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MarketScreener Homepage  >  Equities  >  Nyse  >  McDonald's Corporation    MCD

MCDONALD'S CORPORATION

(MCD)
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McDonald : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

02/23/2021 | 01:53pm EST
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, after-tax return on invested capital from
continuing operations, 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 are compared to the same period in the prior year and
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
(including restaurants temporarily closed due to COVID-19 in 2020). Comparable
sales exclude the impact of currency translation and the sales of any market
considered hyper-inflationary (generally identified as those markets whose
cumulative inflation rate over a three-year period exceeds 100%), which
management believes more accurately reflects the underlying business trends.
Comparable sales are driven by changes in guest counts and average check, which
is affected by changes in pricing and product mix.
•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 solely of sales by Company-operated restaurants and fees from
franchised restaurants operated by conventional franchisees, developmental
licensees and affiliates. Changes in Systemwide sales are primarily driven by
comparable sales and net restaurant unit expansion.
•The Company's after-tax return on invested capital ("ROIC") from continuing
operations is a metric that management believes measures our capital-allocation
effectiveness over time. Other companies may calculate ROIC differently,
limiting the usefulness of the measure for comparisons with other companies.
Refer to the reconciliation in Exhibit 12 for further information on the
Company's calculation of ROIC.
•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. Refer to the reconciliations in Exhibit 12 for
further information on the Company's calculations of free cash flow and free
cash flow conversion rate.
2020 FINANCIAL PERFORMANCE
In 2020, global comparable sales decreased 7.7% primarily as a result of
COVID-19. Comparable guest counts were negative across all segments for the
year.
•Comparable sales in the U.S. increased 0.4% benefiting from strong average
check growth and positive comparable sales primarily at the dinner daypart. The
Company's strategic marketing investments and promotional activity, along with
growth in delivery, had a positive impact on comparable sales in the second half
of 2020.
•Comparable sales in the International Operated segment decreased 15.0%
reflecting negative comparable sales in most markets as a result of COVID-19.
The comparable sales decline was primarily driven by France, the U.K., Germany,
Italy and Spain, partly offset by positive results in Australia.
•Comparable sales in the International Developmental Licensed segment decreased
10.5% reflecting negative comparable sales primarily in Latin America and Asia,
partly offset by strong comparable sales in Japan.
In addition to the comparable sales results, the Company had the following
financial results in 2020:
•Consolidated revenues decreased 10% (10% in constant currencies).
•Systemwide sales decreased 7% (7% in constant currencies).
•Consolidated operating income decreased 19% (20% in constant currencies) and
included $268 million of net strategic gains. Excluding these gains, operating
income decreased 23% (23% in constant currencies), when also excluding $74
million of net strategic charges from the prior year. Refer to the Operating
Income section on page 17 for additional details.
                                     McDonald's Corporation 2020 Annual Report 8
--------------------------------------------------------------------------------

•Operating margin, defined as operating income as a percent of total revenues,
decreased from 42.5% in 2019 to 38.1% in 2020. Excluding the items referenced in
the previous bullet point, operating margin decreased from 42.8% in 2019 to
36.7% in 2020.
•Diluted earnings per share of $6.31 decreased 20% (20% in constant currencies).
Refer to the Net Income and Diluted Earnings Per Share section on page 12 for
additional details.
•Cash provided by operations was $6.27 billion.
•Capital expenditures of $1.64 billion were allocated mainly to reinvestment in
existing restaurants and, to a lesser extent, to new restaurant openings.
•Free cash flow was $4.62 billion, a 19% decrease from the prior year.
•Across the System, nearly 1,000 restaurants (including those in our
developmental licensee and affiliated markets) were opened.
•The Company increased its quarterly cash dividend per share by 3% to $1.29 for
the fourth quarter, equivalent to an annual dividend of $5.16 per share.
STRATEGIC DIRECTION
In 2020, the Company announced a new growth strategy, Accelerating the Arches
(the "Strategy"). The Strategy encompasses all aspects of McDonald's business as
the leading global omni-channel restaurant brand, and includes a refreshed
purpose, updated values, and new growth pillars that build on the Company's
competitive advantages.
Purpose, Mission, & Values
The Company is embracing and prioritizing its role and commitments to the
communities in which it operates through our:
•Purpose to feed and foster communities,
•Mission to create delicious feel-good moments for everyone, and
•Core values that define who we are and how we run our business.
Growth Pillars
The new growth pillars, rooted in the Company's identity, MCD, build on historic
strengths and articulate areas of further opportunity. Under the Strategy, the
Company will:
•Maximize our Marketing by investing in new, culturally relevant approaches to
effectively communicate the story of our brand, food and purpose. This will
focus on enhanced digital capabilities that provide a more personal connection
with customers. The Company is also committed to a marketing strategy that
highlights value at every tier of the menu, as affordability remains a
cornerstone of the McDonald's brand.
•Commit to the Core by tapping into customer demand for the familiar and
focusing on serving delicious burgers, chicken and coffee. The Company will
prioritize chicken and beef offerings as we expect they represent the largest
growth opportunities. The Company expects there is significant opportunity to
expand its chicken offerings by leveraging line extensions of customer
favorites. In addition, the Company plans to introduce a new Crispy Chicken
Sandwich in the U.S. at the end of February. The Company will also implement a
series of operational and formulation changes designed to improve upon the great
taste of our burgers. We also see a significant opportunity with coffee, and
markets will leverage the McCafe brand, experience, value and quality to drive
long-term growth.
•Double Down on the 3D's: Digital, Delivery and Drive Thru by leveraging
competitive strengths and building a powerful digital experience growth engine
that provides a fast, easy experience for our customers. To unlock further
growth, the Company will accelerate technology innovation so that when customers
interact with McDonald's, they can enjoy a fast, easy experience that meets
their needs.
•Digital: The Company's new digital experience growth engine, "MyMcDonald's"
will transform its digital offerings across drive thru, takeaway, delivery,
curbside pick-up and dine-in. Through the digital tools across this platform,
customers will receive tailored offers, be able to participate in a new loyalty
program and order and receive McDonald's food through the channel of their
choice. The Company expects to have elements of "MyMcDonald's" across its top
six markets by the end of 2021, featuring loyalty programs in several of those
markets, including a U.S. loyalty launch later in 2021. Across these top six
markets, digital sales exceeded $10 billion or nearly 20% of Systemwide sales in
2020.
•Delivery: Over the past three years, the Company has expanded the number of
McDonald's restaurants offering delivery to nearly 30,000 restaurants, and
delivery sales have grown significantly. The Company will build on this progress
and enhance the delivery experience for customers by adding the ability to order
on the McDonald's app, which is already available in several markets around the
world, and optimizing operations with a focus on speed and accuracy.
•Drive Thru: The Company has drive thru locations in over 25,000 restaurants
globally, including nearly 95% of the over 13,000 locations in the U.S. During
the COVID-19 pandemic, this channel has heightened importance and we expect that
it will become even more critical to meet customers' demand for flexibility and
choice. The Company will build on its drive thru advantage as the vast majority
of new restaurant openings in the U.S. and International Operated Markets will
include a drive thru. The Company will test new concepts and technology to
enhance the customer experience, including automated order taking; a new drive
thru express pick-up lane for customers with a digital order; and a restaurant
concept that offers drive thru, delivery and takeaway only to provide a faster,
more convenient experience.
The Company's Strategy is underpinned by a relentless focus on running great
restaurants, including improving speed of service to address customer needs. The
Company believes this Strategy will build on our inherent strengths by
harnessing our competitive advantages and investing in innovations that will
enhance the customer experience and deliver long-term growth.
                                     McDonald's Corporation 2020 Annual Report 9
--------------------------------------------------------------------------------

OUTLOOK

2021 Outlook
Based on current conditions, the following information is provided to assist in
forecasting the Company's future results for 2021.
•The Company expects 2021 Systemwide sales growth, in constant currencies, in
the low double digits, and expects net restaurant unit expansion to contribute
about 1% to 2021 Systemwide sales growth.
•The Company expects operating margin percent to be in the low-to-mid 40% range.
•The Company expects full year 2021 selling, general and administrative expenses
of approximately 2.3% of Systemwide sales, reflecting a decrease of about 2% to
4% in constant currencies.
•Based on current interest and foreign currency exchange rates, the Company
expects interest expense for the full year 2021 to decrease about 1% to 3% due
primarily to lower average debt balances as the Company expects to pay down
current debt levels to return to pre-COVID-19 leverage ratios.
•The Company expects the effective income tax rate for the full year 2021 to be
in the 21% to 23% range. Some volatility may result in a quarterly tax rate
outside of the annual range.
•The Company expects 2021 capital expenditures to be approximately $2.3 billion,
about half of which will be directed towards new unit expansion across the U.S.
and International Operated Markets.
In 2021, about $1.1 billion will be dedicated to our U.S. business, about $500
million of which will be allocated to approximately 1,200 restaurant
modernization projects. Globally, the Company expects to open over 1,300
restaurants. We will open nearly 500 restaurants in the U.S. and International
Operated Markets segments, and our developmental licensee and affiliates will
contribute capital towards over 800 restaurant openings in their respective
markets. Additionally, the U.S. expects to close roughly 325 restaurants in
2021; a majority of which are lower sales volume McDonald's in Walmart
locations. The Company expects about 650 net restaurant additions in 2021.
•The Company expects to achieve a free cash flow conversion rate greater than
90%.

2022 Outlook
The Company has provided a 2022 outlook that is detailed in its Form 10-Q for
the quarter ended September 30, 2020.



                                    McDonald's Corporation 2020 Annual Report 10
--------------------------------------------------------------------------------

CONSOLIDATED OPERATING RESULTS
The following discussion should be read in conjunction with the consolidated
financial statements and accompanying notes included on pages 38 through 59 of
this Form 10-K. This section generally discusses 2020 and 2019 items and the
year-to-year comparisons between the year ended December 31, 2020 compared to
the year ended December 31, 2019. Discussions of 2018 items and the year-to-year
comparisons between the year ended December 31, 2019 compared to the year ended
December 31, 2018 are not included in this Form 10-K and can be found in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of the Company's Annual Report on Form 10-K for the year
ended December 31, 2019, filed with the SEC on February 26, 2020.

Operating results

                                                                                    2020                                               2019             

2018

Dollars and shares in millions, except per
share data                                             Amount       Increase/ (decrease)                  Amount       Increase/ (decrease)                   Amount

Revenues

Sales by Company-operated restaurants              $ 8,139                       (14  %)              $ 9,421                        (6  %)              $ 10,013
Revenues from franchised restaurants                10,726                        (8)                  11,656                         6                    11,012
Other revenues                                         343                        19                      288                        24                       233
Total revenues                                      19,208                       (10)                  21,365                         1                    21,258
Operating costs and expenses
Company-operated restaurant expenses                 6,981                       (10)                   7,761                        (6)               

8,266

Franchised restaurants-occupancy expenses            2,208                         0                    2,201                        12                     1,973
Other restaurant expenses                              267                        19                      224                        20                       186
Selling, general & administrative expenses
Depreciation and amortization                          301                        14                      262                        22                       215
Other                                                2,245                        14                    1,967                        (1)                    1,985

Other operating (income) expense, net                 (118)                        2                     (120)                       37                 

(190)

Total operating costs and expenses                  11,884                        (3)                  12,295                        (1)                   12,435
Operating income                                     7,324                       (19)                   9,070                         3                     8,823
Interest expense                                     1,218                         9                    1,122                        14                       981
Nonoperating (income) expense, net                     (35)                       50                      (70)                          n/m            

26

Income before provision for income taxes             6,141                       (23)                   8,018                         3                

7,816

Provision for income taxes                           1,410                       (29)                   1,993                         5                     1,892
Net income                                         $ 4,731                       (21  %)              $ 6,025                         2  %               $  5,924
Earnings per common share-diluted                  $  6.31                       (20  %)              $  7.88                         5  %               $   7.54
Weighted-average common shares outstanding-
diluted                                              750.1                        (2  %)                764.9                        (3  %)                 785.6


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.

Impact of foreign currency translation on reported results

                                                                                                                                           Currency translation
                                                                                      Reported amount                                            benefit/(cost)
In millions, except per share data                           2020              2019              2018                 2020                  2019           2018
Revenues                                              $ 19,208$ 21,365$ 21,258$ (75)$      (610)$ 124
Company-operated margins                                 1,158             1,660             1,747                   (1)                  (51)             4
Franchised margins                                       8,519             9,455             9,039                   32                  (256)            57
Selling, general & administrative expenses               2,546             2,229             2,200                   (2)                   29            (13)
Operating income                                         7,324             9,070             8,823                   35                  (280)            56
Net income                                               4,731             6,025             5,924                   26                  (165)            33
Earnings per common share-diluted                         6.31              7.88              7.54                 0.04                 (0.21)          0.04



In 2020, results primarily reflected the strengthening of the Euro and British
Pound, partly offset by the weakening of the Brazilian Real. In 2019, results
reflected the weakening of the Euro and most other major currencies.
                                    McDonald's Corporation 2020 Annual Report 11
--------------------------------------------------------------------------------

NET INCOME AND DILUTED EARNINGS PER COMMON SHARE
In 2020, net income decreased 21% (22% in constant currencies) to $4.7 billion
and diluted earnings per common share decreased 20% (20% in constant currencies)
to $6.31. Foreign currency translation had a positive impact of $0.04 on diluted
earnings per share.
Results in 2020 reflected sales declines in the International Operated Markets
and International Developmental Licensed Markets segments as a result of
COVID-19.
Results in 2020 also included the following:
•Higher Selling, General and Administrative Expenses reflecting:
•$100 million for the Company's five year commitment to Ronald McDonald House
Charities;
•one-time investments in renewed brand communications as part of the "Serving
Here" campaign launch that was announced with the new growth strategy,
Accelerating the Arches; and
•partly offset by lower incentive-based compensation expense.
•Over $200 million of incremental franchisee support for the year for marketing
to accelerate recovery and drive growth across the U.S. and International
Operated Markets, a majority of which was recorded in Selling, General and
Administrative Expenses.
•About $100 million was recorded in the U.S. and the remaining support was
recorded in the International Operated Markets segment.
•Higher restaurant closing costs of $68 million in both the International
Operated Markets and in the U.S. The U.S. costs were primarily related to
planned closings of McDonald's in Walmart locations.
•Lower gains on sales of restaurant businesses.
•An increase of reserves for bad debts of $58 million related to rent and
royalty deferrals.
Outlined below is additional information for the full year 2020, 2019, and 2018:
Diluted Earnings Per Common Share Reconciliation
                                                                                                                                                                   Increase/(decrease)
                                                                                                                                                                    excluding currency
                                                                                    Amount                           Increase/(decrease)                                   translation
                                                      2020            2019            2018                          2020            2019                          2020            2019
GAAP earnings per share-diluted                  $ 6.31$ 7.88$ 7.54                          (20  %)            5  %                       (20  %)            7  %
Strategic (gains) charges                         (0.26)           0.07     

0.26

Income tax (benefit) cost, net                        -           (0.11)    

0.10

Non-GAAP earnings per share-diluted              $ 6.05$ 7.84$ 7.90                          (23)  %           (1) %                       (23)  %            2  %


2020 results included:
•net pre-tax strategic gains of $268 million, or $0.26 per share, primarily
related to the sale of McDonald'sJapan stock, which reduced the Company's
ownership by about 6%.
2019 results included:
•$84 million, or $0.11 per share, of income tax benefit due to regulations
issued in the fourth quarter 2019 related to the Tax Act.
•net pre-tax strategic charges of $74 million, 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.
2018 results included:
•net tax cost of $75 million, or $0.10 per share, associated with the final 2018
adjustments to the provisional amounts recorded in December 2017 under the Tax
Act.
•$234 million, or $0.26 per share, of pre-tax strategic impairment and
restructuring charges.
Excluding the above 2020 and 2019 items, 2020 net income decreased 24% (25% in
constant currencies), and diluted earnings per share decreased 23% (23% in
constant currencies).
Diluted earnings per share for 2020 and 2019 benefited from a decrease in
diluted weighted average shares outstanding. In early March 2020, the Company
suspended its share repurchase program. The Company repurchased 4.3 million
shares of its stock for $874 million in 2020 and 25.0 million shares of its
stock for $5 billion in 2019.
RESTAURANT UPDATE
The Company has continued to follow the guidance of expert health authorities to
ensure the appropriate precautionary steps are taken to protect the health and
safety of our people and our customers.
As a result of COVID-19, throughout 2020, there have been numerous instances of
government restrictions on restaurant operating hours, limited dine-in capacity
in most countries and, in some cases, mandated dining room closures particularly
in the International Operated Markets. These restrictions, which have carried
into 2021, are impacting most of the Company's key markets outside of the U.S.,
particularly those with fewer drive thru restaurant locations. The Company
expects some restrictions in various markets so long as the COVID-19 pandemic
continues.


                                    McDonald's Corporation 2020 Annual Report 12
--------------------------------------------------------------------------------

REVENUES

The Company's revenues consist of sales by Company-operated restaurants and fees
from restaurants operated by 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. The Company's Other revenues are comprised of fees paid by
franchisees to recover a portion of costs incurred by the Company for various
technology platforms, revenues from brand licensing arrangements to market and
sell consumer packaged goods using the McDonald's brand, and third party
revenues for the Dynamic Yield business.
Franchised restaurants represented 93% of McDonald's restaurants worldwide at
December 31, 2020. The Company's heavily franchised business model is designed
to generate stable and predictable revenue, which is largely a function of
franchisee sales and resulting cash flow streams. As most revenues are based on
a percent of sales, the Company expects that government regulations as a result
of COVID-19 resurgences will continue to have a negative impact on revenue in
the near term.
Revenues
                                                                                                                                                                                  Increase/(decrease)
                                                                                                                                                                                   excluding currency
                                                                                                Amount                            Increase/(decrease)                                     translation
Dollars in millions                                           2020              2019              2018                         2020              2019                          2020              2019
Company-operated sales:
U.S.                                                   $  2,395$  2,490$  2,665                          (4  %)            (7  %)                        (4  %)            (7  %)
International Operated Markets                            5,114             6,334             6,668                         (19)               (5)                          (18)               (1)
International Developmental Licensed Markets &
Corporate                                                   630               597               680                           6               (12)                            7                (7)
Total                                                  $  8,139$  9,421$ 10,013                         (14  %)            (6  %)                       (12  %)            (3  %)
Franchised revenues:
U.S.                                                   $  5,261$  5,353$  5,001                          (2  %)             7  %                         (2  %)             7  %
International Operated Markets                            4,348             5,064             4,839                         (14)                5                           (15)               10
International Developmental Licensed Markets &
Corporate                                                 1,117             1,239             1,172                         (10)                6                            (8)               10
Total                                                  $ 10,726$ 11,656$ 11,012                          (8  %)             6  %                         (8  %)             9  %
Total Company-operated sales and Franchised
revenues:
U.S.                                                   $  7,656$  7,843$  7,666                          (2  %)             2  %                         (2  %)             2  %
International Operated Markets                            9,462            11,398            11,507                         (17)               (1)                          (17)                4
International Developmental Licensed Markets &
Corporate                                                 1,747             1,836             1,852                          (5)               (1)                           (3)                4
Total                                                  $ 18,865$ 21,077$ 21,025                         (10  %)             0  %                        (10  %)             3  %
Total Other revenues                                   $    343$    288$    233                          19  %             24  %                         19  %             25  %
Total Revenues                                         $ 19,208$ 21,365$ 21,258                         (10  %)             1  %                        (10  %)             3  %


In 2020, total Company-operated sales and franchised revenues decreased 10% (10%
in constant currencies), primarily reflecting sales declines in the
International Operated Markets segment as a result of COVID-19. Results also
reflected positive sales performance in the U.S., which was more than offset by
support provided for marketing, through incentives to franchisees, to accelerate
recovery and drive growth, including the free Thank You Meals served across the
country to first responders and health care workers.
Revenue declines were more significant in the International Operated Markets
segment, driven by the temporary restaurant closures and limited operations.
While performance was mixed, the ability of each market to drive sales and
revenue growth is also impacted by the number of drive thru restaurant
locations. The revenue declines were driven by the U.K., France, Germany, Italy
and Spain.
TOTAL REVENUES BY SEGMENT
[[Image Removed: mcd-20201231_g2.jpg]][[Image Removed: mcd-20201231_g3.jpg]][[Image Removed: mcd-20201231_g4.jpg]]
      U.S.

      International Operated Markets

      International Developmental Licensed Markets & Corporate


                                    McDonald's Corporation 2020 Annual Report 13
--------------------------------------------------------------------------------

The following tables present comparable sales and Systemwide sales increases/(decreases): Comparable sales increases/(decreases)

                                                                    2020             2019             2018

U.S.                                                             0.4  %            5.0  %           2.5  %
International Operated Markets                                 (15.0)              6.1              6.1

International Developmental Licensed Markets & Corporate (10.5)

       7.2              5.6
Total                                                           (7.7  %)           5.9  %           4.5  %



Systemwide sales increases/(decreases)*

                                                                                                                               Increase/(decrease)
                                                                                                                                excluding currency
                                                                                                                                       translation
                                                                             2020             2019                           2020             2019
U.S.                                                                        0  %              5  %                          0  %              5  %
International Operated Markets                                            (13)                3                           (14)                8
International Developmental Licensed Markets & Corporate                  (10)                5                            (8)               10
Total                                                                      (7  %)             4  %                         (7  %)             7  %


  * Unlike comparable sales, the Company has not excluded hyper-inflationary
market results from Systemwide sales as these sales are the basis on which the
Company calculates and records revenues.

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                                 2020              2019              2018                         2020           2019                          2020             2019
U.S.                                         $ 38,123$ 37,923$ 35,860                           1  %            6  %                         1  %              6  %
International Operated Markets                 25,446            28,853            27,557                         (12)              5                          (13)               10
International Developmental Licensed
Markets & Corporate                            21,609            23,981            22,717                         (10)              6                           (8)               10
Total                                        $ 85,178$ 90,757$ 86,134                          (6  %)           5  %                        (6  %)             8  %

Ownership type
Conventional franchised                      $ 63,297$ 66,415$ 63,251                          (5)              5  %                        (5)  %             7  %
Developmental licensed                         11,781            14,392            13,519                         (18)              6                          (14)               13
Foreign affiliated                             10,100             9,950             9,364                           2               6                            0                 7
Total                                        $ 85,178$ 90,757$ 86,134                          (6  %)           5  %                        (6  %)             8  %




                                    McDonald's Corporation 2020 Annual Report 14
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RESTAURANT MARGINS
Restaurant margins
                                                                                                                                                        

Increase/(decrease) excluding currency

                                                                     Amount                                                 Increase/(decrease)                                     translation
Dollars in millions                                 2020             2019              2018                              2020              2019                          2020              2019
Franchised:
U.S.                                             $ 4,097$  4,227$  4,070                           (3  %)             4  %                         (3  %)             4  %
International Operated Markets                     3,329             4,018             3,829                          (17)                5                           (19)               10
International Developmental Licensed Markets &     1,093             1,210             1,140                          (10)                6                            (8)               11
Corporate
Total                                            $ 8,519$  9,455$  9,039                          (10  %)             5  %                        (10  %)             7  %
Company-operated:
U.S.                                             $   405$    388$    397                            4  %             (2  %)                         4  %             (2  %)
International Operated Markets                       748             1,266             1,327                          (41)               (5)                          (41)               (1)
International Developmental Licensed Markets &          n/m               n/m               n/m                           n/m               n/m                           n/m               n/m
Corporate
Total                                            $ 1,158$  1,660$  1,747                          (30  %)            (5  %)                       (30  %)            (2  %)
Total restaurant margins:
U.S.                                             $ 4,502$  4,615$  4,467                           (2  %)             3  %                         (2  %)             3  %
International Operated Markets                     4,077             5,284             5,156                          (23)                2                           (24)                7
International Developmental Licensed Markets &          n/m               n/m               n/m                           n/m               n/m                           n/m               n/m
Corporate
Total                                            $ 9,677$ 11,115$ 10,786                          (13  %)             3  %                        (13  %)             6  %


n/m Not meaningful
In 2020, total restaurant margins decreased 13% (13% in constant currencies),
which reflected sales declines in the International Operated Markets segment as
a result of COVID-19, partly offset by positive sales performance in the U.S.
Franchised margins represented over 85% of restaurant margin dollars.
Franchised margins in the U.S. reflected higher depreciation costs related to
investments in Experience of the Future ("EOTF"), as well as support provided
for marketing to accelerate recovery and drive growth, including the free Thank
You Meals served across the country to first responders and health care workers.
Company-operated margins in the U.S. and International Operated Markets segments
reflected incremental COVID-19 expenses incurred for employee related costs,
personal protective equipment, and signage and other restaurant costs.
Due to the nature of our operating model, franchised margin expenses (primarily
comprised of lease expense and depreciation expense) are mainly fixed, whereas
Company-operated restaurant expenses have more variable cost components. Total
restaurant margins included $1,452 million of depreciation and amortization
expenses in 2020.

RESTAURANT MARGINS BY TYPE (In millions)
[[Image Removed: mcd-20201231_g5.jpg]]

                                    McDonald's Corporation 2020 Annual Report 15
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SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general & administrative expenses
                                                                                                                                                                      Increase/(decrease)
                                                                                                                                                                       excluding currency
                                                                                     Amount                             Increase/(decrease)                                   translation
Dollars in millions                                  2020             2019             2018                          2020              2019                         2020             2019
U.S.                                           $   625$   587$   591                            7  %             (1  %)                        7  %            (1  %)
International Operated Markets                     700              629              641                           11                (2)                          11                3
International Developmental Licensed Markets &
Corporate(1)                                     1,221            1,013              968                           20                 5                           20                5
Total Selling, General & Administrative
Expenses                                       $ 2,546$ 2,229$ 2,200                           14  %              1  %                        14  %             3  %

Less: Incentive-Based Compensation(2)              158              289              284                          (45  %)             2  %                       (45  %)            3  %

Total Excluding Incentive-Based Compensation $ 2,388$ 1,940

     $ 1,916                           23  %              1  %                        23  %             3  %


(1)Included in International Developmental Licensed Markets & Corporate are home
office support costs in areas such as facilities, finance, human resources,
investments in strategic technology initiatives, legal, marketing, restaurant
operations, supply chain and training.
(2)Includes all cash incentives and share-based compensation expense.
In 2020, consolidated selling, general and administrative expenses increased 14%
(14% in constant currencies). The results reflected about $175 million of
incremental marketing contributions by the Company to the System's advertising
cooperative arrangements across the U.S. and International Operated Markets to
accelerate recovery and drive growth; the Company's five year commitment
totaling $100 million to RMHC; one-time investments in renewed brand
communications as part of the "Serving Here" campaign launch that was announced
with the new growth strategy, Accelerating the Arches; and higher investments in
strategic technology initiatives. These results were partly offset by lower
incentive-based compensation expense and travel costs.
Selling, general and administrative expenses as a percent of Systemwide sales
was 2.7% in 2020, 2.2% in 2019 and 2.3% in 2018. 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.

OTHER OPERATING (INCOME) EXPENSE, NET
Other operating (income) expense, net
In millions                                              2020        2019   

2018

Gains on sales of restaurant businesses              $  (23)$ (127)$ (304)
Equity in earnings of unconsolidated affiliates        (117)       (154)    

(152)

Asset dispositions and other (income) expense, net 290 87

34

Impairment and other charges (gains), net              (268)         74         232
Total                                                $ (118)$ (120)$ (190)


•Gains on sales of restaurant businesses
In 2020, gains on sales of restaurant businesses decreased primarily due to
fewer restaurant sales primarily in the U.K. and the U.S.
•Equity in earnings of unconsolidated affiliates
In 2020, equity in earnings of unconsolidated affiliates declined primarily due
to sales declines as a result of COVID-19 in both the International Operated
Markets and International Developmental Licensed Markets.
•Asset dispositions and other (income) expense, net
Asset dispositions and other expense, net reflected $68 million of restaurant
closing costs in both the International Operated Markets and in the U.S. The
U.S. costs were primarily related to planned closings of McDonald's in Walmart
locations.
Results also reflected an increase of reserves for bad debts of $58 million,
related to rent and royalty deferrals; $31 million of payments to distribution
centers for obsolete inventory to support franchisee liquidity; and litigation
settlements.
•Impairment and other charges (gains), net
In 2020, impairment and other charges (gains), net reflected $274 million of
pre-tax strategic gains related to the sale of McDonald'sJapan stock, which
reduced the Company's ownership by about 6% for the year. Results also reflected
the write-off of impaired software that was no longer being used of $26 million,
partly offset by $13 million of income primarily comprised of a reversal of a
reserve associated with the Company's sale of its business in the India Delhi
market in January 2020.
The results in 2019 reflected $99 million of impairment associated with the
purchase of our joint venture partner's interest in the India Delhi market,
partly offset by $20 million of gains on the sales of property at the former
Corporate headquarters.
The results in 2018 reflected $140 million of impairment charges and $85 million
of strategic restructuring charges in the U.S.McDonald's Corporation 2020 Annual Report 16
--------------------------------------------------------------------------------

OPERATING INCOME
Operating income
                                                                                                                                                 

Increase/(decrease) excluding currency

                                                                                   Amount                             Increase/(decrease)                                   translation
Dollars in millions                                2020             2019             2018                           2020             2019                          2020            2019
U.S.                                         $ 3,789$ 4,069$ 4,016                            (7  %)             1  %                        (7  %)            1  %
International Operated Markets                 3,315            4,789            4,643                           (31)                3                          (32)               8
International Developmental Licensed Markets
& Corporate                                         220              212              164                          4                29                           12               59
Total                                        $ 7,324$ 9,070$ 8,823                           (19  %)             3  %                       (20  %)            6  %

Operating margin                                38.1  %          42.5  %          41.5  %
Non-GAAP operating margin                       36.7  %          42.8  %          42.6  %


•Operating Income: Operating income decreased 19% (20% in constant currencies).
Results for 2020 included $268 million of net strategic gains primarily related
to the sale of McDonald'sJapan stock, and results for 2019 included $74 million
of net strategic charges. Excluding these current year and prior year items,
operating income decreased 23% (23% in constant currencies) for 2020.
•U.S.: The operating income decrease reflected positive sales performance, which
was more than offset by about $100 million of support for marketing to
accelerate recovery and drive growth; EOTF depreciation; a comparison to a prior
year gain on the sale of real estate; lower gains on sales of restaurant
businesses; and higher restaurant closing costs, primarily related to planned
closings of McDonald's in Walmart locations.
•International Operated Markets: The operating income decrease reflected sales
declines as a result of COVID-19; over $100 million of support for marketing to
accelerate recovery and drive growth; incremental COVID-19 Company-operated
expenses primarily for employee related costs; lower gains on sales of
restaurant businesses primarily in the U.K.; higher restaurant closing costs;
lower equity in earnings from unconsolidated affiliates; and $23 million of
payments to distribution centers for obsolete inventory.
•International Developmental Licensed Markets & Corporate: Excluding the current
year and prior year strategic gains and charges described above, the results
primarily reflected higher G&A due to the Company's five year commitment
totaling $100 million to RMHC as well as one-time investments in renewed brand
communications.

OPERATING INCOME BY SEGMENT* [[Image Removed: mcd-20201231_g6.jpg]][[Image Removed: mcd-20201231_g7.jpg]][[Image Removed: mcd-20201231_g8.jpg]]

      U.S.

      International Operated Markets

      International Developmental Licensed Markets & Corporate*

*The IDL segment excludes Corporate activities, which is a Non-GAAP metric.




                                    McDonald's Corporation 2020 Annual Report 17
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•Operating margin: Operating margin is defined as operating income as a percent
of total revenues. The contributions to operating margin differ by segment due
to each segment's ownership structure, primarily due to the relative percentage
of franchised versus Company-operated restaurants. Additionally, the number of
temporary restaurant closures, which varies by segment, as a result of COVID-19,
also impacts the contribution of each segment to the consolidated operating
margin.
The decrease in operating margin percent for 2020 was driven by a decline in
sales, higher other operating expenses and higher G&A. While the sales-driven
franchised margin decline had a dilutive effect on operating margin percent,
franchised margin dollars represented over 85% of overall margin dollars and
were a key component of operating income.

OPERATING MARGIN PERCENT ROLL-FORWARD*

                     [[Image Removed: mcd-20201231_g9.jpg]]
                            Operating margin        Increase       Decrease


*The operating margin roll-forward excludes the strategic gains and charges previously described.


INTEREST EXPENSE
Interest expense increased 9% (8% in constant currencies) and 14% (16% in
constant currencies) in 2020 and 2019, respectively. Results in 2020 reflected
higher average debt balances, partly offset by a decrease in the amount of Euro
denominated deposits incurring interest expense as a result of the Company's
cash management strategies.

NONOPERATING (INCOME) EXPENSE, NET
Nonoperating (income) expense, net
In millions                                     2020       2019      2018
Interest income                              $ (18)$ (37)$ (4)
Foreign currency and hedging activity           (3)       (48)        5
Other expense                                  (14)        15        25
Total                                        $ (35)$ (70)$ 26


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.


                                    McDonald's Corporation 2020 Annual Report 18
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PROVISION FOR INCOME TAXES
In 2020, 2019 and 2018 the reported effective income tax rates were 23.0%, 24.9%
and 24.2%, respectively.
Results for 2020 included $50 million of income tax benefits due to new U.S. tax
regulations and $48 million of income tax benefits related to the impact of a
tax rate change in the U.K.
The effective income tax rate for 2019 reflected $84 million of income tax
benefit due to 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 impact of the Tax Act and impairment charges, the
effective income tax rate was 22.9% for the year 2018.
Consolidated net deferred tax liabilities included tax assets, net of valuation
allowance, of $6.5 billion in 2020 and $5.3 billion in 2019. 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 43 of this Form 10-K.


CASH FLOWS
The Company has a long history of generating significant cash from operations
and has substantial credit capacity to fund operating and discretionary spending
such as capital expenditures, debt repayments, dividends and share repurchases.
As our operations have been impacted due to COVID-19, we have taken actions to
preserve financial flexibility, primarily during the peak of the pandemic.
Cash provided by operations totaled $6.3 billion in 2020, a decrease of $1.9
billion or 23%. Free cash flow was $4.6 billion in 2020, a decrease of $1.1
billion or 19%. The Company's free cash flow conversion rate was 98% in 2020 and
95% in 2019. Cash provided by operations decreased in 2020 compared to 2019
primarily due to a reduction in operating earnings due to COVID-19. In 2019,
cash provided by operations totaled $8.1 billion, an increase of $1.1 billion or
17% compared with 2018, primarily due to a decrease in accounts receivable and
lower income tax payments.
During 2020, the Company deferred collection of rent and royalties earned from
franchisees. In total, the Company deferred collection of approximately $1
billion, and has collected over 80% of these total deferrals as of December 31,
2020. The remaining deferrals are expected to be collected in the first half of
2021.
Cash used for investing activities totaled $1.5 billion in 2020, a decrease of
$1.5 billion compared with 2019. The decrease was primarily due to lower capital
expenditures, fewer strategic acquisitions, and proceeds received from the sale
of McDonald'sJapan stock in 2020. 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 financing activities totaled $2.2 billion in 2020, a decrease of
$2.7 billion compared with 2019. The decrease was primarily due to $4.1 billion
of lower treasury stock purchases in 2020 as the Company suspended its share
repurchase program in early March 2020. In addition, the Company had $2.2
billion in net debt issuances in 2020, as compared to $3.2 billion in net debt
issuances in 2019. The decrease in net debt issuances was primarily due to the
timing of short-term commercial paper issuances and repayments. 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.
The Company's cash and equivalents balance was $3.4 billion and $899 million at
year end 2020 and 2019, 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.
                                    McDonald's Corporation 2020 Annual Report 19
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RESTAURANT DEVELOPMENT AND CAPITAL EXPENDITURES
In 2020, the Company opened 977 restaurants and closed 643 restaurants. In 2019,
the Company opened 1,231 restaurants and closed 391 restaurants. The decrease in
openings during the year compared to 2019 was due to COVID-19. The closures in
2020 include approximately 200 closures in the U.S.; over half of which are
lower sales volume McDonald's in Walmart locations.
Systemwide restaurants at year end
                                                                          2020              2019              2018
U.S.                                                                 13,682            13,846            13,914
International Operated Markets                                       10,560            10,465            10,263
International Developmental Licensed Markets & Corporate             14,956            14,384            13,678
Total                                                                39,198            38,695            37,855

RESTAURANTS BY OWNERSHIP TYPE [[Image Removed: mcd-20201231_g10.jpg]][[Image Removed: mcd-20201231_g11.jpg]][[Image Removed: mcd-20201231_g12.jpg]]

Franchised restaurants Company-operated restaurants




Approximately 93% of the restaurants at year-end 2020 were franchised, including
95% in the U.S., 84% in International Operated Markets and 98% in the
International Developmental Licensed Markets.
Capital expenditures decreased $753 million or 31% in 2020 primarily due to
lower reinvestment in existing restaurants as a result of COVID-19. 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.


                                    McDonald's Corporation 2020 Annual Report 20
--------------------------------------------------------------------------------

CAPITAL EXPENDITURES BY TYPE (In millions)
[[Image Removed: mcd-20201231_g13.jpg]]
* 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 $4.4 million in 2020.
As of December 31, 2020 and December 31, 2019, the Company owned approximately
55% of the land and 80% of the buildings for restaurants in its consolidated
markets.

SHARE REPURCHASES AND DIVIDENDS
In 2020, the Company returned approximately $4.6 billion to shareholders,
primarily through dividends paid.
Shares repurchased and dividends
In millions, except per share data                         2020         2019         2018
Number of shares repurchased                              4.3         25.0  

32.2

Shares outstanding at year end                            745          746  

767

Dividends declared per share                          $  5.04$  4.73$  4.19
Treasury stock purchases (in Shareholders' equity)    $   874$ 4,980$ 5,247
Dividends paid                                          3,753        3,582  

3,256

Total returned to shareholders                        $ 4,627$ 8,562

$ 8,503



In December 2019, 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 2020, approximately 4.3 million shares were repurchased for $874.1
million under the program. In early March 2020, the Company voluntarily
suspended share repurchases from the open market.
The Company has paid dividends on its common stock for 45 consecutive years and
has increased the dividend amount every year. The 2020 full year dividend of
$5.04 per share reflects the quarterly dividend paid for each of the first three
quarters of $1.25 per share, with an increase to $1.29 per share paid in the
fourth quarter. This 3% increase in the quarterly dividend equates to a $5.16
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.

                                    McDonald's Corporation 2020 Annual Report 21
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FINANCIAL POSITION AND CAPITAL RESOURCES
TOTAL ASSETS AND RETURN
Total assets increased $5.1 billion or 11% in 2020, primarily due to an increase
in Cash and equivalents driven by lower capital expenditures and fewer treasury
stock purchases compared to the prior year, as well as proceeds received from
the sale of McDonald'sJapan stock. Net property and equipment increased $0.8
billion in 2020, primarily due to fixed asset additions and the impact of
foreign exchange rates, partly offset by depreciation. Net property and
equipment and the Lease right-of-use asset, net represented approximately 50%
and approximately 25%, respectively, of total assets at year-end. Approximately
86% of total assets were in the U.S. and International Operated Markets at
year-end 2020.
The Company's after-tax ROIC from continuing operations is a metric that
management believes measures our capital-allocation effectiveness over time and
was 14.9%, 19.2% and 20.0% as of December 31, 2020, 2019 and 2018, respectively.
The decrease from 2019 to 2020 was primarily due to the decrease in operating
performance as a result of COVID-19 and higher average debt balances compared to
the prior year. Refer to the reconciliation in Exhibit 12.

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, 2020 totaled $37.4 billion, compared with $34.2 billion at
December 31, 2019. The net increase in 2020 was primarily due to net long-term
issuances of $3.1 billion, which were used to bolster our cash position in
anticipation of the adverse macroeconomic and business conditions associated
with COVID-19.
Debt highlights(1)
                                                                                2020             2019             2018
Fixed-rate debt as a percent of total debt(2,3)                                95  %            92  %            91  %
Weighted-average annual interest rate of total debt(3)                        3.2              3.2              3.2
Foreign currency-denominated debt as a percent of total debt(2)                36               38               38

Total debt as a percent of total capitalization (total debt and total Shareholders' equity)(2)

                                                      126              131              125
Cash provided by operations as a percent of total debt(2)                      17               24               22


(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.

In connection with the increased funding activity during the first quarter of
2020, both Standard & Poor's (S&P) and Moody's affirmed our ratings, although
S&P put McDonald's on negative outlook. S&P and Moody's currently rate 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 December
2019, the Company's Board of Directors authorized $15 billion of borrowing
capacity with no specified expiration date, of which $9.5 billion remains
outstanding as of December 31, 2020. 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 April 2020,
the Company's Board of Directors provided additional authorization to issue
commercial paper and draw on lines of credit agreements up to $8 billion in
addition to the $15 billion authorized as referenced above. 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 $4.5 billion available
under committed line of credit agreements (see Debt Financing note to the
consolidated financial statements). As of December 31, 2020, the Company's
subsidiaries also had $274 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 $13.7 billion and $12.9 billion for the years
ended December 31, 2020 and 2019, 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.



                                    McDonald's Corporation 2020 Annual Report 22
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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, 2020, 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 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        2020       2019
British Pounds Sterling       $ 1,374$ 811
Australian Dollars                913        560
Canadian Dollars                  878        699
Russian Ruble                     533        577
Polish Zloty                      393        396



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 2020 levels nor a 10%
adverse change in foreign currency rates from 2020 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.
During the first quarter of 2020, the Company secured $6.5 billion of new
financing, including $5.5 billion of debt issuances at various maturities and a
new $1.0 billion line of credit that was drawn upon immediately. In the third
quarter of 2020, the Company repaid the total $1.0 billion on its line of
credit. The $1.0 billion line of credit agreement remains in place and the
amount remains available to be borrowed. The Company also has $3.5 billion
available under a committed line of credit, which has not been drawn upon, as
well as continuing authority to issue commercial paper in the U.S. and global
markets. In 2021, the Company intends to reduce current debt levels to return to
pre-COVID-19 leverage ratios.
Consistent with prior years, we expect existing domestic cash and equivalents,
domestic cash flows from operations, the ability to issue 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.

                                    McDonald's Corporation 2020 Annual Report 23
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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 payments 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, 2020.
                                        Contractual cash outflows         Contractual cash inflows
                                                                                Minimum rent under
In millions               Leases (1)         Debt obligations (2)           franchise arrangements
2021                      $  1,216$  2,244$  3,073
2022                         1,150                        2,332                            2,954
2023                         1,068                        2,644                            2,835
2024                           989                        3,301                            2,743
2025                           899                        3,159                            2,642
Thereafter                   7,358                       23,881                           20,175
Total                     $ 12,680$ 37,561$ 34,422


(1)For sites that have lease escalations tied to an index, future minimum
payments reflect the current index adjustments through December 31, 2020. 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 $269 million, as they are supported by a long-term line
of credit agreement expiring in December 2024. 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,
2020, total liabilities for the supplemental plans were $431 million.
At December 31, 2020, total liabilities for gross unrecognized tax benefits were
$1.5 billion.
On a recurring basis, the Company contracts with vendors and suppliers in the
normal course of business. These contracts may
include items related to construction projects, inventory, energy, marketing,
technology and other services. Generally, these items are shorter term in nature
and have no minimum payment requirements. They are funded from operating cash
flows and reflected in other areas of the Form 10-K (e.g., franchised margins,
Company-operated margins and selling, general and administrative expenses that
are reflected in the Consolidated Statement of Income and capital expenditures
that are reflected on the Consolidated Statement of Cash Flows).
The Company has guaranteed certain loans totaling approximately $95 million at
December 31, 2020. These guarantees are contingent commitments generally issued
by the Company to support borrowing arrangements of the System. At December 31,
2020, there was no carrying value for obligations under these guarantees in the
Consolidated Balance Sheet.
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. Refer to the Property and Equipment section in the Summary of
Significant Accounting Policies footnote on page 44 and the Property and
Equipment footnote on page 51 for additional information.
•Leasing Arrangements
The Lease right-of-use asset and Lease liability include an assumption on
renewal options that have not yet been exercised by the Company. The Company
also uses an incremental borrowing rate in calculating 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. Refer to the Leasing section in the Summary of Significant
Accounting Policies footnote on page 44 and the Leasing Arrangements footnote on
page 52 for additional information.

                                    McDonald's Corporation 2020 Annual Report 24
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•Long-lived assets impairment review
Long-lived assets (including goodwill) are reviewed for impairment annually. If
qualitative indicators of impairment are present, such as changes in global and
local business and economic conditions, operating costs, inflation, competition,
and consumer and demographic trends, the Company will use these and other
factors in estimating future cash flows when testing for the recoverability of
its long-lived assets. Estimates of future cash flows are highly subjective
judgements based on the Company's experience and knowledge of its operations. 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. Refer to
the Long-lived Assets and Goodwill sections in the Summary of Significant
Accounting Policies footnote on page 45 for additional information.
•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. Refer to the Contingencies footnote on page 53 for additional
information.
•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.
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.
Refer to the Income Taxes sections in the Summary of Significant Accounting
Policies footnote on page 46 and the Income Taxes footnote on page 53 for
additional information.

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 2020 Annual Report 25
--------------------------------------------------------------------------------

                             Other Key Information

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