of total debt^(2,3)	81	%	74	%	74	%
Weighted-average annual interest rate of total debt⁽³⁾	3.8		4.0		4.0
Foreign currency-denominated debt as a percent of total debt⁽²⁾	29		40		41
Total debt as a percent of total capitalization (total debt and total Shareholders' equity)⁽²⁾	77		54		47
Cash provided by operations as a percent of total debt⁽²⁾	27		45		50


(1)	All percentages are as of December 31, except for the weighted-average annual interest rate, which is for the year.<