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Dynamic quotes 
OFFON

MCDONALD'S CORPORATION

(MCD)
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McDonald : MCDONALDS CORP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

05/05/2021 | 03:57pm EDT

Overview

The Company franchises and operates McDonald's restaurants, which serve a
locally-relevant menu of quality food and beverages in 119 countries. Of the
39,160 restaurants at March 31, 2021, 36,484 were franchised, which is 93% of
McDonald's restaurants.
The Company's reporting segments are aligned with its strategic priorities and
reflect how management reviews and evaluates operating performance. Significant
reportable segments include the United States ("U.S.") and International
Operated Markets. In addition, throughout this report we present the
International Developmental Licensed Markets & Corporate segment, which includes
markets in over 80 countries, as well as Corporate activities.
McDonald's franchised restaurants are owned and operated under one of the
following structures - conventional franchise, developmental license or
affiliate. The optimal ownership structure for an individual restaurant, trading
area or market (country) is based on a variety of factors, including the
availability of individuals with entrepreneurial experience and financial
resources, as well as the local, legal and regulatory environment in critical
areas such as property ownership and franchising. The business relationship
between McDonald's and its independent franchisees is supported by adhering to
standards and policies and is of fundamental importance to overall performance
and to protecting the McDonald's brand.
The Company is primarily a franchisor and believes franchising is paramount to
delivering great-tasting food, locally relevant customer experiences and driving
profitability. Franchising enables an individual to be their own employer and
maintain control over all employment related matters, marketing and pricing
decisions, while also benefiting from the strength of McDonald's global brand,
operating system and financial resources.
Directly operating McDonald's restaurants contributes significantly to our
ability to act as a credible franchisor. One of the strengths of the franchising
model is that the expertise from operating Company-owned restaurants allows
McDonald's to improve the operations and success of all restaurants while
innovations from franchisees can be tested and, when viable, efficiently
implemented across relevant restaurants. Having Company-owned and operated
restaurants provides Company personnel with a venue for restaurant operations
training experience. In addition, in our Company-owned and operated restaurants,
and in collaboration with franchisees, we are able to further develop and refine
operating standards, marketing concepts and product and pricing strategies that
will ultimately benefit McDonald's restaurants.
The Company's revenues consist of sales by Company-operated restaurants and fees
from restaurants operated by franchisees. Fees vary by type of site, amount of
Company investment, if any, and local business conditions. These fees, along
with occupancy and operating rights, are stipulated in franchise/license
agreements that generally have 20-year terms. The Company's Other revenues are
comprised of technology fees paid by franchisees, revenues from brand licensing
arrangements, and third party revenues for the Dynamic Yield business.
Conventional Franchise
Under a conventional franchise arrangement, the Company generally owns or
secures a long-term lease on the land and building for the restaurant location
and the franchisee pays for equipment, signs, seating and décor. The Company
believes that ownership of real estate, combined with the co-investment by
franchisees, enables us to achieve restaurant performance levels that are among
the highest in the industry.
Franchisees are responsible for reinvesting capital in their businesses over
time. In addition, to accelerate implementation of certain initiatives, the
Company may co-invest with franchisees to fund improvements to their restaurants
or their operating systems. These investments, developed in collaboration with
franchisees, are designed to cater to consumer preferences, improve local
business performance, and increase the value of our brand through the
development of modernized, more attractive and higher revenue generating
restaurants.
The Company requires franchisees to meet rigorous standards and generally does
not work with passive investors. The business relationship with franchisees is
designed to facilitate consistency and high quality at all McDonald's
restaurants. Conventional franchisees contribute to the Company's revenue,
primarily through the payment of rent and royalties based upon a percent of
sales, with specified minimum rent payments, along with initial fees paid upon
the opening of a new restaurant or grant of a new franchise. 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 consumer sentiment and government regulations as a result of
COVID-19 may continue to have a negative impact on revenue in the near term.
Developmental License or Affiliate
Under a developmental license or affiliate arrangement, licensees are
responsible for operating and managing the business, providing capital
(including the real estate interest) and developing and opening new restaurants.
The Company generally does not invest any capital under a developmental license
or affiliate arrangement, and it receives a royalty based on a percent of sales,
and generally receives initial fees upon the opening of a new restaurant or
grant of a new license.
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While developmental license and affiliate arrangements are largely the same,
affiliate arrangements are used in a limited number of foreign markets
(primarily China and Japan) within the International Developmental Licensed
Markets segment and a limited number of individual restaurants within the
International Operated Markets segment, where the Company also has an equity
investment and records its share of net results in Equity in earnings of
unconsolidated affiliates.
As both royalty revenues and the Company's share of net results in equity
investments are based on sales results, the Company may continue to experience a
negative impact to revenues and Equity in earnings of unconsolidated affiliates
as a result of COVID-19 in the near term.

Strategic Direction
In 2020, the Company announced the Accelerating the Arches (the "Strategy")
growth 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 growth pillars that build on the Company's
competitive advantages.
Purpose, Mission, & Values
The Company embraces and prioritizes 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.
Our values underpin our success and are at the very heart of our Strategy. In
addition to the Company's financial performance, beginning in 2021, the Company
incorporated quantitative metrics into the Company's annual incentive
compensation plan. For 2021, executives will be measured on their ability to
champion our core values, improve diversity representation within leadership
roles for both women and historically underrepresented groups, and create a
strong culture of inclusion. In addition, in April, the Company defined a set of
Global Brand Standards designed to reinforce a culture of safety and inclusion.
All McDonald's restaurants across the globe, including Company-owned and
franchised locations, will be required to uphold these standards.
Growth Pillars
The 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 recognizes there is significant opportunity to
expand its chicken offerings by leveraging line extensions of customer
favorites, such as the new Crispy Chicken Sandwich that launched in the U.S. at
the end of February 2021. 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 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 program launch later in 2021. Across these top six
markets, digital sales exceeded $10 billion or nearly 20% of Systemwide sales in
2020.


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•Delivery: Over the past three years, the Company has expanded the number of
McDonald's restaurants offering delivery to over 30,000 or 75% of its
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. This
channel will remain of 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'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 builds on our inherent strengths by harnessing
our competitive advantages and investing in innovations that will enhance the
customer experience and deliver long-term growth.

First Quarter 2021 Financial Performance
Global comparable sales increased 7.5% for the quarter with all segments
reflecting positive results as we began to lap the significant impact of
COVID-19 on our global results beginning in March 2020. Guest counts remained
negative for all segments.
•U.S. comparable sales increased 13.6%. Comparable sales results benefited from
average check growth with double digit positive comparable sales across all
dayparts. The Company's strong national menu and marketing offerings, as well as
growth in delivery and digital platforms, contributed to the comparable sales
growth.
•International Operated Markets segment comparable sales increased 0.6%. Results
reflected strong positive comparable sales in the U.K., Australia and Canada,
partly offset by significantly negative comparable sales in France and Germany.
Comparable sales in many markets continued to be impacted by varying levels of
government imposed COVID-19 restrictions on restaurant operations.
•International Developmental Licensed Markets segment comparable sales increased
6.4%. Monthly comparable sales results improved sequentially throughout the
quarter. The strong quarterly comparable sales were primarily driven by China
and Japan.
In addition to the comparable sales results, the Company had the following
financial results in the quarter:
•Consolidated revenues increased 9% (5% in constant currencies)
•Systemwide sales increased 12% (8% in constant currencies)
•Consolidated operating income increased 35% (30% in constant currencies) and
included $135 million of strategic gains primarily related to the sale of
McDonald's Japan stock. Excluding these gains, operating income increased 27%
(22% in constant currencies).
•Diluted earnings per share increased 39% (35% in constant currencies) to $2.05.
Excluding $0.13 per share of strategic gains, diluted earnings per share was
$1.92 for the quarter, an increase of 31% (27% in constant currencies).

Management reviews and analyzes business results excluding the effect of foreign currency translation, as well as impairment and other strategic charges and gains, and bases incentive compensation plans on these results, because the Company believes this better represents underlying business trends.

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The Following Definitions Apply to these Terms as Used Throughout this Form
10-Q:
•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, as well as impairment and other
strategic charges and gains, 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). 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 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.
•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.

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CONSOLIDATED OPERATING RESULTS

                                                       Quarter Ended
Dollars in millions, except per share data             March 31, 2021
                                                                    Increase/
                                                         Amount     (Decrease)
Revenues
Sales by Company-operated restaurants               $ 2,161.5              7  %
Revenues from franchised restaurants                  2,877.4             10
Other revenues                                           85.7              6
Total revenues                                        5,124.6              9
Operating costs and expenses
Company-operated restaurant expenses                  1,817.6              4
Franchised restaurants-occupancy expenses               571.5              3
Other restaurant expenses                                67.2              3
Selling, general & administrative expenses
Depreciation and amortization                            76.0              3
Other                                                   490.4             

(5)

Other operating (income) expense, net                  (179.4)              

n/m

Total operating costs and expenses                    2,843.3             (6)
Operating income                                      2,281.3             35
Interest expense                                        300.0              7
Nonoperating (income) expense, net                       28.6               

n/m

Income before provision for income taxes              1,952.7             35
Provision for income taxes                              415.5             23
Net income                                          $ 1,537.2             39  %
Earnings per common share-basic                     $    2.06             38  %
Earnings per common share-diluted                   $    2.05             39  %


n/m Not meaningful
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Impact of Foreign Currency Translation
While changes in foreign currency exchange rates affect reported results,
McDonald's mitigates exposures, where practical, by purchasing goods and
services in local currencies, financing in local currencies and hedging certain
foreign-denominated cash flows. Results excluding the effect of foreign currency
translation (referred to as constant currency) are calculated by translating
current year results at prior year average exchange rates.
IMPACT OF FOREIGN CURRENCY TRANSLATION
Dollars in millions, except per share data
                                                                                             Currency
                                                                                          Translation
                                                                                      Benefit/ (Cost)
Quarters Ended March 31,                               2021              2020                    2021
Revenues                                        $ 5,124.6         $ 4,714.4                 $ 154.8
Company-operated margins                            343.9             273.0                    11.8
Franchised margins                                2,305.9           2,053.8                    80.9
Selling, general & administrative expenses          566.4             589.8                   (11.3)
Operating income                                  2,281.3           1,693.6                    82.1
Net income                                        1,537.2           1,106.9                    44.1
Earnings per share-diluted                      $    2.05         $    1.47                 $  0.06


•The impact of foreign currency translation on consolidated operating results
for the quarter primarily reflected the strengthening of the Euro and Australian
Dollar.
Net Income and Diluted Earnings per Share
For the quarter, net income increased 39% (35% in constant currencies) to
$1,537.2 million, and diluted earnings per share increased 39% (35% in constant
currencies) to $2.05. Foreign currency translation had a positive impact of
$0.06 on diluted earnings per share.
Results for the quarter reflected stronger operating performance in the U.S. due
to higher sales-driven restaurant margins.
Results for the quarter included $135 million of pre-tax strategic gains, or
$0.13 per share, primarily related to the sale of McDonald's Japan stock, which
reduced the Company's ownership by an additional 3%.

EARNINGS PER SHARE-DILUTED RECONCILIATION

                                                                                   Quarters Ended March 31,
                                                                                                                             Inc/ (Dec)
                                                                                                                              Excluding
                                                                                                                               Currency
                                                                   2021            2020           Inc/ (Dec)                Translation
GAAP earnings per share-diluted                         $       2.05          $ 1.47                39       %                 35       %
Strategic gains                                                (0.13)       

-

Non-GAAP earnings per share-diluted                     $       1.92          $ 1.47                31       %                 27       %


Excluding the strategic gains, for the quarter net income increased 30% (26% in
constant currencies) and diluted earnings per share increased 31% (27% in
constant currencies).
Diluted weighted average shares outstanding were relatively flat with the prior
year. In early March 2020, the Company suspended its share repurchase program.
The share repurchase activity in the current quarter relates to shares withheld
for taxes under the Company's equity compensation program. For the quarter,
these shares withheld for tax purposes totaled 0.1 million shares of stock for
$21.5 million.
In the first quarter, the Company paid a quarterly dividend of $1.29 per share,
or $962.3 million.

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 resurgences, throughout the quarter there have been
numerous instances of government restrictions on restaurant operating hours,
limited dine-in capacity and, in some cases, mandated dining room closures
particularly in the International Operated Markets. These restrictions are
impacting most of the Company's markets across Europe, particularly those with
fewer drive thru restaurant locations. The Company expects some restrictions in
various markets so long as the COVID-19 pandemic continues.
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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
March 31, 2021. 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 restrictions as a result
of COVID-19 may continue to have a negative impact on revenue in the near term.
The Company granted the deferral of cash collection for certain rent and
royalties earned from franchisees in substantially all markets in the first
quarter of 2020. While the Company deferred cash collection, revenue continued
to be recognized as sales were incurred. The extent of the deferrals in 2020
differed in length by market and nearly 95% of the deferrals were collected by
March 31, 2021.
REVENUES
Dollars in millions
                                                                                                                  Inc/ (Dec)
                                                                                                                   Excluding
                                                                                                                   Currency
Quarters Ended March 31,                                     2021               2020         Inc/ (Dec)           Translation
Company-operated sales
U.S.                                                     $   618.3          $   579.2                   7  %                  7  %
International Operated Markets                             1,379.7            1,305.3                   6                     3

International Developmental Licensed Markets & Corporate 163.5

    141.3                  16                     8
Total                                                    $ 2,161.5          $ 2,025.8                   7  %                  4  %
Franchised revenues
U.S.                                                     $ 1,420.5          $ 1,250.7                  14  %                 14  %
International Operated Markets                             1,144.4            1,074.0                   7                    (3)

International Developmental Licensed Markets & Corporate 312.5

     283.3                  10                     9
Total                                                    $ 2,877.4          $ 2,608.0                  10  %                  6  %

Total Company-operated sales and Franchised revenues U.S.

                                                     $ 2,038.8          $ 1,829.9                  11  %                 11  %
International Operated Markets                             2,524.1            2,379.3                   6                     0

International Developmental Licensed Markets & Corporate 476.0

    424.6                  12                     8
Total                                                    $ 5,038.9          $ 4,633.8                   9  %                  5  %

Total Other revenues                                     $    85.7          $    80.6                   6  %                  3  %

Total Revenues                                           $ 5,124.6          $ 4,714.4                   9  %                  5  %


•Total Company-operated sales and franchised revenues increased 9% (5% in
constant currencies) for the quarter. The increase reflected strong sales
performance in the U.S. and the International Developmental Licensed Markets
segment driven by China.
Revenues in the International Operated Markets segment were flat with the prior
year in constant currencies. Performance was mixed, with revenue growth impacted
by varying levels of government imposed COVID-19 restrictions on restaurant
operations. Results reflected an increase in revenues in the U.K. and Australia,
partly offset by decreases in France and Germany. In addition, revenues were
positively impacted by results in Russia, reflecting both strong comparable
sales and unit expansion.

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Comparable Sales
The following table presents the percent change in comparable sales for the
quarters ended March 31, 2021 and 2020:
                                                                                     Increase/(Decrease)
                                                                                   Quarters Ended March 31,
                                                                                                   2021            2020
U.S.                                                                                            13.6  %          0.1  %
International Operated Markets                                                                   0.6            (6.9)
International Developmental Licensed Markets & Corporate                                         6.4            (4.3)
Total                                                                                            7.5  %         (3.4) %



Systemwide Sales and Franchised Sales
The following table presents the percent change in Systemwide sales for the
quarter ended March 31, 2021:
SYSTEMWIDE SALES*
                                                                            

Quarter Ended March 31, 2021

                                                                                                      Inc/ (Dec)
                                                                                                       Excluding
                                                                                                        Currency
                                                                           Inc/ (Dec)                Translation
U.S.                                                                            13  %                      13  %
International Operated Markets                                                  10                          2
International Developmental Licensed Markets & Corporate                        11                          9
Total                                                                           12  %                       8  %

* 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
Dollars in millions
                                                                                                                              Inc/ (Dec)
                                                                                                                               Excluding
                                                                                                                                Currency
Quarters Ended March 31,                                   2021                2020                Inc/ (Dec)                Translation
U.S.                                              $ 10,089.8          $  8,873.7                        14  %                      14  %
International Operated Markets                       6,880.6             6,192.7                        11                          2
International Developmental Licensed
Markets & Corporate                                  6,048.0             5,447.0                        11                          9
Total                                             $ 23,018.4          $ 20,513.4                        12  %                       9  %

Ownership type
Conventional franchised                           $ 16,907.6          $ 14,986.4                        13  %                       9  %
Developmental licensed                               3,280.2             3,228.0                         2                          2
Foreign affiliated                                   2,830.6             2,299.0                        23                         18
Total                                             $ 23,018.4          $ 20,513.4                        12  %                       9  %



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Restaurant Margins
RESTAURANT MARGINS
Dollars in millions
                                                                                                                     Inc/ (Dec)
                                                                    Amount                                            Excluding
                                                                                                                       Currency
Quarters Ended March 31,                                                    2021          Inc/ (Dec)    2020        Translation
Franchised
U.S.                                                                $ 1,131.1          $    961.3                         18  %              18  %
International Operated Markets                                          868.6               815.3                          7                 (3)
International Developmental Licensed Markets &
Corporate                                                               306.2               277.2                         10                  9
Total                                                               $ 2,305.9          $  2,053.8                         12  %               8  %
Company-operated
U.S.                                                                $   125.1          $     80.5                         56  %              56  %
International Operated Markets                                          218.0               197.7                         10                  4
International Developmental Licensed Markets &
Corporate                                                                    n/m                 n/m                        n/m                n/m
Total                                                               $   343.9          $    273.0                         26  %              22  %
Total restaurant margins
U.S.                                                                $ 1,256.2          $  1,041.8                         21  %              21  %
International Operated Markets                                        1,086.6             1,013.0                          7                 (1)
International Developmental Licensed Markets &
Corporate                                                                    n/m                 n/m                        n/m                n/m
Total                                                               $ 2,649.8          $  2,326.8                         14  %              10  %


n/m Not meaningful
•Total restaurant margins increased $323.0 million or 14% (10% in constant
currencies) for the quarter. The increase reflected strong sales performance in
the U.S., partly offset by sales declines primarily in France and Germany in the
International Operated Markets segment as a result of government imposed
COVID-19 restrictions.
The increase in U.S. franchised margins was partly offset by higher depreciation
costs related to investments in restaurant modernization.
•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 $376.6 million of depreciation and amortization
expense for the quarter.
•Franchised margins represented over 85% of restaurant margin dollars for the
quarter.

Selling, General & Administrative Expenses
•Selling, general and administrative expenses decreased $23.4 million or 4% (6%
in constant currencies) for the quarter. The decrease reflected the benefit from
comparisons to prior year costs related to the cancellation of the 2020
Worldwide Owner/Operator Convention and contractual obligations as a result of a
reduction in scope of certain investments in restaurant technology and research
& development.
•Selling, general and administrative expenses as a percent of Systemwide sales
was 2.2% and 2.6% for the quarters ended 2021 and 2020, respectively.








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Other Operating (Income) Expense, Net
OTHER OPERATING (INCOME) EXPENSE, NET
Dollars in millions

                                                         Quarters Ended
                                                           March 31,
                                                           2021        2020
Gains on sales of restaurant businesses              $  (17.6)     $ (2.5)

Equity in earnings of unconsolidated affiliates (35.1) (14.7) Asset dispositions and other (income) expense, net 8.5 74.4 Impairment and other charges, net

                      (135.2)        1.3
Total                                                $ (179.4)     $ 58.5


•Gains on sales of restaurant businesses increased for the quarter primarily due
to a higher number of restaurant sales, mostly in the U.S.
•Equity in earnings of unconsolidated affiliates increased for the quarter
primarily due to improved performance in China.
•Asset dispositions and other expense, net decreased for the quarter primarily
due to higher reserves for bad debts in the prior year related to rent and
royalty deferrals.
•Impairment and other charges, net for the quarter reflected $128.6 million of
strategic gains related to the sale of McDonald's Japan stock, which reduced the
Company's ownership by an additional 3%. As of March 31, 2021, the Company owned
approximately 41% of McDonald's Japan.
Results for the first quarter 2020 reflected the write-off of impaired software
that was no longer being used of $14.4 million, mostly offset by $13.0 million
of income associated with the Company's sale of its business in the India Delhi
market.


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Operating Income
OPERATING INCOME
Dollars in millions
                                                                                                                         Inc/ (Dec)
                                                                                                                          Excluding
                                                                                                                           Currency
Quarters Ended March 31,                                 2021               2020               Inc/ (Dec)               Translation
U.S.                                             $ 1,125.5          $   892.4                       26  %                     26  %
International Operated Markets                       953.8              879.1                        8                        (1)
International Developmental Licensed Markets &
Corporate                                            202.0              (77.9)                        n/m                       n/m
Total                                            $ 2,281.3          $ 1,693.6                       35  %                     30  %

Operating margin                                      44.5  %            35.9  %
Non-GAAP operating Margin                             41.9  %                n/a


n/m Not meaningful
n/a Not applicable
•Operating Income: Operating income increased $587.7 million or 35% (30% in
constant currencies) for the quarter. Results included $135 million of strategic
gains primarily related to the sale of McDonald's Japan stock. Excluding the
strategic gains, operating income increased 27% (22% in constant currencies).
•U.S.: The operating income increase for the quarter was driven by strong sales
performance.
•International Operated Markets: The operating income decrease in constant
currencies was primarily due to sales declines in France and Germany, partly
offset by increases in Australia, the U.K. and Canada.
•International Developmental Licensed Markets & Corporate: Excluding the
strategic gains, results for the quarter reflected strong sales performance and
the benefit from comparisons to prior year G&A costs and reserves for bad debts.
•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, temporary
restaurant closures, which vary by segment, also impact the contribution of each
segment to the consolidated operating margin.
Excluding the strategic gains, the increase in operating margin percent for the
quarter was driven by stronger sales performance, higher other operating income
and lower G&A costs.

Interest Expense
•Interest expense increased 7% (5% in constant currencies) for the quarter,
primarily due to higher average interest rates and the impact of foreign
currency translation.

Nonoperating (Income) Expense, Net
NONOPERATING (INCOME) EXPENSE, NET
Dollars in millions
                                            Quarters Ended
                                              March 31,
                                             2021         2020
Interest income                         $  (1.8)     $  (5.4)
Foreign currency and hedging activity      20.3        (17.8)
Other expense, net                         10.1         (8.1)
Total                                   $  28.6      $ (31.3)




Income Taxes
•The effective income tax rate was 21.3% and 23.4% for the quarters ended 2021
and 2020, respectively.


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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.
Cash provided by operations totaled $2.1 billion and exceeded capital
expenditures by $1.8 billion for the first quarter 2021. Cash provided by
operations increased $578.0 million compared with the first quarter 2020,
primarily due to changes in working capital and improved operating results,
partly offset by higher income tax payments.
The Company granted the deferral of cash collections for certain rent and
royalties earned from franchisees in substantially all markets in the first
quarter of 2020. While the Company deferred cash collections, revenue continued
to be recognized as sales were incurred. The extent of the deferrals in 2020
differed in length by market and nearly 95% of the deferrals were collected by
March 31, 2021.
Cash used for investing activities totaled $244.6 million for the first quarter
2021, a decrease of $273.8 million compared with the first quarter 2020. The
decrease was primarily due to lower capital expenditures and current year
proceeds received from the sale of McDonald's Japan stock.
Cash used for financing activities totaled $2.3 billion for the first quarter
2021, which included $1.3 billion in debt repayments. Cash provided by financing
activities totaled $3.5 billion for the first quarter 2020 due to long-term debt
issuances of $5.5 billion, which were used to bolster our cash position in
anticipation of the adverse macroeconomic and business conditions associated
with COVID-19.
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Outlook for 2021
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 mid-teens, 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 2.4% of Systemwide sales. This is revised from our previously
provided guidance due to higher incentive-based compensation expense.
•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 over 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%.

Recent Accounting Pronouncements
Recent accounting pronouncements are discussed in Part I, Item 1, page 8 of this
Form 10-Q.
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Risk Factors and Cautionary Statement Regarding Forward-Looking Statements
The information in this report includes forward-looking statements about future
events and circumstances and their effects upon revenues, expenses and business
opportunities. Generally speaking, any statement in this report not based upon
historical fact is a forward-looking statement. Forward-looking statements can
also be identified by the use of forward-looking words, such as "could,"
"should," "continue," "estimate," "forecast," "intend," "look," "may," "will,"
"expect," "believe," "anticipate," "plan," "remain," "confident" and "commit" or
similar expressions. In particular, statements regarding our plans, strategies,
prospects and expectations regarding our business and industry are
forward-looking statements. They reflect our expectations, are not guarantees of
performance and speak only as of the date the statement is made. Except as
required by law, we do not undertake to update such forward-looking statements.
Our business results are subject to a variety of risks, including those that are
reflected in the following considerations and risks, as well as elsewhere in our
filings with the SEC. The considerations and risks that follow are organized
within relevant headings but may be relevant to other headings as well. If any
of these considerations or risks materialize, our expectations (or the
underlying assumptions) may change and our performance may be adversely
affected. You should not rely unduly on forward-looking statements.
GLOBAL PANDEMIC
The COVID-19 pandemic has adversely affected and is expected to continue to
adversely affect our financial results, condition and outlook.
Health epidemics or pandemics can adversely affect consumer spending and
confidence levels and supply availability and costs, as well as the local
operations in impacted markets, all of which can affect our financial results,
condition and outlook. Importantly, the global pandemic resulting from COVID-19
has disrupted global health, economic and market conditions, consumer behavior
and McDonald's global restaurant operations since early 2020. Local and national
governmental mandates or recommendations and public perceptions of the risks
associated with the COVID-19 pandemic have caused, and we expect will continue
to cause, consumer behavior to change and worsening or volatile economic
conditions, each of which could continue to adversely affect our business. In
addition, our global operations have been disrupted to varying degrees and may
continue to be disrupted given the unpredictability of the virus, its
resurgences and government responses thereto as well as potentially permanent
changes to the industry in which we operate. While we cannot predict the
duration or scope of the COVID-19 pandemic, the resurgence of infections or the
emergence of new variants in one or more markets, or the impact of vaccines
across the globe, the COVID-19 pandemic has negatively impacted our business and
is expected to continue to impact our financial results, condition and outlook
in a way that may be material.
The COVID-19 pandemic may also heighten other risks disclosed in these Risk
Factors, such as, but not limited to, those related to consumer behavior,
consumer perceptions of our brand, supply chain interruptions, commodity costs
and labor availability and cost.
STRATEGY AND BRAND
If we do not successfully evolve and execute against our business strategies,
including the Accelerating the Arches strategy, we may not be able to drive
business growth.
To drive Systemwide sales, operating income and free cash flow growth, our
business strategies must be effective in maintaining and strengthening customer
appeal and capturing additional market share. Whether these strategies are
successful depends mainly on our System's ability to:
•Capitalize on our global scale, iconic brand and local market presence to build
upon our historic strengths and competitive advantages, such as our marketing,
core menu items and digital, delivery and drive thru;
•Continue to innovate and differentiate the McDonald's experience, including by
preparing and serving our food in a way that balances value and convenience to
our customers with profitability;
•Accelerate digital innovation for a fast and easy customer experience;
•Continue to run great restaurants by driving efficiencies and expanding
capacities while continuing to prioritize health and safety;
•Identify and develop restaurant sites consistent with our plans for net growth
of Systemwide restaurants;
•Accelerate our existing strategies, including through growth opportunities and
potential acquisitions, investments and partnerships; and
•Evolve and adjust our business strategies in response to, among other things,
changing consumer behavior, operational restrictions and impacts to our results
of operations and liquidity, including as a result of the COVID-19 pandemic.
If we are delayed or unsuccessful in executing our strategies, or if our
strategies do not yield the desired results, our business, financial condition
and results of operations may suffer.
Failure to preserve the value and relevance of our brand could have an adverse
impact on our financial results.
To be successful in the future, we believe we must preserve, enhance and
leverage the value of our brand, including our corporate purpose, mission and
values. Brand value is based in part on consumer perceptions. Those perceptions
are affected by a variety of factors, including the nutritional content and
preparation of our food, the ingredients we use, the manner in which we source
commodities, and general business practices across the System, including the
people practices at McDonald's restaurants. Consumer acceptance of our offerings
is subject to change for a variety of reasons, and some changes can occur
rapidly. For example, nutritional, health, environmental
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and other scientific studies and conclusions, which constantly evolve and may
have contradictory implications, drive popular opinion, litigation and
regulation (including initiatives intended to drive consumer behavior) in ways
that affect the "informal eating out" ("IEO") segment or perceptions of our
brand, generally or relative to available alternatives. Consumer perceptions may
also be affected by adverse commentary from third parties, including through
social media or conventional media outlets, regarding the quick-service category
of the IEO segment, our brand, our culture, our operations, our suppliers, or
our franchisees. If we are unsuccessful in addressing adverse commentary or
perceptions, whether or not accurate, our brand and our financial results may
suffer.
Additionally, the ongoing relevance of our brand may depend on the success of
our sustainability initiatives, which require Systemwide coordination and
alignment. We are working to manage risks and costs to us, our franchisees and
our supply chain of any effects of climate change, greenhouse gases, and
diminishing energy and water resources. These risks include any increased public
focus, including by governmental and nongovernmental organizations, on these and
other environmental sustainability matters, such as packaging and waste, animal
health and welfare, deforestation and land use. These risks also include any
increased pressure to make commitments, set targets or establish additional
goals and take actions to meet them, which could expose us to market,
operational and execution costs or risks.
Our brand trust also depends on how we address social risks, including through
our increased focus on human capital initiatives and diversity, equity and
inclusion (DEI). We expect our DEI strategy to represent a step change in how we
view equitable opportunity across our System. Additionally, we have announced
Global Brand Standards that will apply to McDonald's operations worldwide,
including both Company-owned and franchised restaurants.
If we are not effective in addressing social and environmental responsibility
matters or achieving relevant social or sustainability goals, our brand trust
may suffer. In particular, business incidents or practices, whether actual or
perceived, that erode consumer trust or confidence, particularly if such
incidents or practices receive considerable publicity or result in litigation,
can significantly reduce brand value and have a negative impact on our financial
results.
If we do not anticipate and address evolving consumer preferences and
effectively execute our pricing, promotional and marketing plans, our business
could suffer.
Our continued success depends on our System's ability to build upon our historic
strengths and competitive advantages. In order to do so, we need to anticipate
and respond effectively to continuously shifting consumer demographics and
trends in food sourcing, food preparation, food offerings and consumer
preferences and behaviors in the IEO segment. If we are not able to predict, or
quickly and effectively respond to, these changes, or our competitors predict or
respond more effectively, our financial results could be adversely impacted.
Our ability to build upon our strengths and advantages also depends on the
impact of pricing, promotional and marketing plans across the System, and the
ability to adjust these plans to respond quickly and effectively to evolving
customer preferences, as well as shifting economic and competitive conditions.
Existing or future pricing strategies and marketing plans, as well as the value
proposition they represent, are expected to continue to be important components
of our business strategy; however, they may not be successful, or may not be as
successful as the efforts of our competitors, and could negatively impact sales,
guest counts and market share.
Additionally, we operate in a complex and costly advertising environment. Our
marketing and advertising programs may not be successful in reaching our
customers in the way we intend. Our success depends in part on whether the
allocation of our advertising and marketing resources across different channels,
including digital marketing, allows us to reach our customers effectively and
efficiently, and in ways that are meaningful to them. If the advertising and
marketing programs are not successful, or are not as successful as those of our
competitors, our sales, guest counts and market share could decrease.
Our investments to enhance the customer experience, including through
technology, may not generate the expected returns.
Our long-term business objectives depend on the successful Systemwide execution
of our strategies. We continue to build upon our investments in technology and
modernization, digital engagement and delivery, in order to transform the
customer experience. As part of these investments, we are placing renewed
emphasis on improving our service model and strengthening relationships with
customers, in part through digital channels and loyalty initiatives, mobile
ordering and payment systems, and enhancing our drive thru technologies, which
may not generate expected returns. We also continue to offer and refine our
delivery initiatives, including through growing awareness and trial. Utilizing a
third-party delivery service may not have the same level of profitability as a
non-delivery transaction, and may introduce additional food quality and customer
satisfaction risks. If these customer experience initiatives are not well
executed, or if we do not fully realize the intended benefits of these
significant investments, our business results may suffer.
We face intense competition in our markets, which could hurt our business.
We compete primarily in the IEO segment, which is highly competitive. We also
face sustained, intense competition from traditional, fast casual and other
competitors, which may include many non-traditional market participants such as
convenience stores, grocery stores and coffee shops as well as online retailers.
We expect our environment to continue to be highly competitive, and our results
in any particular reporting period may be impacted by a contracting IEO segment
or by new or continuing actions, product offerings or consolidation of our
competitors and third party partners, which may have a short- or long-term
impact on our results.
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We compete on the basis of product choice, quality, affordability, service and
location. In particular, we believe our ability to compete successfully in the
current market environment depends on our ability to improve existing products,
successfully develop and introduce new products, price our products
appropriately, deliver a relevant customer experience, manage the complexity of
our restaurant operations, manage our investments in technology and
modernization, and respond effectively to our competitors' actions or offerings
or to unforeseen disruptive actions. There can be no assurance these strategies
will be effective, and some strategies may be effective at improving some
metrics while adversely affecting other metrics, which could have the overall
effect of harming our business.
We may not be able to adequately protect our intellectual property or adequately
ensure that we are not infringing the intellectual property of others, which
could harm the value of the McDonald's brand and our business.
The success of our business depends on our continued ability to use our existing
trademarks and service marks in order to increase brand awareness and further
develop our branded products in both domestic and international markets. We rely
on a combination of trademarks, copyrights, service marks, trade secrets,
patents and other intellectual property rights to protect our brand and branded
products.
We have registered certain trademarks and have other trademark registrations
pending in the U.S. and certain foreign jurisdictions. The trademarks that we
currently use have not been registered in all of the countries outside of the
U.S. in which we do business or may do business in the future and may never be
registered in all of these countries. It may be costly and time consuming to
protect our intellectual property, and the steps we have taken to protect our
intellectual property in the U.S. and foreign countries may not be adequate. In
addition, the steps we have taken may not adequately ensure that we do not
infringe the intellectual property of others, and third parties may claim
infringement by us in the future. In particular, we may be involved in
intellectual property claims, including often aggressive or opportunistic
attempts to enforce patents used in information technology systems, which might
affect our operations and results. Any claim of infringement, whether or not it
has merit, could be time-consuming, result in costly litigation and harm our
business.
We cannot ensure that franchisees and other third parties who hold licenses to
our intellectual property will not take actions that hurt the value of our
intellectual property.
OPERATIONS
The global scope of our business subjects us to risks that could negatively
affect our business.
We encounter differing cultural, regulatory, geopolitical and economic
environments within and among the more than 100 countries where McDonald's
restaurants operate, and our ability to achieve our business objectives depends
on the System's success in these environments. Meeting customer expectations is
complicated by the risks inherent in our global operating environment, and our
global success is partially dependent on our System's ability to leverage
operating successes across markets and brand perceptions. Planned initiatives
may not have appeal across multiple markets with McDonald's customers and could
drive unanticipated changes in customer perceptions and guest counts.
Disruptions in operations or price volatility in a market can also result from
governmental actions, such as price, foreign exchange or changes in
trade-related tariffs or controls, sanctions and counter sanctions,
government-mandated closure of our, our franchisees' or our suppliers'
operations, and asset seizures. Trade policies, tariffs and other regulations
affecting trade between the U.S. and other countries could adversely affect our
business and operations. These and other government actions may impact our
results and could cause reputational or other harm. Our international success
depends in part on the effectiveness of our strategies and brand-building
initiatives to reduce our exposure to such governmental actions.
Additionally, challenges and uncertainties are associated with operating in
developing markets, which may entail a relatively higher risk of political
instability, economic volatility, crime, corruption and social and ethnic
unrest. Such challenges may be exacerbated in many cases by a lack of an
independent and experienced judiciary and uncertainties in how local law is
applied and enforced, including in areas most relevant to commercial
transactions and foreign investment. An inability to manage effectively the
risks associated with our international operations could have a material adverse
effect on our business and financial condition.
We may also face challenges and uncertainties in developed markets. For example,
as a result of the U.K.'s exit from the European Union, it is possible that
there will be increased regulatory complexities and uncertainty in European or
worldwide economic conditions. The decision created volatility in certain
foreign currency exchange rates that may or may not continue, and may result in
increased supply chain costs for items that are imported from other countries.
Any of these effects, and others we cannot anticipate, could adversely affect
our business, results of operations, financial condition and cash flows.
Supply chain interruptions may increase costs or reduce revenues.
We depend on the effectiveness of our supply chain management to assure reliable
and sufficient supply of quality products on favorable terms. Although many of
the products we sell are sourced from a wide variety of suppliers in countries
around the world, certain products have limited suppliers, which may increase
our reliance on those suppliers. Supply chain interruptions, including as a
result of shortages and transportation issues or unexpected increases in demand,
and price increases can adversely affect us as well as our suppliers and
franchisees, whose performance may have a significant impact on our results.
Such shortages or disruptions could be caused by factors beyond the control of
our suppliers, franchisees or us. If we experience interruptions in our System's
supply chain, or if contingency planning is not effective, our costs could
increase and it could limit the availability of products critical to our
System's operations.
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Our franchise business model presents a number of risks.
The Company's success as a heavily franchised business relies to a large degree
on the financial success and cooperation of our franchisees, including our
developmental licensees and affiliates. Our restaurant margins arise from two
sources: fees from franchised restaurants (e.g., rent and royalties based on a
percentage of sales) and, to a lesser degree, sales from Company-operated
restaurants. Our franchisees and developmental licensees manage their businesses
independently, and therefore are responsible for the day-to-day operation of
their restaurants. The revenues we realize from franchised restaurants are
largely dependent on the ability of our franchisees to grow their sales.
Business risks affecting our operations also affect our franchisees. In
particular, our franchisees have also been significantly impacted by the
COVID-19 pandemic and the volatility associated with the pandemic. If franchisee
sales trends worsen or volatility persists, our financial results will continue
to be negatively affected, which may be material.
Our success also relies on the willingness and ability of our independent
franchisees and affiliates to implement major initiatives, which may include
financial investment, and to remain aligned with us on operating,
value/promotional and capital-intensive reinvestment plans. The ability of
franchisees to contribute to the achievement of our plans is dependent in large
part on the availability to them of funding at reasonable interest rates and may
be negatively impacted by the financial markets in general, by the
creditworthiness of our franchisees or the Company or by banks' lending
practices. If our franchisees are unwilling or unable to invest in major
initiatives or are unable to obtain financing at commercially reasonable rates,
or at all, our future growth and results of operations could be adversely
affected.
Our operating performance could also be negatively affected if our franchisees
experience food safety or other operational problems or project an image
inconsistent with our brand and values, particularly if our contractual and
other rights and remedies are limited, costly to exercise or subjected to
litigation and potential delays. If franchisees do not successfully operate
restaurants in a manner consistent with our required standards, our brand's
image and reputation could be harmed, which in turn could hurt our business and
operating results.
Our ownership mix also affects our results and financial condition. The decision
to own restaurants or to operate under franchise or license agreements is driven
by many factors whose interrelationship is complex. The benefits of our more
heavily franchised structure depend on various factors including whether we have
effectively selected franchisees, licensees and/or affiliates that meet our
rigorous standards, whether we are able to successfully integrate them into our
structure and whether their performance and the resulting ownership mix supports
our brand and financial objectives.
Challenges with respect to labor, including availability and cost, could impact
our business and results of operations.
Our success depends in part on our System's ability to proactively recruit,
motivate and retain qualified individuals to work in McDonald's restaurants and
to maintain appropriately-staffed restaurants in an intensely competitive
environment. Increased costs associated with recruiting, motivating and
retaining qualified employees to work in our Company-operated restaurants, as
well as costs to promote awareness of the opportunities of working at McDonald's
restaurants, could have a negative impact on our Company-operated margins.
Similar concerns apply to our franchisees.
We are also impacted by the costs and other effects of compliance with U.S. and
international regulations affecting our workforce, which includes our staff and
employees working in our Company-operated restaurants. These regulations are
increasingly focused on employment issues, including wage and hour, healthcare,
immigration, retirement and other employee benefits and workplace practices.
Claims of non-compliance with these regulations could result in liability and
expense to us. Our potential exposure to reputational and other harm regarding
our workplace practices or conditions or those of our independent franchisees or
suppliers, including those giving rise to claims of harassment or discrimination
(or perceptions thereof) or workplace safety could have a negative impact on
consumer perceptions of us and our business. Additionally, economic action, such
as boycotts, protests, work stoppages or campaigns by labor organizations, could
adversely affect us (including our ability to recruit and retain talent) or the
franchisees and suppliers that are also part of the McDonald's System and whose
performance may have a material impact on our results.
Effective succession planning is important to our continued success.
Effective succession planning is important to our long-term success. Failure to
effectively identify, develop and retain key personnel, recruit high-quality
candidates and ensure smooth management and personnel transitions could disrupt
our business and adversely affect our results.
Food safety concerns may have an adverse effect on our business.
Our ability to increase sales and profits depends on our System's ability to
meet expectations for safe food and on our ability to manage the potential
impact on McDonald's of food-borne illnesses and food or product safety issues
that may arise in the future, including in the supply chain, restaurants or
delivery. Food safety is a top priority, and we dedicate substantial resources
to ensure that our customers enjoy safe food products, including as our menu and
service model evolve. However, food safety events, including instances of
food-borne illness, occur within the food industry and our System from time to
time and could occur in the future. Instances of food tampering, food
contamination or food-borne illness, whether actual or perceived, could
adversely affect our brand and reputation as well as our revenues and profits.
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If we do not effectively manage our real estate portfolio, our operating results
may be negatively impacted.
We have significant real estate operations, primarily in connection with our
restaurant business. We generally own or secure a long-term lease on the land
and building for conventional franchised and Company-operated restaurant sites.
We seek to identify and develop restaurant locations that offer convenience to
customers and long-term sales and profit potential. As we generally secure
long-term real estate interests for our restaurants, we have limited flexibility
to quickly alter our real estate portfolio. The competitive business landscape
continues to evolve in light of changing business trends; consumer preferences;
trade area demographics; consumer use of digital, delivery and drive thru; local
competitive positions and other economic factors. If our restaurants are not
located in desirable locations, or if we do not evolve in response to these
factors, it could adversely affect Systemwide sales and profitability.
Our real estate values and the costs associated with our real estate operations
are also impacted by a variety of other factors, including governmental
regulations; insurance; zoning, tax and eminent domain laws; interest rate
levels and the cost of financing. A significant change in real estate values, or
an increase in costs as a result of any of these factors, could adversely affect
our operating results.
Information technology system failures or interruptions, or breaches of network
security, may impact our operations or cause reputational harm.
We are increasingly reliant upon technology systems, such as point-of-sale,
technologies supporting McDonald's digital and delivery solutions, and
technologies that facilitate communication and collaboration with affiliated
entities, customers, employees, franchisees, suppliers, service providers or
other independent third parties to conduct our business, whether developed and
maintained by us or provided by third parties. Any failure or interruption of
these systems could significantly impact our franchisees' operations, or our
customers' experience and perceptions. Additionally, we provide certain
technology systems to businesses that are unaffiliated with the McDonald's
System and a failure, interruption or breach of these systems may cause harm to
those unaffiliated parties, which may result in liability to the Company or
reputational harm.
Despite the implementation of security measures, those technology systems could
become vulnerable to damage, disability or failures due to theft, fire, power
loss, telecommunications failure or other catastrophic events. Certain
technology systems may also become vulnerable, unreliable or inefficient in
cases where technology vendors limit or terminate product support and
maintenance. Our increasing reliance on third party systems also present the
risks faced by the third party's business, including the operational, security
and credit risks of those parties. If those systems were to fail or otherwise be
unavailable, or if business continuity or disaster recovery plans were not
effective, and we were unable to recover in a timely manner, we could experience
an interruption in our or our franchisees' operations.
Furthermore, security incidents or breaches have from time to time occurred and
may in the future occur involving our systems, the systems of the parties we
communicate or collaborate with (including franchisees), or those of third-party
providers. These may include such things as unauthorized access, phishing
attacks, account takeovers, denial of service, computer viruses, introduction of
malware or ransomware and other disruptive problems caused by hackers. These
technology systems contain personal, financial and other information that is
entrusted to us by our customers, our employees, our franchisees, our business
customers and other third parties, as well as financial, proprietary and other
confidential information related to our business. A security breach could result
in disruptions, shutdowns, theft or unauthorized disclosure of personal,
financial, proprietary or other confidential information. The actual or alleged
occurrence of any of these incidents could result in reputational damage,
adverse publicity, loss of consumer confidence, reduced sales and profits,
complications in executing our growth initiatives and regulatory and legal risk,
including criminal penalties or civil liabilities.
LEGAL AND REGULATORY
Increasing regulatory and legal complexity may adversely affect our business and
financial results.
Our regulatory and legal environment worldwide exposes us to complex compliance,
litigation and similar risks that could affect our operations and results in
material ways. Many of our markets are subject to increasing, conflicting and
highly prescriptive regulations involving, among other matters, restaurant
operations, product packaging, marketing, the nutritional and allergen content
and safety of our food and other products, labeling and other disclosure
practices. Compliance efforts with those regulations may be affected by ordinary
variations in food preparation among our own restaurants and the need to rely on
the accuracy and completeness of information from third-party suppliers. We also
are subjected to increased public focus, including by governmental and
nongovernmental organizations, regarding environmental and social initiatives.
Our success depends in part on our ability to manage the impact of regulations
and other initiatives that can affect our business plans and operations, and
have increased our costs of doing business and exposure to litigation,
governmental investigations or other proceedings.
We are also subject to legal proceedings that may adversely affect our business,
including class actions, administrative proceedings, government investigations
and proceedings, shareholder proceedings, employment and personal injury claims,
landlord/ tenant disputes, supplier-related disputes, and claims by current or
former franchisees. Regardless of whether claims against us are valid or whether
we are found to be liable, claims may be expensive to defend and may divert
management's attention away from operations.

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Litigation and regulatory action concerning our relationship with franchisees
and the legal distinction between our franchisees and us for employment law or
other purposes, if determined adversely, could increase costs, negatively impact
our business operations and the business prospects of our franchisees and
subject us to incremental liability for their actions. Similarly, although our
commercial relationships with our suppliers remain independent, there may be
attempts to challenge that independence, which, if determined adversely, could
also increase costs, negatively impact the business prospects of our suppliers,
and subject us to incremental liability for their actions.
Our results could also be affected by the following:
•The relative level of our defense costs, which vary from period to period
depending on the number, nature and procedural status of pending proceedings;
•The cost and other effects of settlements, judgments or consent decrees, which
may require us to make disclosures or take other actions that may affect
perceptions of our brand and products; and
•Adverse results of pending or future litigation, including litigation
challenging the composition and preparation of our products, or the
appropriateness or accuracy of our marketing or other communication practices.
A judgment significantly in excess of any applicable insurance coverage or third
party indemnity could materially adversely affect our financial condition or
results of operations. Further, adverse publicity resulting from claims may hurt
our business. If we are unable to effectively manage the risks associated with
our complex regulatory and legal environment, it could have a material adverse
effect on our business and financial condition.
Changes in tax laws and unanticipated tax liabilities could adversely affect the
taxes we pay and our profitability.
We are subject to income and other taxes in the U.S. and foreign jurisdictions,
and our operations, plans and results are affected by tax and other initiatives
around the world. In particular, we are affected by the impact of changes to tax
laws or policy or related authoritative interpretations. We are also impacted by
settlements of pending or any future adjustments proposed by taxing and
governmental authorities inside and outside of the U.S. in connection with our
tax audits, all of which will depend on their timing, nature and scope. Any
significant increases in income tax rates, changes in income tax laws or
unfavorable resolution of tax matters could have a material adverse impact on
our financial results.
Changes in accounting standards or the recognition of impairment or other
charges may adversely affect our future operations and results.
New accounting standards or changes in financial reporting requirements,
accounting principles or practices, including with respect to our critical
accounting estimates, could adversely affect our future results. We may also be
affected by the nature and timing of decisions about underperforming markets or
assets, including decisions that result in impairment or other charges that
reduce our earnings. In assessing the recoverability of our long-lived assets,
we consider changes in economic conditions and make assumptions regarding
estimated future cash flows and other factors. These estimates are highly
subjective and can be significantly impacted by many factors such as global and
local business and economic conditions, operating costs, inflation, competition,
consumer and demographic trends, and our restructuring activities. If our
estimates or underlying assumptions change in the future, we may be required to
record impairment charges. If we experience any such changes, they could have a
significant adverse effect on our reported results for the affected periods.
If we fail to comply with privacy and data collection laws, we could be subject
to legal proceedings and penalties, which could negatively affect our financial
results or brand perceptions.
We are subject to legal and compliance risks and associated liability related to
privacy and data collection, protection and management, as it relates to
information associated with our technology-related services and platforms made
available to business partners, customers, employees, franchisees or other third
parties. For example, the General Data Protection Regulation ("GDPR") requires
entities processing the personal data of individuals in the European Union to
meet certain requirements regarding the handling of that data. We are also
subject to U.S. federal and state and foreign laws and regulations in this area
such as the California Consumer Privacy Act ("CCPA"). These regulations have
been subject to frequent change, and there may be markets or jurisdictions that
propose or enact new or emerging data privacy requirements in the future.
Failure to comply with GDPR, CCPA or other privacy and data collection laws
could result in legal proceedings and substantial penalties, and materially
adversely impact our financial results or brand perceptions.

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MACROECONOMIC AND MARKET CONDITIONS
Unfavorable general economic conditions could adversely affect our business and
financial results.
Our results of operations are substantially affected by economic conditions,
which can vary significantly by market and can impact consumer disposable income
levels and spending habits. Economic conditions can also be impacted by a
variety of factors including hostilities, epidemics, pandemics and actions taken
by governments to manage national and international economic matters, whether
through austerity, stimulus measures or trade measures, and initiatives intended
to control wages, unemployment, credit availability, inflation, taxation and
other economic drivers. Sustained adverse economic conditions or periodic
adverse changes in economic conditions in our markets could pressure our
operating performance and our business continuity disruption planning, and our
business and financial results may suffer.
Our results of operations are also affected by fluctuations in currency exchange
rates and unfavorable currency fluctuations could adversely affect reported
earnings.
Changes in commodity and other operating costs could adversely affect our
results of operations.
The profitability of our Company-operated restaurants depends in part on our
ability to anticipate and react to changes in commodity costs, including food,
paper, supplies, fuel, utilities and distribution, and other operating costs,
including labor. Any volatility in certain commodity prices or fluctuation in
labor costs could adversely affect our operating results by impacting restaurant
profitability. The commodity markets for some of the ingredients we use, such as
beef and chicken, are particularly volatile due to factors such as seasonal
shifts, climate conditions, industry demand, international commodity markets,
food safety concerns, product recalls and government regulation, all of which
are beyond our control and, in many instances, unpredictable. We can only
partially address future price risk through hedging and other activities, and
therefore increases in commodity costs could have an adverse impact on our
profitability.
A decrease in our credit ratings or an increase in our funding costs could
adversely affect our profitability.
Our credit ratings may be negatively affected by our results of operations or
changes in our debt levels. As a result, our interest expense, the availability
of acceptable counterparties, our ability to obtain funding on favorable terms,
collateral requirements and our operating or financial flexibility could all be
negatively affected, especially if lenders impose new operating or financial
covenants.
Our operations may also be impacted by regulations affecting capital flows,
financial markets or financial institutions, which can limit our ability to
manage and deploy our liquidity or increase our funding costs. If any of these
events were to occur, they could have a material adverse effect on our business
and financial condition.
Trading volatility and the price of our common stock may be adversely affected
by many factors.
Many factors affect the volatility and price of our common stock in addition to
our operating results and prospects. The most important of these factors, some
of which are outside our control, are the following:
•The unpredictable nature of global economic and market conditions;
•Governmental action or inaction in light of key indicators of economic activity
or events that can significantly influence financial markets, particularly in
the U.S., which is the principal trading market for our common stock, and media
reports and commentary about economic, trade or other matters, even when the
matter in question does not directly relate to our business;
•Trading activity in our common stock or trading activity in derivative
instruments with respect to our common stock or debt securities, which can be
affected by market commentary (including commentary that may be unreliable or
incomplete); unauthorized disclosures about our performance, plans or
expectations about our business; our actual performance and creditworthiness;
investor confidence, driven in part by expectations about our performance;
actions by shareholders and others seeking to influence our business strategies;
portfolio transactions in our stock by significant shareholders; or trading
activity that results from the ordinary course rebalancing of stock indices in
which McDonald's may be included, such as the S&P 500 Index and the Dow Jones
Industrial Average;
•The impact of our stock repurchase program or dividend rate; and
•The impact on our results of corporate actions and market and third-party
perceptions and assessments of such actions, such as those we may take from time
to time as we implement our strategies, including through acquisitions, in light
of changing business, legal and tax considerations and evolve our corporate
structure.
Events such as severe weather conditions, natural disasters, hostilities and
social unrest, among others, can adversely affect our results and prospects.
Severe weather conditions, natural disasters, hostilities and social unrest,
climate change or terrorist activities (or expectations about them) can
adversely affect consumer spending and confidence levels and supply availability
and costs, as well as the local operations in impacted markets, all of which can
affect our results and prospects. Our receipt of proceeds under any insurance we
maintain with respect to some of these risks may be delayed or the proceeds may
be insufficient to cover our losses fully.
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