MANAGEMENT'S VIEW OF THE BUSINESS
In analyzing business trends, management reviews results on a constant currency
basis and considers a variety of performance and financial measures which are
considered to be non-GAAP, including comparable sales and comparable guest count
growth, Systemwide sales growth, return on incremental invested capital
("ROIIC"), free cash flow and free cash flow conversion rate, as described
below. Management believes these measures are important in understanding the
financial performance of the Company.
•   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 excluding

the effect of foreign currency translation, impairment and other strategic

charges and gains, as well as income tax provision adjustments related to the

Tax Cuts and Jobs Act of 2017 ("Tax Act"), and bases incentive compensation

plans on these results, because the Company believes this better represents

underlying business trends.

• Comparable sales represent sales at all restaurants, whether operated by the

Company or by franchisees, in operation at least thirteen months including

those temporarily closed. Some of the reasons restaurants may be temporarily

closed include reimaging or remodeling, rebuilding, road construction and

natural disasters. Comparable sales exclude the impact of currency

translation, and, since 2017, also exclude sales from Venezuela due to its

hyper-inflation. Management generally identifies hyper-inflationary markets

as those markets whose cumulative inflation rate over a three-year period

exceeds 100%. Comparable sales are driven by changes in guest counts and

average check, which is affected by changes in pricing and product mix. The

goal is to achieve a relatively balanced contribution from both guest counts

and average check.

• Comparable guest counts represent the number of transactions at all

restaurants, whether operated by the Company or by franchisees, in operation

at least thirteen months including those temporarily closed.

• Systemwide sales include sales at all restaurants, whether operated by the

Company or by franchisees. While franchised sales are not recorded as

revenues by the Company, management believes the information is important in

understanding the Company's financial performance because these sales are the

basis on which the Company calculates and records franchised revenues and are

indicative of the financial health of the franchisee base. The Company's

revenues consist of sales by Company-operated restaurants and fees from

franchised restaurants operated by conventional franchisees, developmental

licensees and affiliates.

• 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.

• Free cash flow, defined as cash provided by operations less capital

expenditures, and free cash flow conversion rate, defined as free cash flow

divided by net income, are measures reviewed by management in order to

evaluate the Company's ability to convert net profits into cash resources,

after reinvesting in the core business, that can be used to pursue

opportunities to enhance shareholder value.




2019 FINANCIAL PERFORMANCE
In 2019, global comparable sales increased 5.9% and global comparable guest
counts increased 1.0%, reflecting the continued execution against the Velocity
Growth Plan.

• Comparable sales in the U.S. increased 5.0% and comparable guest counts

decreased 1.9%. The increase in comparable sales reflected strong sales of

our iconic core products driven by promotional activity and the continued

positive impact from our Experience of the Future ("EOTF") deployment, as

well as menu price increases.

• Comparable sales in the International Operated segment increased 6.1% and

comparable guest counts increased 3.5%, reflecting positive results across

all markets, primarily driven by the U.K. and France.

• Comparable sales in the International Developmental Licensed segment

increased 7.2% and comparable guest counts increased 2.2%, reflecting

positive sales performance across all geographic regions.

In addition to improved comparable sales and guest count performance, the Company achieved the following financial results in 2019: • Consolidated revenues were relatively flat with the prior year (increased 3%

in constant currencies) at $21.1 billion.

• Systemwide sales increased 4% (7% in constant currencies) to $100.2 billion.

• Consolidated operating income increased 3% (6% in constant currencies).

Excluding the impact of current year and prior year impairment and strategic

charges, operating income increased 1% (4% in constant currencies). Refer to

the Operating Income section on page 15 for additional details.

• Operating margin, defined as operating income as a percent of total revenues,

increased from 42.0% in 2018 to 43.0% in 2019. Excluding the items referenced


    in the previous bullet point, operating margin increased from 43.1% in 2018
    to 43.4% in 2019.




                                     McDonald's Corporation 2019 Annual Report 6

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• Diluted earnings per share of $7.88 increased 5% (7% in constant currencies).

Refer to the Net Income and Diluted Earnings Per Share section on page 10 for

additional details.

• Cash provided by operations was $8.1 billion.

• Capital expenditures of $2.4 billion were allocated mainly to reinvestment in

existing restaurants and, to a lesser extent, to new restaurant openings.

• Free cash flow was $5.7 billion, a 36% increase over the prior year.

• Across the System, about 1,200 restaurants (including those in our

developmental licensee and affiliated markets) were opened.

• One-year ROIIC was 22.8% and three-year ROIIC was 40.6% for the period ended

December 31, 2019. Excluding significant investing cash flows resulting from

the Company's strategic refranchising initiatives, three-year ROIIC was 24.6%

(see reconciliation in Exhibit 12).

• The Company increased its quarterly cash dividend per share by 8% to $1.25

for the fourth quarter, equivalent to an annual dividend of $5.00 per share.

• The Company returned $8.6 billion to shareholders through share repurchases

and dividends for the year, marking successful achievement of the Company's

targeted return of $25 billion for the three-year period ending 2019.




STRATEGIC DIRECTION
The strength of the alignment among the Company, its franchisees and suppliers
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.
CUSTOMER-CENTRIC GROWTH STRATEGY
The Velocity Growth Plan, the Company's customer-centric strategy, is rooted in
extensive customer research and insights, along with a deep understanding of the
key drivers of the business. The Plan is designed to drive sustainable
comparable sales and guest count growth, reliable long-term measures of the
Company's strength that are vital to growing shareholder value. In 2019,
execution of the Plan drove further broad-based growth around the globe. In
2020, the Company will continue to focus on elevating the customer experience
through improved restaurant execution and creating excitement around our food
and value offerings, while continuing to leverage technology to enable greater
convenience and customer personalization.
The Company continues to target the opportunity at the core of its business -
its food, value and customer experience. The strategy is built on the following
three pillars, all focusing on building a better McDonald's:

• Retaining existing customers - focusing on areas where it already has a

strong foothold in the IEO category, including family occasions and food-led


    breakfast.



• Regaining customers who visit less often - recommitting to areas of historic

strength, namely food taste and quality, convenience and speed, experience


    and value.



• Converting casual to committed customers - building stronger relationships

with customers so they visit more often, by elevating and leveraging the

McCafé coffee brand and enhancing snack and treat offerings.

The Company continues to scale and optimize the Plan through the following growth accelerators: • Experience of the Future. The Company is building upon its investments in

EOTF, focusing on restaurant modernization in order to transform the

restaurant service experience and enhance our brand in the eyes of our

customers. The modernization efforts are designed to provide a better

customer experience, leading to increased frequency of customer visits and

higher average check. As of the end of 2019, EOTF is deployed in over half of

the restaurants in our global system, with most of the major markets

substantially complete. In 2019, the U.S. converted about 2,000 restaurants

to EOTF, resulting in about 70% of the U.S. restaurants now having EOTF. In

2020, the Company will further deploy EOTF around the globe, including

converting about 1,800 of the remaining restaurants in the U.S. to EOTF.

• Digital. The Company is improving its existing service model with customers

through technology. Digital technology is transforming the retail industry,

and the Company is using it to transform McDonald's for our customers at an

accelerated pace. By evolving the technology platform, the Company is

expanding choices for how customers order, pay and are served their food. The

added functionality of the Company's global mobile app, self-order kiosks,

and other technologies enable greater convenience for the customer on their

terms. In 2019, the Company built on its digital foundation, acquiring

Dynamic Yield, a leader in personalization and decision logic technology. The

Company has implemented this technology via outdoor digital menu boards in

over 11,000 U.S. drive-thrus, offering customers a more customized experience

and producing sales growth through higher average check. This technology is

also deployed in nearly all drive-thrus in Australia, and we are looking to

deploy across further international markets beginning in 2020. The Company

continued to expand its technological capabilities via the acquisition of

Apprente, an early-stage leader in conversational interface technology. This

technology is expected to provide more efficient and accurate ordering in the

drive-thru. In 2020, the Company will continue to utilize more personalized


    digital initiatives to engage customers, grow awareness and adoption of
    digital offerings, and support our menu offerings.





                                     McDonald's Corporation 2019 Annual Report 7
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• Delivery. The Company continues to build momentum with its delivery platform

as a way of expanding the convenience for its customers. In 2019, McDonald's

continued to add third-party delivery partners in order to maximize the

System's delivery scale and potential. Across the global system, nearly

25,000 restaurants now offer delivery. Customers are responding positively,

as demonstrated by high satisfaction ratings, strong reorder rates, and

average checks that are generally two times higher than average non-delivery

transactions. Further, in some of our top markets, delivery now represents as

much as 10% of sales in those restaurants offering delivery. Consequently,

McDonald's global delivery business has grown to over $4 billion in

Systemwide sales in 2019, up from $1 billion in 2016. We continue to see

great runway ahead of us to drive awareness and trial of delivery, and are

focusing on efforts to encourage frequency and retention in 2020 and beyond.





The Plan is a global strategy that is tailored at a market level to allow for
the best customer experience and most convenience for our valued customers.
While the Plan provides a consistent framework on how to retain, regain, and
convert customers, the execution varies across the globe. The U.S., for example,
remains centered on returning to guest count growth by focusing on running
better restaurant operations, introducing new menu items and offering compelling
value. In addition, we will continue transforming the customer experience
through aggressive execution of the growth accelerators of EOTF, digital and
delivery. In 2020, the markets around the world will continue to make progress
on the three pillars of the Plan and its growth accelerators, focusing on food,
value and customer convenience.
Our Plan also includes the Company further embedding actions in response to
certain social and environmental issues into the core of our business. As one of
the world's largest restaurant companies, our approach highlights our commitment
to global actions that are consistent with our strategic priorities and provides
an opportunity to collaborate with our franchisees and suppliers to drive
meaningful progress. We recognize that our success in advancing these
initiatives will be demonstrated as customers continue to feel good about
visiting McDonald's restaurants and eating our food.
While we are working to address many challenges facing society today, we are
elevating global action where we believe we can make the greatest difference in
driving industry-wide change. Our priorities reflect the social and
environmental impacts of our food and our business. Highlights include
science-based targets for greenhouse gas emissions reductions and climate
action, advancing sustainable practices in beef production with suppliers and
producers, driving innovative solutions for our packaging and recycling efforts,
and ongoing commitments to support families and provide opportunities for youth
in our communities. In 2019, for example, we made progress toward our 2030
climate action target with the addition of significant investments in renewable
energy projects in the U.S.; we achieved our goal of 100% sustainably sourced
McCafé coffee for U.S. restaurants; and we continued to make a difference for
families through innovation in our food offerings, reading programs and support
for Ronald McDonald House Charities.
The Company is confident, that under the Plan, we will continue to improve the
taste of our delicious food, enhance convenience and service through running
great restaurants, offer compelling value, and heighten the trust consumers
place in our brand, which we believe will enable us to deliver long-term
sustainable growth.


                                     McDonald's Corporation 2019 Annual Report 8

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OUTLOOK


2020 Outlook
The following information is provided to assist in forecasting the Company's
future results.
•   Changes in Systemwide sales are driven by comparable sales, net restaurant

unit expansion, and the potential impacts of hyper-inflation. The Company

expects net restaurant additions to add approximately 1.5 percentage points

to 2020 Systemwide sales growth (in constant currencies).

• The Company expects full year 2020 selling, general and administrative

expenses to increase about 5% to 7% in constant currencies as the Company

invests in technology and research & development, and incurs costs related to

the Worldwide Owner/Operator Convention, which will occur in the second

quarter 2020.

• Based on current interest and foreign currency exchange rates, the Company

expects interest expense for the full year 2020 to increase about 4% to 6%

due primarily to higher average debt balances.

• A significant part of the Company's operating income is generated outside the

U.S., and about 40% of its total debt is denominated in foreign currencies.

Accordingly, earnings are affected by changes in foreign currency exchange

rates, particularly the Euro, British Pound, Australian Dollar and Canadian

Dollar. Collectively, these currencies represent approximately 80% of the

Company's operating income outside the U.S. If all four of these currencies

moved by 10% in the same direction, the Company's annual diluted earnings per

share would change by about 35 cents.

• The Company expects the effective income tax rate for the full year 2020 to

be in the 23% to 25% range. Some volatility may result in a quarterly tax

rate outside of the annual range.

• The Company expects capital expenditures for 2020 to be approximately $2.4

billion. About $1.3 billion will be dedicated to our U.S. business, over half

of which is allocated to approximately 1,800 EOTF projects. Globally, we

expect to open roughly 1,400 restaurants. We will spend approximately $800

million in the U.S. and International Operated segments to open 400

restaurants and our developmental licensees and affiliates will contribute

capital towards the remaining 1,000 restaurant openings in the International

Developmental Licensed segment. The Company expects about 1,000 net

restaurant additions in 2020.

Long-Term Outlook • Over the long-term, the Company expects to achieve the following average

annual (constant currency) financial targets:

• Systemwide sales growth of 3% to 5%;

• Operating margin in the mid-40% range;

• Earnings per share growth in the high-single digits; and

• Return on incremental invested capital in the mid-20% range.

McDonald's Corporation 2019 Annual Report 9

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CONSOLIDATED OPERATING RESULTS
Operating results
                                                       2019                             2018              2017
Dollars and shares in millions,                   Increase/                        Increase/
except per share data                 Amount     (decrease)            Amount     (decrease)            Amount
Revenues
Sales by Company-operated
restaurants                          $ 9,421             (6 %)       $ 10,013            (21 %)       $ 12,719
Revenues from franchised
restaurants                           11,656              6            11,012              9            10,101
Total revenues                        21,077              0            21,025             (8 )          22,820
Operating costs and expenses
Company-operated restaurant
expenses                               7,761             (6 )           8,266            (21 )          10,410
Franchised restaurants-occupancy
expenses                               2,201             12             1,973             10             1,789
Selling, general &
administrative expenses                2,229              1             2,200             (1 )           2,231
Other operating (income)
expense, net                            (184 )           22              (237 )           80            (1,163 )
Total operating costs and
expenses                              12,007             (2 )          12,202             (8 )          13,267
Operating income                       9,070              3             8,823             (8 )           9,553
Interest expense                       1,122             14               981              7               922
Nonoperating (income) expense,
net                                      (70 )          n/m                26            (56 )              58
Income before provision for
income taxes                           8,018              3             7,816             (9 )           8,573
Provision for income taxes             1,993              5             1,892            (44 )           3,381
Net income                           $ 6,025              2 %        $  5,924             14 %        $  5,192
Earnings per common
share-diluted                        $  7.88              5 %        $   7.54             18 %        $   6.37
Weighted-average common shares
outstanding-
diluted                                764.9             (3 %)          785.6             (4 %)          815.5


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.
In 2019, results reflected the weakening of the Euro and most other major
currencies. In 2018, results reflected the stronger Euro and British Pound. In
2017, results reflected the stronger Euro, offset by the weaker British Pound.
Impact of foreign currency translation on reported results
                                                                                                     Currency translation
                                                        Reported amount                                    benefit/(cost)
In millions, except per share
data                                     2019         2018         2017         2019             2018                2017
Revenues                             $ 21,077     $ 21,025     $ 22,820       $ (606 )     $      123           $     186
Company-operated margins                1,660        1,747        2,309          (51 )              4                  17
Franchised margins                      9,455        9,039        8,312         (256 )             57                  25
Selling, general & administrative
expenses                                2,229        2,200        2,231           29              (13 )               (10 )
Operating income                        9,070        8,823        9,553         (280 )             56                  28
Net income                              6,025        5,924        5,192         (165 )             33                   2

Earnings per common share-diluted 7.88 7.54 6.37

    (0.21 )           0.04                   -



NET INCOME AND DILUTED EARNINGS PER COMMON SHARE
In 2019, net income increased 2% (4% in constant currencies) to $6.0 billion and
diluted earnings per common share increased 5% (7% in constant currencies) to
$7.88. Foreign currency translation had a negative impact of $0.21 on diluted
earnings per share.
In 2018, net income increased 14% (13% in constant currencies) to $5.9 billion
and diluted earnings per common share increased 18% (18% in constant currencies)
to $7.54. Foreign currency translation had a positive impact of $0.04 on diluted
earnings per share.
Results in 2019 reflected stronger operating performance primarily due to an
increase in sales-driven franchised margin dollars, partly offset by lower gains
on sales of restaurant businesses (mostly in the U.S.) and higher G&A spend.
Results in 2018 reflected a lower effective tax rate, and stronger operating
performance due to an increase in sales-driven franchised margin dollars, partly
offset by lower Company-operated margin dollars due to the impact of
refranchising.


                                    McDonald's Corporation 2019 Annual Report 10

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Outlined below is additional information for the full year 2019, 2018, and 2017: Diluted Earnings Per Common Share Reconciliation


                                                                                                             Increase/(decrease)
                                                                                                              excluding currency
                                                                Amount         Increase/(decrease)                   translation
                                            2019       2018       2017        2019            2018         2019             2018
GAAP earnings per share-diluted           $ 7.88     $ 7.54     $ 6.37           5 %            18 %          7 %             18 %
Income tax (benefit) cost, net             (0.11 )     0.10       0.82
Strategic charges                           0.07       0.26      (0.53 )

Non-GAAP earnings per share-diluted $ 7.84 $ 7.90 $ 6.66

     (1 )%           19 %          2 %             18 %



Included in the 2019 results were:
•         $84 million, or $0.11 per share, of income tax benefit due to new
          regulations issued in the fourth quarter 2019 related to the Tax Act;
          and

$74 million of pre-tax strategic charges, or $0.07 per share, primarily

related to impairment associated with the purchase of our joint venture

partner's interest in the India Delhi market, partly offset by gains on

the sales of property at the former Corporate headquarters.

Included in the 2018 results were: • $75 million, or $0.10 per share, of net tax cost associated with the

final 2018 adjustments to the provisional amounts recorded in December

2017 under the Tax Act;

$140 million of pre-tax, non-cash impairment charges, or $0.17 per share; and

$94 million of pre-tax strategic restructuring charges, or $0.09 per share.

Included in the 2017 results were: • $700 million of net tax cost associated with the Tax Act, or $0.82 per

share; and

• a pre-tax gain of $850 million on the sale of the Company's businesses

in China and Hong Kong, offset in part by $150 million of restructuring


          and impairment charges in connection with the Company's global G&A and
          refranchising initiatives, for a net benefit of $0.53 per share.


Excluding the above 2019 and 2018 items, 2019 net income decreased 3% (1% in
constant currencies), and diluted earnings per share decreased 1% (increased 2%
in constant currencies). Excluding items impacting 2018 and 2017, 2018 net
income increased 14% (14% in constant currencies), and diluted earnings per
share increased 19% (18% in constant currencies).
The Company repurchased 25.0 million shares of its stock for $5.0 billion in
2019 and 32.2 million shares of its stock for $5.2 billion in 2018, driving
reductions in weighted-average shares outstanding on a diluted basis in both
periods, which positively benefited earnings per share.

REVENUES


The Company's revenues consist of sales by Company-operated restaurants and fees
from franchised restaurants operated by conventional franchisees, developmental
licensees and 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 developmental
licensees and affiliates include a royalty based on a percent of sales, and
generally include initial fees. Initial fees are recognized evenly over the
franchise term.
Franchised restaurants represent 93% of McDonald's restaurants worldwide at
December 31, 2019. The Company's current mix of Company-owned and franchised
restaurants enables the Company to generate stable and predictable revenue and
cash flow streams. Refranchising to a greater percentage of franchised
restaurants may negatively impact consolidated revenues as Company-operated
sales are replaced by franchised revenues, where the Company receives rent
and/or royalty revenue based on a percent of sales.
In 2019, revenues were relatively flat with the prior year (increased 3% in
constant currencies). The constant currency increase was primarily due to strong
comparable sales, partly offset by the impact of refranchising. In 2018,
revenues decreased 8% (8% in constant currencies), reflecting the Company's
strategic refranchising initiatives, partly offset by positive comparable sales.


                                    McDonald's Corporation 2019 Annual Report 11

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Revenues
                                                                                                                 Increase/(decrease)
                                                                                                                  excluding currency
                                                                     Amount         Increase/(decrease)                  translation
Dollars in millions                          2019         2018         2017        2019            2018         2019            2018
Company-operated sales:
U.S.                                     $  2,490     $  2,665     $  3,260

(7 %) (18 %) (7 %) (18 %) International Operated Markets

              6,334        6,668        6,845          (5 )            (3 )         (1 )            (3 )
International Developmental Licensed
Markets & Corporate                           597          680        2,614         (12 )           (74 )  *      (7 )           (75 )  *
Total                                    $  9,421     $ 10,013     $ 12,719          (6 %)          (21 %)        (3 %)          (22 %)
Franchised revenues:
U.S.                                     $  5,353     $  5,001     $  4,746           7 %             5 %          7 %             5 %
International Operated Markets              5,064        4,839        4,271           5              13           10              11
International Developmental Licensed
Markets & Corporate                         1,239        1,172        1,084           6               8           10              11
Total                                    $ 11,656     $ 11,012     $ 10,101           6 %             9 %          9 %             8 %
Total revenues:
U.S.                                     $  7,843     $  7,666     $  8,006           2 %            (4 %)         2 %            (4 %)
International Operated Markets             11,398       11,507       11,116          (1 )             4            4               2
International Developmental Licensed
Markets & Corporate                         1,836        1,852        3,698          (1 )           (50 )  *       4             (50 )  *
Total                                    $ 21,077     $ 21,025     $ 22,820           0 %            (8 %)         3 %            (8 %)


* Reflects the impact of refranchising the Company's businesses in China and
Hong Kong in 2017.
•   U.S.: Revenues in 2019 and 2018 reflected positive comparable sales. The

impact of refranchising partly offset these benefits in 2019 and more than

offset these benefits in 2018.

• International Operated Markets: In 2019 and 2018, the constant currency

increase in revenues reflected positive comparable sales across all markets,

partly offset by the impact of refranchising.

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



                                                            2019                2018                2017
                                                           Guest               Guest               Guest
                                                  Sales   Counts      Sales   Counts      Sales   Counts
U.S.                                                5.0 %   (1.9 %)     2.5 %   (2.2 %)     3.6 %    1.0 %
International Operated Markets                      6.1      3.5        6.1      2.8        5.6      2.7
International Developmental Licensed Markets &
Corporate**                                         7.2      2.2        5.6      1.0        8.0      2.5
Total**                                             5.9 %    1.0 %      4.5 %    0.2 %      5.3 %    1.9 %

** The Company excludes sales from markets identified as hyper-inflationary (currently, only Venezuela) from the comparable sales calculation as the Company believes this more accurately reflects the underlying business trends.

Systemwide sales increases/(decreases)***



                                                                                   Increase/(decrease)
                                                                                    excluding currency
                                                                                           translation
                                                            2019      2018         2019           2018
U.S.                                                           5 %       2 %          5 %            2 %
International Operated Markets                                 3        10            8              8

International Developmental Licensed Markets & Corporate 5 6


         10              9
Total                                                          4 %       6 %          7 %            6 %


*** Unlike comparable sales, the Company has not excluded hyper-inflationary
market results (currently, only Venezuela) from Systemwide sales as these sales
are the basis on which the Company calculates and records revenues. The
difference between comparable sales growth rates and Systemwide sales growth
rates are due to both restaurant expansion and the hyper-inflationary impact.


                                    McDonald's Corporation 2019 Annual Report 12

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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
                                                                                                              Increase/(decrease)
                                                                                                               excluding currency
                                                                   Amount         Increase/(decrease)                 translation
Dollars in millions                        2019         2018         2017         2019           2018         2019           2018
U.S.                                   $ 37,923     $ 35,860     $ 34,379            6 %            4 %          6 %            4 %
International Operated Markets           28,853       27,557       24,386            5             13           10             11
International Developmental Licensed
Markets & Corporate                      23,981       22,717       19,426            6             17   *       10             20   *
Total                                  $ 90,757     $ 86,134     $ 78,191            5 %           10 %          8 %           10 %

Ownership type
Conventional franchised                $ 66,415     $ 63,251     $ 59,151            5 %            7 %          7 %            6 %
Developmental licensed                   14,392       13,519       12,546            6              8           13             13
Foreign affiliated                        9,950        9,364        6,494            6             44   *        7             42   *
Total                                  $ 90,757     $ 86,134     $ 78,191            5 %           10 %          8 %           10 %

* Reflects the impact of refranchising the Company's businesses in China and Hong Kong in 2017.



FRANCHISED MARGINS
Franchised margin dollars represent revenues from franchised restaurants less
the Company's costs associated with those restaurants, primarily occupancy costs
(rent and depreciation). Franchised margin dollars represented about 85% of the
combined restaurant margins in 2019 and 2018, and about 80% in 2017.
In 2019, franchised margin dollars increased $416 million or 5% (7% in constant
currencies). In 2018, franchised margin dollars increased $727 million or 9% (8%
in constant currencies). For both 2019 and 2018, the increases were due to
positive comparable sales performance across all segments, as well as expansion
and the impact of refranchising.

Franchised margins
                                                                                                                                           Increase/(decrease) excluding
                               Amount   % of Revenue      Amount   % of Revenue      Amount   % of Revenue         Increase/(decrease)              currency translation
Dollars in millions                     2019                       2018                       2017                 2019           2018         2019                 2018
U.S.                          $ 4,227           79.0 %   $ 4,070           81.4 %   $ 3,913           82.4 %          4 %            4 %          4 %                  4 %
International Operated
Markets                         4,018           79.3       3,829           79.1       3,365           78.8            5             14           10                   11
International Developmental     1,210           97.7       1,140           97.3       1,034           95.4            6             10           11                   13
Licensed Markets & Corporate
Total                         $ 9,455           81.1 %   $ 9,039           82.1 %   $ 8,312           82.3 %          5 %            9 %          7 %                  8 %


The adoption of Accounting Standard Codification ("ASC") Topic 842, "Leases"
("ASC 842") had no impact on franchised margin dollars, but had a negative
impact on the Company's franchised margin percent for 2019 of approximately 1.3%
in the U.S. and 0.7% on a consolidated basis. ASC 842 clarified the presentation
of sub-lease income and lease expense, requiring the straight-line impact of
fixed rent escalations to be presented on a gross basis in lease income and
lease expense.
•   U.S.: In 2019 and 2018, the decreases in the franchised margin percents were

primarily due to higher depreciation costs related to investments in EOTF,

partly offset by the benefit from positive comparable sales. 2019 also

reflected the impact of the new lease standard.

• International Operated Markets: In 2019 and 2018, the increases in the


    franchised margin percent primarily reflected the benefit from strong
    comparable sales.




                                    McDonald's Corporation 2019 Annual Report 13
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COMPANY-OPERATED MARGINS
Company-operated margin dollars represent sales by Company-operated restaurants
less the operating costs of these restaurants. In 2019, Company-operated margin
dollars decreased $87 million or 5% (2% in constant currencies). In 2018,
Company-operated margin dollars decreased $562 million or 24% (25% in constant
currencies) primarily reflecting the Company's sale of its businesses in China
and Hong Kong in 2017.
Company-operated margins
                                                                                                                                                   Increase/(decrease)
                                                                                                                                                    excluding currency
                               Amount   % of Revenue      Amount   % of Revenue      Amount   % of Revenue         Increase/(decrease)                     translation
Dollars in millions                     2019                       2018                       2017                2019            2018         2019               2018
U.S.                          $   388           15.6 %   $   397           14.9 %   $   523           16.0 %        (2 %)          (24 %)        (2 %)             (24 %)
International Operated
Markets                         1,266           20.0       1,327           19.9       1,336           19.5          (5 )            (1 )         (1 )               (1 )
International Developmental       n/m            n/m         n/m            n/m         n/m            n/m         n/m             n/m          n/m                n/m
Licensed Markets & Corporate
Total                         $ 1,660           17.6 %   $ 1,747           17.4 %   $ 2,309           18.2 %        (5 %)          (24 %)        (2 %)             (25 %)

n/m Not meaningful • U.S.: In 2019, the increase in the Company-operated margin percent primarily

reflected the benefit from positive comparable sales, partly offset by higher

commodity costs, wages and depreciation expense associated with EOTF

deployment. In 2018, the Company-operated margin percent decreased,

reflecting the impact of accelerated deployment of EOTF (including the

related decrease in labor productivity and higher depreciation expense), and

higher wages and commodity costs, which more than offset the benefit from

positive comparable sales and refranchising.

• International Operated Markets: In 2019 and 2018, the increase in the

Company-operated margin percent was primarily due to strong comparable sales

partly offset by higher labor and occupancy & other costs.




SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses increased 1% (3% in
constant currencies) in 2019 and decreased 1% (2% in constant currencies) in
2018. The results for 2019 and 2018 reflected investments in technology and
research & development. The decrease in 2018 also reflected lower
employee-related costs, partly offset by costs related to the 2018 Worldwide
Owner/Operator Convention and sponsorship of the 2018 Winter Olympics.
Selling, general & administrative expenses
                                                                                                         Increase/(decrease)
                                                                                                          excluding currency
                                                             Amount         Increase/(decrease)                  translation
Dollars in millions                    2019        2018        2017        2019            2018         2019            2018
U.S.                                $   587     $   591     $   624          (1 %)           (5 %)        (1 %)           (5 %)

International Operated Markets 629 641 654

  (2 )            (2 )          3              (4 )
International Developmental
Licensed Markets & Corporate(1)       1,013         968         953           5               2            5               2
Total Selling, General &
Administrative Expenses             $ 2,229     $ 2,200     $ 2,231           1 %            (1 %)         3 %            (2 %)

Less: Incentive-Based
Compensation(2)                         289         284         336           2 %           (16 %)         3 %           (16 %)
Total Excluding Incentive-Based
Compensation                        $ 1,940     $ 1,916     $ 1,895           1 %             1 %          3 %             1 %


(1) Included in International Developmental Licensed Markets & Corporate are home

office support costs in areas such as facilities, finance, human resources,

information technology and R&D, legal, marketing, restaurant operations,

supply chain and training.

(2) Includes all cash incentives and share-based compensation expense.




Selling, general and administrative expenses as a percent of Systemwide sales
was 2.2% in 2019, 2.3% in 2018 and 2.5% in 2017. Management believes that
analyzing selling, general and administrative expenses as a percent of
Systemwide sales is meaningful because these costs are incurred to support the
overall McDonald's business.


                                    McDonald's Corporation 2019 Annual Report 14

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OTHER OPERATING (INCOME) EXPENSE, NET
Other operating (income) expense, net
In millions                                          2019       2018        

2017


Gains on sales of restaurant businesses            $ (127 )   $ (304 )   $   (295 )
Equity in earnings of unconsolidated affiliates      (154 )     (152 )       (184 )
Asset dispositions and other (income) expense, net     23        (13 )      

19


Impairment and other charges (gains), net              74        232         (703 )
Total                                              $ (184 )   $ (237 )   $ (1,163 )

• Gains on sales of restaurant businesses

In 2019, gains on sales of restaurant businesses decreased primarily due to fewer restaurant sales in the U.S. • Impairment and other charges (gains), net




In 2019, impairment and other charges (gains), net primarily reflected $99.4
million of impairment associated with the purchase of our joint venture
partner's interest in the India Delhi market. Impairment was recorded to reflect
the write-down of net assets to fair value in accordance with accounting rules.
This was partly offset by $20.3 million of gains on the sales of property at the
former Corporate headquarters which were impaired in 2015 based on estimated
fair values.
The results in 2018 reflected $140 million of impairment charges due to the
Company's assessment of the recoverability of long-lived assets as well as the
strategic restructuring charge in the U.S. of $85.0 million.
The results in 2017 reflected a gain on the Company's sale of its businesses in
China and Hong Kong of $850 million, partly offset by $150 million of
restructuring and impairment charges.
OPERATING INCOME
Operating income
                                                                                                     Increase/(decrease) excluding
                                                             Amount         Increase/(decrease)               currency translation
Dollars in millions                    2019        2018        2017         2019           2018          2019                 2018
U.S.                                $ 4,069     $ 4,016     $ 4,023            1 %            0 %           1 %                  0 %

International Operated Markets 4,789 4,643 4,173


   3             11             8                    9
International Developmental
Licensed Markets & Corporate            212         164       1,357           29            (88 )          59                  (86 )
Total                               $ 9,070     $ 8,823     $ 9,553            3 %           (8 %)          6 %                 (8 %)

• Operating Income: Results for 2019 included $74 million of net impairment and

strategic charges. Results for 2018 included $140 million of impairment

charges and $94 million of strategic restructuring charges. Results for 2017

included a gain on the Company's sale of its businesses in China and Hong

Kong of $850 million, partly offset by $150 million of restructuring and


    impairment charges. Excluding these current year and prior year items,
    operating income increased 1% (4% in constant currencies) for 2019 and
    increased 2% (2% in constant currencies) for 2018.

U.S.: Excluding the 2018 strategic restructuring charge of $85 million,


          operating income decreased 1% for 2019 and increased 2% for 2018. 2019
          results reflected lower gains on sales of restaurant businesses, partly

offset by higher franchised margin dollars. 2018 results reflected

higher franchised margin dollars and lower G&A costs, partly offset by

lower Company-operated margin dollars.

• International Operated Markets: In 2019 and 2018, the constant currency

operating income increase was primarily due to sales-driven

improvements in franchised margin dollars. 2018 results also reflected


          higher gains on sales of restaurant businesses in the U.K. and
          Australia compared to 2017.

• Operating margin: Operating margin was 43.0% in 2019, 42.0% in 2018 and 41.9%

in 2017. Excluding the impact of the current and prior year impairment and

strategic charges, as well as the 2017 refranchising gain, operating margin

was 43.4%, 43.1% and 38.8% for the years ended 2019, 2018 and 2017,

respectively.




INTEREST EXPENSE
Interest expense increased 14% (16% in constant currencies) and 7% (6% in
constant currencies) in 2019 and 2018, respectively. Both periods reflected
higher average debt balances. Interest expense in 2019 also reflected the impact
of interest incurred on certain Euro denominated deposits due to the current
interest rate environment, while 2018 results reflected lower average interest
rates.


                                    McDonald's Corporation 2019 Annual Report 15

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NONOPERATING (INCOME) EXPENSE, NET
Nonoperating (income) expense, net
In millions                              2019     2018     2017
Interest income                         $ (37 )   $ (4 )   $ (7 )

Foreign currency and hedging activity (48 ) 5 26 Other expense

                              15       25       39
Total                                   $ (70 )   $ 26     $ 58


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.

PROVISION FOR INCOME TAXES
In 2019, 2018 and 2017, the reported effective income tax rates were 24.9%,
24.2% and 39.4%, respectively.
The effective income tax rate for 2019 reflected $84 million of income tax
benefit due to new regulations issued in the fourth quarter 2019 related to the
Tax Act. Excluding the income tax benefit, the effective income tax rate was
25.9% for the year 2019.
The effective income tax rate for 2018 reflected the final 2018 adjustments to
the provisional amounts recorded in 2017 under the Tax Act of $75 million net
tax cost. Excluding the 2018 impact of the Tax Act and impairment charges, the
effective income tax rate was 22.9% for the year 2018.
Excluding these current year and prior year items, the lower effective income
tax rate for 2018 primarily reflected a benefit from a change in tax reserves as
a result of global audit progression, as well as lower tax costs in 2018 related
to ongoing taxes under the Tax Act.
Consolidated net deferred tax liabilities included tax assets, net of valuation
allowance, of $5.3 billion in 2019 and $2.0 billion in 2018. Substantially all
of the net tax assets are expected to be realized in the U.S. and other
profitable markets.
RECENTLY ISSUED ACCOUNTING STANDARDS
Recently issued accounting standards are included on page 39 of this Form 10-K.
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 $8.1 billion in 2019, an increase of $1.1
billion or 17%. Free cash flow was $5.7 billion in 2019, an increase of $1.5
billion or 36%. The Company's free cash flow conversion rate was 95% in 2019 and
71% in 2018 (see reconciliation in Exhibit 12). Cash provided by operations
increased in 2019 compared to 2018 primarily due to a decrease in accounts
receivable and lower income tax payments. In 2018, cash provided by operations
totaled $7.0 billion, an increase of $1.4 billion or 25% compared with 2017,
primarily due to lower tax payments.
Cash used for investing activities totaled $3.1 billion in 2019, an increase of
$616 million compared with 2018. The increase was primarily due to the Company's
strategic acquisitions of a real estate entity, Dynamic Yield and Apprente,
partly offset by lower capital expenditures. Cash used for investing activities
totaled $2.5 billion in 2018, an increase of $3.0 billion compared with 2017.
The increase was primarily due to lower proceeds from the sale of restaurant
businesses in 2018 including the comparison to the proceeds received in 2017
associated with the sale of the Company's businesses in China and Hong Kong, as
well as higher capital expenditures.
Cash used for financing activities totaled $5.0 billion in 2019, a decrease of
$955 million compared with 2018, primarily due to net debt activity. Cash used
for financing activities totaled $5.9 billion in 2018, an increase of $639
million compared with 2017, primarily due to higher treasury stock purchases.
The Company's cash and equivalents balance was $899 million and $866 million at
year end 2019 and 2018, respectively. 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 2019, the Company opened 1,231 restaurants and closed 391 restaurants. In
2018, the Company opened 1,081 restaurants and closed 467 restaurants.
Systemwide restaurants at year end
                                                           2019      2018   

2017


U.S.                                                     13,846    13,914   

14,036


International Operated Markets                           10,465    10,263   

10,098

International Developmental Licensed Markets & Corporate 14,384 13,678


 13,107
Total                                                    38,695    37,855    37,241


Approximately 93% of the restaurants at year-end 2019 were franchised, including
95% in the U.S., 84% in International Operated Markets and 98% in the
International Developmental Licensed Markets.
Capital expenditures decreased $348 million or 13% in 2019 primarily due to
lower reinvestment in existing restaurants, partly offset by an increase in new
restaurant openings that required the Company's capital. Capital expenditures
increased $888 million or 48% in 2018, primarily due to reinvestment in existing
restaurants (including investment in EOTF).



                                    McDonald's Corporation 2019 Annual Report 16
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Capital expenditures
In millions                    2019        2018        2017
New restaurants            $    605    $    488    $    537
Existing restaurants          1,702       2,111       1,236
Other(1)                         87         143          81

Total capital expenditures $ 2,394 $ 2,742 $ 1,854 Total assets

$ 47,511    $ 32,811    $ 33,804

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




New restaurant investments in all years were concentrated in markets with strong
returns and/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, as well as leveraging the
Company's global sourcing network and best practices. Although the Company is
not responsible for all costs for every restaurant opened, total development
costs for new traditional McDonald's restaurants in the U.S. averaged
approximately $4.0 million in 2019.
The Company owned approximately 55% and 50% of the land for restaurants in its
consolidated markets at year-end 2019 and 2018, respectively, and approximately
80% of the buildings for restaurants in its consolidated markets at year-end
2019 and 2018.

SHARE REPURCHASES AND DIVIDENDS
In 2019, the Company returned approximately $8.6 billion to shareholders through
a combination of shares repurchased and dividends paid, marking the achievement
of the Company's targeted return of $25 billion for the three-year period ended
2019.
Shares repurchased and dividends
In millions, except per share data                    2019       2018       

2017


Number of shares repurchased                          25.0       32.2       

31.4


Shares outstanding at year end                         746        767       

794


Dividends declared per share                       $  4.73    $  4.19    $  

3.83

Treasury stock purchases (in Shareholders' equity) $ 4,980 $ 5,247 $ 4,651 Dividends paid

                                       3,582      3,256      

3,089


Total returned to shareholders                     $ 8,562    $ 8,503    $ 

7,740




In July 2017, the Company's Board of Directors authorized the purchase of up to
$15 billion of the Company's outstanding stock, with no specified expiration
date. In 2019, approximately 25.0 million shares were repurchased for $5.0
billion, bringing total purchases under the program to approximately 74.5
million shares or $12.9 billion. In December 2019, the Company's Board of
Directors terminated the 2017 program and replaced it with a new share
repurchase program, effective January 1, 2020, that authorized the purchase of
up to $15 billion of the Company's outstanding common stock with no specified
expiration date.
The Company has paid dividends on its common stock for 44 consecutive years and
has increased the dividend amount every year. The 2019 full year dividend of
$4.73 per share reflects the quarterly dividend paid for each of the first three
quarters of $1.16 per share, with an increase to $1.25 per share paid in the
fourth quarter. This 8% increase in the quarterly dividend equates to a $5.00
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
Total assets increased $14.7 billion or 45% in 2019, primarily due to the
addition of the Lease Right-of-Use Asset, Net, which was recorded upon adoption
of ASC 842 effective January 1, 2019. Refer to the Lease Accounting section
under Recent Accounting Pronouncements on page 39 for additional information on
ASC 842. Net property and equipment increased $1.3 billion in 2019, primarily
due to capital expenditures, partly offset by depreciation. Net property and
equipment and the Lease Right-of-Use Asset, Net represented over 50% and
approximately 30%, respectively, of total assets at year-end. Approximately 93%
of total assets were in the U.S. and International Operated Markets at year-end
2019.
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, 2019 totaled $34.2 billion, compared with $31.1 billion at
December 31, 2018. The net increase in 2019 was primarily due to net long-term
issuances of $2.5 billion.


                                    McDonald's Corporation 2019 Annual Report 17

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Debt highlights(1)


                                                                2019     2018     2017
Fixed-rate debt as a percent of total debt(2,3)                   92 %     91 %     89 %
Weighted-average annual interest rate of total debt(3)           3.2      3.2      3.3
Foreign currency-denominated debt as a percent of total debt(2)   38       38       42
Total debt as a percent of total capitalization (total debt and
total Shareholders' equity)(2)                                   131      

125 112 Cash provided by operations as a percent of total debt(2) 24 22 19

(1) All percentages are as of December 31, except for the weighted-average annual

interest rate, which is for the year. See reconciliation in Exhibit 12.

(2) Based on debt obligations before the effects of fair value hedging

adjustments and deferred debt costs. These effects are excluded as they have

no impact on the obligation at maturity. See Debt Financing note to the

consolidated financial statements.

(3) Includes the effect of interest rate swaps used to hedge debt.

Standard & Poor's and Moody's currently rate, with a stable outlook, the
Company's commercial paper A-2 and P-2, respectively; and its long-term debt
BBB+ and Baa1, respectively. To access the debt capital markets, the Company
relies on credit-rating agencies to assign short-term and long-term credit
ratings.
Certain of the Company's debt obligations contain cross-acceleration provisions
and restrictions on Company and subsidiary mortgages and the long-term debt of
certain subsidiaries. There are no provisions in the Company's debt obligations
that would accelerate repayment of debt as a result of a change in credit
ratings or a material adverse change in the Company's business. In October 2016,
the Company's Board of Directors authorized the borrowing of up to $15.0 billion
of funds, of which $1.9 billion remained outstanding as of December 31, 2019. In
December 2019, the Company's Board of Directors terminated the 2016 borrowing
authority and authorized a new $15 billion of borrowing capacity with no
specified expiration date. These borrowings may include (i) public or private
offering of debt securities; (ii) direct borrowing from banks or other financial
institutions; and (iii) other forms of indebtedness. In addition to debt
securities available through a medium-term notes program registered with the SEC
and a Global Medium-Term Notes program, the Company has $3.5 billion available
under a committed line of credit agreement as well as authority to issue
commercial paper in the U.S. and global markets (see Debt Financing note to the
consolidated financial statements). In 2020, the Company plans to issue
long-term debt to refinance $2.4 billion of maturing corporate debt. As of
December 31, 2019, the Company's subsidiaries also had $242 million of
borrowings outstanding, primarily under uncommitted foreign currency line of
credit agreements.
The Company uses major capital markets, bank financings and derivatives to meet
its financing requirements. The Company manages its debt portfolio in response
to changes in interest rates and foreign currency rates by periodically
retiring, redeeming and repurchasing debt, terminating swaps and using
derivatives. The Company does not hold or issue derivatives for trading
purposes. All swaps are over-the-counter instruments.
In managing the impact of interest rate changes and foreign currency
fluctuations, the Company uses interest rate swaps and finances in the
currencies in which assets are denominated. The Company uses foreign currency
debt and derivatives to hedge the foreign currency risk associated with certain
royalties, intercompany financings and long-term investments in foreign
subsidiaries and affiliates. This reduces the impact of fluctuating foreign
currencies on cash flows and shareholders' equity. Total foreign
currency-denominated debt was $12.9 billion and $11.8 billion for the years
ended December 31, 2019 and 2018, respectively. In addition, where practical,
the Company's restaurants purchase goods and services in local currencies
resulting in natural hedges. See the Summary of significant accounting policies
note to the consolidated financial statements related to financial instruments
and hedging activities for additional information regarding the accounting
impact and use of derivatives.
The Company does not have significant exposure to any individual counterparty
and has master agreements that contain netting arrangements. Certain of these
agreements also require each party to post collateral if credit ratings fall
below, or aggregate exposures exceed, certain contractual limits. At
December 31, 2019, the Company was required to post an immaterial amount of
collateral due to negative fair value of certain derivative positions. The
Company's counterparties were not required to post collateral on any derivative
position, other than on hedges of certain of the Company's supplemental benefit
plan liabilities where the counterparties were required to post collateral on
their liability positions.
The Company's net asset exposure is diversified among a broad basket of
currencies. The Company's largest net asset exposures (defined as foreign
currency assets less foreign currency liabilities) at year end were as follows:
Foreign currency net asset exposures
In millions of U.S. Dollars  2019       2018
British Pounds Sterling     $ 811    $ 1,840
Canadian Dollars              699        684
Russian Ruble                 577        631
Australian Dollars            560      1,499
Polish Zloty                  396        340




                                    McDonald's Corporation 2019 Annual Report 18

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The Company prepared sensitivity analyses of its financial instruments to
determine the impact of hypothetical changes in interest rates and foreign
currency exchange rates on the Company's results of operations, cash flows and
the fair value of its financial instruments. The interest rate analysis assumed
a one percentage point adverse change in interest rates on all financial
instruments, but did not consider the effects of the reduced level of economic
activity that could exist in such an environment. The foreign currency rate
analysis assumed that each foreign currency rate would change by 10% in the same
direction relative to the U.S. Dollar on all financial instruments; however, the
analysis did not include the potential impact on revenues, local currency prices
or the effect of fluctuating currencies on the Company's anticipated foreign
currency royalties and other payments received from the markets. Based on the
results of these analyses of the Company's financial instruments, neither a one
percentage point adverse change in interest rates from 2019 levels nor a 10%
adverse change in foreign currency rates from 2019 levels would materially
affect the Company's results of operations, cash flows or the fair value of its
financial instruments.
LIQUIDITY
The Company has significant operations outside the U.S. where we earn
approximately 65% of our operating income. A significant portion of these
historical earnings have been reinvested in foreign jurisdictions where the
Company has made, and will continue to make, substantial investments to support
the ongoing development and growth of our international operations.
The Company's cash and equivalents held by our foreign subsidiaries totaled
approximately $425 million as of December 31, 2019.
Consistent with prior years, we expect existing domestic cash and equivalents,
domestic cash flows from operations, issuance of domestic debt, and repatriation
of a portion of foreign earnings to continue to be sufficient to fund our
domestic operating, investing, and financing activities. We also continue to
expect existing foreign cash and equivalents and foreign cash flows from
operations to be sufficient to fund our foreign operating, investing and
financing activities.
In the future, should we require more capital to fund activities in the U.S.
than is generated by our domestic operations and is available through the
issuance of domestic debt, we could elect to repatriate a greater portion of
future periods' earnings from foreign jurisdictions.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Company has long-term contractual obligations primarily in the form of lease
obligations (related to both Company-operated and franchised restaurants) and
debt obligations. In addition, the Company has long-term revenue and cash flow
streams that relate to its franchise arrangements. Minimum rent under franchise
arrangements are based on the Company's underlying investment in owned sites and
parallel the Company's underlying lease obligations and escalations on
properties that are leased. The Company believes that control over the real
estate enables it to achieve restaurant performance levels that are amongst the
highest in the industry. Cash provided by operations (including cash provided by
these franchise arrangements) along with the Company's borrowing capacity and
other sources of cash will be used to satisfy the obligations. The following
table summarizes the Company's contractual obligations and their aggregate
maturities as well as future minimum rent payments due to the Company under
existing franchise arrangements as of December 31, 2019.
                                                                 Contractual cash outflows        Contractual cash inflows
                                                                                                        Minimum rent under
In millions                             Operating leases (1)          Debt obligations (2)          franchise arrangements
2020                                     $             1,147           $                59          $                3,008
2021                                                   1,096                         2,132                           2,884
2022                                                   1,014                         2,250                           2,750
2023                                                     933                         6,007                           2,631
2024                                                     854                         2,819                           2,541
Thereafter                                             7,090                        21,038                          20,510
Total                                    $            12,134           $            34,305          $               34,324

(1) For sites that have lease escalations tied to an index, future minimum

payments reflect the current index adjustments through December 31, 2019. In

addition, future minimum payments exclude option periods that have not yet

been exercised.

(2) The maturities include reclassifications of short-term obligations to

long-term obligations of $3.5 billion, as they are supported by a long-term

line of credit agreement expiring in December 2023. Debt obligations do not

include the impact of non-cash fair value hedging adjustments, deferred debt

costs and accrued interest.




In the U.S., the Company maintains certain supplemental benefit plans that allow
participants to (i) make tax-deferred contributions and (ii) receive
Company-provided allocations that cannot be made under the qualified benefit
plans because of Internal Revenue Service ("IRS") limitations. At December 31,
2019, total liabilities for the supplemental plans were $435 million.
At December 31, 2019, total liabilities for gross unrecognized tax benefits were
$1.4 billion.
There are certain purchase commitments that are not recognized in the
consolidated financial statements and are primarily related to construction,
inventory, energy, marketing and other service related arrangements that occur
in the normal course of business.  Such commitments are generally shorter term
in nature, will be funded from operating cash flows, and are not significant to
the Company's overall financial position.
The Company also has guaranteed certain other loans totaling approximately $75
million at December 31, 2019. These guarantees are contingent commitments
generally issued by the Company to support borrowing arrangements of the System.
At December 31, 2019, there was no carrying value for obligations under these
guarantees in the Consolidated Balance Sheet.


                                    McDonald's Corporation 2019 Annual Report 19
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OTHER MATTERS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the U.S. The preparation of these financial statements requires the Company
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses as well as related disclosures. On an ongoing
basis, the Company evaluates its estimates and judgments based on historical
experience and various other factors that are believed to be reasonable under
the circumstances. Actual results may differ from these estimates.
The Company reviews its financial reporting and disclosure practices and
accounting policies quarterly to confirm that they provide accurate and
transparent information relative to the current economic and business
environment. The Company believes that of its significant accounting policies,
the following involve a higher degree of judgment and/or complexity:
• Property and equipment


Property and equipment are depreciated or amortized on a straight-line basis
over their useful lives based on management's estimates of the period over which
the assets will generate revenue (not to exceed lease term plus options for
leased property). The useful lives are estimated based on historical experience
with similar assets, taking into account anticipated technological or other
changes. The Company periodically reviews these lives relative to physical
factors, economic factors and industry trends. If there are changes in the
planned use of property and equipment, or if technological changes occur more
rapidly than anticipated, the useful lives assigned to these assets may need to
be shortened, resulting in the accelerated recognition of depreciation and
amortization expense or write-offs in future periods.
• Leasing Arrangements


The Company is the lessee in a significant real estate portfolio, primarily
through ground leases (the Company leases the land and generally owns the
building) and through improved leases (the Company leases the land and
buildings). The Right of Use Asset and Lease Liability reflect the present value
of the Company's estimated future minimum lease payments over the lease term,
which includes options that are reasonably assured of being exercised,
discounted using a collateralized incremental borrowing rate.
Typically, renewal options are considered reasonably assured of being exercised
if the associated asset lives of the building or leasehold improvements exceed
that of the initial lease term, and the sales performance of the restaurant
remains strong. Therefore, the Right of Use Asset and Lease Liability include an
assumption on renewal options that have not yet been exercised by the Company.
As the rate implicit in each lease is not readily determinable, the Company uses
an incremental borrowing rate to calculate the lease liability that represents
an estimate of the interest rate the Company would incur to borrow on a
collateralized basis over the term of a lease within a particular currency
environment.
• Share-based compensation


The Company has a share-based compensation plan which authorizes the granting of
various equity-based incentives including stock options and restricted stock
units ("RSUs") to employees and nonemployee directors. The expense for these
equity-based incentives is based on their fair value at date of grant and
generally amortized over their vesting period. The Company estimates forfeitures
when determining the amount of compensation costs to be recognized in each
period.
The fair value of each stock option granted is estimated on the date of grant
using a closed-form pricing model. The pricing model requires assumptions, which
impact the assumed fair value, including the expected life of the stock option,
the risk-free interest rate, expected volatility of the Company's stock over the
expected life and the expected dividend yield. The Company uses historical data
to determine these assumptions and if these assumptions change significantly for
future grants, share-based compensation expense will fluctuate in future years.
The fair value of each RSU granted is equal to the market price of the Company's
stock at date of grant, and prior to 2018 included a reduction for the present
value of expected dividends over the vesting period. For performance-based RSUs,
the Company includes a relative Total Shareholder Return ("TSR") modifier to
determine the number of shares earned at the end of the performance period. The
fair value of performance-based RSUs that include the TSR modifier is determined
using a Monte Carlo valuation model.
• Long-lived assets impairment review


Long-lived assets (including goodwill) are reviewed for impairment annually in
the fourth quarter and whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. In assessing the
recoverability of the Company's long-lived assets, the Company considers changes
in economic conditions and makes assumptions regarding estimated future cash
flows and other factors. Estimates of future cash flows are highly subjective
judgments based on the Company's experience and knowledge of its operations.
These estimates can be significantly impacted by many factors including changes
in global and local business and economic conditions, operating costs,
inflation, competition, and consumer and demographic trends. A key assumption
impacting estimated future cash flows is the estimated change in comparable
sales. If the Company's estimates or underlying assumptions change in the
future, the Company may be required to record impairment charges. Based on the
annual goodwill impairment test, conducted in the fourth quarter, the Company
does not have any reporting units (defined as each individual market) with risk
of material goodwill impairment.
• Litigation accruals


In the ordinary course of business, the Company is subject to proceedings,
lawsuits and other claims primarily related to competitors, customers,
employees, franchisees, government agencies, intellectual property, shareholders
and suppliers. The Company is required to assess the likelihood of any adverse
judgments or outcomes to these matters as well as potential ranges of probable
losses. A determination of the amount of accrual required, if any, for these
contingencies is made after careful analysis of each matter. The required
accrual may change in the future due to new developments in a particular matter
or changes in approach such as a change in settlement strategy in dealing with
these matters. The Company does not believe that any such matter currently being
reviewed will have a material adverse effect on its financial condition or
results of operations.



                                    McDonald's Corporation 2019 Annual Report 20

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• Income taxes




The Company records a valuation allowance to reduce its deferred tax assets if
it is considered more likely than not that some portion or all of the deferred
tax assets will not be realized. While the Company has considered future taxable
income and ongoing prudent and feasible tax strategies, including the sale of
appreciated assets, in assessing the need for the valuation allowance, if these
estimates and assumptions change in the future, the Company may be required to
adjust its valuation allowance. This could result in a charge to, or an increase
in, income in the period such determination is made.
The Company operates within multiple taxing jurisdictions and is subject to
audit in these jurisdictions. The Company records accruals for the estimated
outcomes of these audits, and the accruals may change in the future due to new
developments in each matter. The most significant new developments in 2019 and
2018 are described below.
In 2019 and 2018, the Company increased the balance of unrecognized tax benefits
by $96 million and $162 million, respectively. In both 2019 and 2018, there was
audit progression in the U.S. federal and state audits, as well as multiple
foreign tax jurisdictions. The Company has considered this new information in
evaluating the unrecognized tax benefits and in certain situations, the Company
changed its judgment on the measurement of the related unrecognized tax
benefits. These changes have been reflected in the Unrecognized Tax Benefits
table that is included in the Income Taxes footnote on page 50.
In 2015, the Internal Revenue Service ("IRS") issued a Revenue Agent Report
("RAR") that included certain disagreed transfer pricing adjustments related to
the Company's U.S. Federal income tax returns for 2009 and 2010. Also in 2015,
the Company filed a protest with the IRS related to these disagreed transfer
pricing matters. During 2017, the Company received a response to its protest. In
December 2018, the Company met with the IRS Appeals team and during 2019, the
Company and the IRS Appeals team continued to have a dialogue regarding these
disagreed transfer pricing matters. As of December 31, 2019, the Company does
not yet have a signed closing agreement with the IRS related to the settlement
of these issues. The Company expects resolution on these issues in 2020.
In 2017, the IRS completed its examination of the Company's U.S. Federal income
tax returns for 2011 and 2012. In 2018, the IRS issued a RAR for these years. As
expected, the RAR included the same disagreed transfer pricing matters as the
2009 and 2010 RAR. Also in 2018, the Company filed a protest with the IRS
related to these disagreed transfer pricing matters. The transfer pricing
matters for 2011 and 2012 are being addressed along with the 2009 and 2010
transfer pricing matters as part of the 2009-2010 appeals process, such that
resolution is expected in 2020.
While the Company cannot predict the ultimate resolution of the aforementioned
tax matters, we believe that the liabilities recorded are appropriate and
adequate as determined in accordance with Topic 740 - Income Taxes of the ASC.
The Tax Act was enacted in the U.S. on December 22, 2017. The Tax Act reduced
the U.S. federal corporate income tax rate to 21% from 35% and required
companies to pay a one-time transition tax on earnings of certain foreign
subsidiaries that were previously tax deferred. In 2017, the Company recorded
provisional amounts for certain enactment-date effects of the Tax Act by
applying the guidance in Staff Accounting Bulletin ("SAB") 118. In 2018, the
Company recorded adjustments to the provisional amounts and completed its
accounting for all of the enactment-date income tax effects of the Tax Act.

SAB 118 measurement period
At December 31, 2017, the Company had not completed its accounting for all of
the enactment-date income tax effects of the Tax Act under ASC 740, Income
Taxes, primarily for the following aspects: remeasurement of deferred tax assets
and liabilities, one-time transition tax, and its accounting position related to
indefinite reinvestment of unremitted foreign earnings.
One-time transition tax: The one-time transition tax is based on the Company's
total post-1986 earnings and profits ("E&P"), the tax on which it previously
deferred from U.S. income taxes under U.S. law. The Company recorded a
provisional amount for its one-time transition tax liability for each of its
foreign subsidiaries, resulting in a transition tax liability of approximately
$1.2 billion at December 31, 2017.
Upon further analysis of the Tax Act and notices and regulations issued and
proposed by the IRS and the U.S. Department of the Treasury, the Company
finalized its calculations of the transition tax liability during 2018 and
increased its December 31, 2017 provisional amount by approximately $75 million.
The Company has elected to pay its transition tax over the eight-year period
provided in the Tax Act.
Deferred tax assets and liabilities: As of December 31, 2017, the Company
remeasured certain deferred tax assets and liabilities based on the rates at
which they were expected to reverse in the future (generally 21%), by recording
a provisional amount of approximately $500 million. No adjustment to the
provisional amount was made in 2018.
EFFECTS OF CHANGING PRICES-INFLATION
The Company has demonstrated an ability to manage inflationary cost increases
effectively. This ability is because of rapid inventory turnover, the ability to
adjust menu prices, cost controls and substantial property holdings, many of
which are at fixed costs and partly financed by debt made less expensive by
inflation.



                                    McDonald's Corporation 2019 Annual Report 21

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