Document
false--12-31Q320182018-09-300000063908Large Accelerated FilerMCDONALDS CORPMCD0.010.0135000000003500000000166060000016606000003100000235000001200000130000001040000003764000001900000090600000050000008000000016500000016500000000866500000889700000
0000063908
2018-01-01
2018-09-30
0000063908
2018-09-30
0000063908
2017-12-31
0000063908
2018-07-01
2018-09-30
0000063908
2017-01-01
2017-09-30
0000063908
2017-07-01
2017-09-30
0000063908
2017-09-30
0000063908
2018-06-30
0000063908
2017-06-30
0000063908
2016-12-31
0000063908
us-gaap:AccumulatedTranslationAdjustmentMember
2018-01-01
2018-09-30
0000063908
us-gaap:TreasuryStockMember
2018-01-01
2018-09-30
0000063908
us-gaap:TreasuryStockMember
2018-09-30
0000063908
us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember
2018-09-30
0000063908
us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember
2018-09-30
0000063908
us-gaap:CommonStockMember
2017-12-31
0000063908
us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember
2018-01-01
2018-09-30
0000063908
us-gaap:CommonStockMember
2018-09-30
0000063908
us-gaap:AdditionalPaidInCapitalMember
2018-09-30
0000063908
us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember
2017-12-31
0000063908
us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember
2017-12-31
0000063908
us-gaap:AdditionalPaidInCapitalMember
2018-01-01
2018-09-30
0000063908
us-gaap:RetainedEarningsMember
2017-12-31
0000063908
us-gaap:RetainedEarningsMember
2018-01-01
2018-09-30
0000063908
us-gaap:AccumulatedTranslationAdjustmentMember
2018-09-30
0000063908
us-gaap:RetainedEarningsMember
2018-09-30
0000063908
us-gaap:AccumulatedTranslationAdjustmentMember
2017-12-31
0000063908
us-gaap:TreasuryStockMember
2017-12-31
0000063908
us-gaap:AdditionalPaidInCapitalMember
2017-12-31
0000063908
us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember
2018-01-01
2018-09-30
0000063908
us-gaap:FranchisedUnitsMember
mcd:DevelopmentalLicenseesMember
2018-09-30
0000063908
us-gaap:FranchisedUnitsMember
us-gaap:AffiliatedEntityMember
2018-09-30
0000063908
us-gaap:EntityOperatedUnitsMember
2018-09-30
0000063908
us-gaap:EntityOperatedUnitsMember
2017-09-30
0000063908
us-gaap:FranchisedUnitsMember
mcd:ConventionalFranchisesMember
2018-09-30
0000063908
us-gaap:FranchisedUnitsMember
us-gaap:AffiliatedEntityMember
2017-09-30
0000063908
us-gaap:FranchisedUnitsMember
2018-09-30
0000063908
us-gaap:FranchisedUnitsMember
mcd:ConventionalFranchisesMember
2017-09-30
0000063908
us-gaap:FranchisedUnitsMember
2017-09-30
0000063908
us-gaap:FranchisedUnitsMember
mcd:DevelopmentalLicenseesMember
2017-09-30
0000063908
us-gaap:NewAccountingPronouncementMember
2017-01-01
2017-12-31
0000063908
us-gaap:NewAccountingPronouncementMember
2018-01-01
2018-09-30
0000063908
us-gaap:AccountingStandardsUpdate201606Member
2018-01-01
0000063908
us-gaap:NewAccountingPronouncementMember
2018-07-01
2018-09-30
0000063908
us-gaap:AccountingStandardsUpdate201409Member
us-gaap:ScenarioForecastMember
2018-01-01
2018-12-31
0000063908
us-gaap:AccountingStandardsUpdate201409Member
2018-01-01
0000063908
us-gaap:AccountingStandardsUpdate201409Member
2018-07-01
2018-09-30
0000063908
us-gaap:AccountingStandardsUpdate201409Member
2018-01-01
2018-09-30
0000063908
country:US
2017-01-01
2017-09-30
0000063908
mcd:FoundationalMarketsandCorporateMember
2018-07-01
2018-09-30
0000063908
mcd:InternationalLeadMarketsMember
2018-01-01
2018-09-30
0000063908
mcd:FoundationalMarketsandCorporateMember
2017-07-01
2017-09-30
0000063908
mcd:InternationalLeadMarketsMember
2018-07-01
2018-09-30
0000063908
mcd:HighGrowthMarketsMember
2017-07-01
2017-09-30
0000063908
mcd:FoundationalMarketsandCorporateMember
2017-01-01
2017-09-30
0000063908
country:US
2017-07-01
2017-09-30
0000063908
mcd:InternationalLeadMarketsMember
2017-07-01
2017-09-30
0000063908
mcd:HighGrowthMarketsMember
2018-07-01
2018-09-30
0000063908
mcd:HighGrowthMarketsMember
2018-01-01
2018-09-30
0000063908
mcd:FoundationalMarketsandCorporateMember
2018-01-01
2018-09-30
0000063908
country:US
2018-07-01
2018-09-30
0000063908
mcd:InternationalLeadMarketsMember
2017-01-01
2017-09-30
0000063908
country:US
2018-01-01
2018-09-30
0000063908
mcd:HighGrowthMarketsMember
2017-01-01
2017-09-30
0000063908
us-gaap:FairValueInputsLevel2Member
2018-09-30
0000063908
us-gaap:PrepaidExpensesAndOtherCurrentAssetsMember
us-gaap:ForeignExchangeMember
us-gaap:DesignatedAsHedgingInstrumentMember
2017-12-31
0000063908
us-gaap:DesignatedAsHedgingInstrumentMember
2018-09-30
0000063908
mcd:AccruedExpensesAndOtherCurrentLiabilitiesMember
us-gaap:InterestRateContractMember
us-gaap:DesignatedAsHedgingInstrumentMember
2017-12-31
0000063908
us-gaap:OtherAssetsMember
us-gaap:ForeignExchangeMember
us-gaap:DesignatedAsHedgingInstrumentMember
2017-12-31
0000063908
us-gaap:PrepaidExpensesAndOtherCurrentAssetsMember
us-gaap:ForeignExchangeMember
us-gaap:NondesignatedMember
2017-12-31
0000063908
us-gaap:NondesignatedMember
2018-09-30
0000063908
mcd:AccruedExpensesAndOtherCurrentLiabilitiesMember
us-gaap:ForeignExchangeMember
us-gaap:NondesignatedMember
2017-12-31
0000063908
us-gaap:OtherLiabilitiesMember
us-gaap:InterestRateContractMember
us-gaap:DesignatedAsHedgingInstrumentMember
2018-09-30
0000063908
us-gaap:OtherAssetsMember
us-gaap:EquityMember
us-gaap:NondesignatedMember
2018-09-30
0000063908
mcd:AccruedExpensesAndOtherCurrentLiabilitiesMember
us-gaap:EquityMember
us-gaap:NondesignatedMember
2017-12-31
0000063908
us-gaap:PrepaidExpensesAndOtherCurrentAssetsMember
us-gaap:ForeignExchangeMember
us-gaap:NondesignatedMember
2018-09-30
0000063908
us-gaap:DesignatedAsHedgingInstrumentMember
2017-12-31
0000063908
us-gaap:PrepaidExpensesAndOtherCurrentAssetsMember
us-gaap:EquityMember
us-gaap:NondesignatedMember
2018-09-30
0000063908
us-gaap:PrepaidExpensesAndOtherCurrentAssetsMember
us-gaap:ForeignExchangeMember
us-gaap:DesignatedAsHedgingInstrumentMember
2018-09-30
0000063908
us-gaap:OtherAssetsMember
us-gaap:ForeignExchangeMember
us-gaap:DesignatedAsHedgingInstrumentMember
2018-09-30
0000063908
mcd:AccruedExpensesAndOtherCurrentLiabilitiesMember
us-gaap:ForeignExchangeMember
us-gaap:DesignatedAsHedgingInstrumentMember
2017-12-31
0000063908
mcd:AccruedExpensesAndOtherCurrentLiabilitiesMember
us-gaap:EquityMember
us-gaap:NondesignatedMember
2018-09-30
0000063908
mcd:AccruedExpensesAndOtherCurrentLiabilitiesMember
us-gaap:ForeignExchangeMember
us-gaap:NondesignatedMember
2018-09-30
0000063908
us-gaap:OtherAssetsMember
us-gaap:InterestRateContractMember
us-gaap:DesignatedAsHedgingInstrumentMember
2018-09-30
0000063908
us-gaap:OtherLiabilitiesMember
us-gaap:ForeignExchangeMember
us-gaap:DesignatedAsHedgingInstrumentMember
2017-12-31
0000063908
us-gaap:PrepaidExpensesAndOtherCurrentAssetsMember
us-gaap:EquityMember
us-gaap:NondesignatedMember
2017-12-31
0000063908
us-gaap:OtherAssetsMember
us-gaap:InterestRateContractMember
us-gaap:DesignatedAsHedgingInstrumentMember
2017-12-31
0000063908
mcd:AccruedExpensesAndOtherCurrentLiabilitiesMember
us-gaap:ForeignExchangeMember
us-gaap:DesignatedAsHedgingInstrumentMember
2018-09-30
0000063908
us-gaap:OtherLiabilitiesMember
us-gaap:ForeignExchangeMember
us-gaap:DesignatedAsHedgingInstrumentMember
2018-09-30
0000063908
us-gaap:OtherAssetsMember
us-gaap:EquityMember
us-gaap:NondesignatedMember
2017-12-31
0000063908
us-gaap:NondesignatedMember
2017-12-31
0000063908
us-gaap:OtherLiabilitiesMember
us-gaap:InterestRateContractMember
us-gaap:DesignatedAsHedgingInstrumentMember
2017-12-31
0000063908
mcd:AccruedExpensesAndOtherCurrentLiabilitiesMember
us-gaap:InterestRateContractMember
us-gaap:DesignatedAsHedgingInstrumentMember
2018-09-30
0000063908
us-gaap:InterestRateSwapMember
2018-09-30
0000063908
us-gaap:RoyaltyArrangementMember
2018-09-30
0000063908
us-gaap:RoyaltyArrangementMember
2018-01-01
2018-09-30
0000063908
us-gaap:InterestRateRiskMember
us-gaap:FairValueHedgingMember
2018-01-01
2018-09-30
0000063908
mcd:IntercompanyDebtMember
2018-01-01
2018-09-30
0000063908
us-gaap:DebtMember
2018-01-01
2018-09-30
0000063908
us-gaap:NetInvestmentHedgingMember
2018-01-01
2018-09-30
0000063908
us-gaap:CashFlowHedgingMember
2017-01-01
2017-09-30
0000063908
us-gaap:NondesignatedMember
2017-01-01
2017-09-30
0000063908
us-gaap:EquityMember
us-gaap:NondesignatedMember
us-gaap:SellingGeneralAndAdministrativeExpensesMember
2018-01-01
2018-09-30
0000063908
us-gaap:ForeignExchangeForwardMember
us-gaap:NetInvestmentHedgingMember
2018-01-01
2018-09-30
0000063908
us-gaap:ForeignExchangeMember
us-gaap:NondesignatedMember
us-gaap:NonoperatingIncomeExpenseMember
2018-01-01
2018-09-30
0000063908
us-gaap:EquityMember
us-gaap:NondesignatedMember
us-gaap:SellingGeneralAndAdministrativeExpensesMember
2017-01-01
2017-09-30
0000063908
us-gaap:InterestRateContractMember
us-gaap:CashFlowHedgingMember
2018-01-01
2018-09-30
0000063908
us-gaap:ForeignExchangeMember
us-gaap:CashFlowHedgingMember
2017-01-01
2017-09-30
0000063908
us-gaap:NetInvestmentHedgingMember
2017-01-01
2017-09-30
0000063908
us-gaap:ForeignExchangeForwardMember
us-gaap:NetInvestmentHedgingMember
2017-01-01
2017-09-30
0000063908
mcd:OtherForeignCurrencyDenominatedDebtMember
us-gaap:NetInvestmentHedgingMember
2018-01-01
2018-09-30
0000063908
us-gaap:CashFlowHedgingMember
2018-01-01
2018-09-30
0000063908
us-gaap:InterestRateContractMember
us-gaap:CashFlowHedgingMember
2017-01-01
2017-09-30
0000063908
us-gaap:NondesignatedMember
2018-01-01
2018-09-30
0000063908
us-gaap:ForeignExchangeMember
us-gaap:NondesignatedMember
us-gaap:NonoperatingIncomeExpenseMember
2017-01-01
2017-09-30
0000063908
mcd:OtherForeignCurrencyDenominatedDebtMember
us-gaap:NetInvestmentHedgingMember
2017-01-01
2017-09-30
0000063908
us-gaap:CrossCurrencyInterestRateContractMember
us-gaap:NetInvestmentHedgingMember
2018-01-01
2018-09-30
0000063908
us-gaap:CrossCurrencyInterestRateContractMember
us-gaap:NetInvestmentHedgingMember
2017-01-01
2017-09-30
0000063908
us-gaap:ForeignExchangeMember
us-gaap:CashFlowHedgingMember
2018-01-01
2018-09-30
xbrli:shares
iso4217:USD
xbrli:shares
mcd:Restaurant
iso4217:USD
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
|
| |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended September 30, 2018 |
OR
|
| |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from to |
Commission File Number 1-5231
McDONALD’S CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
|
| | |
Delaware | | 36-2361282 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
| |
110 North Carpenter Street Chicago, Illinois | | 60607 |
(Address of Principal Executive Offices) | | (Zip Code) |
(630) 623-3000
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
| | | |
| | Large accelerated filer x | | Accelerated filer ¨ |
| | | |
| | Non-accelerated filer ¨ | | Smaller reporting company ¨ |
| | | | |
| | Emerging growth company ¨ | | |
| | | | |
| | If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
|
| |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
770,910,250
(Number of shares of common stock
outstanding as of September 30, 2018)
McDONALD’S CORPORATION
___________________________
INDEX
_______
All trademarks used herein are the property of their respective owners and are used with permission.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
|
| | | | | | | | | |
CONDENSED CONSOLIDATED BALANCE SHEET |
| | | | | |
| | (unaudited) | | | |
In millions, except per share data | | September 30,
2018 | | | December 31,
2017 |
Assets | | | | | |
Current assets | | | | | |
Cash and equivalents | | $ | 2,574.5 |
| | | $ | 2,463.8 |
|
Accounts and notes receivable | | 2,266.8 |
| | | 1,976.2 |
|
Inventories, at cost, not in excess of market | | 41.9 |
| | | 58.8 |
|
Prepaid expenses and other current assets | | 669.9 |
| | | 828.4 |
|
Total current assets | | 5,553.1 |
| | | 5,327.2 |
|
Other assets | | | | | |
Investments in and advances to affiliates | | 1,135.5 |
| | | 1,085.7 |
|
Goodwill | | 2,345.0 |
| | | 2,379.7 |
|
Miscellaneous | | 2,406.5 |
| | | 2,562.8 |
|
Total other assets | | 5,887.0 |
| | | 6,028.2 |
|
Property and equipment | | | | | |
Property and equipment, at cost | | 36,946.4 |
| | | 36,626.4 |
|
Accumulated depreciation and amortization | | (14,332.8 | ) | | | (14,178.1 | ) |
Net property and equipment | | 22,613.6 |
| | | 22,448.3 |
|
Total assets | | $ | 34,053.7 |
| | | $ | 33,803.7 |
|
Liabilities and shareholders’ equity | | | | | |
Current liabilities | | | | | |
Accounts payable | | $ | 932.8 |
| | | $ | 924.8 |
|
Dividends payable | | 888.0 |
| | | — |
|
Income taxes | | 160.0 |
| | | 265.8 |
|
Other taxes | | 256.4 |
| | | 275.4 |
|
Accrued interest | | 314.7 |
| | | 278.4 |
|
Accrued payroll and other liabilities | | 1,074.8 |
| | | 1,146.2 |
|
Total current liabilities | | 3,626.7 |
| | | 2,890.6 |
|
Long-term debt | | 31,895.2 |
| | | 29,536.4 |
|
Long-term income taxes | | 2,376.4 |
| | | 2,370.9 |
|
Deferred revenues - initial franchise fees | | 617.0 |
| | | — |
|
Other long-term liabilities | | 1,129.2 |
| | | 1,154.4 |
|
Deferred income taxes | | 1,201.8 |
| | | 1,119.4 |
|
Shareholders’ equity (deficit) | | | | | |
Preferred stock, no par value; authorized – 165.0 million shares; issued – none | | — |
| | | — |
|
Common stock, $.01 par value; authorized – 3.5 billion shares; issued – 1,660.6 million shares | | 16.6 |
| | | 16.6 |
|
Additional paid-in capital | | 7,257.2 |
| | | 7,072.4 |
|
Retained earnings | | 49,076.2 |
| | | 48,325.8 |
|
Accumulated other comprehensive income (loss) | | (2,508.3 | ) | | | (2,178.4 | ) |
Common stock in treasury, at cost; 889.7 and 866.5 million shares | | (60,634.3 | ) | | | (56,504.4 | ) |
Total shareholders’ equity (deficit) | | (6,792.6 | ) | | | (3,268.0 | ) |
Total liabilities and shareholders’ equity (deficit) | | $ | 34,053.7 |
| | | $ | 33,803.7 |
|
See Notes to condensed consolidated financial statements.
|
| | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) | | | | | | |
| | | | | | | | | | | |
| | Quarters Ended | | | Nine Months Ended |
| | September 30, | | | September 30, |
In millions, except per share data | | 2018 | | | 2017 | | | 2018 | | | 2017 |
Revenues | | | | | | | | | | | |
Sales by Company-operated restaurants | | $ | 2,511.0 |
| | | $ | 3,064.3 |
| | | $ | 7,641.5 |
| | | $ | 10,045.8 |
|
Revenues from franchised restaurants | | 2,858.4 |
| | | 2,690.3 |
| | | 8,220.7 |
| | | 7,434.4 |
|
Total revenues | | 5,369.4 |
| | | 5,754.6 |
| | | 15,862.2 |
| | | 17,480.2 |
|
Operating costs and expenses | | | | | | | | | | | |
Company-operated restaurant expenses | | 2,047.9 |
| | | 2,479.8 |
| | | 6,309.3 |
| | | 8,199.5 |
|
Franchised restaurants-occupancy expenses | | 499.4 |
| | | 457.3 |
| | | 1,463.6 |
| | | 1,325.4 |
|
Selling, general & administrative expenses | | 515.2 |
| | | 567.0 |
| | | 1,590.4 |
| | | 1,613.7 |
|
Other operating (income) expense, net | | (110.8 | ) | | | (828.9 | ) | | | (324.2 | ) | | | (1,066.9 | ) |
Total operating costs and expenses | | 2,951.7 |
| | | 2,675.2 |
| | | 9,039.1 |
| | | 10,071.7 |
|
Operating income | | 2,417.7 |
| | | 3,079.4 |
| | | 6,823.1 |
| | | 7,408.5 |
|
Interest expense | | 250.1 |
| | | 236.7 |
| | | 727.1 |
| | | 686.2 |
|
Nonoperating (income) expense, net | | 8.9 |
| | | 23.2 |
| | | 31.3 |
| | | 33.9 |
|
Income before provision for income taxes | | 2,158.7 |
| | | 2,819.5 |
| | | 6,064.7 |
| | | 6,688.4 |
|
Provision for income taxes | | 521.4 |
| | | 935.8 |
| | | 1,555.7 |
| | | 2,194.8 |
|
Net income | | $ | 1,637.3 |
| | | $ | 1,883.7 |
| | | $ | 4,509.0 |
| | | $ | 4,493.6 |
|
Earnings per common share-basic | | $ | 2.12 |
| | | $ | 2.34 |
| | | $ | 5.77 |
| | | $ | 5.54 |
|
Earnings per common share-diluted | | $ | 2.10 |
| | | $ | 2.32 |
| | | $ | 5.72 |
| | | $ | 5.48 |
|
Dividends declared per common share | | $ | 2.17 |
| | | $ | 1.95 |
| | | $ | 4.19 |
| | | $ | 3.83 |
|
Weighted-average shares outstanding-basic | | 772.8 |
| | | 805.3 |
| | | 781.2 |
| | | 811.8 |
|
Weighted-average shares outstanding-diluted | | 779.6 |
| | | 813.5 |
| | | 788.5 |
| | | 819.4 |
|
See Notes to condensed consolidated financial statements.
|
| | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED) | | | | | | |
| | | | | | | | | | | |
| | Quarters Ended | | | Nine Months Ended |
| | September 30, | | | September 30, |
In millions | | 2018 | | | 2017 | | | 2018 | | | 2017 |
Net income | | $ | 1,637.3 |
| | | $ | 1,883.7 |
| | | $ | 4,509.0 |
| | | $ | 4,493.6 |
|
Other comprehensive income (loss), net of tax | | | | | | | | | | | |
Foreign currency translation adjustments: | | | | | | | | | | | |
Gain (loss) recognized in accumulated other comprehensive
income ("AOCI"), including net investment hedges | (78.8 | ) | | | 247.3 |
| | | (379.5 | ) | | | 780.6 |
|
Reclassification of (gain) loss to net income | — |
| | | 4.9 |
| | | — |
| | | 109.3 |
|
Foreign currency translation adjustments-net of tax
benefit (expense) of $(19.0), $104.0, $(90.6) and $376.4 | (78.8 | ) | | | 252.2 |
| | | (379.5 | ) | | | 889.9 |
|
Cash flow hedges: | | | | | | | | | | | |
Gain (loss) recognized in AOCI | 8.6 |
| | | (14.5 | ) | | | 33.2 |
| | | (44.8 | ) |
Reclassification of (gain) loss to net income | (5.2 | ) | | | 9.1 |
| | | 10.4 |
| | | 3.2 |
|
Cash flow hedges-net of tax benefit (expense) of $(1.2), $3.1, $(13.0) and $23.5 | 3.4 |
| | | (5.4 | ) | | | 43.6 |
| | | (41.6 | ) |
Defined benefit pension plans: | | | | | | | | | | | |
Gain (loss) recognized in AOCI | — |
| | | — |
| | | (1.1 | ) | | | (0.3 | ) |
Reclassification of (gain) loss to net income | 2.1 |
| | | 2.9 |
| | | 7.1 |
| | | 8.2 |
|
Defined benefit pension plans-net of tax benefit (expense)
of $0.0, $0.0, $(0.8) and $(0.5) | 2.1 |
| | | 2.9 |
| | | 6.0 |
| | | 7.9 |
|
Total other comprehensive income (loss), net of tax | (73.3 | ) | | | 249.7 |
| | | (329.9 | ) | | | 856.2 |
|
Comprehensive income (loss) | | $ | 1,564.0 |
| | | $ | 2,133.4 |
| | | $ | 4,179.1 |
| | | $ | 5,349.8 |
|
See Notes to condensed consolidated financial statements.
|
| | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) | | | | | | |
| | | | | | |
| | Quarters Ended | | | Nine Months Ended |
| | September 30, | | | September 30, |
In millions | | 2018 | | | 2017 | | | 2018 | | | 2017 |
Operating activities | | | | | | | | | | | |
Net income | | $ | 1,637.3 |
| | | $ | 1,883.7 |
| | | $ | 4,509.0 |
| | | $ | 4,493.6 |
|
Adjustments to reconcile to cash provided by operations | | | | | | | | | | | |
Charges and credits: | | | | | | | | | | | |
Depreciation and amortization | | 375.1 |
| | | 355.8 |
| | | 1,103.0 |
| | | 1,020.6 |
|
Deferred income taxes | | 31.1 |
| | | 225.1 |
| | | 114.7 |
| | | 375.6 |
|
Share-based compensation | | 36.0 |
| | | 39.5 |
| | | 99.7 |
| | | 83.5 |
|
Net gain on sale of restaurant businesses | | (68.0 | ) | | | (902.0 | ) | | | (257.1 | ) | | | (1,065.2 | ) |
Other | | 15.3 |
| | | (42.3 | ) | | | 58.8 |
| | | (67.8 | ) |
Changes in working capital items | | 444.3 |
| | | 124.7 |
| | | (173.0 | ) | | | (398.4 | ) |
Cash provided by operations | | 2,471.1 |
| | | 1,684.5 |
| | | 5,455.1 |
| | | 4,441.9 |
|
Investing activities | | | | | | | | | | | |
Capital expenditures | | (703.8 | ) | | | (416.9 | ) | | | (1,867.9 | ) | | | (1,213.3 | ) |
Purchases of restaurant businesses | | (40.2 | ) | | | (20.8 | ) | | | (75.5 | ) | | | (38.9 | ) |
Sales of restaurant businesses | | 109.5 |
| | | 1.9 |
| | | 439.4 |
| | | 851.8 |
|
Proceeds from sale of businesses in China and Hong Kong | | — |
| | | 1,597.0 |
| | | — |
| | | 1,597.0 |
|
Sales of property | | 11.3 |
| | | 59.2 |
| | | 135.8 |
| | | 153.3 |
|
Other | | (98.1 | ) | | | (45.7 | ) | | | (203.0 | ) | | | (183.9 | ) |
Cash provided by (used for) investing activities | | (721.3 | ) | | | 1,174.7 |
| | | (1,571.2 | ) | | | 1,166.0 |
|
Financing activities | | | | | | | | | | | |
Net short-term borrowings | | (801.4 | ) | | | (55.8 | ) | | | (5.7 | ) | | | (834.3 | ) |
Long-term financing issuances | | 1,791.9 |
| | | 0.4 |
| | | 3,792.1 |
| | | 2,530.5 |
|
Long-term financing repayments | | (1.9 | ) | | | (3.6 | ) | | | (1,004.7 | ) | | | (407.1 | ) |
Treasury stock purchases | | (1,040.7 | ) | | | (2,081.7 | ) | | | (4,280.8 | ) | | | (3,937.4 | ) |
Common stock dividends | | (779.8 | ) | | | (755.3 | ) | | | (2,363.4 | ) | | | (2,287.4 | ) |
Proceeds from stock option exercises | | 69.2 |
| | | 82.5 |
| | | 236.2 |
| | | 373.1 |
|
Other | | (5.3 | ) | | | 3.5 |
| | | (12.1 | ) | | | (1.1 | ) |
Cash used for financing activities | | (768.0 | ) | | | (2,810.0 | ) | | | (3,638.4 | ) | | | (4,563.7 | ) |
Effect of exchange rates on cash and cash equivalents | | (30.8 | ) | | | 76.2 |
| | | (134.8 | ) | | | 229.6 |
|
Cash and equivalents increase | | 951.0 |
| | | 125.4 |
| | | 110.7 |
| | | 1,273.8 |
|
Change in cash balances of businesses held for sale | | — |
| | | 153.4 |
| | | — |
| | | 174.0 |
|
Cash and equivalents at beginning of period | | 1,623.5 |
| | | 2,392.4 |
| | | 2,463.8 |
| | | 1,223.4 |
|
Cash and equivalents at end of period | | $ | 2,574.5 |
| | | $ | 2,671.2 |
| | | $ | 2,574.5 |
| | | $ | 2,671.2 |
|
See Notes to condensed consolidated financial statements.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) |
| | | | | | | | | | |
| Common stock
issued | | | | | | | Accumulated other
comprehensive income (loss) | | | Common stock in
treasury | | Total
shareholders’
equity | |
Additional
paid-in
capital | | | Retained
earnings |
| Pensions | | Cash flow
hedges | | Foreign
currency
translation | | |
In millions, except per share data | Shares |
| Amount | | Shares |
| | Amount |
|
Balance at December 31, 2017 | 1,660.6 |
| | $ | 16.6 |
| | $ | 7,072.4 |
| | $ | 48,325.8 |
| | $ | (190.2 | ) | | $ | (16.5 | ) | | $ | (1,971.7 | ) | | (866.5 | ) | | $ | (56,504.4 | ) | | $ | (3,268.0 | ) |
Net income | | | | | | | 4,509.0 |
| | | | | | | | | | | | 4,509.0 |
|
Other comprehensive income (loss), net of tax | | | | | | | |
| | 6.0 |
| | 43.6 |
| | (379.5 | ) | | | | | | (329.9 | ) |
Comprehensive income | | | | | | | | | | | | | | | | | | | 4,179.1 |
|
Adoption of ASC 606 (1) | | | | | | | (450.2 | ) | | | | | | | | | | | | (450.2 | ) |
Adoption of ASU 2016-16 (2) | | | | | | | (57.0 | ) | | | | | | | | | | | | (57.0 | ) |
Common stock cash dividends
($4.19 per share) | | | | | | | (3,251.4 | ) | | | | | | | | | | | | (3,251.4 | ) |
Treasury stock purchases | | | | | | | | | | | | | | | (26.7 | ) | | (4,280.8 | ) | | (4,280.8 | ) |
Share-based compensation | | | | | 99.7 |
| | | | | | | | | | | | | | 99.7 |
|
Stock option exercises and other | | | | | 85.1 |
| | | | | | | | | | 3.5 |
| | 150.9 |
| | 236.0 |
|
Balance at September 30, 2018 | 1,660.6 |
| | 16.6 |
| | 7,257.2 |
| | 49,076.2 |
| | (184.2 | ) | | 27.1 |
| | (2,351.2 | ) | | (889.7 | ) | | (60,634.3 | ) | | (6,792.6 | ) |
(1) Accounting Standards Codification ("ASC") 606, "Revenue Recognition - Revenue from Contracts with Customers." Refer to the Recent Accounting Pronouncements footnote on page 9 for further details.
(2) Accounting Standards Update ("ASU") 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory." Refer to the Recent Accounting Pronouncements footnote on page 9 for further details.
See Notes to condensed consolidated financial statements.
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
Basis of Presentation
The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in the Company’s December 31, 2017 Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. The results for the quarter and nine months ended September 30, 2018, do not necessarily indicate the results that may be expected for the full year.
Restaurant Information
The following table presents restaurant information by ownership type:
|
| | | | | |
Restaurants at September 30, | 2018 | | 2017 |
Conventional franchised | 21,586 |
| | 21,214 |
|
Developmental licensed | 7,103 |
| | 6,824 |
|
Foreign affiliated | 6,056 |
| | 5,708 |
|
Total Franchised | 34,745 |
| | 33,746 |
|
Company-operated | 2,812 |
| | 3,230 |
|
Systemwide restaurants | 37,557 |
| | 36,976 |
|
The results of operations of restaurant businesses purchased and sold in transactions with franchisees were not material either individually or in the aggregate to the condensed consolidated financial statements for the periods prior to purchase and sale.
Per Common Share Information
Diluted earnings per common share is calculated using net income divided by diluted weighted-average shares. Diluted weighted-average shares include weighted-average shares outstanding plus the dilutive effect of share-based compensation, calculated using the treasury stock method, of 6.8 million shares and 8.2 million shares for the quarters 2018 and 2017, respectively, and 7.3 million shares and 7.6 million shares for the nine months 2018 and 2017, respectively. Stock options that would have been antidilutive, and therefore were not included in the calculation of diluted weighted-average shares, totaled 2.5 million shares and 0.1 million shares for the quarters 2018 and 2017, respectively, and 2.5 million shares and 0.7 million shares for the nine months 2018 and 2017, respectively.
In September 2018, McDonald's Board of Directors declared a fourth quarter dividend of $1.16 per share of common stock, resulting in $888.0 million of dividends payable in December 2018.
Recent Accounting Pronouncements
Recently Issued Accounting Standards
Measurement Period - Tax Cuts and Jobs Act of 2017
In December 2017, the Securities and Exchange Commission published Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance on reporting for accounting impacts of the Tax Cuts and Jobs Act of 2017 (“Tax Act”). SAB 118 allowed the Company to provide reasonable estimates in its 2017 consolidated financial statements for the income tax effects of the Tax Act and to report those effects as provisional amounts in its financial statements through a limited measurement period. Under SAB 118, the measurement period may not extend beyond one year from the enactment of the Tax Act.
The Company has not completed the accounting for the tax effects of the enactment of the Tax Act, although it has made reasonable estimates of the effects on existing deferred tax balances and on the one-time transition tax on earnings of certain foreign subsidiaries. Certain aspects of the Tax Act are expected to be clarified, and as such, could impact these estimates. The Company will complete the accounting for the tax effects in the fourth quarter 2018. A net provisional tax cost of approximately $700 million was originally recognized in the Company's 2017 consolidated financial statements, and the Company subsequently recorded an additional $47 million in the third quarter 2018, resulting in a total increase of $99 million for the nine months 2018.
Lease Accounting
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, “Leases (Topic 842),” to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Most prominent among the amendments is the recognition of assets and liabilities by lessees for those leases classified as operating leases under current U.S. GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company will adopt the new standard effective January 1, 2019.
At transition, the Company will recognize and measure leases using the required modified retrospective approach. The Company anticipates ASU 2016-02 will have a material impact on the consolidated balance sheet due to the significance of the Company’s operating lease portfolio. The Company will elect an optional practical expedient to retain the classification of existing leases, and, therefore, anticipates a minimal initial impact on the consolidated statement of income. The impact of ASU 2016-02 is non-cash in nature; therefore, it will not affect the Company’s cash flows.
Recently Adopted Accounting Standards
Derivatives and Hedging
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 expanded components of fair value hedging, specifies the recognition and presentation of the effects of hedging instruments, and eliminates the separate measurement and presentation of hedge ineffectiveness. The Company elected to early adopt the new standard in the first quarter of 2018 and applied the presentation and disclosure guidance on a prospective basis. The adoption of the standard did not have a material impact on the Company's condensed consolidated financial statements.
Income Taxes
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” The goal of this update was to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The Company adopted this standard on January 1, 2018 using a modified retrospective method, resulting in a cumulative catch up adjustment of $57 million, the majority of which was recorded within miscellaneous other assets on the condensed consolidated balance sheet. The adoption of this standard did not have a material impact on the condensed consolidated statements of income and cash flows.
Revenue Recognition
In May 2014, the FASB issued guidance codified in ASC 606, “Revenue Recognition - Revenue from Contracts with Customers,” which amended the guidance in former ASC 605, "Revenue Recognition." The core principle of the standard is to recognize revenue when control of the promised goods or services is transferred to customers in an amount that reflects the consideration expected to be received for those goods or services. The standard also requires additional disclosures around the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method. Refer to the Revenues footnote below for further details.
Revenues
The Company’s revenues consist of sales by Company-operated restaurants and fees from franchised restaurants operated by conventional franchisees, developmental licensees and foreign affiliates. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales with minimum rent payments, and initial fees. Revenues from restaurants licensed to foreign affiliates and developmental licensees include a royalty based on a percent of sales, and may include initial fees.
ASC 606 provides that revenues are to be recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration expected to be received for those goods or services. This standard does not impact the Company's recognition of revenue from Company-operated restaurants as those sales are recognized on a cash basis at the time of the underlying sale and are presented net of sales tax and other sales-related taxes. The standard also does not change the recognition of royalties from restaurants operated by franchisees or licensed to affiliates and developmental licensees, which are based on a percent of sales and recognized at the time the underlying sales occur. Rental income from restaurants operated by conventional franchisees is also not impacted by this standard as those revenues are subject to the guidance in ASC 840, "Leases." The standard does change the timing in which the Company recognizes initial fees from franchisees for new restaurant openings and new franchise terms. The Company's accounting policy through December 31, 2017, was to recognize initial franchise fees when received, upon a new restaurant opening and at the start of a new franchise term. Beginning in January 2018, initial franchise fees are being recognized as the Company satisfies the performance obligation over the franchise term, which is generally 20 years.
The Company adopted ASC 606 as of January 1, 2018, using the modified retrospective method. This method allows the standard to be applied retrospectively through a cumulative catch up adjustment recognized upon adoption. As such, comparative information in the Company’s financial statements has not been restated and continues to be reported under the accounting standards in effect for those periods. The cumulative adjustment recorded upon adoption of ASC 606 consisted of deferred revenue of approximately $600 million within long-term liabilities and approximately $150 million of associated adjustments to the deferred tax balances which are recorded in Deferred income taxes and Miscellaneous other assets on the condensed consolidated balance sheet.
The following table presents revenue disaggregated by revenue source (in millions):
|
| | | | | | | | | | | | | | | | |
| | Quarters Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2018 |
| | 2017 |
| | 2018 | | 2017 |
|
Company-operated sales | |
|
| |
|
| |
|
| | |
U.S. | | $ | 637.3 |
| | $ | 798.7 |
| | $ | 2,042.8 |
| | $ | 2,483.8 |
|
International Lead Markets | | 992.3 |
| | 1,076.3 |
| | 3,022.1 |
| | 3,038.9 |
|
High Growth Markets | | 737.8 |
| | 1,054.9 |
| | 2,170.7 |
| | 3,859.5 |
|
Foundational Markets & Corporate | | 143.6 |
| | 134.4 |
| | 405.9 |
| | 663.6 |
|
Total | | $ | 2,511.0 |
| | $ | 3,064.3 |
| | $ | 7,641.5 |
| | $ | 10,045.8 |
|
Franchised revenues | |
|
| |
|
| | | | |
U.S. | | $ | 1,292.7 |
| | $ | 1,224.6 |
| | $ | 3,715.6 |
| | $ | 3,516.9 |
|
International Lead Markets | | 948.2 |
| | 894.2 |
| | 2,726.8 |
| | 2,388.3 |
|
High Growth Markets | | 302.4 |
| | 267.2 |
| | 855.7 |
| | 679.0 |
|
Foundational Markets & Corporate | | 315.1 |
| | 304.3 |
| | 922.6 |
| | 850.2 |
|
Total* | | $ | 2,858.4 |
| | $ | 2,690.3 |
| | $ | 8,220.7 |
| | $ | 7,434.4 |
|
Total revenues | |
|
| |
|
| | | | |
U.S. | | $ | 1,930.0 |
| | $ | 2,023.3 |
| | $ | 5,758.4 |
| | $ | 6,000.7 |
|
International Lead Markets | | 1,940.5 |
| | 1,970.5 |
| | 5,748.9 |
| | 5,427.2 |
|
High Growth Markets | | 1,040.2 |
| | 1,322.1 |
| | 3,026.4 |
| | 4,538.5 |
|
Foundational Markets & Corporate | | 458.7 |
| | 438.7 |
| | 1,328.5 |
| | 1,513.8 |
|
Total | | $ | 5,369.4 |
| | $ | 5,754.6 |
| | $ | 15,862.2 |
| | $ | 17,480.2 |
|
| |
* | The Company expects the application of ASC 606 to negatively impact 2018 annual franchised revenues by approximately $50 million. Results for the quarter and nine months ended September 30, 2018, reflected an impact of approximately $10 million and $25 million, respectively, due to the timing of new restaurant openings and new franchise terms. |
Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value. Fair value disclosures are reflected in a three-level hierarchy, maximizing the use of observable inputs and minimizing the use of unobservable inputs. The Company did not have any significant changes to the valuation techniques used to measure fair value as described in the Company's December 31, 2017 Annual Report on Form 10-K.
At September 30, 2018, the fair value of the Company’s debt obligations was estimated at $32.8 billion, compared to a carrying amount of $31.9 billion. The fair value was based upon quoted market prices, Level 2 within the valuation hierarchy. The carrying amounts of cash and equivalents, short-term investments and notes receivable approximate fair value.
Financial Instruments and Hedging Activities
The Company is exposed to global market risks, including the effect of changes in interest rates and foreign currency fluctuations. The Company uses foreign currency denominated debt and derivative instruments to mitigate the impact of these changes. The Company does not hold or issue derivatives for trading purposes.
The following table presents the fair values of derivative instruments included on the condensed consolidated balance sheet:
|
| | | | | | | | | | | | | | | | | | | |
| Derivative Assets | | Derivative Liabilities |
In millions | Balance Sheet Classification | | September 30, 2018 | | December 31, 2017 | | Balance Sheet Classification | | September 30, 2018 | | December 31, 2017 |
Derivatives designated as hedging instruments | | | | | | | | |
Foreign currency | Prepaid expenses and other current assets | | $ | 24.7 |
| | $ | 0.5 |
| | Accrued payroll and other liabilities | | $ | (1.7 | ) | | $ | (31.0 | ) |
Interest rate | | | | | | | Accrued payroll and other liabilities | | (0.6 | ) | | (0.3 | ) |
Foreign currency | Miscellaneous other assets | | 6.5 |
| | 0.1 |
| | Other long-term liabilities | | (0.3 | ) | | (1.4 | ) |
Interest rate | Miscellaneous other assets
| | 3.0 |
| | — |
| | Other long-term liabilities | | (27.7 | ) | | (5.9 | ) |
Total derivatives designated as hedging instruments | | $ | 34.2 |
| | $ | 0.6 |
| | | | $ | (30.3 | ) | | $ | (38.6 | ) |
Derivatives not designated as hedging instruments | | | | | | | | |
Equity | Prepaid expenses and other current assets
| | $ | 166.4 |
| | $ | — |
| | Accrued payroll and other liabilities | | $ | (0.2 | ) | | $ | (1.3 | ) |
Foreign currency | Prepaid expenses and other current assets
| | 12.1 |
| | — |
| | Accrued payroll and other liabilities | | — |
| | (5.5 | ) |
Equity | Miscellaneous other assets | | — |
| | 167.3 |
| | | | | | |
Total derivatives not designated as hedging instruments | | $ | 178.5 |
| | $ | 167.3 |
| | | | $ | (0.2 | ) | | $ | (6.8 | ) |
Total derivatives | | $ | 212.7 |
| | $ | 167.9 |
| | | | $ | (30.5 | ) | | $ | (45.4 | ) |
The following table presents the pre-tax amounts from derivative instruments affecting income and other comprehensive income (“OCI”) for the nine months ended September 30, 2018 and 2017, respectively:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Location of Gain or Loss Recognized in Income on Derivative | | Gain (Loss) Recognized in Accumulated OCI | | Gain (Loss) Reclassified into Income from Accumulated OCI | | Gain (Loss) Recognized in Income on Derivative |
| | | |
| | | |
In millions | | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
Foreign currency | Nonoperating income/expense | | $ | 42.9 |
| | $ | (70.1 | ) | | $ | (12.9 | ) | | $ | (4.6 | ) | | | | |
Interest rate | Interest expense | | — |
| | — |
| | (0.8 | ) | | (0.4 | ) | | | | |
Cash flow hedges | | $ | 42.9 |
| | $ | (70.1 | ) | | $ | (13.7 | ) | | $ | (5.0 | ) | | | | |
| | | | | | | | | | | | | |
Foreign currency denominated debt | Nonoperating income/expense | | $ | 501.6 |
| | $ | (1,376.1 | ) | | $ | — |
| | $ | — |
| | | | |
Foreign currency derivatives | Nonoperating income/expense | | 4.2 |
| | (17.4 | ) | | — |
| | 8.6 |
| | | | |
Foreign currency derivatives(1) | Interest expense | | | | | | | | | | $ | 1.6 |
| | $ | — |
|
Net investment hedges | | $ | 505.8 |
| | $ | (1,393.5 | ) | | $ | — |
| | $ | 8.6 |
| | $ | 1.6 |
| | $ | — |
|
| | | | | | | | | | | | | |
Foreign currency | Nonoperating income/expense | | | | | | | | | | $ | 17.4 |
| | $ | (23.7 | ) |
Equity | Selling, general & administrative expenses | | | | | | | | | | 17.3 |
| | 64.0 |
|
Undesignated derivatives | | | | | | | | | | $ | 34.7 |
| | $ | 40.3 |
|
(1)The amount of gain (loss) recognized in income related to components excluded from effectiveness testing. |
Fair Value Hedges
The Company enters into fair value hedges to reduce the exposure to changes in fair values of certain liabilities. The Company enters into fair value hedges that convert a portion of its fixed rate debt into floating rate debt by use of interest rate swaps. At September 30, 2018, the carrying amount of fixed-rate debt that was effectively converted was $724.7 million, which included a decrease of $25.3 million of cumulative hedging adjustments. For the nine months ended September 30, 2018, the Company recognized a $19.1 million loss on the fair value of interest rate swaps, and a corresponding gain on the fair value of the related hedged debt instrument to Interest expense.
Cash Flow Hedges
The Company enters into cash flow hedges to reduce the exposure to variability in certain expected future cash flows. To protect against the reduction in value of forecasted foreign currency cash flows (such as royalties denominated in foreign currencies), the Company uses foreign currency forwards to hedge a portion of anticipated exposures. The hedges cover the next 18 months for certain exposures and are denominated in various currencies. As of September 30, 2018, the Company had derivatives outstanding with an equivalent notional amount of $746.0 million that hedged a portion of forecasted foreign currency denominated cash flows.
Based on market conditions at September 30, 2018, the $27.1 million in cumulative cash flow hedging gains, after tax, is not expected to have a significant effect on earnings over the next 12 months.
Net Investment Hedges
The Company primarily uses foreign currency denominated debt (third party and intercompany) to hedge its investments in certain foreign subsidiaries and affiliates. Realized and unrealized translation adjustments from these hedges are included in shareholders' equity in the foreign currency translation component of OCI and offset translation adjustments on the underlying net assets of foreign subsidiaries and affiliates, which also are recorded in OCI. As of September 30, 2018, $11.7 billion of the Company's third party foreign currency denominated debt and $4.1 billion of intercompany foreign currency denominated debt were designated to hedge investments in certain foreign subsidiaries and affiliates.
Undesignated Derivatives
The Company enters into certain derivatives that are not designated for hedge accounting, therefore the changes in the fair value of these derivatives are recognized immediately in earnings together with the gain or loss from the hedged balance sheet position. As an example, the Company enters into equity derivative contracts, including total return swaps, to hedge market-driven changes in certain of its supplemental benefit plan liabilities. Changes in the fair value of these derivatives are recorded in selling, general & administrative expenses together with the changes in the supplemental benefit plan liabilities. In addition, the Company uses foreign currency forwards to mitigate the change in fair value of certain foreign currency denominated assets and liabilities. The changes in the fair value of these derivatives are recognized in Nonoperating (income) expense, net, along with the currency gain or loss from the hedged balance sheet position.
Credit Risk
The Company is exposed to credit-related losses in the event of non-performance by its derivative counterparties. The Company did not have significant exposure to any individual counterparty at September 30, 2018 and has master agreements that contain netting arrangements. For financial reporting purposes, the Company presents gross derivative balances in the financial statements and supplementary data, including for counterparties subject to netting arrangements. Some of these agreements also require each party to post collateral if credit ratings fall below, or aggregate exposures exceed, certain contractual limits. At September 30, 2018, the Company was required to post an immaterial amount of collateral due to the negative fair value of certain derivative positions. The Company's counterparties were not required to post collateral on any derivative position, other than on certain hedges of the Company’s supplemental benefit plan liabilities where the counterparties were required to post collateral on their liability positions.
Segment Information
The Company franchises and operates McDonald’s restaurants in the global restaurant industry. The following reporting segments reflect how management reviews and evaluates operating performance.
| |
• | U.S. - the Company's largest segment |
| |
• | International Lead Markets - established markets including Australia, Canada, France, Germany, the U.K. and related markets |
| |
• | High Growth Markets - markets the Company believes have relatively higher restaurant expansion and franchising potential including China, Italy, South Korea, Poland, Russia, Spain, Switzerland, the Netherlands and related markets |
| |
• | Foundational Markets & Corporate - the remaining markets in the McDonald's system, most of which operate under a largely franchised model. Corporate activities are also reported within this segment. |
The following table presents the Company’s revenues and operating income by segment:
|
| | | | | | | | | | | | | | | |
| Quarters Ended | | Nine Months Ended |
| September 30, | | September 30, |
In millions | 2018 | | 2017 | | 2018 | | 2017 |
Revenues | | | | | | | |
U.S. | $ | 1,930.0 |
| | $ | 2,023.3 |
| | $ | 5,758.4 |
| | $ | 6,000.7 |
|
International Lead Markets | 1,940.5 |
| | 1,970.5 |
| | 5,748.9 |
| | 5,427.2 |
|
High Growth Markets | 1,040.2 |
| | 1,322.1 |
| | 3,026.4 |
| | 4,538.5 |
|
Foundational Markets & Corporate | 458.7 |
| | 438.7 |
| | 1,328.5 |
| | 1,513.8 |
|
Total revenues | $ | 5,369.4 |
| | $ | 5,754.6 |
| | $ | 15,862.2 |
| | $ | 17,480.2 |
|
Operating Income | | | | | | | |
U.S. | $ | 1,061.8 |
| | $ | 1,034.6 |
| | $ | 3,059.0 |
| | $ | 3,055.4 |
|
International Lead Markets | 913.9 |
| | 913.6 |
| | 2,613.5 |
| | 2,356.2 |
|
High Growth Markets | 330.1 |
| | 1,073.8 |
| | 847.1 |
| | 1,724.0 |
|
Foundational Markets & Corporate | 111.9 |
| | 57.4 |
| | 303.5 |
| | 272.9 |
|
Total operating income | $ | 2,417.7 |
| | $ | 3,079.4 |
| | $ | 6,823.1 |
| | $ | 7,408.5 |
|
Subsequent Events
The Company evaluated subsequent events through the date the financial statements were issued and filed with the Securities and Exchange Commission. There were no subsequent events that required recognition or disclosure.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company franchises and operates McDonald’s restaurants. Of the 37,557 restaurants in 120 countries at September 30, 2018, 34,745 were licensed to franchisees (comprised of 21,586 franchised to conventional franchisees, 7,103 licensed to developmental licensees and 6,056 licensed to foreign affiliates (“affiliates”) – primarily in Japan and China) and 2,812 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 generally 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 generally 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 be his or her own employer and maintain control over all employment-related matters, 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 approximately 95% franchised over the long term.
The strength of the alignment among the Company, its franchisees and suppliers (collectively referred to as the "System") is 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. McDonald's continually builds on its competitive advantages of System alignment and geographic diversification to deliver consistent, yet locally-relevant restaurant experiences to customers as an integral part of their communities.
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 with minimum rent payments, and initial fees. Revenues from restaurants licensed to affiliates and developmental licensees include a royalty based on a percent of sales, and generally include initial fees. Fees vary by type of site, amount of Company investment, if any, and local business conditions. These fees, along with occupancy and operating rights, are stipulated in franchise/license agreements that generally have 20-year terms.
The business is structured into segments that combine markets with similar characteristics and opportunities for growth, and reflect how management reviews and evaluates operating performance. Significant reportable segments include the United States ("U.S."), International Lead Markets and High Growth Markets. In addition, throughout this report we present the Foundational Markets & Corporate segment which includes markets in over 80 countries, as well as Corporate activities. For the nine months ended September 30, 2018, the U.S., the International Lead Markets and the High Growth Markets accounted for 36%, 36% and 19% of total revenues, respectively.
Strategic Direction
The Company is focused on delivering long-term growth through systemwide execution of its customer-centric growth strategy - the Velocity Growth Plan. The plan is designed to drive sustainable guest count growth, a reliable long-term measure of the Company's strength that is vital to growing sales and shareholder value.
The Company continues to focus on restaurant execution and elevating the overall customer experience, including convenience, value and food offerings. These actions will enable the Company to deliver on the plan’s key pillars of retaining existing customers, regaining lost customers and converting casual customers to committed customers. In each of these pillars, McDonald’s has established platforms that enable each market to engage with franchisees to execute the plan, and markets remain focused on acting with speed, efficiency and impact.
With the evolution of the Company’s business model to a more heavily franchised structure, the Company recently announced changes it will make to its global operating structure in January 2019. The Company believes this structure further enables the right level of support that contributes to the success of our franchisees and developmental licensees, as well as the sharing of best solutions across international markets.
Additionally, the Company continues to scale the following growth accelerators:
•Experience of the Future ("EOTF"). Focuses on restaurant modernization and technology, in order to transform the restaurant service experience and enhance the brand in the eyes of the customer. The modernization efforts are designed to drive incremental customer visits and higher average check. McDonald’s currently has EOTF deployed in over 40% of the restaurants globally, with over half of the U.S. restaurants expected to be deployed by the end of 2018.
•Digital. Emphasizes improving the Company's existing service model (i.e., eat in, take out, or drive-thru) and strengthens relationships with customers through technology. By evolving the technology platform, the Company is expanding choices for how customers order, pay and are served through additional functionality on its global mobile app, self-order kiosks and technology driven models that enable table service and curb-side pick-up.
•Delivery. Offers a platform of added convenience, bringing McDonald's food to customers on their terms. Delivery is now available from over 15,000 McDonald's restaurants in over 65 markets. In addition to added convenience, delivery transactions tend to realize a higher average check and a high customer satisfaction rating. The Company remains focused on expanding the number of restaurants offering delivery as well as raising awareness and demand in the areas where delivery is already offered.
The Company continues to execute on this aggressive and holistic growth strategy making substantial progress modernizing restaurants and enhancing hospitality. Management is encouraged by the success of restaurants that have already implemented the growth accelerators, and remains confident that the Velocity Growth Plan will drive long-term sustainable growth.
Financial Performance
Management reviews and analyzes business results excluding the effect of foreign currency translation, impairment and other strategic charges and gains, as well as adjustments to the provisional amounts recorded in December 2017 under the Tax Act, and generally bases incentive compensation plans on these results, because the Company believes this better represents underlying business trends.
Global comparable sales increased 4.2% for the quarter and 4.5% for the nine months. The refranchising strategy has been a key part of transforming McDonald's into a more stable and more efficient organization focused on continuing to grow top-line sales.
U.S. comparable sales increased 2.4% for the quarter and 2.6% for the nine months, driven by growth in average check resulting from both product mix shifts and menu price increases.
International Lead segment comparable sales increased 5.4% for the quarter and 6.0% for the nine months, reflecting positive results across all markets, primarily driven by the U.K.
High Growth segment comparable sales increased 4.6% for the quarter and 3.9% for the nine months, led by strong performance in Italy and positive results across most of the segment.
Results for the quarter and nine months 2017 reflected a pre-tax gain of approximately $850 million on the sale of the Company's businesses in China and Hong Kong, partly offset by $111 million of unrelated impairment charges, for a net benefit of $0.56 and $0.52 per share, respectively. Results for the nine months 2018 included pre-tax strategic restructuring charges of $94 million, or $0.09 per share (of which $85 million relates to the restructuring of the U.S. business).
Excluding the above items, net income for the quarter increased 14% (17% in constant currencies) and diluted earnings per share increased 19% (22% in constant currencies), and for the nine months net income increased 13% (11% in constant currencies) and diluted earnings per share increased 17% (15% in constant currencies). Results for the quarter and nine months reflected an increase in sales-driven franchised margin dollars and a lower effective tax rate, partly offset by lower Company-operated margin dollars due to the impact of refranchising.
Third Quarter and Nine Months 2018 Highlights:
| |
• | Global comparable sales increased 4.2% for the quarter and 4.5% for the nine months, reflecting positive comparable sales in all segments. |
| |
• | Due to the impact of the Company's strategic refranchising initiative, consolidated revenues decreased 7% (5% in constant currencies) for the quarter and 9% (11% in constant currencies) for the nine months. |
| |
• | Systemwide sales increased 5% in constant currencies for the quarter and 6% in constant currencies for the nine months. |
| |
• | Consolidated operating income decreased 21% (20% in constant currencies) for the quarter and 8% (10% in constant currencies) for the nine months. Diluted earnings per share of $2.10 decreased 9% (7% in constant currencies) for the quarter and $5.72 for the nine months increased 4% (3% in constant currencies). |
| |
◦ | Results for the quarter and nine months 2017 reflected a pre-tax gain of approximately $850 million on the sale of the Company's businesses in China and Hong Kong, partly offset by $111 million of unrelated impairment charges. |
| |
◦ | Results for the nine months 2018 included pre-tax strategic restructuring charges of $94 million (of which $85 million relates to the restructuring of the U.S. business). |