McDonald's - 2021-10K
McDonald's - 2021-10K
McDonald's - 2021-10K
McDONALD’S CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-2361282
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 North Carpenter Street, Chicago, Illinois 60607
(Zip code)
(Address of principal executive offices)
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.01 par value MCD New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2020 was $137,233,144,378.
The number of shares outstanding of the registrant’s common stock as of January 31, 2021 was 745,572,145.
All trademarks used herein are the property of their respective owners.
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" and "confident" or similar expressions. In particular, statements regarding our plans, strategies, prospects and expectations regarding our
business and industry, including those under "2020 Financial Performance", "Strategic Direction", "Outlook", or "Risk Factors" are forward-looking statements. They
reflect our expectations, are not guarantees of performance and speak only as of the date of this report. Except as required by law, we do not undertake to update
such forward-looking statements. Our business results are subject to a variety of risks, including those considerations or risks that are reflected in the "Risk Factors"
section, as well as elsewhere in our filings with the SEC. If any of these considerations or risks materialize, our expectations (or underlying assumptions) may change
or not be realized and our performance may be adversely affected. Therefore, you should not rely unduly on any forward-looking statements.
ABOUT McDONALD'S
McDonald’s Corporation, the registrant, together with its subsidiaries, is referred to herein as the "Company." The Company, its franchisees and suppliers, are
referred to herein as the "System."
BUSINESS SUMMARY
General
For the year ended December 31, 2020, there were no material changes to the Company's corporate structure or in its method of conducting business. 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 ("IOM"). In addition, throughout this report we present the International
Developmental Licensed Markets & Corporate segment ("IDL"), which includes markets in over 80 countries, as well as Corporate activities. Effective January 1,
2019, McDonald's changed its global operating structure. Refer to the Segment and Geographic Information section included on page 50 of this Form 10-K for
additional information.
Description of business
• General
The Company franchises and operates McDonald’s restaurants, which serve a locally-relevant menu of quality food and beverages in 119 countries. Of the 39,198
restaurants at year-end 2020, 36,521 were franchised, which is 93% of McDonald's restaurants.
McDonald’s franchised restaurants are owned and operated under one of the following structures - conventional franchise, developmental license or affiliate. The
optimal ownership structure for an individual restaurant, trading area or market (country) is based on a variety of factors, including the availability of individuals with
the entrepreneurial experience and financial resources, as well as the local legal and regulatory environment in critical areas such as property ownership and
franchising. 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 also 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.
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.
• Supply chain, food safety, and quality
The Company and its franchisees purchase food, packaging, equipment, and other goods from numerous independent suppliers. The Company has established and
enforces high food safety and quality standards. The Company has quality centers around the world designed to promote consistency of its high standards. The
quality management systems and processes not only involve ongoing product reviews, but also on-site and virtual supplier visits. A Food Safety Advisory Council,
composed of the Company’s internal food safety experts, as well as suppliers and outside academia, provides strategic global leadership for all aspects of food
safety. We have ongoing programs to educate employees about food safety practices, and our suppliers and restaurant operators participate in food safety trainings
where we share best practices on food safety and quality. In addition, the Company works closely with suppliers to encourage innovation and drive continuous
improvement. Leveraging scale, supply chain infrastructure and risk management strategies, the Company also collaborates with suppliers toward a goal of achieving
competitive, predictable food and paper costs over the long term.
Independently owned and operated distribution centers, approved by the Company, distribute products and supplies to McDonald’s restaurants. In addition,
restaurant personnel are trained in the proper storage, handling and preparation of food for customers.
As a result of the COVID-19 pandemic, the Company implemented a framework called Safety+ for enhanced hygiene and safety standards to help re-enforce
customer and crew safety. Additionally, the Company worked closely with suppliers on contingency planning for continuous supply so that we were able to continue to
operate safe restaurants, and we had no breaks in supply for food, packaging, toys or equipment globally throughout 2020 due to COVID-19.
• Products
McDonald’s restaurants offer a substantially uniform menu, although there are geographic variations to suit local consumer preferences and tastes.
McDonald’s menu includes hamburgers and cheeseburgers, Big Mac, Quarter Pounder with Cheese, Filet-O-Fish, several chicken sandwiches, Chicken
McNuggets, wraps, McDonald's Fries, salads, oatmeal, shakes, McFlurry desserts, sundaes, soft serve cones, bakery items, soft drinks, coffee, McCafé beverages
and other beverages.
McDonald’s restaurants in the U.S. and many international markets offer a full or limited breakfast menu. Breakfast offerings may include Egg McMuffin, Sausage
McMuffin with Egg, McGriddles, biscuit and bagel sandwiches, oatmeal, breakfast burritos and hotcakes.
In addition to these menu items, the restaurants sell a variety of other products during limited-time promotions.
Taste, quality, choice, value and nutrition are important to our customers, and we are continuously evolving our menu to meet our customers' needs, including
testing new products on an ongoing basis.
• Marketing
McDonald’s global brand is well known. Marketing, promotional and public relations activities are designed with customers in mind and are focused on promoting the
McDonald’s brand and differentiating the Company from its competitors. Marketing and promotional efforts focus on value, quality, food taste, menu choice, nutrition,
convenience and the customer experience.
• Intellectual property
The Company owns or is licensed to use valuable intellectual property including trademarks, service marks, patents, copyrights, trade secrets and other proprietary
information. The Company considers the "McDonald's" trademark and the Golden Arches Logo to be of material importance to its business. Depending on the
jurisdiction, trademarks and service marks generally are valid as long as they are used and/or registered. Patents, copyrights and licenses are of varying durations.
• Competition
McDonald’s restaurants compete with international, national, regional and local retailers of traditional, fast casual and other food service competitors. The Company
competes in the quick-service restaurant industry on the basis of price, convenience, service, experience, menu variety and product quality in a highly fragmented
global restaurant industry.
In measuring the Company’s competitive position, management reviews data compiled by Euromonitor International, a leading source of market data with respect
to the global restaurant industry. The Company measures itself using the informal eating out ("IEO") segment information, which is inclusive of the Company’s primary
competition of quick-service restaurants. The IEO segment includes the following restaurant categories defined by Euromonitor International: limited-service
restaurants (which combines quick-service eating establishments and 100% home delivery/takeaway providers), street stalls or kiosks, cafés, specialist coffee shops,
self-service cafeterias and juice/smoothie bars. The IEO segment excludes establishments that primarily serve alcohol and full-service restaurants other than
providers with limited table service.
Based on data from Euromonitor International, the global IEO segment was composed of approximately 9 million outlets and generated $1.2 trillion in annual
sales in 2019, the most recent year for which data is available. McDonald’s Systemwide 2019 restaurant business accounted for 0.4% of those outlets and 8.4% of
the sales.
Management also on occasion benchmarks McDonald’s against the entire restaurant industry, including the IEO segment defined above and all full-service
restaurants. Based on data from Euromonitor International, the restaurant industry was composed of approximately 20 million outlets and generated $2.6 trillion in
annual sales in 2019. McDonald’s Systemwide restaurant business accounted for 0.2% of those outlets and 3.8% of the sales.
• Environmental matters
The Company prioritizes progress across a range of environmental matters, and endeavors to improve our long-term sustainability and resiliency, which benefits
McDonald’s and the communities it serves. The Company monitors environment-related governmental initiatives and consumer preferences, and while we cannot
predict the precise nature of how these may evolve, the Company plans to respond in a timely and appropriate manner. Although any impact would likely vary by
geographic region and/or market, we believe that the adoption of new regulations may increase costs or operational complexity for the Company.
To guide our management of environmental matters, the Company has developed goals and performance indicators that are updated periodically on the
Company’s website, informed by relevant frameworks including the Sustainability Accounting Standards Board. These include goals and initiatives to reduce System
greenhouse gas emissions, eliminate deforestation from our global supply chain, responsibly source ingredients and packaging, and increase the availability of
recycling in restaurants to reduce waste, which the Company recognizes are increasingly important to customers. The Company also discloses the impacts of
environmental risks and opportunities in its annual CDP Climate Change, CDP Forests and CDP Water reports. In recent years, we have made significant progress
on our global commitments where we can make a difference at scale and drive industry-wide change.
Actual or perceived effects of changes in climate, weather patterns, water resources, forests or other natural resources, or packaging waste could have a direct
or indirect impact on the operations of the System in ways which we cannot fully predict at this time. The Company will continue to assess potential risks and
opportunities to analyze possible material impacts to the System as we believe taking action on environmental matters will drive business value in the long-term by
ensuring we are managing operational costs in our energy supply, improving the security of supply of our raw materials and reducing our exposure to increasing
environmental risks, regulation and taxes.
• Government regulations
The Company has global operations and is therefore subject to the laws of the United States and multiple foreign jurisdictions in which the Company operates and the
rules and regulations of various governing bodies, which may differ among jurisdictions. Throughout 2020, there were various instances around the world of COVID-
19 related government restrictions on operating hours, dine-in capacity and in some cases, mandated full restaurant closures. These government restrictions
negatively impacted the Company's revenues. The Company does not believe that compliance with other current government regulations will have a material effect
on the Company's capital expenditures, earnings or competitive position.
• Human capital management
Purpose, Mission, & Values
Through our size and scale, the Company is embracing and prioritizing our role and commitment to the communities in which we operate 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.
At McDonald's, we are guided by our five core values:
1. Serve – We put our customers and people first;
2. Inclusion – We open our doors to everyone;
3. Integrity – We do the right thing;
4. Community – We are good neighbors; and
5. Family – We get better together.
The Company believes that it is our people, all around the world, who set us apart and bring these values to life on a daily basis.
In addition, the Company’s people strategies aim to create an environment grounded in diversity, equity and inclusion; continually evaluate and evolve
compensation and benefits programs, while offering quality training and learning opportunities; and uphold a high standard of health and safety for employees and
customers alike.
We encourage you to read more information within McDonald’s “Purpose & Impact” section on the Company’s website that includes additional information
regarding our human capital management and other initiatives and is updated periodically as our strategies evolve. Our website is not deemed incorporated by
reference into this Annual Report on Form 10-K, but does provide background for reference.
Our People
The Company’s employees include those in our corporate and other offices as well as Company-owned and operated restaurant employees, totaling approximately
200,000 worldwide as of year-end 2020, of which over 75% are based outside of the U.S. In addition to Company employees, the over two million individuals who
work in our independent Franchisee restaurants globally are critical to the Company’s success, enabling us to drive long-term value creation and further our purpose
and mission. People are at the cornerstone of our business and an essential part of the McDonald's System – our owner-operators, our suppliers, and the Company.
Communities
The Company embraces our role and commitment to the communities we serve. Throughout the past year, McDonald’s rallied together with our suppliers,
franchisees and partners, not just to keep restaurants open and running safely, but also to support our communities and first responders as seen through our
donations of food and masks. Through the Company’s Youth Opportunity program, we aim to reduce barriers to employment for many at risk young people, through
pre-employment job readiness training, employment opportunities, and workplace development programs. We are also proud of the network of over 260 local
Chapters of Ronald McDonald House Charities (“RMHC”) spanning over 60 countries and regions that creates, finds and supports programs that directly improve the
health and well-being of children and their families. In support of RMHC, in 2020, the Company announced our five-year commitment to RMHC totaling $100 million.
The Company will continue to look for ways to utilize our size and scale to create an even bigger impact in the communities we serve in the future.
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.
2022 Outlook
The Company has provided a 2022 outlook that is detailed in its Form 10-Q for the quarter ended September 30, 2020.
Operating results
2020 2019 2018
Increase/
Dollars and shares in millions, except per share data Amount (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
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.
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:
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.
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
U.S.
International Operated Markets
International Developmental Licensed Markets & Corporate
The following tables present comparable sales and Systemwide sales increases/(decreases):
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%
RESTAURANT MARGINS
Restaurant margins
Increase/(decrease) excluding
Amount Increase/(decrease) currency 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 & Corporate 1,093 1,210 1,140 (10) 6 (8) 11
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 & Corporate n/m n/m n/m n/m n/m n/m n/m
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 & Corporate n/m n/m n/m n/m n/m n/m n/m
Total $ 9,677 $ 11,115 $ 10,786 (13 %) 3% (13 %) 6%
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.
Operating income
Increase/(decrease) excluding
Amount Increase/(decrease) currency 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's Japan 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.
U.S.
International Operated Markets
International Developmental Licensed Markets & Corporate*
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.
*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.
Foreign currency and hedging activity includes net gains or losses on certain hedges that reduce the exposure to variability on certain intercompany foreign currency
cash flow streams.
PROVISION FOR INCOME TAXES
In 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.
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’s Japan 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.
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.
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.
CAPITAL EXPENDITURES BY TYPE (In millions)
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.
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.
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's Japan 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.
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.
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
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.
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.
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.
• 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.
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 beginning in 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 we operate in. While we cannot predict the duration or scope of the COVID-19 pandemic,
the resurgence of infections 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 new 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 our general business practices. 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 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 any 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. These risks could expose us to market, operational
and execution costs or risks.
If we are not effective in addressing social and environmental responsibility matters or achieving relevant sustainability goals, consumer trust in our brand 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, marketing plans, and 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.
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.
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 Company granted the deferral of cash collection for certain rent and royalties earned from
franchisees in substantially all markets. If franchisee sales trends worsen, or do not improve at a sufficiently rapid rate, 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.
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 and delivery, 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. Our 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. An actual or alleged security breach could result in disruptions,
shutdowns, theft or unauthorized disclosure of personal, financial, proprietary or other confidential information. The 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. Our success depends in part on our ability to manage the impact of regulations 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.
Litigation and regulatory action concerning our relationship with franchisees and the legal distinction between our franchisees and us for employment law
purposes, if determined adversely, could increase costs, negatively impact 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.
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.
LEGAL PROCEEDINGS
The Company has pending a number of lawsuits that have been filed in various jurisdictions. These lawsuits cover a broad variety of allegations spanning the
Company’s entire business. The following is a brief description of the more significant types of claims and lawsuits. In addition, the Company is subject to various
national and local laws and regulations that impact various aspects of its business, as discussed below. While the Company does not believe that any such claims,
lawsuits or regulations will have a material adverse effect on its financial condition or results of operations, unfavorable rulings could occur. Were an unfavorable
ruling to occur, there exists the possibility of a material adverse impact on net income for the period in which the ruling occurs or for future periods.
▪ Franchising
A substantial number of McDonald’s restaurants are franchised to independent owner/operators and developmental licensees under contractual arrangements with
the Company. In the course of the franchise relationship, occasional disputes arise between the Company and its current or former franchisees relating to a broad
range of subjects including, but not limited to, quality, service and cleanliness issues, menu pricing, contentions regarding grants or terminations of franchises, alleged
discrimination, delinquent payments of rents and fees, and franchisee claims for additional franchises or renewals of franchises. Additionally, occasional disputes arise
between the Company and individuals who claim they should have been granted a McDonald’s franchise or who challenge the legal distinction between the Company
and its franchisees for employment law purposes.
▪ Suppliers
The Company and its affiliates and subsidiaries generally do not supply food, paper or related items to any McDonald’s restaurants. The Company relies upon
numerous independent suppliers, including service providers, that are required to meet and maintain the Company’s high standards and specifications. On occasion,
disputes arise between the Company and its suppliers (or former suppliers) which include, for example, compliance with product specifications and the Company’s
business relationship with suppliers. In addition, disputes occasionally arise on a number of issues between the Company and individuals or entities who claim that
they should be (or should have been) granted the opportunity to supply products or services to the Company’s restaurants.
▪ Employees
Hundreds of thousands of people are employed by the Company and in restaurants owned and operated by subsidiaries of the Company. In addition, thousands of
people from time to time seek employment in such restaurants. In the ordinary course of business, disputes arise regarding hiring, termination, promotion and pay
practices, including wage and hour disputes, alleged discrimination and compliance with labor and employment laws.
▪ Customers
Restaurants owned by subsidiaries of the Company regularly serve a broad segment of the public as do independent owner/operators and developmental licensees of
McDonald's restaurants. In so doing, disputes arise as to products, service, incidents, pricing, advertising, nutritional and other disclosures, as well as other matters
common to an extensive restaurant business such as that of the Company.
▪ Intellectual Property
The Company has registered trademarks and service marks, patents and copyrights, some of which are of material importance to the Company’s business. From time
to time, the Company may become involved in litigation to protect its intellectual property and defend against the alleged use of third party intellectual property.
▪ Government Regulations
Local and national governments have adopted laws and regulations involving various aspects of the restaurant business including, but not limited to, advertising,
franchising, health, safety, environment, competition, zoning, employment and taxation. The Company is occasionally involved in litigation or other proceedings
regarding these matters. The Company strives to comply with all applicable existing statutory and administrative rules and cannot predict the effect on its operations
from these matters or the issuance of additional requirements in the future.
PROPERTIES
The Company owns and leases real estate primarily in connection with its restaurant business. The Company identifies and develops sites that offer convenience to
customers and long-term sales and profit potential to the System. To assess potential, the Company analyzes traffic and walking patterns, census data and other
relevant data. The Company’s experience and access to advanced technology aid in evaluating this information. The Company generally owns or secures a long-term
lease on the land and building for conventional franchised and Company-operated restaurant sites, which facilitates long-term occupancy rights and helps control
related costs. Restaurant profitability for both the Company and franchisees is important; therefore, ongoing efforts are made to control average development costs
through construction and design efficiencies, standardization and by leveraging the Company’s global sourcing network.
In addition, the Company primarily leases real estate in connection with its corporate headquarters, field and other offices.
Additional information about the Company’s properties is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations on
pages 8 through 25 and in Financial Statements and Supplementary Data on pages 38 through 59 of this Form 10-K.
(1) Accounting Standards Codification ("ASC") 606, "Revenue Recognition - Revenue from Contracts with Customers."
(2) Accounting Standards Update ("ASU") 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory."
NATURE OF BUSINESS
The Company franchises and operates McDonald’s restaurants in the global restaurant industry. All restaurants are operated either by the Company or by
franchisees, including conventional franchisees under franchised arrangements, and developmental licensees or affiliates under license agreements.
The following table presents restaurant information by ownership type:
The results of operations of restaurant businesses purchased and sold in transactions with franchisees were not material either individually or in the aggregate to
the consolidated financial statements for periods prior to purchase and sale.
BASIS OF PRESENTATION
Prior to January 1, 2020, the Company presented both expenditures and receipts related to technology fees charged to franchisees and revenues related to certain
licensing arrangements within Other operating (income) expense, net, because these activities were not part of the Company’s ongoing major or central operations.
Effective January 1, 2020, the Company is presenting the revenues and expenses related to these activities within Other revenues and Other restaurant expenses,
respectively, in the Consolidated Statement of Income. The change in presentation was applied retrospectively to all periods presented and had no effect on
Operating income, Net income, or Earnings per share.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its subsidiaries. Investments in affiliates owned 50% or less (primarily McDonald’s
China and Japan) are accounted for by the equity method.
On an ongoing basis, the Company evaluates its business relationships such as those with franchisees, joint venture partners, developmental licensees,
suppliers and advertising cooperatives to identify potential variable interest entities. Generally, these businesses qualify for a scope exception under the variable
interest entity consolidation guidance. The Company has concluded that consolidation of any such entity is not appropriate for the periods presented.
ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
Generally, the functional currency of operations outside the U.S. is the respective local currency.
RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
Financial Instruments - Credit Losses
In June 2016, the Financial Accounting Standards Board ("FASB") issued guidance codified in ASC Topic 326, "Financial Instruments – Credit Losses:
Measurements of Credit Losses on Financial Instruments". The standard replaces the incurred loss impairment methodology in prior GAAP with a methodology that
instead reflects a current estimate of all expected credit losses on financial assets, including receivables. The guidance requires that an entity measure and recognize
expected credit losses at the time the asset is recorded, while considering a broader range of information to estimate credit losses including country specific
macroeconomic conditions that correlate with historical loss experience, delinquency trends and aging behavior of receivables, among others. The Company adopted
this guidance effective January 1, 2020, prospectively, and the adoption of this standard did not have a material impact on the consolidated financial statements. The
Company had an Allowance for bad debts of $55.3 million as of December 31, 2020 recorded as a reduction to Accounts and notes receivable on the Consolidated
Balance Sheet.
Recent Accounting Pronouncements Not Yet Adopted
Income Taxes
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which simplifies the
accounting for income taxes. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including applicable interim periods. The Company
anticipates the adoption of ASU 2019-12 will not have a material impact on its consolidated financial statements.
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting".
The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the
financial reporting burdens related to the expected market transition from the London Interbank Offered Rate and other interbank offered rates to alternative reference
rates. The guidance was effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into or
evaluated on or before December 31, 2022. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial
statements.
REVENUE RECOGNITION
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.
Sales by Company-operated restaurants are recognized on a cash basis at the time of the underlying sale and are presented net of sales tax and other sales-
related taxes. Royalty revenues are based on a percent of sales and recognized at the time the underlying sales occur. Rental income includes both minimum rent
payments, which are recognized straight-line over the franchise term (with the exception of rent concessions as a result of COVID-19 – refer to the Leasing section
that follows), and variable rent payments based on a percent of sales, which are recognized at the time the underlying sales occur. Initial fees are recognized as the
Company satisfies the performance obligation over the franchise term, which is generally 20 years.
The Company provides goods or services related to various technology platforms to certain franchisees that are distinct from the franchise agreement because
they do not require integration with other goods or services we provide. The Company has determined that it is the principal in these arrangements. Accordingly, the
related revenue is presented on a gross basis on the Consolidated Statement of Income. These revenues are recognized as the goods or services are transferred to
the franchisee, and related expenses are recognized as incurred. Brand licensing arrangement revenues are based on a percent of sales and are recognized at the
time the underlying sales occur. Dynamic Yield third party revenues are generated from providing software as a service solutions to customers and are recognized
over the applicable subscription period as the service is performed.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, with depreciation and amortization provided using the straight-line method over the following estimated useful lives:
buildings–up to 40 years; leasehold improvements–the lesser of useful lives of assets or lease terms, which generally include certain option periods; and equipment–3
to 12 years.
The Company periodically reviews these lives relative to physical factors, economic factors and industry trends. If there are changes in the planned use of
property and equipment, or if technological changes occur more rapidly than anticipated, the useful lives assigned to these assets may need to be shortened,
resulting in the accelerated recognition of depreciation and amortization expense or write-offs in future periods.
The Company may share in the cost of certain restaurant improvements with its franchisees, primarily in the U.S. Since McDonald's manages the project and
provides up front funding in these instances, during the project the Company estimates which costs are the responsibility of McDonald's and which are the
responsibility of the franchisee, and allocates the corresponding costs between Property and equipment and Accounts receivable. Upon the completion of the project,
the allocation of costs is finalized and may result in immaterial adjustments to the balances and associated depreciation expense.
Refer to the Property and Equipment footnote on page 51 for additional information.
LEASING
The Company is the lessee in a significant real estate portfolio, primarily through ground leases (the Company leases the land and generally owns the building) and
through improved leases (the Company leases the land and buildings). The Lease right-of-use asset and Lease liability reflect the present value of the Company’s
estimated future minimum lease payments over the lease term, which includes options that are reasonably assured of being exercised, discounted using the rate
implicit in each lease, if determinable, or a collateralized incremental borrowing rate considering the term of the lease and particular currency environment. Leases
with an initial term of 12 months or less, primarily related to leases of office equipment, are not included in the Lease right-or-use asset or Lease liability and continue
to be recognized in the Consolidated Statement of Income on a straight-line basis over the lease term.
The Company has elected not to separate non-lease components from lease components in our lessee portfolio. To the extent that occupancy costs, such as
site maintenance, are included in the asset and liability, the impact is immaterial and is generally limited to Company-owned restaurant locations. For franchised
locations, which represent the majority of the restaurant portfolio, the related occupancy costs including property taxes, insurance and site maintenance are generally
required to be paid by the franchisees as part of the franchise arrangement. In addition, the Company is the lessee under non-restaurant related leases such as office
buildings, vehicles and office equipment. These leases are not a material subset of the Company’s lease portfolio.
The FASB issued guidance for how companies may account for COVID-19 related rent concessions in the form of FASB staff and Board members’ remarks at the
April 8, 2020 public meeting and the FASB Staff Q&A issued on April 10, 2020.
The Company elected the practical expedient to account for COVID-19 related rent concessions as if they were part of the enforceable rights and obligations of
the parties under the existing lease contract. This was elected for the Company’s entire lessee and lessor portfolio for any rent deferrals or rent abatements. For the
lessee portfolio, the Company elected not to remeasure the Lease right- of-use asset and Lease liability if a rent deferral or a rent abatement is granted. Refer to the
Leasing Arrangements footnotes on page 52 of this Form 10-K for additional information on the Lease right-of-use asset and Lease liability.
The Company deferred collection of approximately $490 million of rental income on revenue that was recognized in 2020, and has collected over 80% of these
deferrals as of December 31, 2020. Rental income includes both minimum rent payments and variable rent payments based on a percent of sales.
Refer to the Franchise Arrangements footnote on page 51 of this Form 10-K for additional information on deferred collections of rental income as well as
royalties.
CAPITALIZED SOFTWARE
Capitalized software is stated at cost and amortized using the straight-line method over the estimated useful life of the software, which primarily ranges from 2 to 7
years. Customer facing software is typically amortized over a shorter useful life, while back office and Corporate systems may have a longer useful life. Capitalized
software less accumulated amortization is recorded within Miscellaneous other assets on the Consolidated Balance Sheet and was (in millions): 2020-$691.2; 2019-
$665.4; 2018-$609.7.
The Company reviews capitalized software for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable or if an indicator of impairment exists, which occurs more regularly throughout the year, such as when new software may be ready for its intended use.
Results for the year ended 2020 reflected write-offs of impaired software that were no longer being used of $26.3 million.
LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment annually in the fourth quarter and whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. For purposes of annually reviewing McDonald’s restaurant assets for potential impairment, assets are initially grouped together in
the U.S. at a field office level, and internationally, at a market level. The Company manages its restaurants as a group or portfolio with significant common costs and
promotional activities; as such, an individual restaurant’s cash flows are not generally independent of the cash flows of others in a market. If an indicator of
impairment exists for any grouping of assets, an estimate of undiscounted future cash flows produced by each individual restaurant within the asset grouping is
compared to its carrying value. If an individual restaurant is determined to be impaired, the loss is measured by the excess of the carrying amount of the restaurant
over its fair value as determined by an estimate of discounted future cash flows.
Losses on assets held for disposal are recognized when management and the Board of Directors, as required, have approved and committed to a plan to dispose
of the assets, the assets are available for disposal and the disposal is probable of occurring within 12 months, and the net sales proceeds are expected to be less
than its net book value, among other factors. Generally, such losses are related to restaurants that have closed and ceased operations as well as other assets that
meet the criteria to be considered “held for sale".
GOODWILL
Goodwill represents the excess of cost over the net tangible assets and identifiable intangible assets of acquired restaurants and other businesses. The Company's
goodwill primarily results from purchases of McDonald's restaurants from franchisees and ownership increases in subsidiaries or affiliates, and it is generally assigned
to the reporting unit (defined as each individual market) expected to benefit from the synergies of the combination. If a Company-operated restaurant is sold within 24
months of acquisition, the goodwill associated with the acquisition is written off in its entirety. If a restaurant is sold beyond 24 months from the acquisition, the amount
of goodwill written off is based on the relative fair value of the business sold compared to the reporting unit.
The following table presents the 2020 activity in goodwill by segment:
The Company conducts goodwill impairment testing in the fourth quarter of each year or whenever indicators of impairment exists. If an indicator of impairment
exists, the goodwill impairment test compares the fair value of a reporting unit, generally based on discounted future cash flows, with its carrying amount including
goodwill. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recorded for the difference. In the current period, the Company
performed a qualitative assessment and did not identify any indicators of impairment. Historically, goodwill impairment has not significantly impacted the consolidated
financial statements. Goodwill on the Consolidated Balance Sheet reflects accumulated impairment losses of $14.5 million and $113.9 million as of December 31,
2020 and 2019, respectively.
ADVERTISING COSTS
Advertising costs included in operating expenses of Company-operated restaurants primarily consist of contributions to advertising cooperatives based upon a percent
of sales, and were (in millions): 2020–$325.5; 2019–$365.8; 2018–$388.8. The decrease in 2020 is primarily due to lower sales in the International Operated Markets
as a result of COVID-19. Costs related to the Olympics sponsorship are included in the expenses for 2018.
In addition, significant advertising costs are incurred by conventional franchisees through contributions to advertising cooperatives in individual markets that are
also based upon a percent of sales. In the markets that make up the vast majority of the Systemwide advertising spend, including the U.S., McDonald’s is not the
primary beneficiary of these entities, and therefore has concluded that consolidation would not be appropriate, as the Company does not have the power through
voting or similar rights to direct the activities of the cooperatives that most significantly impact their economic performance.
Production costs for radio and television advertising are expensed when the commercials are initially aired. These production costs, primarily in the U.S., as well
as other marketing-related expenses are included in Selling, general & administrative expenses and were (in millions): 2020–$329.2; 2019–$81.5; 2018–$88.0. The
increase in 2020 is primarily due to 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, as well as 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.
INCOME TAXES
The following table presents the pre-tax amounts from derivative instruments affecting income and AOCI for the year ended December 31, 2020 and 2019,
respectively:
Gain (Loss)
Location of Gain or Loss Gain (Loss) Reclassified Gain (Loss)
Recognized in Income on Recognized in into Income from Recognized in
Derivative AOCI AOCI Income on Derivative
In millions 2020 2019 2020 2019 2020 2019
Foreign currency Nonoperating income/expense $ (76.6) $ 22.5 $ (2.1) $ 50.3
Interest rate Interest expense (90.8) (5.4) (1.3)
Cash flow hedges $ (167.4) $ 22.5 $ (7.5) $ 49.0
Foreign currency denominated debt Nonoperating income/expense $ (989.7) $ 317.3 $ 33.7
Foreign currency derivatives Nonoperating income/expense (12.3) 11.8
Foreign currency derivatives(1) Interest expense $ 14.7 $ 11.7
Net investment hedges $ (1,002.0) $ 329.1 $ 33.7 $ 14.7 $ 11.7
Foreign currency Nonoperating income/expense $ (29.0) $ 14.2
Equity Selling, general & administrative
expenses 44.4 71.8
Equity Other operating income/ expense, net (16.0)
Undesignated derivatives $ (0.6) $ 86.0
(1) The amount of gain (loss) recognized in income related to components excluded from effectiveness testing.
SHARE-BASED COMPENSATION
The Company has a share-based compensation plan, which authorizes the granting of various equity-based incentives including stock options and restricted stock
units (“RSUs”) to employees and nonemployee directors.
Share-based compensation, which includes the portion vesting of all share-based awards granted based on the grant date fair value, is generally amortized on a
straight-line basis over the vesting period in Selling, general & administrative expenses.
The fair value of each stock option granted is estimated on the date of grant using a closed-form pricing model. The pricing model requires assumptions, which
impact the assumed fair value, including the expected life of the stock option, the risk-free interest rate, expected volatility of the Company’s stock over the expected
life and the expected dividend yield. The Company uses historical data to determine these assumptions and if these assumptions change significantly for future
grants, share-based compensation expense will fluctuate in future years. In addition, the Company estimates forfeitures when determining the amount of
compensation costs to be recognized each period.
The fair value of each RSU granted is equal to the market price of the Company’s stock at date of grant. For performance-based RSUs, the Company includes a
relative Total Shareholder Return ("TSR") modifier to determine the number of shares earned at the end of the performance period. The fair value of performance-
based RSUs that include the TSR modifier is determined using a Monte Carlo valuation model.
Refer to the Share-based Compensation footnote on page 58 for additional information.
Total long-lived assets, primarily property and equipment and beginning in 2019, the Company's Lease right-of-use asset, were (in millions)–Consolidated: 2020–
$39,696.3; 2019–$38,291.5; U.S. based: 2020–$19,509.7; 2019–$19,487.6.
Depreciation and amortization expense for property and equipment was (in millions): 2020–$1,469.4; 2019–$1,392.2; 2018–$1,302.9.
Franchise Arrangements
Conventional franchise arrangements generally include a lease and a license and provide for payment of initial fees, as well as continuing rent and royalties to the
Company based upon a percent of sales with minimum rent payments. Minimum rent payments are based on the Company's underlying investment in owned sites
and parallel the Company’s underlying leases and escalations on properties that are leased. Under the franchise arrangement, franchisees are granted the right to
operate a restaurant using the McDonald’s System and, in most cases, the use of a restaurant facility, generally for a period of 20 years. At the end of the 20-year
franchise arrangement, the Company maintains control of the underlying real estate and building and can either enter into a new 20-year franchise arrangement with
the existing franchisee or a different franchisee, or close the restaurant. Franchisees generally pay related occupancy costs including property taxes, insurance and
site maintenance.
Developmental licensees and affiliates operating under license agreements pay a royalty to the Company based upon a percent of sales, and generally pay initial
fees.
McDonald’s has elected to allocate consideration in the franchise contract among lease and non-lease components in the same manner that it has historically:
rental income (lease), royalty income (non-lease) and initial fee income (non-lease). This disaggregation and presentation of revenue is based on the nature, amount,
timing and certainty of the revenue and cash flows. The allocation has been determined based on a mix of both observable and estimated standalone selling prices
(the price at which an entity would sell a promised good or service separately to a customer).
Revenues from franchised restaurants consisted of:
As rent and royalties are based upon a percent of sales, government regulations as a result of COVID-19 had a negative impact on revenues in 2020. The
Company granted the deferrals of cash collection for certain rent and royalties earned from franchisees in substantially all markets primarily in the first and second
quarters of 2020. In total, the Company deferred collection of approximately $1 billion, and has collected over 80% of these total deferrals as of December 31, 2020.
Future gross minimum rent payments due to the Company under existing conventional franchise arrangements are:
At December 31, 2020, net property and equipment under franchise arrangements totaled $20.0 billion (including land of $5.7 billion) after deducting accumulated
depreciation and amortization of $12.1 billion.
Rent expense included percent rents in excess of minimum rents (in millions) as follows–Company-operated restaurants: 2020–$
53.7; 2019–$74.4; 2018–$82.1.
Franchised restaurants: 2020–$136.5; 2019–$200.7; 2018–$200.8. These variable rent payments are based on a percent of sales and as sales have decreased in
2020 as a result of COVID-19, the related rent expense has also decreased as compared to the prior year.
The Lease right-of-use asset and Lease liability reflect the present value of the Company's estimated future minimum lease payments over the lease term, which
includes options that are reasonably assured of being exercised, discounted using a collateralized incremental borrowing rate. Typically, renewal options are
considered reasonably assured of being exercised if the associated asset lives of the building or leasehold improvements exceed that of the initial lease term, and the
sales performance of the restaurant remains strong. Therefore, the Lease right-of-use asset and Lease liability include an assumption on renewal options that have
not yet been exercised by the Company, and are not currently a future obligation.
The Company's lease portfolio includes both operating and finance leases, however as of December 31, 2020, the vast majority of the portfolio was classified as
operating leases.
As the rate implicit in each lease is not readily determinable, the Company uses an incremental borrowing rate to calculate the lease liability that represents an
estimate of the interest rate the Company would incur to borrow on a collateralized basis over the term of a lease within a particular currency environment. The
weighted average discount rate used for leases was 3.8% as of December 31, 2020 and 4.0% as of December 31, 2019.
As of December 31, 2020, maturities of lease liabilities for our lease portfolio were as follows:
In millions Total *
2021 $ 1,230.7
2022 1,197.7
2023 1,159.8
2024 1,124.0
2025 1,082.1
Thereafter 14,295.7
Total lease payments 20,090.0
Less: imputed interest (6,067.2)
Present value of lease liability $ 14,022.8
* Total lease payments include option periods that are reasonably assured of being exercised. See contractual cash outflows for leases within the Contractual
Obligations and Commitments section on page 24.
The increase in the present value of the lease liability since December 31, 2019 is approximately $0.6 billion. The lease liability will continue to be impacted by
new leases, lease modifications, lease terminations, reevaluation of lease terms, and foreign currency.
As of December 31, 2020 and December 31, 2019, the Weighted Average Lease Term remaining that is included in the maturities of lease liabilities was20
years.
Income Taxes
Income before provision for income taxes, classified by source of income, was as follows:
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” The goal of this update was to
improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The Company adopted this standard on January 1,
2018 using a modified retrospective method, resulting in a cumulative catch up adjustment of $57 million, the majority of which was recorded within Miscellaneous
other assets on the Consolidated Balance Sheet. The adoption of this standard did not have a material impact on the Consolidated Statements of Income and Cash
Flows.
The Tax Cuts and Jobs Act of 2017 ("Tax Act") was enacted in the U.S. in December 2017. The Tax Act reduced the U.S. federal corporate income tax rate to
21% from 35% and required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. In 2017, the
Company recorded provisional amounts for certain enactment-date effects of the Tax Act by applying the guidance in Staff Accounting Bulletin ("SAB") 118. In 2018,
the Company recorded adjustments to the provisional amounts and completed its accounting for all of the enactment-date income tax effects of the Tax Act.
SAB 118 measurement period
At December 31, 2017, the Company had not completed its accounting for all of the enactment-date income tax effects of the Tax Act under ASC 740,Income
Taxes, primarily for the one-time transition tax.
The one-time transition tax is based on the Company's total post-1986 earnings and profits ("E&P"), the tax on which it previously deferred from U.S. income
taxes under U.S. law. The Company recorded a provisional amount for its one-time transition tax liability of approximately $1.2 billion at December 31, 2017. Upon
further analysis of the Tax Act and notices and regulations issued and proposed by the U.S. Department of the Treasury and the IRS, the Company increased its
December 31, 2017 provisional amount by approximately $75 million during 2018. The Company has elected to pay its transition tax over the eight-year period
provided in the Tax Act.
The provision for income taxes, classified by the timing and location of payment, was as follows:
At December 31, 2020, the Company had net operating loss carryforwards of $392.5 million, of which $228.2 million has an indefinite carryforward. The
remainder will expire at various dates from 2021 to 2039.
The Company’s effective income tax rates are higher than the U.S. statutory tax rate of 21% primarily due to the impact of state income taxes and foreign income
that is subject to local statutory country tax rates that are above the 21% U.S. statutory tax rate.
The statutory U.S. federal income tax rate reconciles to the effective income tax rates as follows:
As of December 31, 2020, there was $121.5 million of total unrecognized compensation cost related to nonvested share-based compensation that is expected to
be recognized over a weighted-average period of 2.0 years.
STOCK OPTIONS
Stock options to purchase common stock are granted with an exercise price equal to the closing market price of the Company’s stock on the date of grant.
Substantially all of the options become exercisable in four equal installments, beginning a year from the date of the grant, and generally expire 10 years from the grant
date.
The following table presents the weighted-average assumptions used in the option pricing model for the 2020, 2019 and 2018 stock option grants. The expected
life of the options represents the period of time the options are expected to be outstanding and is based on historical trends. Expected stock price volatility is generally
based on the historical volatility of the Company’s stock for a period approximating the expected life. The expected dividend yield is based on the Company’s most
recent annual dividend rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant with a term equal to the expected life.
Weighted-average assumptions
Intrinsic value for stock options is defined as the difference between the current market value of the Company’s stock and the exercise price. During 2020, 2019
and 2018, the total intrinsic value of stock options exercised was $290.4 million, $356.1 million and $364.4 million, respectively. Cash received from stock options
exercised during 2020 was $295.5 million and the tax benefit realized from stock options exercised totaled $59.3 million. The Company uses treasury shares
purchased under the Company’s share repurchase program to satisfy share-based exercises.
A summary of the status of the Company’s stock option grants as of December 31, 2020, 2019 and 2018, and changes during the years then ended, is presented
in the following table:
The total fair value of RSUs vested during 2020, 2019 and 2018 was $119.4 million, $111.0 million and $117.9 million, respectively. The tax benefit realized from
RSUs vested during 2020 was $23.6 million.
SUBSEQUENT EVENTS
The Company evaluated subsequent events through the date the financial statements were issued and filed with the SEC. There were no subsequent events that
required recognition or disclosure.
The financial statements were prepared by management, which is responsible for their integrity and objectivity and for establishing and maintaining adequate internal
controls over financial reporting.
The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting
includes those policies and procedures that:
I. pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
II. provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management
and directors of the Company; and
III. provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could
have a material effect on the financial statements.
There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls.
Accordingly, even effective internal controls can provide only reasonable assurances with respect to financial statement preparation. Further, because of changes in
conditions, the effectiveness of internal controls may vary over time.
Management assessed the design and effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated
Framework (2013 Framework).
Based on management’s assessment using those criteria, as of December 31, 2020, management believes that the Company’s internal control over financial
reporting is effective.
Ernst & Young, LLP, independent registered public accounting firm, has audited the financial statements of the Company for the fiscal years ended December 31,
2020, 2019 and 2018 and the Company’s internal control over financial reporting as of December 31, 2020. Their reports are presented on the following pages. The
independent registered public accountants and internal auditors advise management of the results of their audits, and make recommendations to improve the system
of internal controls. Management evaluates the audit recommendations and takes appropriate action.
McDONALD’S CORPORATION
February 23, 2021
We have audited the accompanying consolidated balance sheets of McDonald’s Corporation (the Company) as of December 31, 2020 and 2019, and the related
consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2020,
and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control
over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) and our report dated February 23, 2021 expressed an unqualified opinion thereon.
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements
based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that
our audits provide a reasonable basis for our opinion.
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be
communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially
challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the
account or disclosure to which it relates.
Unrecognized Tax Benefits
Description of the Matter As described in the income taxes footnote to the consolidated financial statements, the Company’s unrecognized tax benefits, which
includes transfer pricing matters, totaled $1,479.2 million at December 31, 2020. The Company, like other multi-national companies, is
regularly audited by federal, state and foreign tax authorities, and tax assessments may arise several years after tax returns have been
filed. Accordingly, tax liabilities are recorded when, in management’s judgment, a tax position does not meet the more likely than not
threshold for recognition. For tax positions that meet the more likely than not threshold, a tax liability may still be recorded depending on
management’s assessment of how the tax position will ultimately be settled.
Auditing the measurement of unrecognized tax benefits related to transfer pricing used in intercompany transactions was challenging
because the measurement is based on judgmental interpretations of complex tax laws and legal rulings and because the pricing of the
intercompany transactions is based on studies that may produce a range of outcomes (e.g., the price that would be charged in an arm’s-
length transaction).
How We Addressed the We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s process to
Matter in Our Audit assess the technical merits and measure unrecognized tax benefits related to transfer pricing used in intercompany transactions. For
example, we tested management’s review of the unrecognized tax benefit calculations, which included evaluation of the comparable
transactions used to determine the ranges of outcomes, pricing conclusions reached in management’s transfer pricing studies, and the
assessment of other third-party information.
With the assistance of our income tax professionals, we performed audit procedures that included, among others, evaluating the technical
merits of the Company’s position and testing the measurement of unrecognized tax benefits related to transfer pricing. For example, we
assessed the inputs utilized and the pricing conclusions reached in the transfer pricing studies executed by management, and compared
the methods used to alternative methods and industry benchmarks. We also reviewed the Company’s communications with the relevant tax
authorities and any advice obtained by the Company from third-party advisors. In addition, we used our knowledge of historical settlement
activity, income tax laws, and other market information to evaluate the technical merits of the positions and the measurement of
unrecognized tax benefits related to transfer pricing.
We have audited McDonald’s Corporation’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion,
McDonald’s Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance
sheets of McDonald’s Corporation as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, shareholders’
equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and our report dated February 23, 2021 expressed
an unqualified opinion thereon.
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express
an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
DISCLOSURE CONTROLS
An evaluation was conducted under the supervision and with the participation of the Company’s management, including the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as that term is defined in Rules 13a-
15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of December 31, 2020. Based on that evaluation, the CEO and CFO
concluded that the Company’s disclosure controls and procedures were effective as of such date to provide reasonable assurances that information required to be
disclosed by the Company in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms, and is accumulated and communicated to the Company's management, including the CEO and CFO, as appropriate to allow timely
decisions regarding required disclosure.
MANAGEMENT’S REPORT
Management’s Report and the Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting are set forth in the consolidated
financial statements.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The following table summarizes information about the Company’s equity compensation plans as of December 31, 2020. All outstanding awards relate to the
Company’s common stock. Shares issued under all of the following plans may be from the Company’s treasury, newly issued or both.
Equity compensation plan information
Number of securities
Number of securities remaining available for
to be issued upon Weighted-average future issuance under
exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
Plan category (a) (b) (c)
Equity compensation plans approved by security holders 14,672,813 (1) $ 142.81 24,630,227
Equity compensation plans not approved by security holders — — —
Total 14,672,813 $ 142.81 24,630,227
(1) Includes 802,380 stock options granted under the McDonald’s Corporation 2001 Omnibus Stock Ownership Plan and 12,545,811 stock options and 1,324,622 restricted stock units granted under
the McDonald's Corporation Amended and Restated 2012 Omnibus Stock Ownership Plan.
Additional matters are incorporated herein by reference from the Company’s definitive proxy statement, which will be filed no later than 120 days after
December 31, 2020.
b. Exhibits
The exhibits listed in the accompanying index are filed as part of this report.
* Other instruments defining the rights of holders of long-term debt of the registrant, and all of its subsidiaries for which consolidated financial statements are
required to be filed and which are not required to be registered with the Commission, are not included herein as the securities authorized under these
instruments, individually, do not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. An agreement to furnish a copy of
any such instruments to the Commission upon request has been filed with the Commission.
(a) - Incorporated herein by reference from the Company's definitive proxy statement, which will be filed no later than 120 days after December 31, 2020.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in their capacities indicated below on the 23rd day of February, 2021: