UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
10-K
x☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20162019
or
¨☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to     
Commission File Number 1-5231
archyellowlogoa07.jpg
Commission File Number 1-5231
McDONALD’S CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
36-2361282
(State or other jurisdiction of
incorporation or organization)
 
36-2361282
(I.R.S. Employer
Identification No.)
  
One McDonald’s Plaza
Oak Brook, 110 North Carpenter Street,
Chicago,Illinois
60607
(Address of principal executive offices)
60523
(Zip code)
Registrant’s telephone number, including area code: (630) 623-3000
  
(Zip code)

Registrant’s telephone number, including area code: (630)623-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)
Name of each exchange
on which registered
Common stock, $.01Stock, $0.01 par valueMCDNew York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None(Title of class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yesx☒  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 ¨☐Nox☒
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.  Yesx☒  No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yesx☒  No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filerx☒         Accelerated filer  ¨
☐Non-accelerated filer  ¨  (do not check if a smaller reporting company)        ☐
Smaller reporting company  ¨☐Emerging growth company  ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨☐  No x☒
The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 201628, 2019 was $102,676,655,213$157,661,991,693.
The number of shares outstanding of the registrant’s common stock as of January 31, 20172020 was 818,993,182.745,446,655.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates information by reference from the registrant’s 20172020 definitive proxy statement, which will be filed no later than 120 days after December 31, 2016.2019.
 



McDONALD’S CORPORATION
TABLE OF CONTENTS

ORGANIZATION OF OUR ANNUAL REPORT ON FORM 10-K
The order and presentation of content in our Annual Report on Form 10-K ("Form 10-K") differs from the traditional U.S. Securities and Exchange Commission ("SEC") Form 10-K format. We believe that our format improves readability and better presents how we organize and manage our business. See "Form 10-K Cross-Reference Index" for a cross-reference index to the traditional SEC Form 10-K format.
INDEX

Page reference
  
Part I.
Item 1
Business
1
Item 1A
Risk Factors and Cautionary Statement Regarding Forward-Looking Statements
3
 Item 1B
About McDonald's
Unresolved Staff Comments3
    Business Summary
83
 Item 2
Management's Discussion and Analysis of Financial Condition and Results of Operations
Properties
86
    Item 3Management's View of the Business
Legal Proceedings
86
    Item 4Financial Performance and Strategic Direction
Mine Safety Disclosures
86
    Additional Item
Executive Officers of the Registrant
Outlook
9
    Consolidated Operating Results
10
    Cash Flows
16
    Financial Position and Capital Resources
17
    Other Matters
20
  
Part II.Other Key Information
22
    Item 5Selected Financial Data
22
Market for Registrant’sRegistrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
1024
    Item 6Risk Factors
Selected Financial Data
1225
    Item 7Legal Proceedings
Management’s Discussion and Analysis of Financial Condition and Results of Operations
1331
    Item 7AProperties
Quantitative and Qualitative Disclosures About Market Risk
2831
    Item 8Information About our Executive Officers
Financial Statements and Supplementary Data
2832
    Item 9Availability of Company Information
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
51
Item 9A
Controls and Procedures
51
Item 9B
Other Information
5133
  
Financial Statements and Supplementary Data
33
  
Part III.Controls and Procedures
59
  
Item 10
Directors, Executive Officers and Corporate Governance
51
Item 11
Executive Compensation
51
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
51
Item 13
Certain Relationships and Related Transactions, and Director Independence
52
Item 14
Principal Accounting Fees and Services
52
Part IV.
Item 15
Exhibits and Financial Statement Schedules
52
Item 16
Form 10-K Summary
5459
  
SignaturesExhibits and Financial Statement Schedules
5560
  
ExhibitsForm 10-K Cross-Reference Index
62
 
Signatures
63
All trademarks used herein are the property of their respective owners.



PART IFORWARD-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” and “plan” or similar expressions. In particular, statements regarding our plans, strategies, prospects and expectations regarding our business and industry, including those under "Financial Performance and 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. Therefore, you should not rely unduly on any 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 may change or not be realized and our performance may be adversely affected.
ITEM 1. BusinessABOUT McDONALD'S
 
McDonald’s Corporation, the registrant, together with its sub-sidiaries,subsidiaries, is referred to herein as the “Company.”"Company." The Company, its franchisees and suppliers, are referred to herein as the "System."
BUSINESS SUMMARY
a. General
During 2016, there were no material changesEffective January 1, 2019, McDonald's operates under an organizational structure designed to support the Company's corporate structure or inefforts toward efficiently driving growth through the Velocity Growth Plan (the "Plan"). The Company’s reporting segments are aligned with its method of conducting business. The business is structured with segments that combine markets with similar characteristicsstrategic priorities and opportunities for growth.reflect how management reviews and evaluates operating performance. Significant reportable segments include the United States ("U.S."), and International Lead Markets and High GrowthOperated Markets. In addition, throughout this report we present the FoundationalInternational Developmental Licensed Markets & Corporate segment, which includes markets in over 80 countries, as well as Corporate activities.
b. Financial information about segments
Segment data for the years ended December 31, 2016, 2015, and 2014 are included in Part II, Item 8, page 44 of this Form 10-K.
c. Narrative descriptionDescription of business
▪General
General
The Company operatesfranchises and franchisesoperates McDonald’s restaurants, which serve a locally-relevant menu of quality food and beverages soldin 119 countries. Of the 38,695 restaurants at various price points in more than 100 countries. McDonald’s global systemyear-end 2019, 36,059 were franchised, which is comprised93% of both Company-owned and franchisedMcDonald'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. We continually review our mix of Company-owned and franchised restaurants to help optimize overall performance, with a goal to be approximately 95% franchised over the long term. 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. This business relationship is supported by an agreement that requires adherence to standards and policies essential to protecting our brand.
The Company is primarily a franchisor with approximately 85% of McDonald's restaurants currently owned and operated by independent franchisees.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 thisthe franchising model is that the expertise gained 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.
Directly operating McDonald’s restaurants contributes significantly to our ability to act as a credible franchisor. 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 relevant 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.
Conventional Franchise
Under a conventional franchise arrangement, the Company generally owns the land and building 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 frequently co-investsmay co-invest with franchisees to fund improvements to their restaurants or their operating systems. These investments, developed in collaboration with input from McDonald’s with the aim of improvingfranchisees, 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’s typical franchise term is 20 years.
McDonald's Corporation 2019 Annual Report 3

The Company requires franchisees to meet rigorous standards and generally does not work with passive investors. The business relationship with franchisees is designed to assurefacilitate 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. This structure enables McDonald’s to generate significant and predictable levels of cash flow.
Developmental License or Affiliate
Under a developmental license or affiliate arrangement, licensees provideare responsible for operating and managing the business, providing capital for the entire business, including(including the real estate interest.interest) and developing and opening new restaurants. The Company generally does not invest any capital under a developmental license arrangement. The Companyor affiliate arrangement, and it receives a royalty based uponon a percent of sales, as well asand generally receives initial fees upon the opening of a new restaurant or grant of a new license. We use the
While developmental license ownership structureand affiliate arrangements are largely the same, affiliate arrangements are used in over 80 countries with a totallimited number of approximately 6,300 restaurants. The largest developmental licensee operates approximately 2,200 restaurants in 19 countries in Latin America and the Caribbean. In early 2017, the Company announced the sale of its businesses inforeign markets (primarily China and Hong Kong, including more than 1,750 company-operated restaurants, to a developmental licensee. Under the terms of the agreement, the Company will retain a 20% ownership in the business.The Company expects to complete the sale and licensing transaction mid-year 2017.
Finally,Japan) where the Company also has an equity investment in a limited number of foreign affiliated markets, referred to as “affiliates.” In these markets, the Company receives a royalty based on a percent of sales and records its share of net results in Equity in earnings of unconsolidated affiliates. The largest of these affiliates is Japan, where there are nearly 3,000 restaurants.
▪Supply Chain and Quality Assurance
Supply chain, food safety, and quality assurance
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 and product specifications.standards. The Company has quality centers around the world designed to ensure thatpromote consistency of its high standards are consistently met.standards. The quality assurance process not only involves ongoing product reviews, but also on-site supplier visits. A Food Safety Advisory Council, composed of the Company’s technical,internal food safety and supply chain specialists,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 assure best practices and drive continuous improvement. Leveraging scale, supply chain infrastructure and risk management strategies, the Company also collaborates with suppliers toward a goal of

McDonald's Corporation 2016 Annual Report 1

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 products.food for customers.
▪Products
Products
McDonald’s restaurants offer a substantially uniform menu, although there are geographic variations to suit local consumer preferences and tastes. In addition, McDonald’s tests new products on an ongoing basis.
McDonald’s menu includes hamburgers and cheeseburgers, Big Mac, Quarter Pounder with Cheese, Filet-O-Fish, several chicken sandwiches, Chicken McNuggets, wraps, french fries,McDonald's Fries, salads, oatmeal, shakes, McFlurry desserts, sundaes, soft serve cones, pies, soft drinks, coffee, McCafé beverages and other beverages. In addition, the restaurants sell a variety of other products during limited-time promotions.
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 and hotcakes.
Quality,In addition to these menu items, the restaurants sell a variety of other products during limited-time promotions.
Taste, quality, choice and nutrition are increasingly important to our customers, and we are continuously evolving our menu to meet our customers' needs.needs, including testing new products on an ongoing basis.
▪Marketing
Marketing
McDonald’s global brand is well known. Marketing, promotional and public relations activities are designed to promote McDonald’s brand and differentiate the Company from competitors. Marketing and promotional efforts focus on value, quality, food taste, menu choice, nutrition, convenience and the customer experience.
▪Intellectual property
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 trademarks “McDonald’s”"McDonald's" trademark and “Thethe Golden Arches Logo”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.
▪Seasonal operations
Seasonal operations
The Company does not consider its operations to be seasonal to any material degree.
▪Working capital practices
Working capital practices
Information about the Company’s working capital practices is incorporated herein by reference tofrom Management’s Discussion and Analysis of Financial Condition and Results of Operations for the years ended December 31, 2016, 2015,2019, 2018 and 2014 in Part II, Item 7,2017 on pages 136 through 27,21 and the consolidated statementConsolidated Statement of cash flowsCash Flows for the years ended December 31, 2016, 2015,2019, 2018 and 2014 in Part II, Item 8,2017 on page 3237 of this Form 10-K.
▪Customers
Customers
The Company’s business is not dependent upon either a single customer or small group of customers.
▪Backlog
Company-operated restaurants have no backlog orders.Government contracts
▪Government contracts
No material portion of the business is subject to renegotiation of profits or termination of contracts or subcontracts at government election.
Competition
▪Competition
McDonald’s restaurants compete with international, national, regional and local retailers of food products. The Company competes on the basis of price, convenience, service, experience, menu variety and product quality in a highly fragmented global restaurant industry.

McDonald's Corporation 2019 Annual Report 4

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’s primary competition, which is referred to as the informal eating out ("IEO") segment, includes the following restaurant categories defined by Euromonitor International: limited-service restaurants (which combines quick-service eating establishments casual dining full-service restaurants,and 100% home delivery/takeaway providers), street stalls or kiosks, cafés,100% home delivery/takeaway providers,s, 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 casual dining.providers with limited table service.
Based on data from Euromonitor International, the global IEO segment was composed of approximately 89 million outlets and generated $1.2 trillion in annual sales in 2015,2018, the most recent year for which data is available. McDonald’s Systemwide 20152018 restaurant business accounted for 0.4% of those outlets and 7.0%8.2% of the sales.
Management also on occasion benchmarks McDonald’s against the entire restaurant industry, including the IEO segment defined above and all other full-service restaurants. Based on data from Euromonitor International, the restaurant industry was composed of approximately 1820 million outlets and generated $2.3$2.7 trillion in annual sales in 2015.2018. McDonald’s Systemwide restaurant business accounted for 0.2% of those outlets and 3.5%3.6% of the sales.
▪
Environmental matters
Research and development
The Company operates research and development facilities in the U.S., Europe and Asia. While research and development activities are important to the Company’s business, these expenditures are not material. Independent suppliers also conduct research activities that benefit the Company, its franchisees and suppliers (collectively referred to as the "System").
▪Environmental matters
The Company continuously monitors developments related to environmental matters, and endeavors to improve its social responsibility and environmental practices to achieve long-term sustainability, which benefits McDonald’s and the communities it serves.
Actual or perceived effects of changes in weather patterns, climate, water 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 launched a framework in 2018, which includes the environment-related pillars of climate action, packaging and recycling, beef sustainability, and other sustainable sourcing efforts. These include goals and initiatives to reduce System greenhouse gas emissions, responsibly source ingredients and packaging, and increase the availability of recycling in restaurants to reduce waste, which the Company recognizes are also increasingly important to customers.
The Company monitors environment-related governmental initiatives and consumer preferences, and plans to respond in a timely and appropriate manner. Increased focus by certain governmental authorities or consumers on environmental matters may lead to new governmental initiatives.initiatives or opportunities. While we cannot predict the precise nature of these initiatives, we expect that they may impact our business both directly and indirectly. Although the impact would likely vary by world region and/or market, we believe that adoption of new regulations may increase costs or operational complexity for the Company. Also, there is a possibility that governmental initiatives, or actual or perceived effects
Number of changes in weather patterns, climate, or water resources could have a direct impact on the operations of the System in ways which we cannot predict at this time.employees
The Company monitors developments related to environmental matters and plans to respond to governmental initiatives in a timely and appropriate manner. At this time, the Company has already begun to undertake its own initiatives relating to preservation of the environment, including the implementation of more energy efficient equipment and management of energy use and more sustainable sourcing practices in many of its markets.


2 McDonald's Corporation 2016 Annual Report

▪Number of employees
The Company’s number of employees worldwide, including its corporate and other office employees as well as Company-owned and company-ownedoperated restaurant employees, was approximately 375,000205,000 as of year-end 2016.2019.
d. Financial information about geographic areas
Financial information about geographic areas is incorporated herein by reference to Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7, pages 13through 27 and Segment and geographic information in Part II, Item 8, page 44 of this Form 10-K.
e. Available information
The Company is subject to the informational requirements of the Securities Exchange Act of 1934 ("Exchange Act"). The Company therefore files periodic reports, proxy statements and other information with the U.S. Securities and Exchange Commission ("SEC"). Such reports may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, DC 20549, or by calling the SEC at (800) SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements and other information.
Financial and other information can also be accessed on the investor section of the Company’s website at www.investor.mcdonalds.com. The Company makes available, free of charge, copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. Copies of financial and other information are also available free of charge by calling (800) 228-9623 or by sending a request to McDonald’s Corporation Shareholder Services, Department 720, One McDonald’s Plaza, Oak Brook, Illinois 60523.
Also posted on McDonald’s website are the Company’s Corporate Governance Principles; the charters for each of the Committees of the Board of Directors, including the Audit and Finance Committee, Compensation Committee, Governance Committee, Public Policy and Strategy Committee and Sustainability and Corporate Responsibility Committee; the Code of Conduct for the Board of Directors; and the Company’s Standards of Business Conduct, which applies to all officers and employees. Copies of these documents are also available free of charge by calling (800) 228-9623 or by sending a request to McDonald’s Corporation Shareholder Services, Department 720, One McDonald’s Plaza, Oak Brook, Illinois 60523.
Information on the Company’s website is not incorporated into this Form 10-K or the Company’s other securities filings and is not a part of them. 
ITEM 1A. Risk Factors and Cautionary Statement Regarding Forward-Looking Statements
The information in this report includes forward-looking statements about future events and circumstances and their effects upon revenues, expenses and business opportunities. Generally speaking, any statement in this report not based upon historical fact is a forward-looking statement. Forward-looking statements can also be identified by the use of forward-looking words, such as “may,” “will,” “expect,” “believe” and “plan” or similar expressions. In particular, statements regarding our plans, strategies, prospects and expectations regarding our business and industry are forward-looking statements. They reflect our expectations, are not guarantees of performance and
speak only as of the date of this report. Except as required by law, we do not undertake to update them. Our expectations (or the underlying assumptions) may change or not be realized, and you should not rely unduly on forward-looking statements. Our business results are subject to a variety of risks, including those that are reflected in the following considerations and factors, as well as elsewhere in our filings with the SEC. If any of these considerations or risks materialize, our expectations may change and our performance may be adversely affected.
If we do not successfully design and execute against our new business strategies within our new organization structure, we may not be able to increase operating income or market share.
To drive future results, we must design business strategies that are effective in delivering operating income growth. Whether these strategies are successful depends mainly on our System’s ability to:
Continue to innovate and differentiate the McDonald’s experience in a way that balances value and convenience to our customers with profitability;
Reinvest in our restaurants and identify and develop restaurant sites consistent with our plans for net growth of Systemwide restaurants;
Provide clean and friendly environments that deliver a consistent McDonald's experience and demonstrate high service levels;
Drive restaurant improvements that achieve optimal capacity, particularly during peak mealtime hours; and
Manage the complexity of our restaurant operations.
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.
The implementation of our turnaround plan may intensify the risks we face and may not be successful in achieving improved performance.
Our turnaround plan includes an accelerated pace of refranchising, cost savings initiatives and global restructuring. As we continue to implement our plans, the existing risks we face in our business may be intensified. Our efforts to reduce costs and capital expenditures depend, in part, upon our refranchising efforts, which, in turn, depend upon our ability to select qualified and capable franchisees and licensees. Our cost savings initiatives also depend upon our ability to achieve efficiencies through the consolidation of global, back-office functions. Therefore, if our turnaround-related initiatives are not successful, take longer to complete than initially projected, or are not well executed, or if our cost reduction efforts adversely impact our effectiveness, our business operations, financial results and results of operations could be adversely affected.
Our investments to enhance the customer experience, including through technology, may not generate the expected returns.
We will continue to build upon our investments in Experience of the Future (“EOTF”), which focus on restaurant modernization and technology and digital engagement in order to transform the restaurant experience. As we accelerate our pace of converting restaurants to EOTF, we are placing renewed emphasis on our improving our service model and strengthening relationships with customers, in part through digital channels and loyalty initiatives. We may not fully realize the intended benefits of these significant investments and therefore our business results may suffer.


 
McDonald's Corporation 20162019 Annual Report 35

We face intense competition in our markets, which could hurt our business.
We compete primarily in the “informal eating out” (IEO) segment, which is highly competitive. We are facing sluggish restaurant industry trends in several key markets, including the U.S. 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. We expect our environment to continue to be highly competitive, and our results in any particular reporting period may be impacted by new or continuing actions of our competitors, 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, develop new products, price our products appropriately, deliver a relevant customer experience, manage the complexity of our restaurant operations and respond effectively to our competitors’ actions. Recognizing these dependencies, we have intensified our focus in recent periods on strategies to achieve these goals, including the turnaround plan described above, and we will likely continue to modify our strategies and implement new strategies in the future. 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.
If we do not anticipate and address evolving consumer preferences, our business could suffer.
Our continued success depends on our System’s ability to anticipate and respond effectively to continuously shifting consumer demographics, and trends in food sourcing, food preparation and consumer preferences in the IEO segment. In order to deliver a relevant experience for our customers amidst a highly competitive, value-driven operating environment, we must implement initiatives to adapt at an aggressive pace. There is no assurance that these initiatives will be successful and, if they are not, our financial results could be adversely impacted.
If pricing, promotional and marketing plans are not effective, our results may be negatively impacted.
Our results depend on the impact of pricing, promotional and marketing plans across the System, and the ability to adjust these plans to respond quickly and effectively to evolving customer preferences, as well as shifting economic and competitive conditions. Existing or future pricing strategies, and the value proposition they represent, are expected to continue to be important components of our business strategy; however, they may not be successful and could negatively impact sales and margins. Further, the promotion of menu offerings may yield results below the desired levels.
Additionally, we operate in a complex and costly advertising environment. Our marketing and advertising programs may not be successful, and we may fail to attract and retain customers. Our success depends in part on whether the allocation of our advertising and marketing resources across different channels allows us to reach our customers effectively. 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.
Failure to preserve the value and relevance of our brand could have a negative impact on our financial results.
To be successful in the future, we believe we must preserve, enhance and leverage the value of our brand. 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, our business practices and the manner in which we source the commodities we use. Consumer acceptance of our offerings is subject to change for a variety of reasons, and some changes can occur rapidly. For example, nutritional, health 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 IEO segment or perceptions of our brand generally or relative to available alternatives. Consumer perceptions may also be affected by third parties presenting or promoting adverse commentary or portrayals of the quick-service category of the IEO segment, our brand and/or our operations, our suppliers or our franchisees. If we are unsuccessful in addressing such adverse commentary or portrayals, 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 System-wide coordination and alignment. If we are not effective in addressing social responsibility matters or achieving relevant sustainability goals, consumer trust in our brand may suffer. In particular, business incidents that erode consumer trust or confidence, particularly if such incidents receive considerable publicity or result in litigation, can significantly reduce brand value and have a negative impact on our financial results.
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 and actions taken by governments to manage national and international economic matters, whether through austerity or stimulus measures or trade measures, and initiatives intended to control wages, unemployment, credit availability, inflation, taxation and other economic drivers. Continued adverse economic conditions or adverse changes in economic conditions in our markets could pressure our operating performance, and our business and financial results may suffer.
Our results of operations are also affected by fluctuations in currency exchange rates, which may adversely affect reported earnings.
Supply chain interruptions may increase costs or reduce revenues.
We depend on the effectiveness of our supply chain management to assure reliable and sufficient product supply, including 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 shortages and transportation issues, 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, our costs could increase and it could limit the availability of products critical to our System’s operations.


4 McDonald's Corporation 2016 Annual Report

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. Food safety is a top priority, and we dedicate substantial resources to ensure that our customers enjoy safe food products, including as our menu evolves. However, food safety events, including instances of food-borne illness, have occurred in the food industry in the past, 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.
Our franchise business model presents a number of risks.
Our success increasingly relies on the financial success and cooperation of our franchisees, yet we have limited influence over their operations. 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 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. If our franchisees do not experience sales growth, our revenues and margins could be negatively affected as a result. Also, if sales trends worsen for franchisees, their financial results may deteriorate, which could result in, among other things, restaurant closures or delayed or reduced payments to us. Our refranchising effort will increase that dependence and the effect of those factors.
Our success also increasingly depends on the willingness and ability of our independent franchisees to implement major initiatives, which may include financial investment, and to remain aligned with us on operating, promotional and capital-intensive reinvestment plans. Franchisees’ ability 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 or by the creditworthiness of our franchisees or the Company. 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. If franchisees do not successfully operate restaurants in a manner consistent with our required standards, the 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 and changing. Our ability to achieve the benefits of our refranchising strategy, which involves a shift to a greater percentage of franchised restaurants, in a timely manner or at all, will depend on various factors, including our ability to timely and effectively select franchisees and/or licensees that meet our rigorous standards and/or to complete transactions on favorable terms and to manage associated risks. It will also depend on the performance of our franchisees, and whether the resulting ownership mix supports our financial objectives.
Challenges with respect to talent management could harm our business.
Effective succession planning is important to our long-term success. Failure effectively to 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.
Our success depends in part on our System’s ability to recruit, motivate and retain a qualified workforce to work in our restaurants in an intensely competitive environment. Increased costs associated with recruiting, motivating and retaining qualified employees to work in our Company-operated 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. Our potential exposure to reputational and other harm regarding our workplace practices or conditions or those of our independent franchisees or suppliers (or perceptions thereof) 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.
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, supply, fuel, utilities, distribution and other operating costs. Any volatility in certain commodity prices 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.
The global scope of our business subjects us to risks that could negatively affect our business.
We encounter differing cultural, regulatory 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. 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,

McDonald's Corporation 2016 Annual Report 5

foreign exchange or changes in trade-related tariffs or controls, government-mandated closure of our, our franchisees' or our suppliers’ operations, and asset seizures. The cost and disruption of responding to governmental investigations or inquiries, whether or not they have merit, 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 investigations or inquiries.
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 decision to leave the European Union through a negotiated exit over a period of time, it is possible that there will be increased regulatory complexities, as well as potential referenda in the U.K. and/or other European countries, that could cause uncertainty in European or worldwide economic conditions. In the short term, the decision created volatility in certain foreign currency exchange rates, and the resulting depression in those exchange rates may continue. Any of these effects, and others we cannot anticipate, could adversely affect our business, results of operations, financial condition and cash flows.
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 United States 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, including to the extent that corporate tax reform becomes a key component of budgetary initiatives in the United States or elsewhere. We are also impacted by settlements of pending or any future adjustments proposed by taxing authorities outside of the U.S. or the IRS in connection with our tax audits, all of which will depend on their timing, nature and scope. Any 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.
Information technology system failures or interruptions or breaches of network security may interrupt our operations.
We are increasingly reliant on technological systems, such as point-of-sale and other in-store systems or platforms, as well as technologies that facilitate communication and collaboration internally, with affiliated entities, or with independent third parties to conduct our business, including technology-enabled solutions provided to us by third parties. Any failure of these systems could significantly impact our operations and customer perceptions.
Despite the implementation of security measures, those technology systems and solutions could become vulnerable to damage, disability or failures due to theft, fire, power loss, telecommunications failure or other catastrophic events. The third party solutions also present the risks faced by the third party’s business. If those systems or solutions were to fail or otherwise be unavailable, and we were unable to recover in a
timely way, we could experience an interruption in our operations.
Furthermore, security breaches involving our systems, the systems of the parties we communicate or collaborate with, or those of third party providers may occur, such as unauthorized access, denial of service, computer viruses and other disruptive problems caused by hackers. Our information technology systems contain personal, financial and other information that is entrusted to us by our customers and employees as well as financial, proprietary and other confidential information related to our business. An actual or alleged security breach could result in system disruptions, shutdowns, theft or unauthorized disclosure of confidential information. The occurrence of any of these incidents could result in adverse publicity, loss of consumer confidence, reduced sales and profits, and criminal penalties or civil liabilities.
Increasing regulatory complexity may adversely affect restaurant operations and our financial results.
Our regulatory environment worldwide exposes us to complex compliance and similar risks that could affect our operations and results in material ways. In many of our markets, we are subject to increasing regulation, which has increased our cost of doing business. We are affected by the cost, compliance and other risks associated with the often conflicting and highly prescriptive regulations we face, including where inconsistent standards imposed by multiple governmental authorities can adversely affect our business and increase our exposure to litigation or governmental investigations or proceedings.
Our success depends in part on our ability to manage the impact of new, potential or changing regulations that can affect our business plans and operations. These regulations include product packaging, marketing, the nutritional content and safety of our food and other products, labeling and other disclosure practices; and compliance efforts 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 (particularly given varying requirements and practices for testing and disclosure).
Additionally, we are working to manage the risks and costs to us, our franchisees and our supply chain of the effects of climate change, greenhouse gases, and diminishing energy and water resources. These risks include the 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 the 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 unable to effectively manage the risks associated with our complex regulatory environment, it could have a material adverse effect on our business and financial condition.
We are subject to increasing legal complexity and could be party to litigation that could adversely affect us.
Increasing legal complexity will continue to affect our operations and results in material ways. We could be subject to legal proceedings that may adversely affect our business, including class actions, administrative proceedings, government investigations, employment and personal injury claims, landlord/tenant disputes, disputes with current or former suppliers, claims by current or former franchisees and intellectual property claims (including claims that we infringed another party’s trademarks, copyrights or patents).


6 McDonald's Corporation 2016 Annual Report

Inconsistent standards imposed by governmental authorities can adversely affect our business and increase our exposure to regulatory proceedings or litigation.
Litigation involving 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 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. We are also subject to legal and compliance risks and associated liability, such as in the areas of privacy and data collection, protection and management, as it relates to information we collect and share when we provide optional technology-related services and platforms to third parties.
Our operating 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;
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; and
The scope and terms of insurance or indemnification protections that we may have.
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 these claims may hurt 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 United States and certain foreign jurisdictions. The trademarks that we currently use have not been registered in all of the countries outside of the United States in which we do business or may do business in the future and may never be registered in all of these countries. The steps we have taken to protect our intellectual property in the United States 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.
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.
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 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 continuing unpredictable 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 United States, which is the principal trading market for our common stock, and media reports and commentary about economic 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

McDonald's Corporation 2016 Annual Report 7

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 in light of changing business, legal and tax considerations and evolve our corporate structure.
Our results and prospects can be adversely affected by events such as severe weather conditions, natural disasters, hostilities and social unrest, among others.
Severe weather conditions, natural disasters, hostilities and social unrest, terrorist activities, health epidemics or pandemics (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.

ITEM 1B. Unresolved Staff CommentsMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
None.
ITEM 2. 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 Company. 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 the land and building or secures long-term leases for conventional franchised and Company-operated restaurant sites, which ensures 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. Additional information about the Company’s properties is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7, pages 13 through 27and in Financial statements and supplementary data in Part II, Item 8, pages 28 through 47 of this Form 10-K.
ITEM 3. 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 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, delinquent payments of rents and fees, and franchisee claims for additional franchises or rewrites 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. In so doing, disputes arise as to products, service, incidents, 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, zoning, employment and taxation. The Company strives to comply with all applicable existing statutory and administrative rules and cannot predict the effect on its operations from the issuance of additional requirements in the future.
ITEM 4. Mine Safety Disclosures
Not applicable.


8 McDonald's Corporation 2016 Annual Report

Executive Officers of the Registrant
The following are the Executive Officers of our Company (as of the date of this filing, unless otherwise noted):
Ian F. Borden, 48, is President - Foundational Markets, a position he has held since July 2015. From January 2014 through June 2015, Mr. Borden served as Vice President and Chief Financial Officer - McDonald’s Asia/Pacific, Middle East and Africa. Prior to that time, Mr. Borden served as Regional Vice President of Europe’s East Division from April 2011 to December 2013 and as Managing Director - McDonald’s Ukraine from December 2007 to December 2013. He has served the Company for 22 years.
Stephen J. Easterbrook, 49, is President and Chief Executive Officer, a position he has held since March 2015. Mr. Easterbrook was also elected a Director of the Company effective March 2015. From May 2014 through February 2015, Mr. Easterbrook served as Corporate Senior Executive Vice President and Global Chief Brand Officer.  From June 2013 through April 2014, Mr. Easterbrook served as Corporate Executive Vice President and Global Chief Brand Officer. From September 2012 through May 2013, Mr. Easterbrook served as the Chief Executive Officer of Wagamama Limited, a pan-Asian restaurant chain, and from September 2011 to September 2012, he served as the Chief Executive Officer of PizzaExpress Limited, an Italian restaurant brand. From December 2010 to September 2011, he held the position of President, McDonald’s Europe. Prior to that, Mr. Easterbrook served in a number of roles with the Company. Except for the period he was with PizzaExpress and Wagamama, Mr. Easterbrook has served the Company for 23 years.
Joseph Erlinger, 43, is President - High Growth Markets, a position he has held since September 2016.   Prior to that, Mr. Erlinger served as Vice President and Chief Financial Officer - High Growth Markets from March 2015 to January 2017 (serving in dual roles from September 2016 through January 2017), as Managing Director of McDonald’s Korea from April 2013 to January 2016 (serving in dual roles from March 2015 through January 2016), and US Vice President - GM for the Indianapolis region from December 2010 to March 2013.  He has served the Company for 15 years.
David O. Fairhurst, 48, is Corporate Executive Vice President & Chief People Officer, a position he has held since October 2015. Mr. Fairhurst served as Corporate Senior Vice President, International Human Resources and Strategy from April 2015 to September 2015. Prior to that time, he served as Europe Vice President - Chief People Officer from January 2011 to March 2015. Mr. Fairhurst has served the Company for 11 years.
Robert L. Gibbs, 45, is Corporate Executive Vice President - Corporate Relations and Chief Communications Officer, a position he has held since June 2015. Mr. Gibbs joined the Company from The Incite Agency, a strategic communications advisory firm that he co-founded in 2013. Prior to that, Mr. Gibbs held several senior advisory roles in the White House, serving as the White House Press Secretary beginning in 2009, then as Senior Advisor in the 2012 re-election campaign.
Douglas M. Goare, 64, is President, International Lead Markets and Chief Restaurant Officer, a position he has held since July 2015. From October 2011 through June 2015, Mr. Goare served as President, McDonald’s Europe. Prior to that time, Mr. Goare served as Corporate Executive Vice President of Supply Chain and Development from February 2011 through September 2011.  In addition, Mr. Goare assumed responsibility for Development in December 2010 and served as Corporate Senior Vice President of Supply Chain and Development through January 2011.  Mr. Goare has served the Company for 38 years.


Catherine Hoovel, 46, is Corporate Vice President - Chief Accounting Officer, a position she has held since October 2016.  Ms. Hoovel served as Controller for the McDonald's restaurants owned and operated by McDonald's USA from April 2014 to September 2016. Prior to that time, Ms. Hoovel served as a Senior Director of Finance from February 2012 to April 2014 and was a Divisional Director from August 2010 to February 2012. Ms. Hoovel has served the Company for 21 years.
Christopher Kempczinski, 48, is President, McDonald’s USA, a position he has held since January 1, 2017. Prior to that, Mr. Kempczinski served as Corporate Executive Vice President - Strategy, Business Development and Innovation, from October 2015 through December 2016. Mr. Kempczinski joined the Company from Kraft Heinz, a manufacturer and marketer of food and beverage products, where he most recently served as Executive Vice President of Growth Initiatives and President of Kraft International from December 2014 to September 2015. Prior to that, Mr. Kempczinski served as President of Kraft Canada from July 2012 through December 2014 and as Senior Vice President - U.S. Grocery from December 2008 to July 2012.
Jerome Krulewitch, 52, was promoted, effective March 4, 2017, to Corporate Executive Vice President, General Counsel and Secretary.  Mr. Krulewitch is currently the Corporate Senior Vice President - Chief Counsel, Global Operations, a position he has held since 2011.  Prior to that, Mr. Krulewitch was Corporate Senior Vice President - General Counsel, The Americas from 2010 to 2011.  Mr. Krulewitch has served the Company for 15 years. 
Silvia Lagnado, 53, is Corporate Executive Vice President, Global Chief Marketing Officer, a position she has held since August 2015. Ms. Lagnado served as Chief Marketing Officer of Bacardi Limited, a spirits company, from September 2010 to October 2012. Prior to that, Ms. Lagnado served more than twenty years in positions of increased responsibility at Unilever.
Kevin M. Ozan, 53, is Corporate Executive Vice President and Chief Financial Officer, a position he has held since March 2015. From February 2008 through February 2015, Mr. Ozan served as Corporate Senior Vice President - Controller. Mr. Ozan has served the Company for 19 years.
Gloria Santona, 66, is Corporate Executive Vice President, General Counsel and Secretary, a position she has held since July 2003. Ms. Santona has been with the Company for 39 years and will retire effective March 3, 2017.
Jim R. Sappington, 58, is Corporate Executive Vice President, Operations, Digital and Technology Systems, a position he has held since March 2015. From January 2013 through February 2015, Mr. Sappington served as Corporate Senior Vice President-Chief Information Officer. Prior to that time, Mr. Sappington served as U.S. Vice President - General Manager for the Northwest Region from September 2010 to December 2012. Mr. Sappington has been with the Company for 29 years.


McDonald's Corporation 2016 Annual Report 9

PART II
ITEM 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
MARKET INFORMATION AND DIVIDEND POLICY
The Company’s common stock trades under the symbol MCD and is listed on the New York Stock Exchange in the U.S. The following table sets forth the common stock price ranges on the New York Stock Exchange and dividends declared per common share:
  2016  2015  
Dollars per shareHigh
 Low
 Dividend
 High
 Low
 Dividend
 
Quarter:            
First126.96
 112.71
 0.89
 101.09
 88.77
 0.85
 
Second131.96
 116.08
 0.89
 101.08
 94.02
 0.85
 
Third128.60
 113.96
 1.83
*101.88
 87.50
 0.85
 
Fourth124.00
 110.33
 —
 120.23
 97.13
 0.89
 
Year131.96
 110.33
 3.61
 120.23
 87.50
 3.44
 
*Includes an $0.89 per share dividend declared and paid in third quarter, and a $0.94 per share dividend declared in third quarter and paid in fourth quarter.
The number of shareholders of record and beneficial owners of the Company’s common stock as of January 31, 2017 was estimated to be 1,658,000.
Given the Company’s returns on incremental invested capital and assets, management believes it is prudent to reinvest in the business in markets with acceptable returns and/or opportunity for long-term growth and use excess cash flow to return cash to shareholders through dividends and share repurchases. The Company has paid dividends on common stock for 41 consecutive years through 2016 and has increased the dividend amount at least once every year. 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.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table presents information related to repurchases of common stock the Company made during the quarter ended December 31, 2016*:
Period
Total Number of
Shares Purchased

 
Average Price
Paid per Share

 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs(1)

 
Approximate Dollar
Value of Shares
that May Yet
Be Purchased Under
the Plans or Programs(1)
 
October 1-31, 20165,902,572
 113.43
 5,902,572
  $4,571,138,206
November 1-30, 20163,076,425
 116.25
 3,076,425
  4,213,514,184
December 1-31, 20162,915,083
 121.76
 2,915,083
  3,858,569,963
   Total11,894,080
 116.20
 11,894,080
  
*Subject to applicable law, the Company may repurchase shares directly in the open market, in privately negotiated transactions, or pursuant to derivative instruments and plans complying with Rule 10b5-1, among other types of transactions and arrangements.
(1)On December 3, 2015, the Company's Board of Directors approved a share repurchase program, effective January 1, 2016, that authorized the purchase of up to $15 billion of the Company's outstanding common stock with no specified expiration date.


10 McDonald's Corporation 2016 Annual Report

Stock Performance Graph
At least annually, we consider which companies comprise a readily identifiable investment peer group. McDonald's is included in published restaurant indices; however, unlike most other companies included in these indices, which have no or limited international operations, McDonald's does business in more than 100 countries and a substantial portion of our revenues and income is generated outside the U.S. In addition, because of our size, McDonald's inclusion in those indices tends to skew the results. Therefore, we believe that such a comparison is not meaningful.
Our market capitalization, trading volume and importance in an industry that is vital to the U.S. economy have resulted in McDonald's inclusion in the Dow Jones Industrial Average (DJIA) since 1985. Like McDonald's, many DJIA companies generate meaningful revenues and income outside the U.S. and some manage global brands. Thus, we believe that the use of the DJIA companies as the group for comparison purposes is appropriate.
The following performance graph shows McDonald's cumulative total shareholder returns (i.e., price appreciation and reinvestment of dividends) relative to the Standard & Poor's 500 Stock Index (S&P 500 Index) and to the DJIA companies for the five-year period ended December 31, 2016. The graph assumes that the value of an investment in McDonald's common stock, the S&P 500 Index and the DJIA companies (including McDonald's) was $100 at December 31, 2011. For the DJIA companies, returns are weighted for market capitalization as of the beginning of each period indicated. These returns may vary from those of the Dow Jones Industrial Average Index, which is not weighted by market capitalization, and may be composed of different companies during the period under consideration.
mcd-1231201_chartx51936.jpg
Company/Index12/31/201112/31/201212/31/201312/31/201412/31/201512/31/2016
McDonald's Corporation$100$91$103$103$134$143
S&P 500 Index100116154175177198
Dow Jones Industrials100110143157158184
Source: S&P Capital IQ

McDonald's Corporation 2016 Annual Report 11

ITEM 6. Selected Financial Data
            
            
6-Year Summary
Years ended December 31,

            
In millions, except per share and unit amounts2016
 2015
 2014
 2013
 2012
 2011
Consolidated Statement of Income Data           
Revenues           
   Sales by Company-operated restaurants$15,295
 $16,488
 $18,169
 $18,875
 $18,603
 $18,293
   Revenues from franchised restaurants9,327
 8,925
 9,272
 9,231
 8,964
 8,713
Total revenues24,622
 25,413
 27,441
  28,106
 27,567
 27,006
Operating income7,745
 7,146
 7,949
 8,764
 8,605
 8,530
Net income4,687
 4,529
 4,758
 5,586
 5,465
 5,503
Consolidated Statement of Cash Flows Data           
Cash provided by operations$6,060
 $6,539
 $6,730
 $7,121
 $6,966
  $7,150
Cash used for investing activities982
 1,420
 2,305
 2,674
 3,167
  2,571
Capital expenditures1,821
 1,814
 2,583
 2,825
 3,049
  2,730
Cash used for (provided by) financing activities11,262
 (735) 4,618
 4,043
 3,850
  4,533
Treasury stock purchases(1)
11,142
 6,182
 3,175
 1,810
 2,605
  3,373
Common stock dividends3,058
 3,230
 3,216
 3,115
 2,897
  2,610
Financial Position           
Total assets$31,024
 $37,939
 $34,227
 $36,626
 $35,386
  $32,990
Total debt25,956
 24,122
 14,936
 14,130
 13,633
  12,500
Total shareholders’ equity (deficit)(2,204) 7,088
 12,853
 16,010
 15,294
  14,390
Shares outstanding819
 907
 963
 990
 1,003
  1,021
Per Common Share Data           
Earnings-diluted$5.44
 $4.80
 $4.82
 $5.55
 $5.36
 $5.27
Dividends declared3.61
 3.44
 3.28
  3.12
 2.87
 2.53
Market price at year end121.72
 118.44
 93.70
  97.03
 88.21
 100.33
Restaurant Information and Other Data           
Restaurants at year end           
   Company-operated restaurants5,669
 6,444
 6,714
 6,738
 6,598
 6,435
   Franchised restaurants31,230
 30,081
 29,544
 28,691
 27,882
 27,075
Total Systemwide restaurants36,899
 36,525
 36,258
 35,429
 34,480
 33,510
Franchised sales(2)
$69,707
 $66,226
 $69,617
 $70,251
 $69,687
 $67,648
(1)Represents treasury stock purchases as reflected in Shareholders' equity.
(2)While franchised sales are not recorded as revenues by the Company, management believes they are important in understanding the Company's financial performance because these sales are the basis on which the Company calculates and records franchised revenues and are indicative of the financial health of the franchisee base. Franchised restaurants represent approximately 85% of McDonald's restaurants worldwide at December 31, 2016.


12 McDonald's Corporation 2016 Annual Report

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
DESCRIPTIONMANAGEMENT'S VIEW OF THE BUSINESS
The Company franchises and operates McDonald’s restaurants. Of the 36,899 restaurants in 120 countries at year-end 2016, 31,230 were franchised (reflects 21,559 franchised to conventional franchisees, 6,300 licensed to developmental licensees and 3,371 licensed to foreign affiliates ("affiliates")—primarily Japan) and 5,669 were operated by the Company.
Under McDonald's conventional franchise arrangement, franchisees provide a portion of the capital required by initially investing in the equipment, signs, seating and décor of their restaurant business, and by reinvesting in the business over time. The Company generally owns the land and building or secures long-term leases for both Company-operated and conventional franchised restaurant sites. This maintains long-term occupancy rights, helps control related costs and assists in alignment with franchisees enabling restaurant performance levels that are among the highest in the industry. In certain circumstances, the Company participates in the reinvestment for conventional franchised restaurants in an effort to accelerate implementation of certain initiatives.
Under McDonald's developmental license arrangement, licensees provide capital for the entire business, including the real estate interest, and the Company generally has no capital invested. In addition, the Company has an equity investment in a limited number of affiliates that invest in real estate and operate or franchise restaurants within a market.
McDonald's is primarily a franchisor and believes franchising is paramount to delivering great-tasting food, locally-relevant customer experiences and driving profitability. Franchising enables an individual to be his or her own employer and maintain control over all employment-related matters, marketing and pricing decisions, while also benefiting from the financial strength and global experience of McDonald's. However, directly operating restaurants is important to being a credible franchisor and provides Company personnel with restaurant operations experience. In Company-operated restaurants, and in collaboration with franchisees, McDonald's further develops and refines operating standards, marketing concepts and product and pricing strategies, so that only those that the Company believes are most beneficial are introduced in the restaurants. McDonald's continually reviews its mix of Company-operated and franchised restaurants to help optimize overall performance, with a goal to be approximately 95% franchised over the long term.
The Company’s revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales along with minimum rent payments, and initial fees. Revenues from restaurants licensed to affiliates and developmental licensees include a royalty based on a percent of sales, and generally include initial fees. Fees vary by type of site, amount of Company investment, if any, and local business conditions. These fees, along with occupancy and operating rights, are stipulated in franchise/license agreements that generally have 20-year terms.
The business is structured into the following segments that combine markets with similar characteristics and opportunities for growth, and reflect how management reviews and evaluates operating performance:
U.S. - the Company's largest segment.
International Lead Markets - established markets including Australia, Canada, France, Germany, the U.K. and related markets.
High Growth Markets - markets that the Company believes have relatively higher restaurant expansion and franchising potential including China, Italy, Korea, the Netherlands, Poland, Russia, Spain, Switzerland and related markets.
Foundational Markets & Corporate - the remaining markets in the McDonald's system, each of which the Company believes have the potential to operate under a largely franchised model. Corporate activities are also reported within this segment.
For the year ended December 31, 2016, the U.S., International Lead Markets and High Growth Markets accounted for 34%, 29% and 25% of total revenues, respectively.
In analyzing business trends, management reviews results on a constant currency basis and considers a variety of performance and financial measures which are considered to be non-GAAP, including comparable sales and comparable guest count growth, Systemwide sales growth, return on incremental invested capital ("ROIIC"), free cash flow and free cash flow conversion rate, as described below. Management believes these measures are important in understanding the financial performance of the Company.
Constant currency results exclude the effects of foreign currency translation and are calculated by translating current year results at prior year average exchange rates. Management reviews and analyzes business results in constant currenciesexcluding the effect of foreign currency translation, impairment and other strategic charges and gains, as well as income tax provision adjustments related to the Tax Cuts and Jobs Act of 2017 ("Tax Act"), and bases most incentive compensation plans on these results, because the Company believes this better represents its underlying business trends.
Comparable sales and comparable guest counts are key performance indicators used within the retail industry and are indicative of the impact of the Company’s initiatives as well as local economic and consumer trends. Increases or decreases in comparablerepresent sales and comparable guest counts represent the percent change in sales and transactions, respectively, from the same period in the prior year forat all restaurants, whether operated by the Company or by franchisees, in operation at least thirteen months including those temporarily closed. Some of the reasons restaurants may be temporarily closed include reimaging or remodeling, rebuilding, road construction and natural disasters. Comparable sales exclude the impact of currency translation.translation, and, since 2017, also exclude sales from Venezuela due to its hyper-inflation. Management generally identifies hyper-inflationary markets as those markets whose cumulative inflation rate over a three-year period exceeds 100%. Comparable sales are driven by changes in guest counts and average check, which is affected by changes in pricing and product mix. Typically, pricing has a greater impact on average check than product mix. The goal is to achieve a relatively balanced contribution from both guest counts and average check.
Comparable guest counts represent the number of transactions at all restaurants, whether operated by the Company or by franchisees, in operation at least thirteen months including those temporarily closed.
Systemwide sales include sales at all restaurants.restaurants, whether operated by the Company or by franchisees. While franchised sales are not recorded as revenues by the Company, management believes the information is important in understanding the Company’s financial performance because these sales are the basis on which the Company calculates and records franchised revenues and are indicative of the financial health of the franchisee base. The Company's revenues consist of sales by Company-operated restaurants and fees from franchised restaurants operated by conventional franchisees, developmental licensees and affiliates.
ROIIC is a measure reviewed by management over one-year and three-year time periods to evaluate the overall profitability of the markets, the effectiveness of capital deployed and the future allocation of capital. The return is calculated by dividing the change in operating income plus depreciation and amortization (numerator) by the cash used for investing activities (denominator), primarily capital expenditures. The calculation uses a constant average

McDonald's Corporation 2016 Annual Report 13

foreign exchange rate over the periods included in the calculation.
Free cash flow, defined as cash provided by operations less capital expenditures, and free cash flow conversion rate, defined as free cash flow divided by net income, are measures reviewed by management in order to evaluate the Company’s ability to convert net profits into cash resources, after reinvesting in the core business, that can be used to pursue opportunities to enhance shareholder value.
STRATEGIC DIRECTION AND FINANCIAL PERFORMANCE
The strength of the alignment among the Company, its franchisees and suppliers (collectively referred to as the "System") is key to McDonald's long-term success. By leveraging the System, McDonald’s is able to identify, implement and scale ideas that meet customers' changing needs and preferences. McDonald's continually builds on its competitive advantages of System alignment and geographic diversification to deliver consistent, yet locally-relevant restaurant experiences to customers as an integral part of their communities.
PROGRESS ON THE COMPANY'S TURNAROUND
The turnaround plan, introduced in 2015, represented a significant step change in how McDonald's operates and a recommitment to putting customers first. With an aspiration of being recognized by customers as a modern and progressive burger company, the Company prioritized fewer, more strategic initiatives that focused on running better restaurants, driving operational growth, returning excitement to the brand and enhancing financial value.
Building on these initial steps, the Company made purposeful changes in 2016. The Company continued to right-size the organization and put the appropriate talent in place by blending executives with deep McDonald’s experience with new executives to generate fresh energy and innovative ideas, while successfully executing against the key elements of its turnaround plan. As reflected by improved customer satisfaction measures across most of the major markets, customers have taken notice.
In addition to the customer-relevant changes in the restaurants, the Company has enhanced financial value through its refranchising efforts, cost savings initiatives and cash return to shareholders, as follows:
Refranchising - the Company expects to achieve its refranchising target of 4,000 restaurants by the end of 2017, a full year ahead of the original target date, with a long-term goal to become approximately 95% franchised. Since 2015, the Company has pursued its refranchising goal through the expansion of its conventional franchisee base and the addition of new developmental licensees that bring strong strategic capabilities and financial resources that will enable accelerated expansion and innovation.
Moving to a more heavily franchised business model will benefit the Company’s performance over the long term, as the rent and royalty income received from franchisees will provide a more predictable and stable revenue stream with significantly lower operating costs and risks. This model is less capital intensive as franchisees are responsible for reinvesting capital in their businesses.
Cost Savings - the Company made meaningful progress towards its goal of reducing net G&A levels by $500 million by the end of 2018 from the Company’s G&A base of $2.6 billion at the beginning of 2015. Actions taken in 2015 and 2016, including the redesign of the organization to eliminate layers and increase spans of control, more centralization of non-customer facing business processes and execution
against its refranchising targets, have resulted in savings of more than $200 million.
Cash Return to Shareholders - The strength and reliability of the Company's significant and growing free cash flow, strong investment grade credit rating and continued access to credit provide the flexibility to fund capital expenditures as well as return cash to shareholders. By the end of 2016, the Company achieved its three-year target of $30 billion cash return to shareholders. Optimization of the Company's capital structure by adding a meaningful amount of additional debt was instrumental in meeting this target.
20162019 FINANCIAL PERFORMANCE
The Company's progress in executing the turnaround plan is evident by its stronger business results, including the highest comparable sales growth since 2011. In McDonald’s heavily franchised business model, growing comparable sales is key to increasing operating income and returns. In 2016,2019, global comparable sales increased 3.8%, including positive5.9% and global comparable sales across all segments. Comparable guest counts were negative 0.3%increased 1.0%, as positive guest traffic inreflecting the Foundational Markets and International Lead Markets was more than offset by negative guest traffic incontinued execution against the U.S. and HighVelocity Growth Markets.Plan.

Comparable sales in the U.S. increased 1.7%, due in part to a higher average check, while comparable guest counts declined 2.1% amidst continued industry softness. The growth in comparable sales was supported by All-Day Breakfast and everyday value under the McPick 2 platform.
Comparable sales in the International Lead Markets increased 3.4%5.0% and comparable guest counts increased 1.5%, reflecting solid comparable sales performance across most of the segment, led by the U.K.
In the High Growth Markets, comparable sales increased 2.8%, while comparable guest counts declined 0.8%decreased 1.9%. The increase in comparable sales reflected strong sales of our iconic core products driven by promotional activity and the continued positive results across mostimpact from our Experience of the segment, led by China.Future ("EOTF") deployment, as well as menu price increases.
Comparable sales in the Foundational MarketsInternational Operated segment increased 10.0%6.1% and comparable guest counts increased 1.9%3.5%, led by very strong performance in Japan and certain markets in Latin America, as well as solidreflecting positive results across all markets, primarily driven by the remainder ofU.K. and France.
Comparable sales in the segment.International Developmental Licensed segment increased 7.2% and comparable guest counts increased 2.2%, reflecting positive sales performance across all geographic regions.
In addition to improved comparable sales and guest count performance, the Company achieved the following financial results in 2016:2019:
Consolidated revenues decreasedwere relatively flat with the prior year (increased 3% (flat in constant currencies) due to the impact of refranchising, partly offset by positive comparable sales.at $21.1 billion.
Systemwide sales increased 3% (5%4% (7% in constant currencies). to $100.2 billion.
Consolidated operating income increased 8% (11%3% (6% in constant currencies). Excluding the impact of current year and prior year impairment and strategic charges, operating income increased 1% (4% in constant currencies). Refer to the Operating Income section on page 15 for additional details.
Operating margin, defined as operating income as a percent of total revenues, increased from 28.1%42.0% in 20152018 to 31.5%43.0% in 2016.2019. Excluding the items referenced in the previous bullet point, operating margin increased from 43.1% in 2018 to 43.4% in 2019.

McDonald's Corporation 2019 Annual Report 6

Diluted earnings per share of $5.44$7.88 increased 13% (16%5% (7% in constant currencies). Refer to the Net Income and Diluted Earnings Per Share section on page 10 for additional details.
Cash provided by operations was $6.1
•
Cash provided by operations was $8.1 billion.
Capital expenditures of $1.8$2.4 billion were allocated mainly to reinvestment in existing restaurants and, to a lesser extent, to new restaurant openings. Across the System, about 900


14 McDonald's Corporation 2016 Annual Report

restaurants were opened and over 1,700 existing locations were reimaged.
Free cash flow was $4.2$5.7 billion, a 36% increase over the prior year.
Across the System, about 1,200 restaurants (including those in our developmental licensee and the Company's free cash flow conversion rate was 90% (see reconciliation in Exhibit 12).affiliated markets) were opened.
One-year ROIIC was 62.7%22.8% and three-year ROIIC was 5.1%40.6% for the period ended December 31, 2016(see2019. Excluding significant investing cash flows resulting from the Company's strategic refranchising initiatives, three-year ROIIC was 24.6% (see reconciliation in Exhibit 12).
The Company increased its quarterly cash dividend per share by 6%8% to $0.94$1.25 for the fourth quarter, equivalent to an annual dividend of $3.76$5.00 per share.
The Company returned $14.2$8.6 billion to shareholders through dividendsshare repurchases and share repurchasesdividends for the year, achievingmarking successful achievement of the Company's targeted return of $30$25 billion for the three-year period ended 2016.ending 2019.
STRATEGIC DIRECTION
Building onThe strength of the momentum established in 2016,alignment among the Company, its franchisees and suppliers is beginningkey to shift focus from revitalizingMcDonald's long-term success. By leveraging the businessSystem, McDonald’s is able to longer-term growth. identify, implement and scale ideas that meet customers' changing needs and preferences. McDonald's continually builds on its competitive advantages of System alignment and geographic diversification to deliver consistent, yet locally-relevant restaurant experiences to customers as an integral part of their communities.
CUSTOMER-CENTRIC GROWTH STRATEGY
The Company will moveVelocity Growth Plan, the Company’s customer-centric strategy, is rooted in extensive customer research and insights, along with increased velocitya deep understanding of the key drivers of the business. The Plan is designed to drive sustainable comparable sales and guest count growth, a reliable long-term measuremeasures of the Company's strength that isare vital to growing the Company’s sales and shareholder value.
In order to drive guest count2019, execution of the Plan drove further broad-based growth in an ever-changing customer environment,around the globe. In 2020, the Company developed a customer-centric growth strategy for 2017will continue to focus on elevating the customer experience through improved restaurant execution and beyond, informed by deepcreating excitement around our food and value offerings, while continuing to leverage technology to enable greater convenience and customer research across multiple markets. personalization.
The Company's greatest opportunities areCompany continues to target the opportunity at the heartcore of the brandits business - in its food, value and customer experience - and within defined customer groups. Thisexperience. The strategy is built on the following three pillars, which will position McDonald's as a modern and progressive burger company that "makes delicious, feel good moments easy for everyone."
Retaining existing customers. The Company will renew its focus on areas where the Company already has a strong foothold in the IEO, including family occasions and food-led breakfast.
Regaining lost customers. The Company plans to regain customers by recommitting to areas of historic strength, namely quality, convenience and value.
Converting casual to committed customers. The Company will focusall focusing on building stronger relationships with customers so they visit more often, by elevating and leveraging the McCafé coffee brand and enhancing snack and treat offerings.a better McDonald’s:

•
Retaining existing customers - focusing on areas where it already has a strong foothold in the IEO category, including family occasions and food-led breakfast.

•
Regaining customers who visit less often - recommitting to areas of historic strength, namely food taste and quality, convenience and speed, experience and value.

•
Converting casual to committed customers- building stronger relationships with customers so they visit more often, by elevating and leveraging the McCafé coffee brand and enhancing snack and treat offerings.

The Company will continuecontinues to build upon its investments in Experience ofscale and optimize the Future ("EOTF"), which focuses on restaurant modernization and technology, in order to transform the restaurant service experience. The Company is also accelerating its pursuit ofPlan through the following two initiatives designed to further drive growth.growth accelerators:
•
Experience of the Future. The Company is building upon its investments in EOTF, focusing on restaurant modernization in order to transform the restaurant service experience and enhance our brand in the eyes of our customers. The modernization efforts are designed to provide a better customer experience, leading to increased frequency of customer visits and higher average check. As of the end of 2019, EOTF is deployed in over half of the restaurants in our global system, with most of the major markets substantially complete. In 2019, the U.S. converted about 2,000 restaurants to EOTF, resulting in about 70% of the U.S. restaurants now having EOTF. In 2020, the Company will further deploy EOTF around the globe, including converting about 1,800 of the remaining restaurants in the U.S. to EOTF.
•
Digital.The Company is improving its existing service model with customers through technology. Digital technology is transforming the retail industry, and the Company is using it to transform McDonald’s for our customers at an accelerated pace. By evolving the technology platform, the Company is expanding choices for how customers order, pay and are served their food. The added functionality of the Company’s global mobile app, self-order kiosks, and other technologies enable greater convenience for the customer on their terms. In 2019, the Company built on its digital foundation, acquiring Dynamic Yield, a leader in personalization and decision logic technology. The Company has implemented this technology via outdoor digital menu boards in over 11,000 U.S. drive-thrus, offering customers a more customized experience and producing sales growth through higher average check. This technology is also deployed in nearly all drive-thrus in Australia, and we are looking to deploy across further international markets beginning in 2020. The Company continued to expand its technological capabilities via the acquisition of Apprente, an early-stage leader in conversational interface technology. This technology is expected to provide more efficient and accurate ordering in the drive-thru. In 2020, the Company will continue to utilize more personalized digital initiatives to engage customers, grow awareness and adoption of digital offerings, and support our menu offerings.

Digital. As the Company accelerates its pace of converting restaurants to EOTF, it is placing renewed emphasis on improving its existing service model (i.e., eat in, take out, or drive-thru) and strengthening its relationships with customers through technology. By evolving the technology platform, the Company will simplify how customers order, pay and are served through additional functionality on its global mobile app, self-order kiosks and technology-driven models that enable table service and curb-side pick-up.

Delivery. The Company is accelerating its focus and investment on its delivery platform as a way to expand the convenience customers expect from McDonald's. The
 
McDonald's Corporation 2019 Annual Report 7

•
Delivery.  The Company continues to build momentum with its delivery platform as a way of expanding the convenience for its customers. In 2019, McDonald’s continued to add third-party delivery partners in order to maximize the System’s delivery scale and potential. Across the global system, nearly 25,000 restaurants now offer delivery. Customers are responding positively, as demonstrated by high satisfaction ratings, strong reorder rates, and average checks that are generally two times higher than average non-delivery transactions. Further, in some of our top markets, delivery now represents as much as 10% of sales in those restaurants offering delivery. Consequently, McDonald’s global delivery business has grown to over $4 billion in Systemwide sales in 2019, up from $1 billion in 2016. We continue to see great runway ahead of us to drive awareness and trial of delivery, and are focusing on efforts to encourage frequency and retention in 2020 and beyond.

The Plan is conducting various pilot tests ina global strategy that is tailored at a market level to allow for the U.S., Europebest customer experience and Asia and plans to scale quickly based on results of these pilots.
AREAS OF FOCUS BY SEGMENT
U.S.
most convenience for our valued customers. While the U.S. has begunPlan provides a consistent framework on how to build sales momentum, its greatest opportunity isretain, regain, and convert customers, the execution varies across the globe. The U.S., for example, remains centered on returning to guest count growth by focusing on actions that collectively transform the customer experience.
A focus on food tasterunning better restaurant operations, introducing new menu items and quality will remain a key priority, including offering the Company's best tasting burger. In 2017, the U.S. is planning to introduce its Signature Crafted offering, a premium platform focused on authentic ingredients that allows customers to customize their sandwiches.compelling value. In addition, the U.S. will remain focused on strengthening its customer-relevant value proposition.
The U.S. expects to launch its mobile order and pay functionality as well as curbside pick-up across all traditional restaurants in the fourth quarter 2017. Further, most of the System's traditional restaurants are expected to be converted to EOTF by 2020. In addition, the U.S.we will continue to test its delivery platform.
International Lead Markets
The International Lead Markets are deepening their connection with customers and meeting their changing needs with meaningful enhancements in menu, accessibility and experience.
The segment is focused on providing quality, great taste, value and choice across the entire menu. Entry-level value programs appeal to teens and young adults, while other platforms provide budget-conscious customers affordable meal bundles. Programs across the segment are energizing the core menu, and every market has successfully extended into premium chicken and beef with locally relevant offerings. All of this is supported by modernized cooking and service platforms that expand capacity and enable hotter, fresher products. The segment will also remain focused on enhancing and expanding the McCafé coffee brand and pastry offerings.
The International Lead Markets continues to lead the McDonald’s System in the development and deployment of EOTF.
High Growth Markets
McDonald’s High Growth Markets have leveraged learnings from the International Lead Markets to enhancetransforming the customer experience through design,aggressive execution of the growth accelerators of EOTF, digital people, menu innovation and value.delivery. In 2020, the markets around the world will continue to make progress on the three pillars of the Plan and its growth accelerators, focusing on food, value and customer convenience.
In addition to driving operational growth in existing restaurants, targeted new restaurant development and refranchising initiatives are top priorities. In early 2017,Our Plan also includes the Company announcedfurther embedding actions in response to certain social and environmental issues into the planned salecore of its businessesour business. As one of the world’s largest restaurant companies, our approach highlights our commitment to global actions that are consistent with our strategic priorities and provides an opportunity to collaborate with our franchisees and suppliers to drive meaningful progress. We recognize that our success in Chinaadvancing these initiatives will be demonstrated as customers continue to feel good about visiting McDonald’s restaurants and Hong Kongeating our food.
While we are working to address many challenges facing society today, we are elevating global action where we believe we can make the greatest difference in driving industry-wide change. Our priorities reflect the social and environmental impacts of our food and our business. Highlights include science-based targets for greenhouse gas emissions reductions and climate action, advancing sustainable practices in beef production with suppliers and producers, driving innovative solutions for our packaging and recycling efforts, and ongoing commitments to support families and provide opportunities for youth in our communities. In 2019, for example, we made progress toward our 2030 climate action target with the addition of significant investments in renewable energy projects in the U.S.; we achieved our goal of 100% sustainably sourced McCafé coffee for U.S. restaurants; and we continued to make a developmental licensee.
Foundational Marketsdifference for families through innovation in our food offerings, reading programs and support for Ronald McDonald House Charities.
The Foundational MarketsCompany is a diverse groupconfident, that under the Plan, we will continue to improve the taste of markets that share common goals of enhancing the critical elements that differentiate McDonald’s - the menuour delicious food, enhance convenience and the customer experience. The segment is committed toservice through running great restaurants, offer compelling value, and increasing convenienceheighten the trust consumers place in our brand, which we believe will enable us to customers, including through drive-thru and delivery. The Foundational Markets continue to pursue refranchising opportunities, including the sale of certain markets to developmental licensees. In early 2017, the Company announced the planned sale of its businesses in the Nordic markets (Denmark, Finland, Norway and Sweden) to a developmental licensee.
deliver long-term sustainable growth.


 
McDonald's Corporation 20162019 Annual Report 158


OUTLOOK
20172020 Outlook
The following global and certain segment-specific information is provided to assist in forecasting the Company’s future results.
Changes in Systemwide sales are driven by comparable sales, and net restaurant unit expansion.expansion, and the potential impacts of hyper-inflation. The Company expects net restaurant additions to add approximately 11.5 percentage pointpoints to 20172020 Systemwide sales growth (in constant currencies).
The Company does not generally provide specific guidance on changes in comparable sales. However, as a perspective, assuming no change in cost structure, a 1 percentage point change in comparable sales for either the U.S. or the International Lead segment would change annual diluted earnings per share by about 4 to 5 cents.
With about 75% of McDonald's grocery bill comprised of 10 different commodities, a basket of goods approach is the most comprehensive way to look at the Company's commodity costs. For the full-year 2017, costs for the total basket of goods are expected to increase about 0.5-1.5% in the U.S. and increase about 2.0% in the International Lead segment.
The Company expects full-year 2017full year 2020 selling, general and administrative expenses to decreaseincrease about 7-8%,5% to 7% in constant currencies with fluctuations expected between the quarters. This includes incentive-based compensation costs of less than $300 million.
Based on current interest and foreign currency exchange rates,as the Company expects interest expense forinvests in technology and research & development, and incurs costs related to the full-year 2017 to increase about 5-10% compared with 2016 due to higher average debt balances.
A significant part of the Company's operating income is generated outside the U.S., and about 35% of its total debt is denominated in foreign currencies. Accordingly, earnings are affected by changes in foreign currency exchange rates, particularly the Euro, British Pound, Australian Dollar and Canadian Dollar. Collectively, these currencies represent approximately 70% of the Company's operating income outside the U.S. If all four of these currencies moved by 10%Worldwide Owner/Operator Convention, which will occur in the same direction, the Company's annual diluted earnings per share would change by about 25 cents. second quarter 2020.
The Company expects the effective income tax rate for the full-year 2017 to be in the 31-33% range. Some volatility may result in a quarterly tax rate outside of the annual range.
•
Based on current interest and foreign currency exchange rates, the Company expects interest expense for the full year 2020 to increase about 4% to 6% due primarily to higher average debt balances.
•
A significant part of the Company's operating income is generated outside the U.S., and about 40% of its total debt is denominated in foreign currencies. Accordingly, earnings are affected by changes in foreign currency exchange rates, particularly the Euro, British Pound, Australian Dollar and Canadian Dollar. Collectively, these currencies represent approximately 80% of the Company's operating income outside the U.S. If all four of these currencies moved by 10% in the same direction, the Company's annual diluted earnings per share would change by about 35 cents.
•
The Company expects the effective income tax rate for the full year 2020 to be in the 23% to 25% range. Some volatility may result in a quarterly tax rate outside of the annual range.
The Company expects capital expenditures for 20172020 to be approximately $1.7$2.4 billion. About $1.3 billion about one-thirdwill be dedicated to our U.S. business, over half of which will be usedis allocated to approximately 1,800 EOTF projects. Globally, we expect to open newroughly 1,400 restaurants. We will spend approximately $800 million in the U.S. and International Operated segments to open 400 restaurants and our developmental licensees and affiliates will contribute capital towards the remaining 1,000 restaurant openings in the International Developmental Licensed segment. The Company expects to open about 900 restaurants, including about 500 restaurants1,000 net restaurant additions in affiliated and developmental licensee markets where the Company generally does not fund any capital expenditures. The Company expects net additions of about 400 restaurants. The remaining two-thirds of capital will be used to reinvest in existing locations, including about 650 reimages in the U.S. When combined with previously modernized restaurants that will be updated with EOTF elements in 2017, we expect to have about 2,500 EOTF restaurants in the U.S. by the end of 2017.2020.
Long-Term Outlook
The Company expects to refranchise about 4,000 restaurants inOver the three-year period ending 2017, with a long-term, goal to become approximately 95% franchised.
The Company expects to realize net annual G&A savings of about $500 million from its G&A base of $2.6 billion at the beginning of 2015. Through the end of 2016, the Company realized cumulative savings of more than $200 million and expects to realize the majority of its savings target by the end of 2017. Beyond its $500 million reduction, the Company expects to further reduce G&A by 5-10% fromachieve the remaining G&A base by the end of 2019. These targets exclude the impact of foreign currency changes.
The Company expects capital expenditures to decline by approximately $500 million from the 2017 level of $1.7 billion, once the U.S. restaurant modernization work is substantially completed.
The Company expects to return between $22 and $24 billion to shareholders for the three-year period ending 2019. This new target contemplates proceeds from future restaurant sales expected under its ongoing refranchising initiative. As the business grows, the Company also expects to modestly increase its debt levels, while maintaining its credit metrics within current ranges.

Long-Term Financial Targets
The Company has established the following long-term, average annual (constant currency) financial targets, beginning in 2019, with variability expected during 2017 and 2018 due to the impact of refranchising:targets:
◦Systemwide sales growth of 3% to 5%;
◦Operating margin in the mid-40% range;
◦Earnings per share growth in the high-single digits; and
◦Return on incremental invested capital in the mid-20% range.

Systemwide sales growth of 3-5%;
Operating margin in the mid-40% range;
Earnings per share growth in the high-single digits; and
ROIIC in the mid-20% range.





16McDonald's Corporation 20162019 Annual Report9


Consolidated Operating ResultsCONSOLIDATED OPERATING RESULTS
Operating results
   2016
    2015
  2014
   2019
    2018
  2017
Dollars and shares in millions, except per share data Amount
 Increase/ (decrease)
 Amount
 Increase/ (decrease)
 Amount
 Amount
 Increase/ (decrease)
 Amount
 Increase/ (decrease)
 Amount
Revenues                    
Sales by Company-operated restaurants $15,295
 (7%) $16,488
 (9%) $18,169
 $9,421
 (6%) $10,013
 (21%) $12,719
Revenues from franchised restaurants 9,327
 5
 8,925
 (4) 9,272
 11,656
 6
 11,012
 9
 10,101
Total revenues 24,622
 (3) 25,413
 (7) 27,441
 21,077
 0
 21,025
 (8) 22,820
Operating costs and expenses                    
Company-operated restaurant expenses 12,699
 (9) 13,977
 (9) 15,288
 7,761
 (6) 8,266
 (21) 10,410
Franchised restaurants-occupancy expenses 1,718
 4
 1,647
 (3) 1,697
 2,201
 12
 1,973
 10
 1,789
Selling, general & administrative expenses 2,384
 (2) 2,434
 (2) 2,488
 2,229
 1
 2,200
 (1) 2,231
Other operating (income) expense, net 76
 (64) 209
 n/m
 19
 (184) 22
 (237) 80
 (1,163)
Total operating costs and expenses 16,877

(8) 18,267
 (6) 19,492
 12,007
 (2) 12,202
 (8) 13,267
Operating income 7,745
 8
 7,146
 (10) 7,949
 9,070
 3
 8,823
 (8) 9,553
Interest expense 885
 39
 638
 11
 576
 1,122
 14
 981
 7
 922
Nonoperating (income) expense, net (6) 87
 (48) n/m
 1
 (70) n/m
 26
 (56) 58
Income before provision for income taxes 6,866
 5
 6,556
 (11) 7,372
 8,018
 3
 7,816
 (9) 8,573
Provision for income taxes 2,180
 8
 2,027
 (22) 2,614
 1,993
 5
 1,892
 (44) 3,381
Net income $4,686
 3% $4,529
 (5%) $4,758
 $6,025
 2% $5,924
 14% $5,192
Earnings per common share—diluted $5.44
 13% $4.80
 0% $4.82
 $7.88
 5% $7.54
 18% $6.37
Weighted-average common shares outstanding—
diluted
 861.2
 (9%) 944.6
 (4%) 986.3
 764.9
 (3%) 785.6
 (4%) 815.5
n/m Not meaningful
IMPACT OF FOREIGN CURRENCY TRANSLATION ON REPORTED RESULTS
While changes in foreign currency exchange rates affect reported results, McDonald’s mitigates exposures, where practical, by purchasing goods and services in local currencies, financing in local currencies and hedging certain foreign-denominated cash flows.
Foreign currency translation had a negative impact on consolidated operatingIn 2019, results in eachreflected the weakening of the last three years.Euro and most other major currencies. In 2016,2018, results were negatively impactedreflected the stronger Euro and British Pound. In 2017, results reflected the stronger Euro, offset by the weaker British Pound as well as many other currencies. In 2015, results were negatively impacted by the weaker Euro, Australian Dollar, Russian Ruble and most other currencies.In 2014, results were negatively impacted by the weaker Russian Ruble, Australian Dollar and certain other currencies, partly offset by the stronger British Pound.
Impact of foreign currency translation on reported results
 
  
 Reported amount     Currency translation benefit/(cost)  
  
 Reported amount     Currency translation benefit/(cost) 
In millions, except per share data 2016
 2015
 2014
 2016
 2015
 2014
 2019
 2018
 2017
 2019
 2018
 2017
Revenues $24,622
 $25,413
 $27,441
 $(692) $(2,829) $(570) $21,077
 $21,025
 $22,820
 $(606) $123
 $186
Company-operated margins 2,596
 2,511
 2,881
 (89) (331) (60) 1,660
 1,747
 2,309
 (51) 4
 17
Franchised margins 7,609
 7,278
 7,575
 (118) (626) (119) 9,455
 9,039
 8,312
 (256) 57
 25
Selling, general & administrative expenses 2,384
 2,434
 2,488
 28
 158
 21
 2,229
 2,200
 2,231
 29
 (13) (10)
Operating income 7,745
 7,146
 7,949
 (173) (771) (152) 9,070
 8,823
 9,553
 (280) 56
 28
Net income 4,686
 4,529
 4,758
 (97) (473) (114) 6,025
 5,924
 5,192
 (165) 33
 2
Earnings per common share—diluted 5.44
 4.80
 4.82
 (0.11) (0.50) (0.12) 7.88
 7.54
 6.37
 (0.21) 0.04
 —
 
NET INCOME AND DILUTED EARNINGS PER COMMON SHARE
In 2016,2019, net income increased 3% (6%2% (4% in constant currencies) to $4.7$6.0 billion and diluted earnings per common share increased 13% (16%5% (7% in constant currencies) to $5.44.$7.88. Foreign currency translation had a negative impact of $0.11$0.21 on diluted earnings per share.
In 2015,2018, net income decreased 5% (increased 5%increased 14% (13% in constant currencies) to $4.5$5.9 billion and diluted earnings per common share was relatively flat (increased 10%increased 18% (18% in constant currencies) at $4.80.to $7.54. Foreign currency translation had a negativepositive impact of $0.50$0.04 on diluted earnings per share.
Results in 2016 benefited from2019 reflected stronger operating performance and higherprimarily due to an increase in sales-driven franchised margin dollars, partly offset by lower gains on sales of restaurant businesses mostly(mostly in the U.S., while results) and higher G&A spend. Results in 2015 benefited from higher2018 reflected a lower effective tax rate, and stronger operating performance due to an increase in sales-driven franchised margins and a gain on the strategic sale of a unique restaurant property in the U.S.
Both 2016 and 2015 results weremargin dollars, partly offset by net pre-tax impairmentlower Company-operated margin dollars due to the impact of refranchising.


McDonald's Corporation 2019 Annual Report 10

Outlined below is additional information for the full year 2019, 2018, and other charges of $342 million and $307 million, respectively, primarily related to goodwill impairment and other asset write-offs in conjunction with the Company's refranchising initiatives, restructuring and incremental restaurant closings. The 2015 charges combined with the gain on the strategic sale of a unique restaurant property2017:
Diluted Earnings Per Common Share Reconciliation
  Amount  Increase/(decrease)  
Increase/(decrease)
excluding currency
translation
 
  2019
 2018
 2017
 2019
 2018
 2019
 2018
GAAP earnings per share-diluted $7.88
 $7.54
 $6.37
 5% 18% 7% 18%
Income tax (benefit) cost, net (0.11) 0.10
 0.82
        
Strategic charges 0.07
 0.26
 (0.53)        
Non-GAAP earnings per share-diluted $7.84
 $7.90
 $6.66
 (1)% 19% 2% 18%

Included in the U.S. had 2019 results were:
◦$84 million, or $0.11 per share, of income tax benefit due to new regulations issued in the fourth quarter 2019 related to the Tax Act; and
◦$74 million of pre-tax strategic charges, or $0.07 per share, primarily related to impairment associated with the purchase of our joint venture partner's interest in the India Delhi market, partly offset by gains on the sales of property at the former Corporate headquarters.
Included in the 2018 results were:
◦$75 million, or $0.10 per share, of net tax cost associated with the final 2018 adjustments to the provisional amounts recorded in December 2017 under the Tax Act;
◦$140 million of pre-tax, non-cash impairment charges, or $0.17 per share; and
◦$94 million of pre-tax strategic restructuring charges, or $0.09 per share.
Included in the 2017 results were:
◦$700 million of net tax cost associated with the Tax Act, or $0.82 per share; and
◦a pre-tax gain of $850 million on the sale of the Company’s businesses in China and Hong Kong, offset in part by $150 million of restructuring and impairment charges in connection with the Company’s global G&A and refranchising initiatives, for a net benefit of $0.53 per share.
Excluding the above 2019 and 2018 items, 2019 net negative impact onincome decreased 3% (1% in constant currencies), and diluted earnings per share of $0.18decreased 1% (increased 2% in 2015, while the 2016 charges had aconstant currencies). Excluding items impacting 2018 and 2017, 2018 net negative impact onincome increased 14% (14% in constant currencies), and diluted earnings per share of $0.28increased 19% (18% in 2016.constant currencies).
The Company repurchased 92.325.0 million shares of its stock for $11.1$5.0 billion in 20162019 and 61.832.2 million shares of its stock for $6.2$5.2 billion in 2015,2018, driving reductions in weighted-average shares outstanding on a diluted basis in both periods, which positively benefited earnings per share.


McDonald's Corporation 2016 Annual Report 17

REVENUES
The Company’sCompany's revenues consist of sales by Company-operated restaurants and fees from franchised restaurants operated by franchisees.conventional franchisees, developmental licensees and affiliates. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales with minimum rent payments, and initial fees. Revenues from franchised restaurants that are licensed to foreign affiliates and developmental licensees and affiliates include a royalty based on a percent of sales, and generally include initial fees. Initial fees are recognized evenly over the franchise term.
Franchised restaurants represent 93% of McDonald's restaurants worldwide at December 31, 2019. The Company's current mix of Company-owned and franchised restaurants enables the Company continues to accelerate the pace of refranchising to optimize its restaurant ownership mix, generate more stable and predictable revenue and cash flow streams, and operate with a less resource-intensive structure. The shiftstreams. Refranchising to a greater percentage of franchised restaurants may negatively impactsimpact consolidated revenues as Company-operated sales are replaced by franchised sales,revenues, where the Company receives rent and/or royalty revenue based on a percentagepercent of sales.
In 2016,2019, revenues decreased 3% (flat in constant currencies) due towere relatively flat with the impact of refranchising, partly offset by positive comparable sales. In 2015, revenues decreased 7%prior year (increased 3% in constant currencies), partly. The constant currency increase was primarily due to foreign currency translation. In constant currencies, revenue growth was driven by positive comparable sales and the benefit from expansion.
Revenues
  Amount  Increase/(decrease)  
Increase/(decrease)
excluding currency
translation
 
Dollars in millions 2016
 2015
 2014
 2016
 2015
 2016
 2015
Company-operated sales:              
U.S. $3,743
 $4,198
 $4,351
 (11%) (4%) (11%) (4%)
International Lead Markets 4,278
 4,798
 5,443
 (11) (12) (6) 1
High Growth Markets 5,378
 5,442
 6,071
 (1) (10) 4
 6
Foundational Markets & Corporate 1,896
 2,050
 2,304
 (8) (11) (5) 5
Total $15,295
 $16,488
 $18,169
 (7%) (9%) (4%) 2%
Franchised revenues:              
U.S. $4,510
 $4,361
 $4,300
 3% 1% 3% 1%
International Lead Markets 2,945
 2,817
 3,101
 5
 (9) 8
 6
High Growth Markets 783
 731
 774
 7
 (5) 9
 9
Foundational Markets & Corporate 1,089
 1,016
 1,097
 7
 (7) 11
 10
Total $9,327
 $8,925
 $9,272
 5% (4%) 6% 5%
Total revenues:              
U.S. $8,253
 $8,559
 $8,651
 (4%) (1%) (4%) (1%)
International Lead Markets
 7,223
 7,615
 8,544
 (5) (11) (1) 3
High Growth Markets 6,161
 6,173
 6,845
 0
 (10) 4
 6
Foundational Markets & Corporate 2,985
 3,066
 3,401
 (3) (10) 1
 7
Total $24,622
 $25,413
 $27,441
 (3%) (7%) 0% 3%
               
US: In 2016, the decrease in revenues reflected the impact of refranchising, partly offset by modestly positive comparable sales. In 2015, the decrease reflected the impact of refranchising.
International Lead Markets: In 2016, the decrease in revenues was due to the impact of refranchising, partly offset by strong comparable sales, growth across most of the segment. In 2015, revenues decreased due to foreign currency translation. In constant currencies, revenues increased due to positive comparable sales performance, primarily in the U.K., Australia and Canada, partly offset by the impact of refranchising. In 2018, revenues decreased 8% (8% in constant currencies), reflecting the Company's strategic refranchising initiatives, partly offset by positive comparable sales.

 
McDonald's Corporation 2019 Annual Report 11

High Growth Markets: In 2016 and 2015, revenue growth was negatively impacted by foreign currency translation. In constant currencies, 2016 revenues increased due to positive comparable sales growth
Revenues 
  Amount  Increase/(decrease)  
Increase/(decrease)
excluding currency
translation
  
Dollars in millions 2019
 2018
 2017
 2019
 2018
 2019
 2018
 
Company-operated sales:               
U.S. $2,490
 $2,665
 $3,260
 (7%) (18%) (7%) (18%) 
International Operated Markets 6,334
 6,668
 6,845
 (5) (3) (1) (3) 
International Developmental Licensed Markets & Corporate 597
 680
 2,614
 (12) (74)*(7) (75)*
Total $9,421
 $10,013
 $12,719
 (6%) (21%) (3%) (22%) 
Franchised revenues:               
U.S. $5,353
 $5,001
 $4,746
 7% 5% 7% 5% 
International Operated Markets 5,064
 4,839
 4,271
 5
 13
 10
 11
 
International Developmental Licensed Markets & Corporate 1,239
 1,172
 1,084
 6
 8
 10
 11
 
Total $11,656
 $11,012
 $10,101
 6% 9% 9% 8% 
Total revenues:               
U.S. $7,843
 $7,666
 $8,006
 2% (4%) 2% (4%) 
International Operated Markets 11,398
 11,507
 11,116
 (1) 4
 4
 2
 
International Developmental Licensed Markets & Corporate 1,836
 1,852
 3,698
 (1) (50)*4
 (50)*
Total $21,077
 $21,025
 $22,820
 0% (8%) 3% (8%) 
* Reflects the impact of refranchising the Company's businesses in China and most other markets, and continued expansionHong Kong in Russia. In constant currencies, 2015 revenues increased due to expansion and positive comparable sales, primarily driven by Russia and China.2017.
•
U.S.:Revenues in 2019 and 2018 reflected positive comparable sales. The impact of refranchising partly offset these benefits in 2019 and more than offset these benefits in 2018.
•
International Operated Markets: In 2019 and 2018, the constant currency increase in revenues reflected positive comparable sales across all markets, partly offset by the impact of refranchising.


18 McDonald's Corporation 2016 Annual Report

The following tables present comparable sales, comparable guest counts and Systemwide sales increases/(decreases):
Comparable sales and guest count increases/(decreases)
       
  2016  2015  2014 
  
 Sales
 
Guest
Counts

 Sales
 
Guest
Counts

 Sales
 
Guest
Counts

U.S. 1.7% (2.1%) 0.5% (3.0%) (2.1%) (4.1%)
International Lead Markets
 3.4
 1.5
 3.4
 1.0
 0.8
 (1.2)
High Growth Markets 2.8
 (0.8) 1.8
 (2.2) (2.8) (2.9)
Foundational Markets & Corporate 10.0
 1.9
 0.7
 (3.7) (0.1) (4.8)
Total 3.8% (0.3%) 1.5% (2.3%) (1.0%) (3.6%)
Comparable sales and guest count increases/(decreases)
       
  2019  2018  2017 
   Sales
Guest
Counts

 Sales
Guest
Counts

 Sales
Guest
Counts

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

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

Systemwide sales increases/(decreases)
         
      
Increase/(decrease)
excluding currency
translation
 
  2016
 2015
 2016
 2015
U.S. 2% 1% 2% 1%
International Lead Markets
 1
 (10) 5
 5
High Growth Markets 3
 (7) 6
 8
Foundational Markets & Corporate 8
 (13) 11
 3
Total 3% (6%) 5% 3%
Systemwide sales increases/(decreases)***
         
      
Increase/(decrease)
excluding currency
translation
 
  2019
 2018
 2019
 2018
U.S. 5% 2% 5% 2%
International Operated Markets 3
 10
 8
 8
International Developmental Licensed Markets & Corporate 5
 6
 10
 9
Total 4% 6% 7% 6%
*** Unlike comparable sales, the Company has not excluded hyper-inflationary market results (currently, only Venezuela) from Systemwide sales as these sales are the basis on which the Company calculates and records revenues. The difference between comparable sales growth rates and Systemwide sales growth rates are due to both restaurant expansion and the hyper-inflationary impact.


McDonald's Corporation 2019 Annual Report 12

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
 Amount  Increase/(decrease)  
Increase/(decrease)
excluding currency
translation
  Amount  Increase/(decrease)  
Increase/(decrease)
excluding currency
translation
  
Dollars in millions 2016
 2015
 2014
 2016
 2015
 2016
 2015
 2019
 2018
 2017
 2019
 2018
 2019
 2018
 
U.S. $32,646
 $31,639
 $31,096
 3% 2% 3% 2% $37,923
 $35,860
 $34,379
 6% 4% 6% 4% 
International Lead Markets
 17,049
 16,313
 17,921
 5
 (9) 8
 6
High Growth Markets 4,858
 4,525
 4,678
 7
 (3) 10
 10
Foundational Markets & Corporate 15,154
 13,749
 15,922
 10
 (14) 14
 3
International Operated Markets 28,853
 27,557
 24,386
 5
 13
 10
 11
 
International Developmental Licensed Markets & Corporate 23,981
 22,717
 19,426
 6
 17
*10
 20
*
Total $69,707
 $66,226
 $69,617
 5% (5%) 7% 4% $90,757
 $86,134
 $78,191
 5% 10% 8% 10% 
                             
Ownership type               
Conventional franchised $66,415
 $63,251
 $59,151
 5% 7% 7% 6% 
Developmental licensed 14,392
 13,519
 12,546
 6
 8
 13
 13
 
Foreign affiliated 9,950
 9,364
 6,494
 6
 44
*7
 42
*
Total $90,757
 $86,134
 $78,191
 5% 10% 8% 10% 

* Reflects the impact of refranchising the Company's businesses in China and Hong Kong in 2017.
McDonald's Corporation 2016 Annual Report 19


FRANCHISED MARGINS
Franchised margin dollars represent revenues from franchised restaurants less the Company’s costs associated with those restaurants, primarily occupancy costs (rent and depreciation) associated with those sites.. Franchised margin dollars represented about 75%85% of the combined restaurant margins in 2016, 2015 2019and 2014.2018, and about 80% in 2017.
In 2016,2019, franchised margin dollars increased $331$416 million or 5% (6%(7% in constant currencies). In 2015,2018, franchised margin dollars decreased $297increased $727 million or 4% (increased 4%9% (8% in constant currencies), due to foreign currency translation.. For both 20162019 and 2015,2018, the constant currency increases were due to positive comparable sales performance across all segments, as well as expansion and the impact of refranchising.
In connection with the Company's refranchising initiatives, the Company expects to refranchise about 4,000 restaurants for the three-year period ending 2017. While this refranchising activity may have a dilutive effect on the franchised margin percent, it typically results in higher franchised margin dollars.
Franchised margins
Amount
% of Revenue
 Amount
% of Revenue
 Amount
% of Revenue
 Increase/(decrease)  Increase/(decrease) excluding currency translation Amount
% of Revenue
 Amount
% of Revenue
 Amount
% of Revenue
 Increase/(decrease)  Increase/(decrease) excluding currency translation 
Dollars in millions2016 2015 2014 2016
 2015
 2016
 2015
2019 2018 2017 2019
 2018
 2019
 2018
U.S.$3,726
82.6% $3,606
82.7% $3,572
83.1% 3% 1% 3% 1%$4,227
79.0% $4,070
81.4% $3,913
82.4% 4% 4% 4% 4%
International Lead Markets2,363
80.2
 2,254
80.0
 2,486
80.1
 5
 (9) 8
 6
High Growth Markets550
70.2
 520
71.1
 555
71.7
 6
 (6) 8
 7
Foundational Markets & Corporate970
89.1
 898
88.3
 962
87.7
 8
 (7) 12
 11
International Operated Markets4,018
79.3
 3,829
79.1
 3,365
78.8
 5
 14
 10
 11
International Developmental Licensed Markets & Corporate1,210
97.7
 1,140
97.3
 1,034
95.4
 6
 10
 11
 13
Total$7,609
81.6% $7,278
81.5% $7,575
81.7% 5% (4%) 6% 4%$9,455
81.1% $9,039
82.1% $8,312
82.3% 5% 9% 7% 8%
U.S.: In 2016 and 2015,The adoption of Accounting Standard Codification ("ASC") Topic 842, "Leases" ("ASC 842") had no impact on franchised margin dollars, but had a negative impact on the decreases in theCompany's franchised margin percent were due to higher occupancy costs, partly offset by positive comparable sales.
International Lead Markets: In 2016, the increasefor 2019 of approximately 1.3% in the franchised margin percent reflectedU.S. and 0.7% on a consolidated basis. ASC 842 clarified the benefit from positive comparable sales performance, partly offset by higher occupancy costspresentation of sub-lease income and lease expense, requiring the straight-line impact of refranchising. In 2015, the slight decrease reflected the benefit from positive comparable sales performancefixed rent escalations to be presented on a gross basis in lease income and the negative impact from higher occupancy costs and refranchising.lease expense.
•
U.S.: In 2019 and 2018, the decreases in the franchised margin percents were primarily due to higher depreciation costs related to investments in EOTF, partly offset by the benefit from positive comparable sales. 2019 also reflected the impact of the new lease standard.
•
International Operated Markets: In 2019 and 2018, the increases in the franchised margin percent primarily reflected the benefit from strong comparable sales.

 
High Growth Markets: In 2016, the decrease in the franchised margin percent was primarily due to the impact of refranchising and higher occupancy costs, partly offset by the benefit of positive comparable sales performance. In 2015, the decrease was primarily due to the impact of refranchising.McDonald's Corporation 2019 Annual Report 13
The franchised margin percent in Foundational Markets & Corporate is higher relative to the other segments due to a larger proportion of developmental licensed and/or affiliated restaurants where the Company receives royalty income with no corresponding occupancy costs.

COMPANY-OPERATED MARGINS
Company-operated margin dollars represent sales by Company-operated restaurants less the operating costs of these restaurants. In 2016,2019, Company-operated margin dollars increased $85decreased $87 million or 3% (7%5% (2% in constant currencies). In 2015,2018, Company-operated margin dollars decreased $370$562 million or 13% (1%24% (25% in constant currencies). primarily reflecting the Company's sale of its businesses in China and Hong Kong in 2017.
Company-operated margins
Amount
% of Revenue
 Amount
% of Revenue
 Amount
% of Revenue
 Increase/(decrease)  Increase/(decrease) excluding currency translation Amount
% of Revenue
 Amount
% of Revenue
 Amount
% of Revenue
 Increase/(decrease)  Increase/(decrease) excluding currency translation 
Dollars in millions2016 2015 2014 2016
 2015
 2016
 2015
2019 2018 2017 2019
 2018
 2019
 2018
U.S.$618
16.5% $632
15.1% $756
17.4% (2%) (16%) (2%) (16%)$388
15.6% $397
14.9% $523
16.0% (2%) (24%) (2%) (24%)
International Lead Markets886
20.7
 961
20.0
 1,080
19.8
 (8) (11) (3) 2
High Growth Markets796
14.8
 659
12.1
 780
12.9
 21
 (16) 26
 3
Foundational Markets & Corporate296
15.6
 259
12.7
 265
11.5
 14
 (2) 17
 15
International Operated Markets1,266
20.0
 1,327
19.9
 1,336
19.5
 (5) (1) (1) (1)
International Developmental Licensed Markets & Corporaten/m
n/m
 n/m
n/m
 n/m
n/m
 n/m
 n/m
 n/m
 n/m
Total$2,596
17.0% $2,511
15.2% $2,881
15.9% 3% (13%) 7% (1%)$1,660
17.6% $1,747
17.4% $2,309
18.2% (5%) (24%) (2%) (25%)
U.S.: In 2016, the increase in the Company-operated margin percent was due to a higher average check and lower commodity costs, partly offset by the impact of negative guest counts and higher labor costs. In 2015, the decrease was primarily due to the incremental investment in wages and benefits for eligible Company-operated restaurant employees, effective July 1, 2015, designed to improve restaurant performance and enhance our employment proposition.n/m Not meaningful
International Lead Markets: In 2016 and 2015, the increases in the Company-operated margin percent were primarily due to positive comparable sales, partly offset by higher labor and occupancy costs. In 2015, the margin percent also benefited from refranchising efforts.
High Growth Markets: In 2016, the increase in the Company-operated margin percent was primarily due to positive comparable sales and improved restaurant profitability in China, which benefited from recent value-added tax ("VAT") reform, partly offset by higher labor costs across the segment. In 2015, the decrease was primarily due to the negative impact from currency and inflationary pressures in Russia, and higher labor and occupancy costs across the segment. This was partly offset by the benefit from recovery in China from a 2014 supplier issue.


20 McDonald's Corporation 2016 Annual Report

•
U.S.:In 2019, the increase in the Company-operated margin percent primarily reflected the benefit from positive comparable sales, partly offset by higher commodity costs, wages and depreciation expense associated with EOTF deployment. In 2018, the Company-operated margin percent decreased, reflecting the impact of accelerated deployment of EOTF (including the related decrease in labor productivity and higher depreciation expense), and higher wages and commodity costs, which more than offset the benefit from positive comparable sales and refranchising.
•
International Operated Markets:In 2019 and 2018, the increase in the Company-operated margin percent was primarily due to strong comparable sales partly offset by higher labor and occupancy & other costs.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses decreased2% (increased 1% (3% in constant currencies) in 20162019 and decreased 2% (increased 4%1% (2% in constant currencies) in 2015.2018. The results for 2019 and 2018 reflected investments in technology and research & development. The decrease in 2016 was due to2018 also reflected lower employee-related costs, resulting from the Company's recent restructuring and other cost-saving initiatives, mostly offset by higher incentive-based compensation expenses reflecting improved Company performance. The decrease in 2015 benefited from foreign currency translation. In constant currencies, selling, general and administrative expenses increased due to higher incentive-based compensation costs reflecting improved performance, partly offset by lower employee-related costs resulting fromrelated to the Company's restructuring initiatives.2018 Worldwide Owner/Operator Convention and sponsorship of the 2018 Winter Olympics.
Selling, general & administrative expenses
 Amount  Increase/(decrease)  
Increase/(decrease)
excluding currency
translation
  
Dollars in millions2016
 2015
 2014
 2016
 2015
 2016
 2015
 
U.S.$741
 $766
 $772
 (3%) (1%) (3%) (1%) 
International Lead Markets464
 534
 621
 (13) (14) (10) (1) 
High Growth Markets294
 326
 389
 (10) (16) (6) (5) 
Foundational Markets & Corporate(1)
885
 808
 706
 10
 15
 10
 20
 
Total (Selling, General & Administrative Expenses)$2,384
 $2,434
 $2,488
 (2%) (2%) (1%) 4% 
               
Less: Incentive-Based Compensation(2)
418
 317
 171
 32% 85% 33% 95% 
Total (Excluding Incentive-Based Compensation)$1,966
 $2,117
 $2,317
 (7%) (9%) (6%)
(3) 
(2%)
(4) 
 Amount  Increase/(decrease)  
Increase/(decrease)
excluding currency
translation
  
Dollars in millions2019
 2018
 2017
 2019
 2018
 2019
 2018
 
U.S.$587
 $591
 $624
 (1%) (5%) (1%) (5%) 
International Operated Markets

629
 641
 654
 (2) (2) 3
 (4) 
International Developmental Licensed Markets & Corporate(1)
1,013
 968
 953
 5
 2
 5
 2
 
Total Selling, General & Administrative Expenses$2,229
 $2,200
 $2,231
 1% (1%) 3% (2%) 
               
Less: Incentive-Based Compensation(2)
289
 284
 336
 2% (16%) 3% (16%) 
Total Excluding Incentive-Based Compensation$1,940
 $1,916
 $1,895
 1% 1% 3% 1% 
(1)Included in FoundationalInternational Developmental Licensed Markets & Corporate are home office support costs in areas such as facilities, finance, human resources, information technology and R&D, legal, marketing, restaurant operations, supply chain and training.
(2)Includes all cash incentives and share-based compensation expense.
(3)Excludes $24.8 million of foreign currency benefit.
(4)Excludes $142.1 million of foreign currency benefit.
Selling, general and administrative expenses as a percent of Systemwide sales was 2.8%2.2% in 20162019, 2.9%2.3% in 20152018 and 2.8%2.5% in 2014.2017. Management believes that analyzing selling, general and administrative expenses as a percent of Systemwide sales is meaningful because these costs are incurred to support the overall McDonald's business.
In connection with our turnaround plan, the Company established a net selling, general and administrative savings target of $500 million to be achieved by the end of 2018, excluding the effects of any foreign currency changes. These savings represent a reduction of about 20% from our selling, general and administrative base of $2.6 billion at the beginning of 2015. This base included incentive-based compensation of approximately $330 million, which assumed achievement of planned operating performance. In 2014, the lower incentive-based compensation reflected nominal payouts for the Company's short-term cash bonus program.

McDonald's Corporation 2019 Annual Report 14

OTHER OPERATING (INCOME) EXPENSE, NET
Other operating (income) expense, net
In millions2016
 2015
 2014
2019
 2018
 2017
Gains on sales of restaurant businesses$(283) $(146) $(137)$(127) $(304) $(295)
Equity in (earnings) losses of unconsolidated affiliates(55) 147
 9
Equity in earnings of unconsolidated affiliates(154) (152) (184)
Asset dispositions and other (income) expense, net72
 (27) 108
23
 (13) 19
Impairment and other charges (gains), net342
 235
 39
74
 232
 (703)
Total$76
 $209
 $19
$(184) $(237) $(1,163)
Gains on sales of restaurant businesses
In 2016, the Company realized higher2019, gains on sales of restaurant businesses decreased primarily due to fewer restaurant sales in the U.S.
Equity in (earnings) losses of unconsolidated affiliates
Equity in earnings of unconsolidated affiliates increased in 2016 mainly due to improved performance in Japan. In 2015, the decrease was primarily due to weaker results in Japan, including the decision to close under-performing restaurants.
Asset dispositions and other (income) expense, net
In 2015, results included a gain of $135 million on the strategic sale of a unique restaurant property in the U.S., mostly offset by asset write-offs of $72 million resulting from the decision to close under-performing restaurants, primarily in the U.S. and China.
Impairment and other charges (gains), net
ImpairmentIn 2019, impairment and other charges (gains), net included pre-taxprimarily reflected $99.4 million of impairment associated with the purchase of our joint venture partner's interest in the India Delhi market. Impairment was recorded to reflect the write-down of net assets to fair value in accordance with accounting rules. This was partly offset by $20.3 million of gains on the sales of property at the former Corporate headquarters which were impaired in 2015 based on estimated fair values.
The results in 2018 reflected $140 million of impairment charges incurred primarilydue to the Company’s assessment of the recoverability of long-lived assets as well as the strategic restructuring charge in Foundational Marketsthe U.S. of $85.0 million.
The results in 2017 reflected a gain on the Company's sale of its businesses in China and Corporate,Hong Kong of $850 million, partly offset by $150 million of restructuring and charges incurred in connection with global restructuring activities.impairment charges.

McDonald's Corporation 2016 Annual Report 21

OPERATING INCOME
Operating income
Amount  Increase/(decrease)  Increase/(decrease) excluding currency translation Amount  Increase/(decrease)  Increase/(decrease) excluding currency translation 
Dollars in millions2016
 2015
 2014
 2016
 2015
 2016
 2015
2019
 2018
 2017
 2019
 2018
 2019
 2018
U.S.$3,769
 $3,612
 $3,523
 4% 3% 4% 3%$4,069
 $4,016
 $4,023
 1% 0% 1% 0%
International Lead Markets
2,838
 2,713
 3,034
 5
 (11) 9
 4
High Growth Markets1,049
 841
 934
 25
 (10) 29
 9
Foundational Markets & Corporate89
 (20) 458
 n/m
 n/m
 n/m
 (74)
International Operated Markets4,789
 4,643
 4,173
 3
 11
 8
 9
International Developmental Licensed Markets & Corporate212
 164
 1,357
 29
 (88) 59
 (86)
Total$7,745
 $7,146
 $7,949
 8% (10%) 11% 0%$9,070
 $8,823
 $9,553
 3% (8%) 6% (8%)

U.S.: In 2016, the increase in operating income reflected higher sales-driven franchised margin dollars and higher gains from sales of restaurant businesses, partly offset by the negative impact from lapping the 2015 gain on the strategic sale of a unique restaurant property. In 2015, the increase was primarily due to the aforementioned gain on sale of property and higher franchised margin dollars, partly offset by lower Company-operated margin dollars reflecting higher costs associated with the incremental investment in wages and benefits for eligible Company-operated restaurant employees, effective July 1, 2015. In addition, 2015 results were negatively impacted by restructuring and restaurant closing charges.
International Lead Markets: In 2016, the constant currency operating income increase was primarily due to sales-driven improvements in franchised margin dollars across most markets. In 2015, the operating income decrease was due to foreign currency translation. In constant currencies, the operating income increase was primarily due to higher franchised margin dollars, benefiting from positive comparable sales performance.
High Growth Markets: In 2016, the constant currency operating income increase was driven primarily by improved restaurant profitability in China. In 2015, the operating income decrease was due to foreign currency translation. In constant currencies, the operating income increase reflected recovery from a 2014 supplier issue in China and higher franchised margin dollars, partly offset by restaurant closing charges.
Foundational Markets and Corporate: In 2016, the constant currency operating income increase reflected Japan's strong performance, partly offset by the net impact of the current and prior year impairment and restructuring charges from the Company's global refranchising and restructuring initiatives. In 2015, the constant currency decrease was due to strategic charges across the segment and weaker results in Japan, as well as higher Corporate selling, general and administrative expenses, including the centralization of certain costs.
Operating margin
Operating margin was 31.5% in 2016, 28.1% in 2015 and 29.0% in 2014.
•
Operating Income: Results for 2019 included $74 million of net impairment and strategic charges. Results for 2018 included $140 million of impairment charges and $94 million of strategic restructuring charges. Results for 2017 included a gain on the Company's sale of its businesses in China and Hong Kong of $850 million, partly offset by $150 million of restructuring and impairment charges. Excluding these current year and prior year items, operating income increased 1% (4% in constant currencies) for 2019 and increased 2% (2% in constant currencies) for 2018.
•
U.S.: Excluding the 2018 strategic restructuring charge of $85 million, operating income decreased 1% for 2019 and increased 2% for 2018. 2019 results reflected lower gains on sales of restaurant businesses, partly offset by higher franchised margin dollars. 2018 results reflected higher franchised margin dollars and lower G&A costs, partly offset by lower Company-operated margin dollars.
•
International Operated Markets: In 2019 and 2018, the constant currency operating income increase was primarily due to sales-driven improvements in franchised margin dollars. 2018 results also reflected higher gains on sales of restaurant businesses in the U.K. and Australia compared to 2017.
•
Operating margin: Operating margin was 43.0% in 2019, 42.0% in 2018 and 41.9% in 2017. Excluding the impact of the current and prior year impairment and strategic charges, as well as the 2017 refranchising gain, operating margin was 43.4%, 43.1% and 38.8% for the years ended 2019, 2018 and 2017, respectively.
INTEREST EXPENSE
Interest expense increased 39%14% (16% in constant currencies) and 11%7% (6% in 2016constant currencies) in 2019 and 2015, respectively, primarily due to2018, respectively. Both periods reflected higher average debt balancesbalances. Interest expense in connection with2019 also reflected the Company's strategyimpact of interest incurred on certain Euro denominated deposits due to optimize its capital structure, partly offset bythe current interest rate environment, while 2018 results reflected lower average interest rates.

McDonald's Corporation 2019 Annual Report 15

NONOPERATING (INCOME) EXPENSE, NET
Nonoperating (income) expense, net
In millions2016 2015 2014 2019 2018 2017 
Interest income $(4) $(9) $(20) $(37) $(4) $(7)
Foreign currency and hedging activity (24) (56) 20
 (48) 5
 26
Other expense 22
 17
 1
 15
 25
 39
Total $(6) $(48) $1
 $(70) $26
 $58
Foreign currency and hedging activity includes net gains or losses on certain hedges that reduce the exposure to variability on certain intercompany foreign currency cash flow streams.



22 McDonald's Corporation 2016 Annual Report

PROVISION FOR INCOME TAXES
In 2016, 20152019, 2018 and 2014,2017, the reported effective income tax rates were 31.7%24.9%, 30.9%24.2% and 35.5%39.4%, respectively.
In 2014,The effective income tax rate for 2019 reflected $84 million of income tax benefit due to new regulations issued in the higherfourth quarter 2019 related to the Tax Act. Excluding the income tax benefit, the effective income tax rate was 25.9% for the year 2019.
The effective income tax rate for 2018 reflected the final 2018 adjustments to the provisional amounts recorded in 2017 under the Tax Act of $75 million net tax cost. Excluding the 2018 impact of the Tax Act and impairment charges, the effective income tax rate was 22.9% for the year 2018.
Excluding these current year and prior year items, the lower effective income tax rate for 2018 primarily due toreflected a benefit from a change in tax reserves for 2003-2010 resulting from an unfavorable lower tax court ruling inas a foreign tax jurisdiction,result of global audit progression, as well as the impact of changeslower tax costs in tax reserves2018 related to audit progression in multiple foreign tax jurisdictions. These items had a negative impact of 4.1% onongoing taxes under the effective tax rate.Tax Act.
Consolidated net deferred tax liabilities included tax assets, net of valuation allowance, of $5.3 billion in 2019 and $2.0 billion in 2016 and $1.8 billionin 2015.2018. Substantially all of the net tax assets are expected to be realized in the U.S. and other profitable markets.
RECENTLY ISSUED ACCOUNTING STANDARDS
Recently issued accounting standards are included in Part II, Item 8,on page34 39 of this Form 10-K.
Cash Flows
CASH FLOWS
The Company generates significant cash from its operations and has substantial credit availability and capacity to fund operating and discretionary spending such as capital expenditures, debt repayments, dividends and share repurchases.
Cash provided by operations totaled $6.1$8.1 billion andin 2019, an increase of $1.1 billion or 17%. Free cash flow was $5.7 billion in 2019, an increase of $1.5 billion or 36%. The Company’s free cash flow conversion rate was $4.2 billion95% in 2016, while2019 and 71% in 2018 (see reconciliation in Exhibit 12). Cash provided by operations increased in 2019 compared to 2018 primarily due to a decrease in accounts receivable and lower income tax payments. In 2018, cash provided by operations totaled $6.5$7.0 billion, and free cash flow was $4.7an increase of $1.4 billion in 2015. In 2016, cash provided by operations decreased $480 million or 7%25% compared with 2015, primarily due to higher income tax payments primarily outside the U.S. and other working capital changes, partly offset by higher net income. In 2015, cash provided by operations decreased $191 million or 3% compared with 20142017, primarily due to lower operating results, including the impact from weaker foreign currencies, and other operating activity, partly offset by changes in working capital.tax payments.
Cash used for investing activities totaled $982 million$3.1 billion in 2016, a decrease2019, an increase of $438$616 million compared with 2015.2018. The decreaseincrease was primarily reflected higher proceeds from salesdue to the Company’s strategic acquisitions of restaurant businesses.a real estate entity, Dynamic Yield and Apprente, partly offset by lower capital expenditures. Cash used for investing activities totaled $1.4$2.5 billion in 2015, a decrease2018, an increase of $885 million$3.0 billion compared with 2014.2017. The decreaseincrease was primarily reflecteddue to lower proceeds from the sale of restaurant businesses in 2018 including the comparison to the proceeds received in 2017 associated with the sale of the Company's businesses in China and Hong Kong, as well as higher capital expenditures.
Cash used for financing activities totaled $11.3$5.0 billion in 2016,2019, a decrease of $955 million compared with 2018, primarily due to net debt activity. Cash used for financing activities totaled $5.9 billion in 2018, an increase of $12.0 billion$639 million compared with 2015,2017, primarily due to a decrease in net borrowings and higher treasury stock purchases. Cash provided by financing activities totaled $735 million in 2015, an increase of $5.4 billion compared with 2014, primarily due to an increase in net borrowings, partly offset by higher treasury stock purchases.
The Company’s cash and equivalents balance was $1.2 billion$899 million and $7.7 billion$866 million at year end 20162019 and 2015,2018, respectively. The decrease was mostly due to higher net borrowings in 2015 that were used for share repurchases in 2016. 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 2016,2019, the Company opened 8961,231 restaurants and closed 522391 restaurants. In 2015,2018, the Company opened 9891,081 restaurants and closed 722467 restaurants. The increase in restaurant closings in 2015 reflected a strategic review that resulted in additional closures of under-performing restaurants. The Company closes restaurants for a variety of reasons, such as existing sales and profit performance or loss of real estate tenure.
Systemwide restaurants at year end
 2016
 2015
 2014
U.S.14,155
 14,259
 14,350
International Lead Markets6,851
 6,802
 6,717
High Growth Markets5,552
 5,266
 5,031
Foundational Markets & Corporate10,341
 10,198
 10,160
Total36,899
 36,525
 36,258
 2019
 2018
 2017
U.S.13,846
 13,914
 14,036
International Operated Markets10,465
 10,263
 10,098
International Developmental Licensed Markets & Corporate14,384
 13,678
 13,107
Total38,695
 37,855
 37,241
Approximately 85%93% of the restaurants at year-end 20162019 were franchised, including 92%95% in the U.S., 84% in International Lead Markets, 48% in High GrowthOperated Markets and 94%98% in Foundationalthe International Developmental Licensed Markets.
Capital expenditures decreased $348 million or 13% in 2016 were essentially flat with 2015,2019 primarily due to higherlower reinvestment related to reimages,in existing restaurants, partly offset by feweran increase in new restaurant openings.openings that required the Company's capital. Capital expenditures decreased $769increased $888 million or 30%48% in 2015,2018, primarily due to fewer new restaurant openings and lower reinvestment atin existing restaurants.restaurants (including investment in EOTF).



McDonald's Corporation 2019 Annual Report 16

Capital expenditures invested in the U.S., International Lead markets and High Growth markets represented over 90% of the total in 2016, 2015 and 2014.
Capital expenditures
In millions2016
 2015
 2014
2019
 2018
 2017
New restaurants$674
 $892
 $1,435
$605
 $488
 $537
Existing restaurants1,108
 842
 1,044
1,702
 2,111
 1,236
Other(1)
39
 80
 104
87
 143
 81
Total capital expenditures$1,821
 $1,814
 $2,583
$2,394
 $2,742
 $1,854
Total assets$31,024
 $37,939
 $34,227
$47,511
 $32,811
 $33,804
(1)Primarily corporate equipment and other office-related expenditures
New restaurant investments in all years were concentrated in markets with strong returns and/or opportunities for long-term growth. Average development costs vary widely by market depending on the types of restaurants built and the real estate and construction costs within each market. These costs, which include land, buildings and equipment, are managed through the use of optimally-sized restaurants, construction and design efficiencies, as well as leveraging the Company's global sourcing network and leveraging best practices. Although the Company is not responsible for all costs for every restaurant opened, total development costs (consisting of land, buildings and equipment) for new traditional McDonald’s restaurants in the U.S. averaged approximately $3.4$4.0 million in 2016.2019.
The Company owned approximately 45%55% and 50% of the land for restaurants in its consolidated markets at year-end 2019 and about 70%2018, respectively, and approximately 80% of the buildings for restaurants in its consolidated markets at year-end 20162019 and 2015.2018.

SHARE REPURCHASES AND DIVIDENDS
In 2016,2019, the Company returned $14.2approximately $8.6 billion to shareholders through a combination of shares repurchased and dividends paid, marking the achievement of the Company's targeted return of $30$25 billion for the three-year period ended 2016.2019.
Shares repurchased and dividends
In millions, except per share data2016
 2015
 2014
Number of shares repurchased92.3
 61.8
 33.1
Shares outstanding at year end819
 907
 963
Dividends declared per share$3.61
 $3.44
 $3.28
      
Treasury stock purchases (in Shareholders' equity)
$11,142
 $6,182
 $3,175
Dividends paid3,058
 3,230
 3,216
Total returned to shareholders$14,200
 $9,412
 $6,391

In millions, except per share data2019
 2018
 2017
Number of shares repurchased25.0
 32.2
 31.4
Shares outstanding at year end746
 767
 794
Dividends declared per share$4.73
 $4.19
 $3.83
Treasury stock purchases (in Shareholders' equity)
$4,980
 $5,247
 $4,651
Dividends paid3,582
 3,256
 3,089
Total returned to shareholders$8,562
 $8,503
 $7,740
McDonald's Corporation 2016 Annual Report 23

In December 2015,July 2017, the Company’sCompany's Board of Directors approvedauthorized the purchase of up to $15 billion of the Company's outstanding stock, with no specified expiration date. In 2019, approximately 25.0 million shares were repurchased for $5.0 billion, bringing total purchases under the program to approximately 74.5 million shares or $12.9 billion. In December 2019, the Company's Board of Directors terminated the 2017 program and replaced it with a $15 billionnew share repurchase program, effective January 1, 2016,2020, that authorized the purchase of up to $15 billion of the Company's outstanding common stock with no specified expiration date. In 2016, approximately 92.3 million shares were repurchased for $11.1 billion under the program.
The Company has paid dividends on its common stock for 4144 consecutive years and has increased the dividend amount every year. The 20162019 full year dividend of $3.61$4.73 per share reflects the quarterly dividend paid for each of the first three quarters of $0.89$1.16 per share, with an increase to $0.94$1.25 per share paid in the fourth quarter. This 6%8% increase in the quarterly dividend equates to a $3.76$5.00 per share annual dividend and reflects the Company’s confidence in the ongoing strength and reliability of its cash flow. As in the past, future dividend amounts will be considered after reviewing profitability expectations and financing needs, and will be declared at the discretion of the Company’s Board of Directors.
Financial Position and Capital Resources
FINANCIAL POSITION AND CAPITAL RESOURCES
TOTAL ASSETS AND RETURNS
Total assets decreased $6.9increased $14.7 billion or 18%45% in 20162019, primarily due to lower cashthe addition of the Lease Right-of-Use Asset, Net, which was recorded upon adoption of ASC 842 effective January 1, 2019. Refer to the Lease Accounting section under Recent Accounting Pronouncements on page 39for additional information on ASC 842. Net property and equivalents. Nearly 85%equipment increased $1.3 billion in 2019, primarily due to capital expenditures, partly offset by depreciation. Net property and equipment and the Lease Right-of-Use Asset, Net represented over 50% and approximately 30%, respectively, of total assets at year-end. Approximately 93% of total assets were in the U.S., and International Lead markets and High Growth marketsOperated Markets at year-end 2016. Net property and equipment decreased $1.9 billion in 2016, primarily due to the impact of depreciation and the reclass of the assets of China, Hong Kong, and Taiwan markets to assets of businesses held for sale, partly offset by capital expenditures. Net property and equipment represented about 70% of total assets at year end.
Operating income and month-end asset balances are used to compute return on average assets. For the years ended 2016, 2015 and 2014, return on average assets was 23.0%, 20.9% and 21.8%, respectively.
In 2016, return on average assets increased due to higher operating income and lower average assets. In 2015, return on average assets decreased primarily due to the negative impact of foreign currency translation on operating income, partly offset by lower average assets. Operating income does not include interest income; however, cash balances are included in average assets. The inclusion of cash balances in average assets reduced return on average assets by about three percentage points for all years presented.2019.
FINANCING AND MARKET RISK
The Company generally borrows on a long-term basis and is exposed to the impact of interest rate changes and foreign currency fluctuations. Debt obligations at December 31, 20162019 totaled $26.0$34.2 billion, compared with $24.1$31.1 billion at December 31, 2015.2018. The net increase in 20162019 was primarily due to net long-term issuances of $2.7$2.5 billion.

McDonald's Corporation 2019 Annual Report 17

Debt highlights(1) 
 2016
 2015
 2014
Fixed-rate debt as a percent of total
debt(2,3)
82% 81% 74%
Weighted-average annual interest
rate of total debt(3)
3.5
 3.8
 4.0
Foreign currency-denominated debt
as a percent of total debt(2)
34
 29
 40
Total debt as a percent of total
capitalization (total debt and total
Shareholders' equity)(2)
109
 77
 54
Cash provided by operations as a
percent of total debt(2)
23
 27
 45
 2019
 2018
 2017
Fixed-rate debt as a percent of total debt(2,3)
92% 91% 89%
Weighted-average annual interest rate of total debt(3)
3.2
 3.2
 3.3
Foreign currency-denominated debt as a percent of total debt(2)
38
 38
 42
Total debt as a percent of total capitalization (total debt and total Shareholders' equity)(2)
131
 125
 112
Cash provided by operations as a percent of total debt(2)
24
 22
 19
(1)All percentages are as of December 31, except for the weighted-average annual interest rate, which is for the year. See reconciliation in Exhibit 12.
(2)Based on debt obligations before the effects of fair value hedging adjustments and deferred debt costs. These effects are excluded as they have no impact on the obligation at maturity. See Debt financingFinancing note to the consolidated financial statements.
(3)Includes the effect of interest rate swaps.swaps used to hedge debt.


Standard & Poor’s and Moody’s currently rate, with a stable outlook, the Company’s commercial paper A-2 and P-2, respectively; and its long-term debt BBB+ and Baa1, respectively. To access the debt capital markets, the Company relies on credit-rating agencies to assign short-term and long-term credit ratings.
Certain of the Company’s debt obligations contain cross-acceleration provisions and restrictions on Company and subsidiary mortgages and the long-term debt of certain subsidiaries. There are no provisions in the Company’s debt obligations that would accelerate repayment of debt as a result of a change in credit ratings or a material adverse change in the Company’s business. Under existing authorization fromIn October 2016, the Company’sCompany's Board of Directors at December 31, 2016,authorized the Company hadborrowing of up to $15.0 billion of funds, of which $1.9 billion remained outstanding as of December 31, 2019. In December 2019, the Company's Board of Directors terminated the 2016 borrowing authority remaining to borrow funds, including throughand authorized a new $15 billion of borrowing capacity with no specified expiration date. These borrowings may include (i) public or private offering of debt securities; (ii) direct borrowing from banks or other financial institutions; and (iii) other forms of indebtedness. In addition to debt securities available through a medium-term notes program registered with the U.S. Securities and Exchange Commission ("SEC")SEC and a Global Medium-Term Notes program, the Company has $2.5$3.5 billion available under a committed line of credit agreement as well as authority to issue commercial paper in the U.S. and global markets (see Debt Financing note to the consolidated financial statements). Debt maturing in 2017 is $1.6 billion of long-term corporate debt. TheIn 2020, the Company plans to issue long-term debt to refinance this$2.4 billion of maturing corporate debt. As of December 31, 2016,2019, the Company's subsidiaries also had $489$242 million of borrowings outstanding, primarily under uncommitted foreign currency line of credit agreements, of which $297 million is classified in Liabilities of businesses held for sale on the consolidated balance sheet.agreements.
The Company uses major capital markets, bank financings and derivatives to meet its financing requirements and reduce interest expense.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 $8.9$12.9 billion and $7.0$11.8 billion for the years ended December 31, 20162019 and 2015,2018, respectively. In addition, where practical, the Company’s restaurants purchase goods and services in local currencies resulting in natural hedges. See the Summary of significant accounting policies note to the consolidated financial statements related to financial instruments and hedging activities for additional information regarding the accounting impact and use of derivatives.
The Company does not have significant exposure to any individual counterparty and has master agreements that contain netting arrangements. Certain of these agreements also require each party to post collateral if credit ratings fall below, or aggregate exposures exceed, certain contractual limits. At December 31, 2016,2019, the Company was required to post an immaterial amount of collateral due to negative fair value of certain


24 McDonald's Corporation 2016 Annual Report

derivative positions. The Company's counterparties were not required to post collateral on any derivative position, other than on hedges of certain of the Company’s supplemental benefit plan liabilities where the counterparties were required to post collateral on their liability positions.
The Company’s net asset exposure is diversified among a broad basket of currencies. The Company’s largest net asset exposures (defined as foreign currency assets less foreign currency liabilities) at year end were as follows:
Foreign currency net asset exposures
In millions of U.S. Dollars2016
 2015
2019
 2018
Euro$1,968
 $3,974
British Pounds Sterling1,340
 1,333
$811
 $1,840
Canadian Dollars699
 684
Russian Ruble577
 631
Australian Dollars1,393
 1,316
560
 1,499
Canadian Dollars1,190
 1,096
Japanese Yen490
 363
Polish Zloty396
 340


McDonald's Corporation 2019 Annual Report 18

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 20162019 levels nor a 10% adverse change in foreign currency rates from 20162019 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 about 60%approximately 65% of our operating income. A significant portion of these historical earnings are considered to be indefinitelyhave 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. Accordingly, no U.S. federal or state income taxes have been provided on these undistributed foreign earnings.
The Company's cash and equivalents held by our foreign subsidiaries totaled approximately $663$425 million as of December 31, 2016. We do not intend, nor do we foresee a need, to repatriate these funds.2019.
Consistent with prior years, we expect existing domestic cash and equivalents, domestic cash flows from operations, annualissuance of domestic debt, and repatriation of a portion of the current period's foreign earnings and the issuance of domestic debt 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. This could also result in a higher effective tax rate in the future.
While the likelihood is remote, to the extent foreign cash is available, the Company could also elect to repatriate earnings from foreign jurisdictions that have previously been considered to be indefinitely reinvested. Upon distribution of those earnings in the form of dividends or otherwise, the Company may be subject to additional U.S. income taxes (net of an adjustment for foreign tax credits), which could result in a use of cash. This could also result in a higher effective tax rate in the period in which such a determination is made to repatriate prior period foreign earnings. Refer to the Income Taxes note to the consolidated financial statements for further information related to our income taxes and the undistributed earnings of the Company's foreign subsidiaries.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Company has long-term contractual obligations primarily in the form of lease obligations (related to both Company-operated and franchised restaurants) and debt obligations. In addition, the Company has long-term revenue and cash flow streams that relate to its franchise arrangements. Minimum rent under franchise arrangements are based on the Company’s underlying investment in owned sites and parallel the Company’s underlying lease obligations and escalations on properties that are leased. The Company believes that control over the real estate enables it to achieve restaurant performance levels that are amongst the highest in the industry. Cash provided by operations (including cash provided by these franchise arrangements) along with the Company’s borrowing capacity and other sources of cash will be used to satisfy the obligations. The following table summarizes the Company’s contractual obligations and their aggregate maturities as well as future minimum rent payments due to the Company under existing franchise arrangements as of December 31, 2016. See discussions of cash flows and financial position and capital resources as well as the Notes to the consolidated financial statements for further details.2019. 
Contractual cash outflows  Contractual cash inflows Contractual cash outflows  Contractual cash inflows 
In millions
Operating
leases (1)
  Debt obligations (2)  
Minimum rent under
franchise arrangements (3)
 
Operating leases (1)
  
Debt obligations (2)
  
Minimum rent under
franchise arrangements
 
2017 $1,303
 $77
 $2,690
2018 1,200
 1,756
 2,617
2019 1,103
 3,933
 2,540
2020 1,001
 2,396
 2,426
 $1,147
 $59
 $3,008
2021 892
 1,555
 2,295
 1,096
 2,132
 2,884
2022 1,014
 2,250
 2,750
2023 933
 6,007
 2,631
2024 854
 2,819
 2,541
Thereafter 6,754
 16,349
 18,764
 7,090
 21,038
 20,510
Total $12,253
 $26,066
 $31,332
 $12,134
 $34,305
 $34,324
(1)IncludesFor sites that have lease escalations tied to an index, future minimum lease payments for businesses in markets considered held for sale as ofreflect the date of the Company's filing of this report on Form 10-K. These leasecurrent index adjustments through December 31, 2019. In addition, future minimum payments per year (in millions) are as follows: 2017- $251.1; 2018- $206.7; 2019- $178.6; 2020- $157.3; 2021- $136.4; Thereafter- $593.3.exclude option periods that have not yet been exercised.
(2)The maturities include reclassifications of short-term obligations to long-term obligations of $2.5$3.5 billion, as they are supported by a long-term line of credit agreement expiring in December 2019.2023. Debt obligations do not include the impact of noncashnon-cash fair value hedging adjustments, deferred debt costs and accrued interest.
(3)Includes future gross minimum rent payments due to the Company from businesses in markets considered held for sale as of the date of the Company's filing of this report on Form 10-K. These rent payments per year (in millions) are as follows: 2017- $91.8; 2018- $90.6; 2019- $87.2; 2020- $84.5; 2021- $81.3; Thereafter- $589.2.
In the U.S., the Company maintains certain supplemental benefit plans that allow participants to (i) make tax-deferred contributions and (ii) receive Company-provided allocations that cannot be made under the qualified benefit plans because of Internal Revenue Service ("IRS") limitations. At December 31, 2016,2019, total liabilities for the supplemental plans were $465 million.$435 million.
In addition,At December 31, 2019, total liabilities for gross unrecognized tax benefits were $924 million at December 31, 2016.$1.4 billion.
There are certain purchase commitments that are not recognized in the consolidated financial statements and are primarily related to construction, inventory, energy, marketing and other service related arrangements that occur in the normal course of business, and timing of such payments are not

McDonald's Corporation 2016 Annual Report 25

estimable or determinable. The amounts related to these commitments are not significant to the Company’s financial position.business.  Such commitments are generally shorter term in nature, and will be funded from operating cash flows.flows, and are not significant to the Company’s overall financial position.
The Company also has guaranteed certain other loans totaling approximately $75 million at December 31, 2019. These guarantees are contingent commitments generally issued by the Company to support borrowing arrangements of the System. At December 31, 2019, there was no carrying value for obligations under these guarantees in the Consolidated Balance Sheet.

McDonald's Corporation 2019 Annual Report 19

Other Matters
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 ensureconfirm that they provide accurate and transparent information relative to the current economic and business environment. The Company believes that of its significant accounting policies, the following involve a higher degree of judgment and/or complexity:
Property and equipment
Property and equipment are depreciated or amortized on a straight-line basis over their useful lives based on management’s estimates of the period over which the assets will generate revenue (not to exceed lease term plus options for leased property). The useful lives are estimated based on historical experience with similar assets, taking into account anticipated technological or other changes. The Company periodically reviews these lives relative to physical factors, economic factors and industry trends. If there are changes in the planned use of property and equipment, or if technological changes occur more rapidly than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the accelerated recognition of depreciation and amortization expense or write-offs in future periods.
Businesses Held for SaleLeasing Arrangements
Assets and liabilities of businesses held for sale on the consolidated balance sheet primarily consist of balances related to businesses in China and Hong Kong. In December 2016, the Company’s Board of Directors approved an agreement for the Company to sell its existing businesses in China and Hong Kong, which comprise over 2,600 restaurants, to a developmental licensee organization. Under the terms of the agreement, the Company will retain a 20% ownership in the business. The Company expects to completeis the salelessee in a significant real estate portfolio, primarily through ground leases (the Company leases the land and licensing transaction mid-year 2017, subject to satisfactiongenerally owns the building) and through improved leases (the Company leases the land and buildings). The Right of customary conditions, including receipt of any regulatory approvals.
Based on approval byUse Asset and Lease Liability reflect the Board of Directors, the Company concluded that these markets were “held for sale” as of December 31, 2016 in accordance with the requirements of ASC 360 “Property, Plant and Equipment”. Accordingly, the Company has ceased recording depreciation expense with respect to the assets of the China and Hong Kong markets effective January 1, 2017. As of December 31, 2016, total assets relating to businesses in China and Hong Kong were $1.3 billion, of which $217 million was current, and total liabilities were $592 million, most of which was current.
As a result of this sale, the Company expects to record a gain of approximately $700-$900 million reflecting the difference between the net bookpresent value of the businessesCompany’s estimated future minimum lease payments over the lease term, which includes options that are reasonably assured of being exercised, discounted using a collateralized incremental borrowing rate.
Typically, renewal options are considered reasonably assured of being exercised if the associated asset lives of the building or leasehold improvements exceed that of the initial lease term, and the sales performance of the restaurant remains strong. Therefore, the Right of Use Asset and Lease Liability include an estimated $1.5 billionassumption on renewal options that have not yet been exercised by the Company.
As the rate implicit in each lease is not readily determinable, the Company uses an incremental borrowing rate to calculate the lease liability that represents an estimate of cash proceedsthe interest rate the Company would incur to be received at closing, subject to adjustments.borrow on a collateralized basis over the term of a lease within a particular currency environment.
Share-based compensation
The Company has a share-based compensation plan which authorizes the granting of various equity-based incentives including stock options and restricted stock units ("RSUs") to employees and nonemployee directors. The expense for these equity-based incentives is based on their fair value at date of grant and generally amortized over their vesting period. The Company estimates forfeitures when determining the amount of compensation costs to be recognized in each period.
The fair value of each stock option granted is estimated on the date of grant using a closed-form pricing model. The pricing model requires assumptions, which impact the assumed fair value, including the expected life of the stock option, the risk-free interest rate, expected volatility of the Company’s stock over the expected life and the expected dividend yield. The Company uses historical data to determine these assumptions and if these assumptions change significantly for future grants, share-based compensation expense will fluctuate in future years. The fair value of each RSU granted is equal to the market price of the Company’s stock at date of grant, lessand prior to 2018 included a reduction for the present value of expected dividends over the vesting period. For performance-based RSUs, the Company includes a relative Total Shareholder Return ("TSR") modifier to determine the number of shares earned at the end of the performance period. The fair value of performance-based RSUs that include the TSR modifier is determined using a Monte Carlo valuation model.
Long-lived assets impairment review
Long-lived assets (including goodwill) are reviewed for impairment annually in the fourth quarter and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability of the Company’s long-lived assets, the Company considers changes in economic conditions and makes assumptions regarding estimated future cash flows and other factors. Estimates of future cash flows are highly subjective judgments based on the Company’s experience and knowledge of its operations. These estimates can be significantly impacted by many factors including changes in global and local business and economic conditions, operating costs, inflation, competition, and consumer and demographic trends. A key assumption impacting estimated future cash flows is the estimated change in comparable sales. If the Company’s estimates or underlying assumptions change in the future, the Company may be required to record impairment charges. Based on the annual goodwill impairment test, conducted in the fourth quarter, approximately 5-10% of goodwill may be atthe Company does not have any reporting units (defined as each individual market) with risk of future impairment as the fair values of certain reporting units were not substantially in excess of their carrying amounts.material goodwill impairment.
Litigation accruals
In the ordinary course of business, the Company is subject to proceedings, lawsuits and other claims primarily related to competitors, customers, employees, franchisees, government agencies, intellectual property, shareholders and suppliers. The Company is required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of accrual required, if any, for these contingencies is made after
careful analysis of each matter. The required accrual may change in the future due to new developments in eacha particular matter or changes in approach such as a change in settlement strategy in dealing with these matters. The Company does not believe that any such matter currently being reviewed will have a material adverse effect on its financial condition or results of operations.





26McDonald's Corporation 20162019 Annual Report20


•
Income taxes
The Company records a valuation allowance to reduce its deferred tax assets if it is considered more likely than not that some portion or all of the deferred tax assets will not be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax strategies, including the sale of appreciated assets, in assessing the need for the valuation allowance, if these estimates and assumptions change in the future, the Company may be required to adjust its valuation allowance. This could result in a charge to, or an increase in, income in the period such determination is made.
The Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. The Company records accruals for the estimated outcomes of these audits, and the accruals may change in the future due to new developments in each matter. The most significant new developments in 2019 and 2018 are described below.
In 2016,2019 and 2018, the Company increased the balance of unrecognized tax benefits related toby $96 million and $162 million, respectively. In both 2019 and 2018, there was audit progression in the U.S. federal and state audits, as well as multiple foreign tax positions takenjurisdictions. The Company has considered this new information in prior years by $150 million. In 2015,evaluating the Company decreased the balance of unrecognized tax benefits and in certain situations, the Company changed its judgment on the measurement of the related to settlements with taxing authorities by $258 million. Seeunrecognized tax benefits. These changes have been reflected in the Unrecognized Tax Benefits table that is included in the Income Taxes footnote in the consolidated financial statements for the related tax reconciliations. The most significant new developments in 2015 and 2016 are described below.
In 2015, the Company received an unfavorable decision related to its procedural efforts to appeal a prior year unfavorable lower tax court ruling in a foreign tax jurisdiction related to exempt income matters. As a result of this new information, the Company agreed to settle the issue for 2003-2008 with the tax authorities and the unrecognized tax benefits were reduced by $143 million. No cash payment was made related to this settlement in 2015 as the Company had previously made a payment to the taxing authority. The settlement did not have a material impact on the Company's cash flows, results of operations or financial position. In 2016, the unrecognized tax benefits related to this issue for 2009-2010 were reduced by $57 million as a result of the lapsing of the statute of limitations.page 50.
In 2015, the Internal Revenue Service (“IRS”) issued a Revenue Agent Report for(“RAR”) that included certain agreeddisagreed transfer pricing adjustments related to the Company’s U.S. Federal income tax returns for 2009 and 2010 and the balance of unrecognized tax benefits was reduced by $102 million.2010. Also in 2015, the Company filed a protest with the IRS Appeals Office related to certainthese disagreed transfer pricing mattersmatters. During 2017, the Company received a response to its protest. In December 2018, the Company met with the IRS Appeals team and during 2019, the Company and the IRS Appeals team continued to have a dialogue regarding these disagreed transfer pricing matters. As of December 31, 2019, the Company does not yet have a signed closing agreement with the IRS related to the settlement of these issues. The Company expects resolution on these issues in 2020.
In 2017, the IRS completed its examination of the Company’s U.S. Federal income tax returns for 2011 and 2012. In 2018, the IRS issued a RAR for these years. As expected, the RAR included the same disagreed transfer pricing matters as the 2009 and 2010. As of December 31, 2016,2010 RAR. Also in 2018, the Company had not yet receivedfiled a responseprotest with the IRS related to this protest from the IRS.these disagreed transfer pricing matters. The Company expects resolution on these issues in either 2017 or 2018. In addition, the Company'stransfer pricing matters for 2011 and 2012 U.S. federal income tax returns are currently under examinationbeing addressed along with the 2009 and the completion2010 transfer pricing matters as part of the field audit2009-2010 appeals process, such that resolution is expected in 2017.
In 2016, the Company received new information during the progression of tax audits in multiple foreign tax jurisdictions. As a result of this new information, the Company changed its judgment on the measurement of the related unrecognized tax benefits and recorded an increase in the gross unrecognized tax benefits of $125 million.
In December 2015, the European Commission opened a formal investigation directly with the Luxembourg government to examine whether decisions by the tax authorities in Luxembourg with regard to the corporate income tax paid by certain of our subsidiaries comply with European Union rules on state aid. If this matter is adversely resolved, Luxembourg may be required to assess, and the Company may be required to pay, additional amounts with respect to current and prior periods and our taxes in the future could increase. As of December 31, 2016, no decision has been published with respect to this investigation.2020.
While the Company cannot predict the ultimate resolution of the aforementioned tax matters, we believe that the liabilities recorded are appropriate and adequate as determined in accordance with Topic 740 - Income Taxes of the ASC.
The Tax Act was enacted in the U.S. on December 22, 2017. The Tax Act reduced the U.S. federal corporate income tax rate to 21% from 35% and required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. In 2017, the Company recorded provisional amounts for certain enactment-date effects of the Tax Act by applying the guidance in Staff Accounting Standards Codification (“ASC”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.
Deferred
SAB 118 measurement period
At December 31, 2017, the Company had not completed its accounting for all of the enactment-date income tax effects of the Tax Act under ASC 740, Income Taxes, primarily for the following aspects: remeasurement of deferred tax assets and liabilities, one-time transition tax, and its accounting position related to indefinite reinvestment of unremitted foreign earnings.
One-time transition tax: The one-time transition tax is based on the Company's total post-1986 earnings and profits ("E&P"), the tax on which it previously deferred from U.S. income taxes have not beenunder U.S. law. The Company recorded a provisional amount for temporary differences totaling $16.0 billion related to investments in certainits one-time transition tax liability for each of its foreign subsidiaries, resulting in a transition tax liability of approximately $1.2 billion at December 31, 2017.
Upon further analysis of the Tax Act and corporate affiliates. The temporary differences consist primarily of undistributed earnings that are considered permanently invested in operations outsidenotices and regulations issued and proposed by the IRS and the U.S. If management's intentions changeDepartment of the Treasury, the Company finalized its calculations of the transition tax liability during 2018 and increased its December 31, 2017 provisional amount by approximately $75 million. The Company has elected to pay its transition tax over the eight-year period provided in the Tax Act.
Deferred tax assets and liabilities: As of December 31, 2017, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future deferred taxes may need(generally 21%), by recording a provisional amount of approximately $500 million. No adjustment to be provided.the provisional amount was made in 2018.
EFFECTS OF CHANGING PRICES—INFLATION
The Company has demonstrated an ability to manage inflationary cost increases effectively. This ability is because of rapid inventory turnover, the ability to adjust menu prices, cost controls and substantial property holdings, many of which are at fixed costs and partly financed by debt made less expensive by inflation.



 
McDonald's Corporation 20162019 Annual Report 2721

RISK FACTORS AND CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING INFORMATION
This report includes forward-looking statements about our plans and future performance, including those under Outlook for 2017. Refer to the cautionary statement regarding forward-looking statements in Part 1, Item 1A, page 3, of this Form 10-K.

ITEM 7A. Quantitative and Qualitative Disclosures About Market RiskOther Key Information
 
Quantitative
SELECTED FINANCIAL DATA
5-Year SummaryYears ended December 31,
          
In millions, except per share and unit amounts2019
 2018
 2017
 2016
 2015
Consolidated Statement of Income Data         
Revenues         
   Sales by Company-operated restaurants$9,421
 $10,013
 $12,719
 $15,295
 $16,488
   Revenues from franchised restaurants11,656
 11,012
 10,101
 9,327
 8,925
Total revenues21,077
 21,025
 22,820
 24,622
 25,413
Operating income9,070
 8,823
 9,553
 7,745
 7,146
Net income6,025
 5,924
 5,192
 4,687
 4,529
Consolidated Statement of Cash Flows Data         
Cash provided by operations$8,122
 $6,967
 $5,551
 $6,060
 $6,539
Cash used for (provided by) investing activities3,071
 2,455
 (562) 982
 1,420
Capital expenditures2,394
 2,742
 1,854
 1,821
 1,814
Cash used for (provided by) financing activities4,995
 5,950
 5,311
 11,262
 (735)
Treasury stock purchases(1)
4,980
 5,247
 4,651
 11,142
 6,182
Common stock dividends3,582
 3,256
 3,089
 3,058
 3,230
Financial Position         
Total assets(2)
$47,511
 $32,811
 $33,804
 $31,024
 $37,939
Total debt34,177
 31,075
 29,536
 25,956
 24,122
Total shareholders’ equity (deficit)(8,210) (6,258) (3,268) (2,204) 7,088
Shares outstanding746
 767
 794
 819
 907
Per Common Share Data         
Earnings-diluted$7.88
 $7.54
 $6.37
 $5.44
 $4.80
Dividends declared4.73
 4.19
 3.83
 3.61
 3.44
Market price at year end197.61
 177.57
 172.12
 121.72
 118.44
Restaurant Information and Other Data         
Restaurants at year end         
   Company-operated restaurants2,636
 2,770
 3,133
 5,669
 6,444
   Franchised restaurants36,059
 35,085
 34,108
 31,230
 30,081
Total Systemwide restaurants38,695
 37,855
 37,241
 36,899
 36,525
Franchised sales(3)
$90,757
 $86,134
 $78,191
 $69,707
 $66,226
(1)Represents treasury stock purchases as reflected in Shareholders' equity.
(2)Total assets increased from 2018 to 2019 primarily due to the Company's right-of-use asset recorded as a result of the adoption of ASC 842.
(3)While franchised sales are not recorded as revenues by the Company, management believes they are important in understanding the Company's financial performance because these sales are the basis on which the Company calculates and records franchised revenues and are indicative of the financial health of the franchisee base. Franchised restaurants represent 93% of McDonald's restaurants worldwide at December 31, 2019.

McDonald's Corporation 2019 Annual Report 22

STOCK PERFORMANCE GRAPH
At least annually, we consider which companies comprise a readily identifiable investment peer group. McDonald's is included in published restaurant indices; however, unlike most other companies included in these indices, which have no or limited international operations, McDonald's does business in more than 100 countries and qualitativea substantial portion of our revenues and income is generated outside the U.S. In addition, because of our size, McDonald's inclusion in those indices tends to skew the results. Therefore, we believe that such a comparison is not meaningful.
Our market capitalization, trading volume and importance in an industry that is vital to the U.S. economy have resulted in McDonald's inclusion in the Dow Jones Industrial Average (DJIA) since 1985. Like McDonald's, many DJIA companies generate meaningful revenues and income outside the U.S. and some manage global brands. Thus, we believe that the use of the DJIA companies as the group for comparison purposes is appropriate.
The following performance graph shows McDonald's cumulative total shareholder returns (i.e., price appreciation and reinvestment of dividends) relative to the Standard & Poor's 500 Stock Index (S&P 500 Index) and to the DJIA companies for the five-year period ended December 31, 2019. The graph assumes that the value of an investment in McDonald's common stock, the S&P 500 Index and the DJIA companies (including McDonald's) was $100 at December 31, 2014. For the DJIA companies, returns are weighted for market capitalization as of the beginning of each period indicated. These returns may vary from those of the Dow Jones Industrial Average Index, which is not weighted by market capitalization, and may be composed of different companies during the period under consideration.
chart-498111fd0ec25699b7d.jpg
Company/Index12/31/201412/31/201512/31/201612/31/201712/31/201812/31/2019
McDonald's Corporation$100$130$139$201$213$242
S&P 500 Index$100$101$114$138$132$174
Dow Jones Industrials$100$100$117$150$144$181
Source: S&P Capital IQ

McDonald's Corporation 2019 Annual Report 23

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION AND DIVIDEND POLICY
The Company’s common stock trades under the symbol MCD and is listed on the New York Stock Exchange in the U.S.
The number of shareholders of record and beneficial owners of the Company’s common stock as of January 31, 2020 was estimated to be 2,500,000.
Given the Company’s returns on incremental invested capital and significant cash provided by operations, management believes it is prudent to reinvest in the business to drive profitable growth and use excess cash flow to return cash to shareholders through dividends and share repurchases. The Company has paid dividends on common stock for 44 consecutive years through 2019 and has increased the dividend amount at least once every year. 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.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table presents information related to repurchases of common stock the Company made during the quarter ended December 31, 2019*:
Period
Total Number of
Shares Purchased

 
Average Price
Paid per Share

 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs(1)

 
Approximate Dollar
Value of Shares
that May Yet
Be Purchased Under
the Plans or Programs(1)
 
October 1-31, 20192,393,580
 208.93
 2,393,580
  $2,943,051,009
November 1-30, 20192,886,335
 193.60
 2,886,335
  2,384,270,449
December 1-31, 20191,787,824
 195.90
 1,787,824
  2,034,034,984
   Total7,067,739
 199.37
 7,067,739
  
*Subject to applicable law, the Company may repurchase shares directly in the open market, in privately negotiated transactions, or pursuant to derivative instruments and plans complying with Rule 10b5-1, among other types of transactions and arrangements.
(1)On July 27, 2017, the Company's Board of Directors approved a share repurchase program, effective July 28, 2017 ("2017 Program"), that authorized the purchase of up to $15 billion of the Company's outstanding common stock with no specified expiration date. On December 6, 2019, the Company's Board of Directors terminated the 2017 Program, effective December 31, 2019, and replaced it with a new share repurchase program, effective January 1, 2020 ("2020 Program"), that authorized the purchase of up to $15 billion of the Company's outstanding common stock with no specified expiration date. As of December 31, 2019, no further share repurchases may be made under the 2017 Program; future share repurchases will be made pursuant to the 2020 program.


McDonald's Corporation 2019 Annual Report 24

RISK FACTORS
If we do not successfully evolve and execute against our business strategies, including under the Velocity Growth Plan, we may not be able to increase operating income.
To drive operating income growth, our business strategies must be effective in maintaining and strengthening customer appeal, delivering sustainable guest count growth and driving a higher average check. Whether these strategies are successful depends mainly on our System’s ability to:
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;
Capitalize on our global scale, iconic brand and local market presence to enhance our ability to retain, regain and convert key customer groups;
Utilize our organizational structure to build on our progress and execute against our business strategies;
Integrate and augment our technology and digital initiatives, including mobile ordering and delivery;
Identify and develop restaurant sites consistent with our plans for net growth of Systemwide restaurants;
Operate restaurants with high service levels and optimal capacity while managing the increasing complexity of our restaurant operations, create efficiencies through innovative use of technology and complete Experience of the Future (“EOTF”), particularly in the U.S.; and
Accelerate our existing strategies, including through growth opportunities, acquisitions, investments and partnerships.
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.
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, including in EOTF (which focuses on restaurant 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, as well as mobile ordering and payment systems. We also continue to refine our delivery initiatives, including through growing awareness and trial, and to enhance our drive-thru technologies, which may not generate expected returns. If these initiatives are not well executed, or if we do not fully realize the intended benefits of these significant investments, our business results may suffer.
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 retain, regain and convert customers. 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 in the “informal eating out” (“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 retain, regain and convert customers also depends on the impact of pricing, promotional and marketing plans across the System, and the ability to adjust these plans to respond quickly and effectively to evolving customer preferences, as well as shifting economic and competitive conditions. Existing or future pricing strategies, and the value proposition they represent, are expected to continue to be important components of our business strategy; however, they may not be successful in retaining, regaining and converting customers, 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 retaining, regaining and converting customers. 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. 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.

McDonald's Corporation 2019 Annual Report 25

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. 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 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 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.
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. 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 or product offerings of our competitors, 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.
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 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 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.
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 shortages and transportation issues, 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, our costs could increase and it could limit the availability of products critical to our System’s operations.
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.

McDonald's Corporation 2019 Annual Report 26

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. If our franchisees do not experience sales growth, our revenues and margins could be negatively affected as a result. Also, if sales trends worsen for franchisees, their financial results may deteriorate, which could result in, among other things, restaurant closures, or delayed or reduced payments to us.
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 talent management could harm our business.
Effective succession planning is important to our long-term success. The Board named Christopher Kempczinski as President and Chief Executive Officer and named Joseph Erlinger as President, McDonald's USA, effective as of November 1, 2019. In addition, on December 6, 2019, the Board named Ian Borden as President, International, effective that same day. Failure to effectively identify, develop and retain key personnel, recruit high-quality candidates and ensure smooth management and personnel transitions, including the recent leadership transitions, could disrupt our business and adversely affect our results.
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. In many of our markets, unemployment is low and demand is high for labor. 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 sexual harassment or discrimination (or perceptions thereof) 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.
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, and we were unable to recover in a timely manner, we could experience an interruption in our or our franchisees’ operations.

McDonald's Corporation 2019 Annual Report 27

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.
If we fail to comply with privacy and data collection laws, we could be subject to 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. 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 meet GDPR or other data privacy requirements could result in substantial penalties and materially adversely impact our financial results or brand perceptions.
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 decision to leave the European Union, whether through a negotiated exit over a period of time or without any agreement in place to govern post-exit relations, it is possible that there will be increased regulatory complexities, particularly in the event that the U.K. leaves the European Union without any agreement in place, as well as potential additional referenda in the U.K. and/or other European countries, that could cause 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.
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.

McDonald's Corporation 2019 Annual Report 28

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 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.
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, 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.
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.

McDonald's Corporation 2019 Annual Report 29

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.
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 riskand 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, any shifting climate patterns, terrorist activities, health epidemics or pandemics (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. For example, the recent outbreak of the coronavirus in China has disrupted local operations, and neither the duration nor scope of the disruption can be predicted. Therefore, while we expect this matter to negatively impact our results, the related financial impact cannot be reasonably estimated at this time. 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.

McDonald's Corporation 2019 Annual Report 30

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, 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 Part II, Item 7, page 24Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 6 through 21and in Financial Statements and Supplementary Data on pages 33 through 58 of this Form 10-K.

McDonald's Corporation 2019 Annual Report 31

INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The following are the Executive Officers of our Company (as of the date of this filing):
Ian Borden, 51, is President, International, a position he has held since January 2020. Prior to that, Mr. Borden served as President - International Developmental Licensed Markets, from January 2019 through December 2019. Prior to that, Mr. Borden served as President - Foundational Markets, from July 2015 through December 2018. From January 2014 through June 2015, Mr. Borden served as Vice President and Chief Financial Officer - McDonald’s Asia/Pacific, Middle East and Africa. Prior to that time, Mr. Borden served as Regional Vice President of Europe’s East Division from April 2011 to December 2013 and as Managing Director - McDonald’s Ukraine from December 2007 to December 2013. He has served the Company for 25 years.
Francesca A. DeBiase, 54, is Corporate Executive Vice President - Worldwide Supply Chain and Sustainability, a position she has held since April 2018. Prior to that, Ms. DeBiase served as Corporate Senior Vice President - Worldwide Supply Chain and Sustainability, from March 2015 through March 2018. From August 2007 through February 2015, Ms. DeBiase served as Corporate Vice President - Worldwide Strategic Sourcing. Prior to that, Ms. DeBiase served as Europe Vice President - Supply Chain, from January 2006 through July 2007. Ms. DeBiase has served the Company for 28 years.
Joseph Erlinger, 46, is President, McDonald's USA, a position he has held since November 2019. Prior to that, Mr. Erlinger served as President - International Operated Markets, from January 2019 through October 2019 and President - High Growth Markets, from September 2016 through December 2018. From March 2015 to January 2017, Mr. Erlinger served as Vice President and Chief Financial Officer - High Growth Markets (serving in dual roles from September 2016 through January 2017), as Managing Director of McDonald’s Korea from April 2013 to January 2016 (serving in dual roles from March 2015 through January 2016), and US Vice President - GM for the Indianapolis region from December 2010 to March 2013.  Mr. Erlinger has served the Company for 18 years.
Daniel Henry, 49, is Corporate Executive Vice President - Chief Information Officer, a position he has held since May 2018. From October 2017 through April 2018, Mr. Henry served as Corporate Vice President - Chief Information Officer. Prior to that, Mr. Henry served as Vice President of Customer Technology and Enterprise Architecture at American Airlines from April 2012 to October 2017. Mr. Henry has served the Company for 2 years.
Catherine Hoovel, 49, is Corporate Vice President - Chief Accounting Officer, a position she has held since October 2016.  Ms. Hoovel served as Controller for the McDonald's restaurants owned and operated by McDonald's USA from April 2014 to September 2016. Prior to that time, Ms. Hoovel served as a Senior Director of Finance from February 2012 to April 2014 and was a Divisional Director from August 2010 to February 2012. Ms. Hoovel has served the Company for 24 years.
Christopher Kempczinski, 51, is President and Chief Executive Officer, a position he has held since November 2019. Prior to that, Mr. Kempczinski served as President, McDonald’s USA from December 2016 through October 2019 and Corporate Executive Vice President - Strategy, Business Development and Innovation, from October 2015 through December 2016. Mr. Kempczinski joined the Company from Kraft Heinz, a manufacturer and marketer of food and beverage products, where he most recently served as Executive Vice President of Growth Initiatives and President of Kraft International from December 2014 to September 2015. Prior to that, Mr. Kempczinski served as President of Kraft Canada from July 2012 through December 2014 and as Senior Vice President - U.S. Grocery from December 2008 to July 2012. Mr. Kempczinski has served the Company for 4 years.
Jerome Krulewitch, 55, is Corporate Executive Vice President, General Counsel and Secretary, a position he has held since March 2017. From May 2011 until March 2017, Mr. Krulewitch served as Corporate Senior Vice President - Chief Counsel, Global Operations.  Prior to that, Mr. Krulewitch was Corporate Senior Vice President - General Counsel, The Americas from September 2010 to April 2011.  Mr. Krulewitch has served the Company for 18 years. 
Kevin Ozan, 56, is Corporate Executive Vice President and Chief Financial Officer, a position he has held since March 2015. From February 2008 through February 2015, Mr. Ozan served as Corporate Senior Vice President - Controller. Mr. Ozan has served the Company for 22 years.


McDonald's Corporation 2019 Annual Report 32

AVAILABILITY OF COMPANY INFORMATION
The Company is subject to the informational requirements of the Securities Exchange Act of 1934 ("Exchange Act"). The Company therefore files periodic reports, proxy statements and other information with the SEC. Such reports may be obtained by visiting the SEC's website at www.sec.gov.
Financial and other information can also be accessed on the investor section of the Company’s website at www.investor.mcdonalds.com. The Company uses this website as a primary channel for disclosing key information to its investors, some of which may contain material and previously non-public information. The Company makes available, free of charge, copies of its annual report on Form 10-K.10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. Copies of financial and other information are also available free of charge by calling (800) 228-9623.
Also posted on McDonald’s website are the Company’s Corporate Governance Principles; the charters for each of the Committees of the Board of Directors, including the Audit and Finance Committee, Compensation Committee, Governance Committee, Public Policy and Strategy Committee and Sustainability and Corporate Responsibility Committee; the Code of Conduct for the Board of Directors; and the Company’s Standards of Business Conduct, which applies to all officers and employees. Copies of these documents are also available free of charge by calling (800) 228-9623.
Information on the Company’s website is not incorporated into this Form 10-K or the Company’s other securities filings unless expressly noted.

ITEM 8. Financial Statements and Supplementary Data 
  
Index to consolidated financial statementsPage reference
  
Consolidated statement of income for each of the three years in the period ended December 31, 20162019
2934
Consolidated statement of comprehensive income for each of the three years in the period ended December 31, 20162019
3035
Consolidated balance sheet at December 31, 20162019 and 20152018
3136
Consolidated statement of cash flows for each of the three years in the period ended December 31, 20162019
3237
Consolidated statement of shareholders’ equity for each of the three years in the period ended December 31, 20162019
3338
Notes to consolidated financial statements
3439
Quarterly results (unaudited)
4754
Management’s assessment of internal control over financial reporting
4855
Report of independent registered public accounting firm
4956
Report of independent registered public accounting firm on internal control over financial reporting
5058
  



28McDonald's Corporation 20162019 Annual Report33


 
Consolidated Statement of Income
In millions, except per share data
Years ended December 31, 2016
  2015
 2014
Years ended December 31, 2019
  2018
 2017
REVENUESREVENUES     REVENUES     
Sales by Company-operated restaurantsSales by Company-operated restaurants$15,295.0
 $16,488.3
 $18,169.3
Sales by Company-operated restaurants$9,420.8
 $10,012.7
 $12,718.9
Revenues from franchised restaurantsRevenues from franchised restaurants9,326.9
 8,924.7
 9,272.0
Revenues from franchised restaurants11,655.7
 11,012.5
 10,101.5
Total revenuesTotal revenues24,621.9
 25,413.0
 27,441.3
Total revenues21,076.5
 21,025.2
 22,820.4
OPERATING COSTS AND EXPENSESOPERATING COSTS AND EXPENSES     OPERATING COSTS AND EXPENSES     
Company-operated restaurant expensesCompany-operated restaurant expenses     Company-operated restaurant expenses     
Food & paperFood & paper4,896.9
 5,552.2
 6,129.7
Food & paper2,980.3
 3,153.8
 4,033.5
Payroll & employee benefitsPayroll & employee benefits4,134.2
 4,400.0
 4,756.0
Payroll & employee benefits2,704.4
 2,937.9
 3,528.5
Occupancy & other operating expensesOccupancy & other operating expenses3,667.7
 4,024.7
 4,402.6
Occupancy & other operating expenses2,075.9
 2,174.2
 2,847.6
Franchised restaurants-occupancy expensesFranchised restaurants-occupancy expenses1,718.4
 1,646.9
 1,697.3
Franchised restaurants-occupancy expenses2,200.6
 1,973.3
 1,790.0
Selling, general & administrative expensesSelling, general & administrative expenses2,384.5
 2,434.3
 2,487.9
Selling, general & administrative expenses2,229.4
 2,200.2
 2,231.3
Other operating (income) expense, netOther operating (income) expense, net75.7
 209.4
 18.6
Other operating (income) expense, net(183.9) (236.8) (1,163.2)
Total operating costs and expensesTotal operating costs and expenses16,877.4
 18,267.5
 19,492.1
Total operating costs and expenses12,006.7
 12,202.6
 13,267.7
Operating incomeOperating income7,744.5
 7,145.5
 7,949.2
Operating income9,069.8
 8,822.6
 9,552.7
Interest expense-net of capitalized interest of $7.1, $9.4 and $14.7884.8
 638.3
 576.4
Interest expense-net of capitalized interest of $7.4, $5.6 and $5.3Interest expense-net of capitalized interest of $7.4, $5.6 and $5.31,121.9
 981.2
 921.3
Nonoperating (income) expense, netNonoperating (income) expense, net(6.3) (48.5) 0.8
Nonoperating (income) expense, net(70.2) 25.3
 57.9
Income before provision for income taxesIncome before provision for income taxes6,866.0
 6,555.7
 7,372.0
Income before provision for income taxes8,018.1
 7,816.1
 8,573.5
Provision for income taxesProvision for income taxes2,179.5
 2,026.4
 2,614.2
Provision for income taxes1,992.7
 1,891.8
 3,381.2
Net incomeNet income$4,686.5
 $4,529.3
 $4,757.8
Net income$6,025.4
 $5,924.3
 $5,192.3
Earnings per common share–basicEarnings per common share–basic$5.49
 $4.82
 $4.85
Earnings per common share–basic$7.95
 $7.61
 $6.43
Earnings per common share–dilutedEarnings per common share–diluted$5.44
 $4.80
 $4.82
Earnings per common share–diluted$7.88
 $7.54
 $6.37
Dividends declared per common shareDividends declared per common share$3.61
 $3.44
 $3.28
Dividends declared per common share$4.73
 $4.19
 $3.83
Weighted-average shares outstanding–basicWeighted-average shares outstanding–basic854.4
 939.4
 980.5
Weighted-average shares outstanding–basic758.1
 778.2
 807.4
Weighted-average shares outstanding–dilutedWeighted-average shares outstanding–diluted861.2
 944.6
 986.3
Weighted-average shares outstanding–diluted764.9
 785.6
 815.5
See Notes to consolidated financial statements.



McDonald's Corporation 20162019 Annual Report 2934


 
Consolidated Statement of Comprehensive Income
In millions
Years ended December 31, 2016
  2015
 2014
Years ended December 31, 2019
  2018
 2017
Net income $4,686.5
 $4,529.3
 $4,757.8
 $6,025.4
 $5,924.3
 $5,192.3
Other comprehensive income (loss), net of tax            
Foreign currency translation adjustments:            
Gain (loss) recognized in accumulated other comprehensive
income (AOCI), including net investment hedges
Gain (loss) recognized in accumulated other comprehensive
income (AOCI), including net investment hedges
 (272.8) (1,347.4) (1,971.6)
Gain (loss) recognized in accumulated other comprehensive
income (AOCI), including net investment hedges
 127.5
 (453.6) 827.7
Reclassification of (gain) loss to net incomeReclassification of (gain) loss to net income 94.0
 1.3
 15.2
Reclassification of (gain) loss to net income 46.8
 —
 109.3
Foreign currency translation adjustments-net of tax
benefit (expense) of $(264.4), $(209.8), and $(196.0)
(178.8) (1,346.1) (1,956.4)
Foreign currency translation adjustments-net of tax
benefit (expense) of $(55.4), $(90.7), and $453.1
Foreign currency translation adjustments-net of tax
benefit (expense) of $(55.4), $(90.7), and $453.1
174.3
 (453.6) 937.0
Cash flow hedges:            
Gain (loss) recognized in AOCIGain (loss) recognized in AOCI 18.5
 22.2
 40.1
Gain (loss) recognized in AOCI 17.3
 46.5
 (48.4)
Reclassification of (gain) loss to net incomeReclassification of (gain) loss to net income (15.6) (33.2) (6.8)Reclassification of (gain) loss to net income (37.7) 2.4
 9.0
Cash flow hedges-net of tax benefit (expense) of $(1.6), $6.2,
and $(18.2)
2.9
 (11.0) 33.3
Cash flow hedges-net of tax benefit (expense) of $6.1, $(14.5),
and $22.4
Cash flow hedges-net of tax benefit (expense) of $6.1, $(14.5),
and $22.4
(20.4) 48.9
 (39.4)
Defined benefit pension plans:            
Gain (loss) recognized in AOCIGain (loss) recognized in AOCI (47.1) (5.4) (26.6)Gain (loss) recognized in AOCI (24.5) (27.0) 16.3
Reclassification of (gain) loss to net incomeReclassification of (gain) loss to net income 9.9
 2.4
 2.4
Reclassification of (gain) loss to net income (2.6) 0.6
 0.6
Defined benefit pension plans-net of tax benefit (expense)
of $(10.0), $1.3, and $7.7
(37.2) (3.0) (24.2)
Defined benefit pension plans-net of tax benefit (expense)
of $5.2, $4.3, and $(3.9)
Defined benefit pension plans-net of tax benefit (expense)
of $5.2, $4.3, and $(3.9)
(27.1) (26.4) 16.9
            
Total other comprehensive income (loss), net of taxTotal other comprehensive income (loss), net of tax(213.1) (1,360.1) (1,947.3)Total other comprehensive income (loss), net of tax126.8
 (431.1) 914.5
            
            
Comprehensive income $4,473.4
 $3,169.2
 $2,810.5
 $6,152.2
 $5,493.2
 $6,106.8
            
See Notes to consolidated financial statements.



30McDonald's Corporation 20162019 Annual Report35


 
Consolidated Balance Sheet
In millions, except per share data
December 31, 2016
  2015
December 31, 2019
  2018
ASSETSASSETS   ASSETS   
Current assetsCurrent assets   Current assets   
Cash and equivalentsCash and equivalents$1,223.4
 $7,685.5
Cash and equivalents$898.5
 $866.0
Accounts and notes receivableAccounts and notes receivable1,474.1
 1,298.7
Accounts and notes receivable2,224.2
 2,441.5
Inventories, at cost, not in excess of marketInventories, at cost, not in excess of market58.9
 100.1
Inventories, at cost, not in excess of market50.2
 51.1
Prepaid expenses and other current assetsPrepaid expenses and other current assets565.2
 558.7
Prepaid expenses and other current assets385.0
 694.6
Assets of businesses held for sale1,527.0
 —
Total current assetsTotal current assets4,848.6
 9,643.0
Total current assets3,557.9
 4,053.2
Other assetsOther assets   Other assets   
Investments in and advances to affiliatesInvestments in and advances to affiliates725.9
 792.7
Investments in and advances to affiliates1,270.3
 1,202.8
GoodwillGoodwill2,336.5
 2,516.3
Goodwill2,677.4
 2,331.5
MiscellaneousMiscellaneous1,855.3
 1,869.1
Miscellaneous2,584.0
 2,381.0
Total other assetsTotal other assets4,917.7
 5,178.1
Total other assets6,531.7
 5,915.3
Lease right-of-use asset, netLease right-of-use asset, net13,261.2
 —
Property and equipmentProperty and equipment   Property and equipment   
Property and equipment, at costProperty and equipment, at cost34,443.4
 37,692.4
Property and equipment, at cost39,050.9
 37,193.6
Accumulated depreciation and amortizationAccumulated depreciation and amortization(13,185.8) (14,574.8)Accumulated depreciation and amortization(14,890.9) (14,350.9)
Net property and equipmentNet property and equipment21,257.6
 23,117.6
Net property and equipment24,160.0
 22,842.7
Total assetsTotal assets$31,023.9
 $37,938.7
Total assets$47,510.8
 $32,811.2
LIABILITIES AND SHAREHOLDERS’ EQUITYLIABILITIES AND SHAREHOLDERS’ EQUITY   LIABILITIES AND SHAREHOLDERS’ EQUITY   
Current liabilitiesCurrent liabilities   Current liabilities   
Accounts payableAccounts payable$756.0
 $874.7
Accounts payable$988.2
 $1,207.9
Lease liabilityLease liability621.0
 —
Income taxesIncome taxes267.2
 154.8
Income taxes331.7
 228.3
Other taxesOther taxes266.3
 309.0
Other taxes247.5
 253.7
Accrued interestAccrued interest247.5
 233.1
Accrued interest337.8
 297.0
Accrued payroll and other liabilitiesAccrued payroll and other liabilities1,159.3
 1,378.8
Accrued payroll and other liabilities1,035.7
 986.6
Current maturities of long-term debtCurrent maturities of long-term debt77.2
 —
Current maturities of long-term debt59.1
 —
Liabilities of businesses held for sale694.8
 —
Total current liabilitiesTotal current liabilities3,468.3
 2,950.4
Total current liabilities3,621.0
 2,973.5
Long-term debtLong-term debt25,878.5
 24,122.1
Long-term debt34,118.1
 31,075.3
Long-term lease liabilityLong-term lease liability12,757.8
 —
Long-term income taxesLong-term income taxes2,265.9
 2,081.2
Deferred revenues - initial franchise feesDeferred revenues - initial franchise fees660.6
 627.8
Other long-term liabilitiesOther long-term liabilities2,064.3
 2,074.0
Other long-term liabilities979.6
 1,096.3
Deferred income taxesDeferred income taxes1,817.1
 1,704.3
Deferred income taxes1,318.1
 1,215.5
Shareholders’ equity (deficit)Shareholders’ equity (deficit)   Shareholders’ equity (deficit)   
Preferred stock, no par value; authorized – 165.0 million shares; issued – nonePreferred stock, no par value; authorized – 165.0 million shares; issued – none—
 —
Preferred stock, no par value; authorized – 165.0 million shares; issued – none—
 —
Common stock, $.01 par value; authorized – 3.5 billion shares; issued – 1,660.6 million sharesCommon stock, $.01 par value; authorized – 3.5 billion shares; issued – 1,660.6 million shares16.6
 16.6
Common stock, $.01 par value; authorized – 3.5 billion shares; issued – 1,660.6 million shares16.6
 16.6
Additional paid-in capitalAdditional paid-in capital6,757.9
 6,533.4
Additional paid-in capital7,653.9
 7,376.0
Retained earningsRetained earnings46,222.7
 44,594.5
Retained earnings52,930.5
 50,487.0
Accumulated other comprehensive income(3,092.9) (2,879.8)
Common stock in treasury, at cost; 841.3 and 753.8 million shares(52,108.6) (41,176.8)
Accumulated other comprehensive income (loss)Accumulated other comprehensive income (loss)(2,482.7) (2,609.5)
Common stock in treasury, at cost; 914.3 and 893.5 million sharesCommon stock in treasury, at cost; 914.3 and 893.5 million shares(66,328.6) (61,528.5)
Total shareholders’ equity (deficit)Total shareholders’ equity (deficit)(2,204.3) 7,087.9
Total shareholders’ equity (deficit)(8,210.3) (6,258.4)
Total liabilities and shareholders’ equity (deficit)Total liabilities and shareholders’ equity (deficit)$31,023.9
 $37,938.7
Total liabilities and shareholders’ equity (deficit)$47,510.8
 $32,811.2
See Notes to consolidated financial statements.



McDonald's Corporation 20162019 Annual Report 3136


 
Consolidated Statement of Cash Flows
In millions
Years ended December 31, 2016
  2015
 2014
Years ended December 31, 2019
  2018
 2017
Operating activitiesOperating activities     Operating activities     
Net incomeNet income$4,686.5
 $4,529.3
 $4,757.8
Net income$6,025.4
 $5,924.3
 $5,192.3
Adjustments to reconcile to cash provided by operationsAdjustments to reconcile to cash provided by operations     Adjustments to reconcile to cash provided by operations     
Charges and credits:Charges and credits:     Charges and credits:     
Depreciation and amortizationDepreciation and amortization1,516.5
 1,555.7
 1,644.5
Depreciation and amortization1,617.9
 1,482.0
 1,363.4
Deferred income taxesDeferred income taxes(538.6) (1.4) (90.7)Deferred income taxes149.7
 102.6
 (36.4)
Share-based compensationShare-based compensation131.3
 110.0
 112.8
Share-based compensation109.6
 125.1
 117.5
Net gain on sale of restaurant businessesNet gain on sale of restaurant businesses(128.2) (308.8) (1,155.8)
OtherOther96.9
 177.6
 369.5
Other49.2
 114.2
 1,050.7
Changes in working capital items:Changes in working capital items:     Changes in working capital items:     
Accounts receivableAccounts receivable(159.0) (180.6) 27.0
Accounts receivable27.0
 (479.4) (340.7)
Inventories, prepaid expenses and other current assetsInventories, prepaid expenses and other current assets28.1
 44.9
 (4.9)Inventories, prepaid expenses and other current assets128.8
 (1.9) (37.3)
Accounts payableAccounts payable89.8
 (15.0) (74.7)Accounts payable(26.8) 129.4
 (59.7)
Income taxesIncome taxes169.7
 (64.4) 3.3
Income taxes173.4
 (33.4) (396.4)
Other accrued liabilitiesOther accrued liabilities38.4
 383.0
 (14.3)Other accrued liabilities(3.9) (87.4) (146.4)
Cash provided by operationsCash provided by operations6,059.6
 6,539.1
 6,730.3
Cash provided by operations8,122.1
 6,966.7
 5,551.2
Investing activitiesInvesting activities     Investing activities     
Capital expendituresCapital expenditures(1,821.1) (1,813.9) (2,583.4)Capital expenditures(2,393.7) (2,741.7) (1,853.7)
Purchases of restaurant businesses(109.5) (140.6) (170.5)
Purchases of restaurant and other businessesPurchases of restaurant and other businesses(540.9) (101.7) (77.0)
Sales of restaurant businessesSales of restaurant businesses975.6
 341.1
 403.1
Sales of restaurant businesses340.8
 530.8
 974.8
Proceeds from sale of businesses in China and Hong KongProceeds from sale of businesses in China and Hong Kong—
 —
 1,597.0
Sales of propertySales of property82.9
 213.1
 86.8
Sales of property151.2
 160.4
 166.8
OtherOther(109.5) (19.7) (40.9)Other(628.5) (302.9) (245.9)
Cash used for investing activities(981.6) (1,420.0) (2,304.9)
Cash provided by (used for) investing activitiesCash provided by (used for) investing activities(3,071.1) (2,455.1) 562.0
Financing activitiesFinancing activities     Financing activities     
Net short-term borrowingsNet short-term borrowings(286.2) 589.7
 510.4
Net short-term borrowings799.2
 95.9
 (1,050.3)
Long-term financing issuancesLong-term financing issuances3,779.5
 10,220.0
 1,540.6
Long-term financing issuances4,499.0
 3,794.5
 4,727.5
Long-term financing repaymentsLong-term financing repayments(822.9) (1,054.5) (548.1)Long-term financing repayments(2,061.9) (1,759.6) (1,649.4)
Treasury stock purchasesTreasury stock purchases(11,171.0) (6,099.2) (3,198.6)Treasury stock purchases(4,976.2) (5,207.7) (4,685.7)
Common stock dividendsCommon stock dividends(3,058.2) (3,230.3) (3,216.1)Common stock dividends(3,581.9) (3,255.9) (3,089.2)
Proceeds from stock option exercisesProceeds from stock option exercises299.4
 317.2
 235.4
Proceeds from stock option exercises350.5
 403.2
 456.8
Excess tax benefit on share-based compensation—
 51.1
 70.9
OtherOther(3.0) (58.7) (12.8)Other(23.5) (20.0) (20.5)
Cash provided by (used for) financing activities(11,262.4) 735.3
 (4,618.3)
Cash (used for) financing activitiesCash (used for) financing activities(4,994.8) (5,949.6) (5,310.8)
Effect of exchange rates on cash and equivalentsEffect of exchange rates on cash and equivalents(103.7) (246.8) (527.9)Effect of exchange rates on cash and equivalents(23.7) (159.8) 264.0
Cash and equivalents increase (decrease)Cash and equivalents increase (decrease)(6,288.1) 5,607.6
 (720.8)Cash and equivalents increase (decrease)32.5
 (1,597.8) 1,066.4
Cash balance of businesses held for sale at end of year(174.0) —
 —
Change in cash balances of businesses held for saleChange in cash balances of businesses held for sale—
 —
 174.0
Cash and equivalents at beginning of yearCash and equivalents at beginning of year7,685.5
 2,077.9
 2,798.7
Cash and equivalents at beginning of year866.0
 2,463.8
 1,223.4
Cash and equivalents at end of yearCash and equivalents at end of year$1,223.4
 $7,685.5
 $2,077.9
Cash and equivalents at end of year$898.5
 $866.0
 $2,463.8
Supplemental cash flow disclosuresSupplemental cash flow disclosures     Supplemental cash flow disclosures     
Interest paidInterest paid$873.5
 $640.8
 $573.2
Interest paid$1,066.5
 $959.6
 $885.2
Income taxes paidIncome taxes paid2,387.5
 1,985.4
 2,388.3
Income taxes paid1,589.7
 1,734.4
 2,786.3
See Notes to consolidated financial statements.
 



32McDonald's Corporation 20162019 Annual Report37


 
Consolidated Statement of Shareholders’ Equity
Common stock
issued
      
Accumulated other
comprehensive income (loss)
  
Common stock in
treasury
 
Total
shareholders’
equity
 
Common stock
issued
      
Accumulated other
comprehensive income (loss)
  
Common stock in
treasury
 
Total
shareholders’
equity
 
Additional
paid-in
capital
  
Retained
earnings

Pensions 
Cash flow
hedges
 
Foreign
currency
translation
  
Additional
paid-in
capital
  
Retained
earnings

Pensions Cash flow
hedges		 
Foreign
currency
translation
  
In millions, except per share dataShares
Amount Shares
 Amount
Shares
Amount Shares
 Amount
Balance at December 31, 20131,660.6
 $16.6
 $5,994.1
 $41,751.2
 $(142.7) $(2.3) $572.6
 (670.2) $(32,179.8) $16,009.7
Balance at December 31, 20161,660.6
 $16.6
 $6,757.9
 $46,222.7
 $(207.1) $22.9
 $(2,908.7) (841.3) $(52,108.6) $(2,204.3)
Net income      4,757.8
           4,757.8
      5,192.3
           5,192.3
Other comprehensive income (loss),
net of tax
        (24.2) 33.3
 (1,956.4)     (1,947.3)        16.9
 (39.4) 937.0
     914.5
Comprehensive income                  2,810.5
                  6,106.8
Common stock cash dividends
($3.28 per share)
      (3,216.1)           (3,216.1)
Common stock cash dividends
($3.83 per share)
      (3,089.2)           (3,089.2)
Treasury stock purchases              (33.1) (3,175.3) (3,175.3)              (31.4) (4,650.5) (4,650.5)
Share-based compensation    112.8
             112.8
    117.5
             117.5
Stock option exercises and other
(including tax benefits of $70.2)
    132.2
 1.6
       5.6
 178.0
 311.8
Balance at December 31, 20141,660.6
 16.6
 6,239.1
 43,294.5
 (166.9) 31.0
 (1,383.8) (697.7) (35,177.1) 12,853.4
Stock option exercises and other    197.0
 


       6.2
 254.7
 451.7
Balance at December 31, 20171,660.6
 16.6
 7,072.4
 48,325.8
 (190.2) (16.5) (1,971.7) (866.5) (56,504.4) (3,268.0)
Net income      4,529.3
           4,529.3
      5,924.3
           5,924.3
Other comprehensive income (loss),
net of tax
        (3.0) (11.0) (1,346.1)     (1,360.1)        (26.4) 48.9
 (453.6)     (431.1)
Comprehensive income                  3,169.2
                  5,493.2
Common stock cash dividends
($3.44 per share)
      (3,230.3)           (3,230.3)
Adoption of ASC 606 (1)
      (450.2)           (450.2)
Adoption of ASU 2016-16 (2)
      (57.0)           (57.0)
Common stock cash dividends
($4.19 per share)
      (3,255.9)           (3,255.9)
Treasury stock purchases              (61.8) (6,182.2) (6,182.2)              (32.2) (5,247.5) (5,247.5)
Share-based compensation    110.0
             110.0
    125.1
             125.1
Stock option exercises and other
(including tax benefits of $44.8)
    184.3
 1.0
       5.7
 182.5
 367.8
Balance at December 31, 20151,660.6
 16.6
 6,533.4
 44,594.5
 (169.9) 20.0
 (2,729.9) (753.8) (41,176.8) 7,087.9
Stock option exercises and other    178.5
         5.2
 223.4
 401.9
Balance at December 31, 20181,660.6
 16.6
 7,376.0
 50,487.0
 (216.6) 32.4
 (2,425.3) (893.5) (61,528.5) (6,258.4)
Net income      4,686.5
           4,686.5
      6,025.4
           6,025.4
Other comprehensive income (loss),
net of tax
        (37.2) 2.9
 (178.8)     (213.1)        (27.1) (20.4) 174.3
     126.8
Comprehensive income                  4,473.4
                  6,152.2
Common stock cash dividends
($3.61 per share)
      (3,058.2)           (3,058.2)
Common stock cash dividends
($4.73 per share)
      (3,581.9)           (3,581.9)
Treasury stock purchases              (92.3) (11,141.5) (11,141.5)              (25.0) (4,980.5) (4,980.5)
Share-based compensation    131.3
             131.3
    109.6
             109.6
Stock option exercises and other
(including tax benefits of $0.6)
    93.2
 (0.1)       4.8
 209.7
 302.8
Balance at December 31, 20161,660.6
 $16.6
 $6,757.9
 $46,222.7
 $(207.1) $22.9
 $(2,908.7) (841.3) $(52,108.6) $(2,204.3)
Stock option exercises and other    168.3
         4.2
 180.4
 348.7
Balance at December 31, 20191,660.6
 $16.6
 $7,653.9
 $52,930.5
 $(243.7) $12.0
 $(2,251.0) (914.3) $(66,328.6) $(8,210.3)
(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."
See Notes to consolidated financial statements.





McDonald's Corporation 20162019 Annual Report 3338


Notes to Consolidated Financial Statements
 
Summary of Significant Accounting Policies

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 franchisefranchised arrangements, and foreign affiliates and developmental licensees or affiliates under license agreements.
The following table presents restaurant information by ownership type:
Restaurants at December 31,2019
 2018
 2017
Conventional franchised21,837
 21,685
 21,366
Developmental licensed7,648
 7,225
 6,945
Foreign affiliated6,574
 6,175
 5,797
    Total Franchised36,059
 35,085
 34,108
    Company-operated2,636
 2,770
 3,133
        Total Systemwide restaurants38,695
 37,855
 37,241
Restaurants at December 31,2016
 2015
 2014
Conventional franchised21,559
 21,147
 20,774
Developmental licensed6,300
 5,529
 5,228
Foreign affiliated3,371
 3,405
 3,542
Franchised31,230
 30,081
 29,544
Company-operated5,669
 6,444
 6,714
Systemwide restaurants36,899
 36,525
 36,258

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.
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.
RECENTLY ISSUED
FOREIGN CURRENCY TRANSLATION
Generally, the functional currency of operations outside the U.S. is the respective local currency.
RECENT ACCOUNTING STANDARDSPRONOUNCEMENTS
Employee Share-Based PaymentRecently Adopted Accounting Pronouncements
In March 2016, the FinancialLease Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The goal of this update is to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows.
The Company elected to early adopt ASU 2016-09 in the second quarter 2016, which required reflecting any adjustmentsadopted ASC Topic 842, "Leases" ("ASC 842") as of January 1, 2016. 2019, using the modified retrospective method. As discussed further in the “Franchise Arrangements” and “Leasing Arrangements” footnotes, the Company is engaged in a significant amount of leasing activity, both from a lessor and a lessee perspective.
The primaryCompany has elected the package of practical expedients, which allows the Company to retain the classification of existing leases; therefore, there was minimal initial impact in the Consolidated Statement of adoption was the recognition of excess tax benefits as a reduction to the provision for income taxes.
Additional amendments to ASU 2016-09 related to income taxesIncome, and minimum statutory withholding tax requirements had no impactcumulative adjustment to retained earnings wherewas recognized upon adoption. As the cumulative effectCompany enters into new ground leases or as existing ground leases are modified, many of these changes are requiredmay be reclassified from operating classification to financing classification, which will change the timing and classification of a portion of lease expense between Operating income and Interest expense. It is not possible to quantify the impact at this time, due to the unknown timing of new leases and lease modifications, however the Company does not expect the impact to be recorded.material to any given year. The Company has also elected
made an accounting policy election to continue estimating forfeitures when determiningkeep leases with an initial term of 12 months or less off of the amountbalance sheet. These types of compensation costsleases primarily relate to leases of office equipment, and are not significant in comparison to the Company’s overall lease portfolio. Payments related to those leases will continue to be recognized in each period.the Consolidated Statement of Income on a straight-line basis over the lease term.
The presentation requirementsCompany has certain leases subject to index adjustments. Historically, the Company has calculated and disclosed future minimum payments for cash flows related to excess tax benefits were applied prospectively;these leases using the index as such, prior years have not been restated. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presentedend of the reporting period. As part of the transition, the Company used the index in effect at transition for adoption of ASC 842 in its disclosure of future minimum lease payments and its calculation of the consolidated statementlease liability. For leases entered into after January 1, 2019, the index at lease inception date will be used to calculate the lease liability until lease modification.
The Company recorded a Right of Use Asset and Lease Liability on the Condensed Consolidated Balance Sheet of $12.5 billion upon adoption. The Lease Liability reflects 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. The impact of the new lease guidance is non-cash in nature, therefore, it does not affect the Company’s cash flows, since such cash flows have historically been presented in financing activities.flows.
Lease

McDonald's Corporation 2019 Annual Report 39

Recent Accounting Pronouncements Not Yet Adopted
Financial Instruments - Credit Losses
In FebruaryJune 2016, the FASB issued ASU 2016-02, “Leases2016-13, "Financial Instruments – Credit Losses (Topic 842)326): Measurement of Credit Losses on Financial Instruments",” to increase transparency that modifies the measurement and comparability among organizations by recognizing lease assets and lease liabilitiesrecognition of expected credit losses on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted.financial assets. The Company anticipates ASU 2016-02will adopt this guidance effective January 1, 2020, prospectively. The adoption of this standard is not expected to have a material impact on the Company's consolidated balance sheet. Upon adoption, a portion of our franchise related revenue may be subject to the allocation provisions outlined in ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)". We are currently evaluating the specific implementation requirements, if any, for allocating consideration within our lessor contracts in accordance with ASU 2014-09. The impact of ASU 2016-02 is non-cash in nature, as such, it will not affect the Company’s cash flows.
Income Taxes
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory”. The goal of this update is to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, including interim periods within those annual reporting periods. The Company anticipates that ASU 2016-16 may have a material impact on the Company’s consolidated balance sheet, but little to no impact on the consolidated statement of income or the Company’s cash flows.
Business Combinations
In January 2017, the FASB issued ASU 2017-1, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” to clarify the definition of a business to assist organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  The Company elected to early adopt ASU 2017-1 in the fourth quarter 2016.  The adoption of this standard did not have a material impact on the Company’s financial statements.
REVENUE RECOGNITION
The Company’sCompany's revenues consist of sales by Company-operated restaurants and fees from franchised restaurants operated by conventional franchisees, developmental licensees and foreign affiliates.
Sales by Company-operated restaurants are recognized on a cash basis. The Company presents sales net of sales tax and other sales-related taxes. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales with minimum rent payments, and initial fees. Revenues from restaurants licensed to foreign affiliates and developmental licensees and affiliates include a royalty based on a percent of sales, and maygenerally include initial fees. Continuing rent and royalties
Sales by Company-operated restaurants are recognized inon a cash basis at the period earned. Initial fees are recognized upon opening of a restaurant or granting of a new franchise term, which is when the Company has performed substantially all initial services required by the franchise arrangement.


34 McDonald's Corporation 2016 Annual Report

In May 2014, the FASB issued guidance codified in the Accounting Standards Codification ("ASC") 606, "Revenue Recognition - Revenue from Contracts with Customers," which amends the guidance in former ASC 605, "Revenue Recognition". The core principaltime of the standard is to recognize revenue when promised goods or servicesunderlying sale and are transferred to customers in an amount that reflects the consideration expected to be received for those goods or services. The standard also calls for additional disclosures around the nature, amount, timingpresented net of sales tax and uncertainty of revenue and cash flows arising from contracts with customers. The standard will be effective for the Company beginning January 1, 2018, with early adoption permitted.
The standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption ("modified retrospective method"). The Company currently expects to apply the modified retrospective transition method upon adoption.
The Company does not believe the standard will impact its recognition of revenue from company-operated restaurants or its recognition of royalties from restaurants operated by franchisees or licensed to affiliates and developmental licensees, whichother sales-related taxes. Royalty revenues are based on a percent of sales. While we continue to assesssales and recognized at the potential impacts to other less significant revenue transactions, we currently believetime the standard will changeunderlying sales occur. Rental income includes both minimum rent payments, which are recognized straight-line over the way initial fees from franchisees for new restaurant openings or new franchise termsterm, and variable rent payments based on a percent of sales, which are recognized.
As noted above,recognized at the time the underlying sales occur. The Company's current accounting policy isthrough December 31, 2017, was to recognize initial franchise fees when "earned" per the contract terms, which is currently whenreceived, upon a new store opens orrestaurant opening and at the start of a new franchise term. In accordance with the new guidance, the initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement, and will therefore be treated as a single performance obligation. As such,Beginning in January 2018, initial fees received will likely beare recognized as the Company satisfies the performance obligation over the franchise term.term, which is generally 20 years.
We do
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.
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): 2019-$665.4; 2018-$609.7; 2017-$535.6.
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 anticipate this impactbe 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 material toimpaired, the Company’s consolidated statementloss is measured by the excess of income,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 cumulative catch-up adjustmentBoard of Directors, as required, have approved and committed to be recorded as deferred revenue upon adoptiona 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 approximately 2%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 “available 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 Company's consolidated long-term liabilities. No impactcombination. 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 Company's consolidated statementreporting unit.
The following table presents the 2019 activity in goodwill by segment:
In millionsU.S.
International
Operated Markets
 International Developmental Licensed Markets & Corporate Consolidated 
Balance at December 31, 2018$1,276.5
 $1,055.0
 $—
 $2,331.5
Business acquisitions348.8
 —
 —
 348.8
Net restaurant purchases (sales)(9.5) 5.7
 99.4
 95.6
Impairment losses—
 —
 (99.4) (99.4)
Currency translation—
 0.9
 —
 0.9
Balance at December 31, 2019$1,615.8
 $1,061.6
 $—
 $2,677.4


McDonald's Corporation 2019 Annual Report 40

The Company conducts goodwill impairment testing in the fourth quarter of each year or whenever an indicator of impairment exists. If an indicator of impairment exists (e.g., estimated earnings multiple value of a reporting unit is less than its carrying value), 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 expectedmeasured as the initial fees will continue to be collected upon store opening date ordifference between the beginningimplied fair value of a new franchise term.the reporting unit's goodwill and the carrying amount of goodwill. Historically, goodwill impairment has not significantly impacted the consolidated financial statements. Goodwill on the Consolidated Balance Sheet reflects accumulated impairment losses of $113.9 million and $15.6 million as of December 31, 2019 and 2018, respectively.
Upon adoption of ASU 2016-02, “Leases (Topic 842)," a portion of our franchise related revenue may be subject to the allocation provisions outlined within the revenue recognition standard. We are currently evaluating the specific implementation requirements, if any, for allocating consideration within our lessor contracts in accordance with the revenue recognition standard.
FOREIGN CURRENCY TRANSLATION
Generally, the functional currency of operations outside the U.S. is the respective local currency.
ADVERTISING COSTS
Advertising costs included in operating expenses of Company-operated restaurants primarily consist of contributions to advertising cooperatives and were (in millions): 2016–2019–$645.8; 2015–365.8; 2018–$718.7; 2014–388.8; 2017–$808.2.532.9. 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): 2016–2019–$88.8; 2015–81.5; 2018–$113.8; 2014–88.0; 2017–$98.7.100.2. Costs related to the Olympics sponsorship are included in thesethe expenses for 2016 and 2014.2018. In addition, significant advertising costs are incurred by franchisees through contributions to advertising cooperatives in individual markets. The costs incurred by these advertising cooperatives are approved and managed jointly by vote of both Company-operated restaurants and franchisees.
INCOME TAXES
Income Tax Uncertainties
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.
The Company records interest and penalties on unrecognized tax benefits in the provision for income taxes.
Accounting for Global Intangible Low-Taxed Income ("GILTI")
The Tax Act requires a U.S. shareholder of a foreign corporation to include GILTI in taxable income. The accounting policy of the Company is to record any tax on GILTI in the provision for income taxes in the year it is incurred. 


McDonald's Corporation 2019 Annual Report 41

FAIR VALUE MEASUREMENTS
The Company measures certain financial assets and liabilities at fair value on a recurring basis, and certain non-financial assets and liabilities on a nonrecurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. Fair value disclosures are reflected in a three-level hierarchy, maximizing the use of observable inputs and minimizing the use of unobservable inputs.
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:
▪Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market.
▪Level 2 – inputs to the valuation methodology include quoted prices for a similar asset or liability in an active market or model-derived valuations in which all significant inputs are observable for substantially the full term of the asset or liability.
▪Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability.
Certain of the Company’s derivatives are valued using various pricing models or discounted cash flow analyses that incorporate observable market parameters, such as interest rate yield curves, option volatilities and currency rates, classified as Level 2 within the valuation hierarchy. Derivative valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by the counterparty or the Company.
▪Certain Financial Assets and Liabilities Measured at Fair Value
The following tables present financial assets and liabilities measured at fair value on a recurring basis by the valuation hierarchy as defined in the fair value guidance:
12/31/2019      
In millions
Level 1 (1)

 Level 2
 
Carrying
Value
 
Derivative assets$179.1
 $45.6
  $224.7
Derivative liabilities  $(11.3)  $(11.3)
        
12/31/2018      
In millions
Level 1 (1)

 Level 2
 
Carrying
Value
 
Derivative assets$167.1
 $39.2
  $206.3
Derivative liabilities  $(16.6)  $(16.6)
(1)Level 1 is comprised of derivatives that hedge market driven changes in liabilities associated with the Company’s supplemental benefit plans.
▪Non-Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment). For the year ended December 31, 2019, the Company recorded fair value adjustments to its long-lived assets, primarily to goodwill, based on Level 3 inputs which includes the use of a discounted cash flow valuation approach.
▪Certain Financial Assets and Liabilities not Measured at Fair Value
At December 31, 2019, the fair value of the Company’s debt obligations was estimated at $37.6 billion, compared to a carrying amount of $34.2 billion. The fair value was based on quoted market prices, Level 2 within the valuation hierarchy. The carrying amount for both cash equivalents and notes receivable approximate fair value.
FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to global market risks, including the effect of changes in interest rates and foreign currency fluctuations. The Company uses foreign currency denominated debt and derivative instruments to mitigate the impact of these changes. The Company does not hold or issue derivatives for trading purposes.
The Company documents its risk management objective and strategy for undertaking hedging transactions, as well as all relationships between hedging instruments and hedged items. The Company’s derivatives that are designated for hedge accounting consist mainly of interest rate swaps, foreign currency forwards, and cross-currency interest rate swaps, and are classified as either fair value, cash flow or net investment hedges. Further details are explained in the "Fair Value," "Cash Flow" and "Net Investment" hedge sections.
The Company also enters into certain derivatives that are not designated for hedge accounting. The Company has entered into equity derivative contracts, including total return swaps, to hedge market-driven changes in certain of its supplemental benefit plan liabilities. In addition, the Company uses foreign currency forwards to mitigate the change in fair value of certain foreign currency denominated assets and liabilities. Further details are explained in the “Undesignated Derivatives” section.
All derivatives (including those not designated for hedge accounting) are recognized on the Consolidated Balance Sheet at fair value and classified based on the instruments’ maturity dates. Changes in the fair value measurements of the derivative instruments are reflected as adjustments to AOCI and/or current earnings.

McDonald's Corporation 2019 Annual Report 42

The following table presents the fair values of derivative instruments included on the Consolidated Balance Sheet as of December 31, 2019 and 2018:
  Derivative Assets Derivative Liabilities
In millionsBalance Sheet Classification 2019
 2018
 Balance Sheet Classification 2019
 2018
Derivatives designated as hedging instruments        
Foreign currencyPrepaid expenses and other current assets $10.0
 $30.9
 Accrued payroll and other liabilities $(5.2) $(0.7)
Interest ratePrepaid expenses and other current assets     Accrued payroll and other liabilities —
 (0.1)
Foreign currencyMiscellaneous other assets 9.5
 3.8
 Other long-term liabilities (1.2) (1.3)
Interest rate
Miscellaneous other assets

 12.1
 —
 Other long-term liabilities —
 (11.8)
Total derivatives designated as hedging instruments $31.6
 $34.7
   $(6.4) $(13.9)
Derivatives not designated as hedging instruments        
Equity
Prepaid expenses and other current assets


 $1.6
 $167.1
 Accrued payroll and other liabilities $(0.1) $(2.7)
Foreign currency
Prepaid expenses and other current assets


 12.4
 4.5
 Accrued payroll and other liabilities (4.8) —
EquityMiscellaneous other assets 179.1
 —
      
Total derivatives not designated as hedging instruments $193.1
 $171.6
   (4.9) $(2.7)
Total derivatives $224.7
 $206.3
   $(11.3) $(16.6)

The following table presents the pre-tax amounts from derivative instruments affecting income and AOCI for the year ended December 31, 2019 and 2018, respectively:
 
Location of Gain or Loss
Recognized in Income on
Derivative
Gain (Loss)
Recognized in
AOCI
 
Gain (Loss) Reclassified
into Income from AOCI
 
Gain (Loss) Recognized in
Income on Derivative
   
   
In millions 2019
 2018
 2019
 2018
 2019
 2018
Foreign currencyNonoperating income/expense$22.5
 $60.0
 $50.3
 $(2.2)    
Interest rateInterest expense


 


 (1.3) (1.2)    
Cash flow hedges$22.5
 $60.0
 $49.0
 $(3.4)    
             
Foreign currency denominated debtNonoperating income/expense$317.3
 $682.9
        
Foreign currency derivativesNonoperating income/expense11.8
 1.3
        
Foreign currency derivatives(1)
Interest expense        $11.7
 $4.0
Net investment hedges$329.1
 $684.2
     $11.7
 $4.0
             
Foreign currencyNonoperating income/expense        $14.2
 $22.1
EquitySelling, general & administrative expenses        71.8
 0.4
Undesignated derivatives        $86.0
 $22.5
(1)The amount of gain (loss) recognized in income related to components excluded from effectiveness testing.

Fair Value Hedges
The Company enters into fair value hedges to reduce the exposure to changes in fair values of certain liabilities. The Company enters into fair value hedges that convert a portion of its fixed rate debt into floating rate debt by use of interest rate swaps.  At December 31, 2019, the carrying amount of fixed-rate debt that was effectively converted was an equivalent notional amount of $998.5 million, which included an increase of $12.1 million of cumulative hedging adjustments. For the year ended December 31, 2019, the Company recognized a $24.0 million gain on the fair value of interest rate swaps, and a corresponding loss on the fair value of the related hedged debt instrument to interest expense.
Cash Flow Hedges
The Company enters into cash flow hedges to reduce the exposure to variability in certain expected future cash flows. To protect against the reduction in value of forecasted foreign currency cash flows (such as royalties denominated in foreign currencies), the Company uses foreign currency forwards to hedge a portion of anticipated exposures. The hedges cover the next 18 months for certain exposures and are denominated in various currencies. As of December 31, 2019, the Company had derivatives outstanding with an equivalent notional amount of $754.7 million that hedged a portion of forecasted foreign currency denominated cash flows.
Based on market conditions at December 31, 2019, the $12.0 million in cumulative cash flow hedging gains, after tax, is not expected to have a significant effect on earnings over the next 12 months.

McDonald's Corporation 2019 Annual Report 43

Net Investment Hedges
The Company primarily uses foreign currency denominated debt (third party and intercompany) to hedge its investments in certain foreign subsidiaries and affiliates. Realized and unrealized translation adjustments from these hedges are included in shareholders' equity in the foreign currency translation component of Other comprehensive income ("OCI") and offset translation adjustments on the underlying net assets of foreign subsidiaries and affiliates, which also are recorded in OCI. As of December 31, 2019, $11.9 billion of the Company's third party foreign currency denominated debt and $642.6 million of intercompany foreign currency denominated debt were designated to hedge investments in certain foreign subsidiaries and affiliates.
Undesignated Derivatives
The Company enters into certain derivatives that are not designated for hedge accounting, therefore the changes in the fair value of these derivatives are recognized immediately in earnings together with the gain or loss from the hedged balance sheet position. As an example, the Company enters into equity derivative contracts, including total return swaps, to hedge market-driven changes in certain of its supplemental benefit plan liabilities. Changes in the fair value of these derivatives are recorded in selling, general & administrative expenses together with the changes in the supplemental benefit plan liabilities. In addition, the Company uses foreign currency forwards to mitigate the change in fair value of certain foreign currency denominated assets and liabilities. The changes in the fair value of these derivatives are recognized in nonoperating (income) expense, net, along with the currency gain or loss from the hedged balance sheet position.
Credit Risk
The Company is exposed to credit-related losses in the event of non-performance by its derivative counterparties. The Company did not have significant exposure to any individual counterparty at December 31, 2019 and has master agreements that contain netting arrangements. For financial reporting purposes, the Company presents gross derivative balances in the financial statements and supplementary data, including for counterparties subject to netting arrangements. Some of these agreements also require each party to post collateral if credit ratings fall below, or aggregate exposures exceed, certain contractual limits. At December 31, 2019, the Company was required to post an immaterial amount of collateral due to the negative fair value of certain derivative positions. The Company's counterparties were not required to post collateral on any derivative position, other than on certain hedges of the Company’s supplemental benefit plan liabilities where the counterparties were required to post collateral on their liability positions.

SHARE-BASED COMPENSATIONFAIR VALUE MEASUREMENTS
Share-based compensationThe Company measures certain financial assets and liabilities at fair value on a recurring basis, and certain non-financial assets and liabilities on a nonrecurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. Fair value disclosures are reflected in a three-level hierarchy, maximizing the use of observable inputs and minimizing the use of unobservable inputs.
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:
▪Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market.
▪Level 2 – inputs to the valuation methodology include quoted prices for a similar asset or liability in an active market or model-derived valuations in which all significant inputs are observable for substantially the full term of the asset or liability.
▪Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability.
Certain of the Company’s derivatives are valued using various pricing models or discounted cash flow analyses that incorporate observable market parameters, such as interest rate yield curves, option volatilities and currency rates, classified as Level 2 within the valuation hierarchy. Derivative valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by the counterparty or the Company.
▪Certain Financial Assets and Liabilities Measured at Fair Value
The following tables present financial assets and liabilities measured at fair value on a recurring basis by the valuation hierarchy as defined in the fair value guidance:
12/31/2019      
In millions
Level 1 (1)

 Level 2
 
Carrying
Value
 
Derivative assets$179.1
 $45.6
  $224.7
Derivative liabilities  $(11.3)  $(11.3)
        
12/31/2018      
In millions
Level 1 (1)

 Level 2
 
Carrying
Value
 
Derivative assets$167.1
 $39.2
  $206.3
Derivative liabilities  $(16.6)  $(16.6)
(1)Level 1 is comprised of derivatives that hedge market driven changes in liabilities associated with the Company’s supplemental benefit plans.
▪Non-Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment). For the year ended December 31, 2019, the Company recorded fair value adjustments to its long-lived assets, primarily to goodwill, based on Level 3 inputs which includes the portion vestinguse of a discounted cash flow valuation approach.
▪Certain Financial Assets and Liabilities not Measured at Fair Value
At December 31, 2019, the fair value of the Company’s debt obligations was estimated at $37.6 billion, compared to a carrying amount of $34.2 billion. The fair value was based on quoted market prices, Level 2 within the valuation hierarchy. The carrying amount for both cash equivalents and notes receivable approximate fair value.
FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to global market risks, including the effect of changes in interest rates and foreign currency fluctuations. The Company uses foreign currency denominated debt and derivative instruments to mitigate the impact of these changes. The Company does not hold or issue derivatives for trading purposes.
The Company documents its risk management objective and strategy for undertaking hedging transactions, as well as all share-based awards grantedrelationships between hedging instruments and hedged items. The Company’s derivatives that are designated for hedge accounting consist mainly of interest rate swaps, foreign currency forwards, and cross-currency interest rate swaps, and are classified as either fair value, cash flow or net investment hedges. Further details are explained in the "Fair Value," "Cash Flow" and "Net Investment" hedge sections.
The Company also enters into certain derivatives that are not designated for hedge accounting. The Company has entered into equity derivative contracts, including total return swaps, to hedge market-driven changes in certain of its supplemental benefit plan liabilities. In addition, the Company uses foreign currency forwards to mitigate the change in fair value of certain foreign currency denominated assets and liabilities. Further details are explained in the “Undesignated Derivatives” section.
All derivatives (including those not designated for hedge accounting) are recognized on the Consolidated Balance Sheet at fair value and classified based on the grant date fair value.
Share-based compensation expense andinstruments’ maturity dates. Changes in the effect on diluted earnings per common share were as follows:
In millions, except per share data2016
 2015
 2014
Share-based compensation expense$131.3
 $110.0
 $112.8
After tax$89.6
 $76.0
 $72.8
Earnings per common share-diluted$0.11
 $0.08
 $0.08
Compensation expense related to share-based awards is generally amortized on a straight-line basis over the vesting period in Selling, general & administrative expenses. As of December 31, 2016, there was $89.6 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.
The fair value measurements of each stock option granted is estimated on the date of grant using a closed-form pricing model. derivative instruments are reflected as adjustments to AOCI and/or current earnings.

McDonald's Corporation 2019 Annual Report 42

The following table presents the weighted-average assumptions used in the option pricing model for the 2016, 2015 and 2014 stock option grants. The expected lifefair values 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 basedderivative instruments included 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
 2016
2015
2014
Expected dividend yield3.0%3.6%3.3%
Expected stock price volatility19.2%18.8%20.0%
Risk-free interest rate1.2%1.7%2.0%
Expected life of options
(in years)
5.9
6.0
6.1
Fair value per option granted$13.65
$10.43
$12.23


McDonald's Corporation 2016 Annual Report 35

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–three to 12 years.
BUSINESSES HELD FOR SALE
Assets and liabilities of businesses held for sale on the consolidated balance sheet primarily consist of balances related to businesses in China and Hong Kong. In December 2016, the Company’s Board of Directors approved an agreement for the Company to sell its existing businesses in China and Hong Kong, which comprise over 2,600 restaurants, to a developmental licensee. Under the terms of the agreement, the Company will retain a 20% ownership in the business. The Company expects to complete the sale and licensing transaction mid-year 2017, subject to satisfaction of customary conditions, including receipt of any regulatory approvals.
Based on approval by the Board of Directors, the Company concluded that these markets were “held for sale”Consolidated Balance Sheet as of December 31, 2016 in accordance with the requirements of ASC 360 “Property, Plant2019 and Equipment”. Accordingly, the Company has ceased recording depreciation expense with respect to the assets of the China and Hong Kong markets effective January 1, 2017. As of December 31, 2016, total assets relating to businesses in China and Hong Kong were $1.3 billion, of which $217 million was current, and total liabilities were $592 million, most of which was current.2018:
  Derivative Assets Derivative Liabilities
In millionsBalance Sheet Classification 2019
 2018
 Balance Sheet Classification 2019
 2018
Derivatives designated as hedging instruments        
Foreign currencyPrepaid expenses and other current assets $10.0
 $30.9
 Accrued payroll and other liabilities $(5.2) $(0.7)
Interest ratePrepaid expenses and other current assets     Accrued payroll and other liabilities —
 (0.1)
Foreign currencyMiscellaneous other assets 9.5
 3.8
 Other long-term liabilities (1.2) (1.3)
Interest rate
Miscellaneous other assets

 12.1
 —
 Other long-term liabilities —
 (11.8)
Total derivatives designated as hedging instruments $31.6
 $34.7
   $(6.4) $(13.9)
Derivatives not designated as hedging instruments        
Equity
Prepaid expenses and other current assets


 $1.6
 $167.1
 Accrued payroll and other liabilities $(0.1) $(2.7)
Foreign currency
Prepaid expenses and other current assets


 12.4
 4.5
 Accrued payroll and other liabilities (4.8) —
EquityMiscellaneous other assets 179.1
 —
      
Total derivatives not designated as hedging instruments $193.1
 $171.6
   (4.9) $(2.7)
Total derivatives $224.7
 $206.3
   $(11.3) $(16.6)

As a result of this sale, the Company expects to record a gain of approximately $700-$900 million reflecting the difference
between the net book value of the businesses and an estimated $1.5 billion of cash proceeds to be received at closing, subject to adjustments.
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 television market level, and internationally, at a country 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 related to restaurants that have closed and ceased operations as well as other assets that meet the criteria to be considered “available for sale."
GOODWILL
Goodwill represents the excess of cost over the net tangible assets and identifiable intangible assets of acquired restaurant 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 country) 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 2016 activity in goodwill by segment:pre-tax amounts from derivative instruments affecting income and AOCI for the year ended December 31, 2019 and 2018, respectively:
 
Location of Gain or Loss
Recognized in Income on
Derivative
Gain (Loss)
Recognized in
AOCI
 
Gain (Loss) Reclassified
into Income from AOCI
 
Gain (Loss) Recognized in
Income on Derivative
   
   
In millions 2019
 2018
 2019
 2018
 2019
 2018
Foreign currencyNonoperating income/expense$22.5
 $60.0
 $50.3
 $(2.2)    
Interest rateInterest expense


 


 (1.3) (1.2)    
Cash flow hedges$22.5
 $60.0
 $49.0
 $(3.4)    
             
Foreign currency denominated debtNonoperating income/expense$317.3
 $682.9
        
Foreign currency derivativesNonoperating income/expense11.8
 1.3
        
Foreign currency derivatives(1)
Interest expense        $11.7
 $4.0
Net investment hedges$329.1
 $684.2
     $11.7
 $4.0
             
Foreign currencyNonoperating income/expense        $14.2
 $22.1
EquitySelling, general & administrative expenses        71.8
 0.4
Undesignated derivatives        $86.0
 $22.5
(1)The amount of gain (loss) recognized in income related to components excluded from effectiveness testing.

In millionsU.S.
International
Lead Markets
 
High Growth
Markets
 
Foundational Markets
& Corporate
 Consolidated 
Balance at December 31, 2015$1,293.4
 $698.1
 $322.4
 $202.4
 $2,516.3
Net restaurant purchases (sales)(10.1) 3.3
 3.0
 (67.1) (70.9)
Impairment losses—
 —
 —
 (39.9) (39.9)
Currency translation  (20.2) (7.7) (4.0) (31.9)
Assets of businesses held for sale—
 —
 (37.6) 0.5
 (37.1)
Balance at December 31, 2016$1,283.3
 $681.2
 $280.1
 $91.9
 $2,336.5
Fair Value Hedges
The Company conducts goodwill impairment testingenters into fair value hedges to reduce the exposure to changes in fair values of certain liabilities. The Company enters into fair value hedges that convert a portion of its fixed rate debt into floating rate debt by use of interest rate swaps.  At December 31, 2019, the fourth quartercarrying amount of eachfixed-rate debt that was effectively converted was an equivalent notional amount of $998.5 million, which included an increase of $12.1 million of cumulative hedging adjustments. For the year or whenever an indicator of impairment exists. If an indicator of impairment exists (e.g., estimated earnings multiple value ofended December 31, 2019, the Company recognized a reporting unit is less than its carrying value), the goodwill impairment test compares$24.0 million gain on the fair value of interest rate swaps, and a reporting unit, generally basedcorresponding loss 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 measured as the difference between the implied fair value of the reporting unit's goodwillrelated hedged debt instrument to interest expense.
Cash Flow Hedges
The Company enters into cash flow hedges to reduce the exposure to variability in certain expected future cash flows. To protect against the reduction in value of forecasted foreign currency cash flows (such as royalties denominated in foreign currencies), the Company uses foreign currency forwards to hedge a portion of anticipated exposures. The hedges cover the next 18 months for certain exposures and are denominated in various currencies. As of December 31, 2019, the carryingCompany had derivatives outstanding with an equivalent notional amount of goodwill. Historically, goodwill impairment has not significantly impacted the consolidated financial statements. Accumulated impairment losses$754.7 million that hedged a portion of forecasted foreign currency denominated cash flows.
Based on market conditions at December 31, 2016 and 2015 were $96.62019, the $12.0 million and $94.1 million, respectively.in cumulative cash flow hedging gains, after tax, is not expected to have a significant effect on earnings over the next 12 months.



36McDonald's Corporation 20162019 Annual Report43


Net Investment Hedges
The Company primarily uses foreign currency denominated debt (third party and intercompany) to hedge its investments in certain foreign subsidiaries and affiliates. Realized and unrealized translation adjustments from these hedges are included in shareholders' equity in the foreign currency translation component of Other comprehensive income ("OCI") and offset translation adjustments on the underlying net assets of foreign subsidiaries and affiliates, which also are recorded in OCI. As of December 31, 2019, $11.9 billion of the Company's third party foreign currency denominated debt and $642.6 million of intercompany foreign currency denominated debt were designated to hedge investments in certain foreign subsidiaries and affiliates.
Undesignated Derivatives
The Company enters into certain derivatives that are not designated for hedge accounting, therefore the changes in the fair value of these derivatives are recognized immediately in earnings together with the gain or loss from the hedged balance sheet position. As an example, the Company enters into equity derivative contracts, including total return swaps, to hedge market-driven changes in certain of its supplemental benefit plan liabilities. Changes in the fair value of these derivatives are recorded in selling, general & administrative expenses together with the changes in the supplemental benefit plan liabilities. In addition, the Company uses foreign currency forwards to mitigate the change in fair value of certain foreign currency denominated assets and liabilities. The changes in the fair value of these derivatives are recognized in nonoperating (income) expense, net, along with the currency gain or loss from the hedged balance sheet position.
Credit Risk
The Company is exposed to credit-related losses in the event of non-performance by its derivative counterparties. The Company did not have significant exposure to any individual counterparty at December 31, 2019 and has master agreements that contain netting arrangements. For financial reporting purposes, the Company presents gross derivative balances in the financial statements and supplementary data, including for counterparties subject to netting arrangements. Some of these agreements also require each party to post collateral if credit ratings fall below, or aggregate exposures exceed, certain contractual limits. At December 31, 2019, the Company was required to post an immaterial amount of collateral due to the negative fair value of certain derivative positions. The Company's counterparties were not required to post collateral on any derivative position, other than on certain hedges of the Company’s supplemental benefit plan liabilities where the counterparties were required to post collateral on their liability positions.

FAIR VALUE MEASUREMENTS
The Company measures certain financial assets and liabilities at fair value on a recurring basis, and certain non-financial assets and liabilities on a nonrecurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. Fair value disclosures are reflected in a three-level hierarchy, maximizing the use of observable inputs and minimizing the use of unobservable inputs.
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:
▪Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market.
▪Level 2 – inputs to the valuation methodology include quoted prices for a similar asset or liability in an active market or model-derived valuations in which all significant inputs are observable for substantially the full term of the asset or liability.
▪Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability.
Certain of the Company’s derivatives are valued using various pricing models or discounted cash flow analyses that incorporate observable market parameters, such as interest rate yield curves, option volatilities and currency rates, classified as Level 2 within the valuation hierarchy. Derivative valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by the counterparty or the Company.
▪Certain Financial Assets and Liabilities Measured at Fair Value
The following tables present financial assets and liabilities measured at fair value on a recurring basis by the valuation hierarchy as defined in the fair value guidance:
December 31, 2016     
12/31/201912/31/2019     
In millionsIn millionsLevel 1*
 Level 2
 
Carrying
Value
 In millions
Level 1 (1)

 Level 2
 
Carrying
Value
 
Derivative assetsDerivative assets$134.3
 $47.0
 $181.3
Derivative assets$179.1
 $45.6
 $224.7
Derivative liabilitiesDerivative liabilities  $(5.6) $(5.6)Derivative liabilities  $(11.3) $(11.3)
            
December 31, 2015     
12/31/201812/31/2018     
In millionsIn millionsLevel 1*
 Level 2
 
Carrying
Value
 In millions
Level 1 (1)

 Level 2
 
Carrying
Value
 
Derivative assetsDerivative assets$139.9
 $65.4
 $205.3
Derivative assets$167.1
 $39.2
 $206.3
Derivative liabilitiesDerivative liabilities  $(44.4) $(44.4)Derivative liabilities  $(16.6) $(16.6)
*(1)Level 1 is comprised of derivatives that hedge market driven changes in liabilities associated with the Company’s supplemental benefit plans.
▪Non-Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment). For the year ended December 31, 2016,2019, the Company recorded fair value adjustments to its long-lived assets, primarily to goodwill, based on Level 3 inputs which includes the use of a discounted cash flow valuation approach.
▪Certain Financial Assets and Liabilities not Measured at Fair Value
At December 31, 2016,2019, the fair value of the Company’s debt obligations was estimated at $27.5$37.6 billion,, compared to a carrying amount of $26.0 billion.$34.2 billion. The fair value was based on quoted market prices, Level 2 within the valuation hierarchy. The carrying amount for both cash equivalents and notes receivable approximate fair value.
FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to global market risks, including the effect of changes in interest rates and foreign currency fluctuations. The Company uses foreign currency denominated debt and derivative instruments to mitigate the impact of these changes. The Company does not hold or issue derivatives for trading purposes.
The Company documents its risk management objective and strategy for undertaking hedging transactions, as well as all relationships between hedging instruments and hedged items. The Company’s derivatives that are designated for hedge accounting consist mainly of interest rate swaps, foreign currency forwards, foreign currency options, and cross-currency interest rate swaps, and are classified as either fair value, cash flow or net investment hedges. Further details are explained in the "Fair Value," "Cash Flow" and "Net Investment" hedge sections.
The Company also enters into certain derivatives that are not designated for hedge accounting. The Company has entered into equity derivative contracts, including total return swaps, to hedge market-driven changes in certain of its supplemental benefit plan liabilities. In addition, the Company uses foreign currency forwards to mitigate the change in fair value of certain foreign currency denominated assets and liabilities. Further details are explained in the “Undesignated Derivatives” section.
All derivatives (including those not designated for hedge accounting) are recognized on the consolidated balance sheetConsolidated Balance Sheet at fair value and classified based on the instruments’ maturity dates. Changes in the fair value measurements of the derivative instruments are reflected as adjustments to accumulated other comprehensive income ("AOCI")AOCI and/or current earnings.


 
McDonald's Corporation 20162019 Annual Report 3742


The following table presents the fair values of derivative instruments included on the consolidated balance sheetConsolidated Balance Sheet as of December 31, 20162019 and 2015:2018:
  Derivative Assets Derivative Liabilities
In millionsBalance Sheet Classification 2019
 2018
 Balance Sheet Classification 2019
 2018
Derivatives designated as hedging instruments        
Foreign currencyPrepaid expenses and other current assets $10.0
 $30.9
 Accrued payroll and other liabilities $(5.2) $(0.7)
Interest ratePrepaid expenses and other current assets     Accrued payroll and other liabilities —
 (0.1)
Foreign currencyMiscellaneous other assets 9.5
 3.8
 Other long-term liabilities (1.2) (1.3)
Interest rate
Miscellaneous other assets

 12.1
 —
 Other long-term liabilities —
 (11.8)
Total derivatives designated as hedging instruments $31.6
 $34.7
   $(6.4) $(13.9)
Derivatives not designated as hedging instruments        
Equity
Prepaid expenses and other current assets


 $1.6
 $167.1
 Accrued payroll and other liabilities $(0.1) $(2.7)
Foreign currency
Prepaid expenses and other current assets


 12.4
 4.5
 Accrued payroll and other liabilities (4.8) —
EquityMiscellaneous other assets 179.1
 —
      
Total derivatives not designated as hedging instruments $193.1
 $171.6
   (4.9) $(2.7)
Total derivatives $224.7
 $206.3
   $(11.3) $(16.6)

The following table presents the pre-tax amounts from derivative instruments affecting income and AOCI for the year ended December 31, 2019 and 2018, respectively:
 
Location of Gain or Loss
Recognized in Income on
Derivative
Gain (Loss)
Recognized in
AOCI
 
Gain (Loss) Reclassified
into Income from AOCI
 
Gain (Loss) Recognized in
Income on Derivative
   
   
In millions 2019
 2018
 2019
 2018
 2019
 2018
Foreign currencyNonoperating income/expense$22.5
 $60.0
 $50.3
 $(2.2)    
Interest rateInterest expense


 


 (1.3) (1.2)    
Cash flow hedges$22.5
 $60.0
 $49.0
 $(3.4)    
             
Foreign currency denominated debtNonoperating income/expense$317.3
 $682.9
        
Foreign currency derivativesNonoperating income/expense11.8
 1.3
        
Foreign currency derivatives(1)
Interest expense        $11.7
 $4.0
Net investment hedges$329.1
 $684.2
     $11.7
 $4.0
             
Foreign currencyNonoperating income/expense        $14.2
 $22.1
EquitySelling, general & administrative expenses        71.8
 0.4
Undesignated derivatives        $86.0
 $22.5
(1)The amount of gain (loss) recognized in income related to components excluded from effectiveness testing.
  Derivative Assets Derivative Liabilities
In millionsBalance Sheet Classification 2016
 2015
 Balance Sheet Classification 2016
 2015
Derivatives designated as hedging instruments        
Foreign currencyPrepaid expenses and other current assets $31.7
 $55.0
 Accrued payroll and other liabilities $(2.0) $(22.5)
Interest ratePrepaid expenses and other current assets 1.0
 —
      
Foreign currencyMiscellaneous other assets 2.5
 0.6
 Other long-term liabilities (0.1) (13.0)
Interest rateMiscellaneous other assets 1.7
 5.3
 Other long-term liabilities (1.6) (3.4)
Total derivatives designated as hedging instruments $36.9
 $60.9
   $(3.7) $(38.9)
Derivatives not designated as hedging instruments        
EquityPrepaid expenses and other current assets $134.3
 $0.3
 Accrued payroll and other liabilities $(1.9) $—
Foreign currencyPrepaid expenses and other current assets 10.1
 4.2
 Accrued payroll and other liabilities —
 (5.5)
EquityMiscellaneous other assets —
 139.9
      
Total derivatives not designated as hedging instruments $144.4
 $144.4
   $(1.9) $(5.5)
Total derivatives $181.3
 $205.3
   $(5.6) $(44.4)

Fair Value Hedges
The Company enters into fair value hedges to reduce the exposure to changes in the fair values of certain liabilities. The Company'sCompany enters into fair value hedges that convert a portion of its fixed-ratefixed rate debt into floating-ratefloating rate debt by use of interest rate swaps.  At December 31, 2016, $2.5 billion2019, the carrying amount of the Company's outstanding fixed-rate debt that was effectively converted. Allconverted was an equivalent notional amount of $998.5 million, which included an increase of $12.1 million of cumulative hedging adjustments. For the Company’syear ended December 31, 2019, the Company recognized a $24.0 million gain on the fair value of interest rate swaps, meet the shortcut method requirements. Accordingly, changes inand a corresponding loss on the fair value of the interest rate swaps are exactly offset by changes in the fair value of the underlying debt. No ineffectiveness has been recorded to net income related hedged debt instrument to interest rate swaps designated as fair value hedges for the year ended December 31, 2016.
Derivatives in Hedging
Relationships
 
Gain (Loss)
Recognized In Earnings
on Hedging Derivative
 
Gain (Loss)
Recognized In Earnings
on Hedged Items
  
In millions  2016
 2015
  2016
 2015
Interest rate  $(1.8) $(3.4)  $1.8
 $3.4
expense.
Cash Flow Hedges
The Company enters into cash flow hedges to reduce the exposure to variability in certain expected future cash flows. The types of cash flow hedges the Company enters into include interest rate swaps, foreign currency forwards, foreign currency options and cross currency swaps. The effective portion of the change in fair value of the derivatives are reported as a component of AOCI and reclassified into earnings in the same period in which the hedged transaction affects earnings. The Company excludes the time value of foreign currency options from its effectiveness assessment. As a result, changes in the fair value of the derivatives due to this component, as well as the ineffectiveness of the hedges, are recognized immediately in earnings.
  
Gain (Loss)
Recognized in AOCI
(Effective Portion)
 
Gain (Loss) Reclassified
From AOCI Into Earnings
(Effective Portion)
 
Gain (Loss)
Recognized in Earnings
(Amount Excluded from
Effectiveness Testing and
Ineffective Portion)
Derivatives in Hedging
Relationships
   
   
In millions  2016
 2015
  2016
 2015
  2016
 2015
Foreign currency  $28.6
 $35.3
  $24.6
 $53.0
  $—
 $22.9
Interest rate(1)
  —
 —
  (0.5) (0.5)  —
 —
   $28.6
 $35.3
  $24.1
 $52.5
  $—
 $22.9
(1)The amount of gain (loss) reclassified from AOCI into earnings is recorded in interest expense.


38 McDonald's Corporation 2016 Annual Report

The Company periodically uses interest rate swaps to effectively convert a portion of floating-rate debt, including forecasted debt issuances, into fixed-rate debt. The agreements are intended to reduce the impact of interest rate changes on future interest expense.
To protect against the reduction in value of forecasted foreign currency cash flows (such as royalties denominated in foreign currencies), the Company uses foreign currency forwards and foreign currency options to hedge a portion of anticipated exposures. When the U.S. dollar strengthens against foreign currencies, the decline in value of future foreign denominated royalties is offset by gains in the fair value of the foreign currency forwards and/or foreign currency options. Conversely, when the U.S. dollar weakens, the increase in the value of future foreign denominated royalties is offset by losses in the fair value of the foreign currency forwards and/or foreign currency options. Although the fair value changes in the foreign currency options may fluctuate over the period of the contract, the Company’s total loss on a foreign currency option is limited to the upfront premium paid for the contract; however, the potential gains on a foreign currency option are unlimited. The hedges cover the next 18 months for certain exposures and are denominated in various currencies. As of December 31, 2016,2019, the Company had derivatives outstanding with an equivalent notional amount of $632.0$754.7 million that were used to hedgehedged a portion of forecasted foreign currency denominated royalties.cash flows.
The Company recorded after tax adjustments to the cash flow hedging component of AOCI in shareholders’ equity. The Company recorded an increase of $2.9 million for the year ended December 31, 2016 and a decrease of $11.0 million for the year ended December 31, 2015. Based on interest rates and foreign exchange ratesmarket conditions at December 31, 2016, there is $22.92019, the $12.0 million in after-tax cumulative cash flow hedging gains, whichafter tax, is not expected to have a significant effect on earnings over the next 12 months.

McDonald's Corporation 2019 Annual Report 43

Net Investment Hedges
The Company primarily uses foreign currency denominated debt (third party and intercompany) to hedge its investments in certain foreign subsidiaries and affiliates. Realized and unrealized translation adjustments from these hedges are included in shareholders' equity in the foreign currency translation component of AOCI, as well as theOther comprehensive income ("OCI") and offset translation adjustments on the underlying net assets of foreign subsidiaries and affiliates. The cumulative translation gains or losses will remainaffiliates, which also are recorded in AOCI until the foreign subsidiaries and affiliates are liquidated or sold.OCI. As of December 31, 2016, $8.62019, $11.9 billion of the Company's third party foreign currency denominated debt $3.3 billionand $642.6 million of intercompany foreign currency denominated debt and $393.0 million of derivatives were designated to hedge investments in certain foreign subsidiaries and affiliates.
Derivatives in Hedging
Relationships
 
Gain (Loss)
Recognized in AOCI
(Effective Portion)
 
In millions  2016
 2015
Foreign currency denominated debt  $654.9
 $668.1
Foreign currency derivatives  9.9
 79.1

  $664.8
 $747.2
Undesignated Derivatives
The Company enters into certain derivatives that are not designated for hedge accounting, therefore the changes in the fair value of these derivatives are recognized immediately in earnings together with the gain or loss from the hedged balance sheet position. As an example, the Company enters into equity derivative contracts, including total return swaps, to hedge market-driven changes in certain of its supplemental benefit plan liabilities. Changes in the fair value of these derivatives are recorded in Selling,selling, general & administrative expenses together with the changes in the supplemental benefit plan liabilities. In addition, the Company uses foreign currency forwards to mitigate the change in fair value of certain foreign currency denominated assets and liabilities. The changes in the fair value of these derivatives are recognized in Nonoperatingnonoperating (income) expense, net, along with the currency gain or loss from the hedged balance sheet position.
Derivatives Not Designated
for Hedge Accounting
 
Gain (Loss)
Recognized in Earnings
 
In millions  2016
 2015
Foreign currency  $4.3
 $14.6
Equity  26.0
 38.9
   $30.3
 $53.5
Credit Risk
The Company is exposed to credit-related losses in the event of non-performance by the counterparties to its hedging instruments. The counterparties to these agreements consist of a diverse group of financial institutions and market participants. The Company continually monitors its positions and the credit ratings of its counterparties and adjusts positions as appropriate.derivative counterparties. The Company did not have significant exposure to any individual counterparty at December 31, 20162019 and has master agreements that contain netting arrangements. For financial reporting purposes, the Company presents gross derivative balances in the financial statements and supplementary data, evenincluding for counterparties subject to netting arrangements. Some of these agreements also require each party to post collateral if credit ratings fall below, or aggregate exposures exceed, certain contractual limits. At December 31, 2016,2019, the Company was required to post an immaterial amount of collateral due to the negative fair value of certain derivative positions. The Company's counterparties were not required to post collateral on any derivative position, other than on certain hedges of certain of the Company’s supplemental benefit plan liabilities where the counterparties were required to post collateral on their liability positions.
INCOME TAX UNCERTAINTIES
SHARE-BASED COMPENSATION
Share-based compensation includes the portion vesting of all share-based awards granted based on the grant date fair value.
Share-based compensation expense and the effect on diluted earnings per common share were as follows:
In millions, except per share data2019
 2018
 2017
Share-based compensation expense$109.6
 $125.1
 $117.5
After tax$94.2
 $108.1
 $82.0
Earnings per common share-diluted$0.12
 $0.14
 $0.10

Compensation expense related to share-based awards is generally amortized on a straight-line basis over the vesting period in Selling, general & administrative expenses. As of December 31, 2019, there was $107.5 million of total unrecognized compensation cost related to nonvested share-based compensation that is expected to be recognized over a weighted-average period of 2.1 years.
The Company, like other multi-national companies,fair value of each stock option granted is regularly audited by federal, stateestimated on the date of grant using a closed-form pricing model. The following table presents the weighted-average assumptions used in the option pricing model for the 2019, 2018 and foreign tax authorities,2017 stock option grants. The expected life of the options represents the period of time the options are expected to be outstanding and tax assessments may arise several years after tax returns have been filed. Accordingly, tax liabilities are recorded when,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 management’s judgment,effect at the time of grant with a tax position does not meetterm equal to 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.expected life.

Weighted-average assumptions
 2019
2018
2017
Expected dividend yield2.7%2.6%3.1%
Expected stock price volatility18.9%18.7%18.4%
Risk-free interest rate2.5%2.7%2.2%
Expected life of options (in years)
5.8
5.8
5.9
Fair value per option granted$25.60
$23.80
$16.10

The fair value of each RSU granted is equal to the market price of the Company’s stock at date of grant, and prior to 2018 included a reduction for the present value of expected dividends over the vesting period. For performance-based RSUs, the Company records interest and penalties on unrecognized tax benefits inincludes a relative TSR modifier to determine the provision for income taxes.
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.



 
McDonald's Corporation 20162019 Annual Report 3944


PER COMMON SHARE INFORMATION
Diluted earnings per common share is calculated using net income divided by diluted weighted-average shares. Diluted weighted-average shares include weighted-average shares outstanding plus the dilutive effect of share-based compensation calculated using the treasury stock method, of (in millions of shares): 2016–2019–6.8; 2015–5.2; 2014–5.8. Stock options2018–7.3; 2017–8.1. Share-based compensation awards that were not included in diluted weighted-average shares because they would have been antidilutive were (in millions of shares): 2016–1.2; 2015–1.0; 2014–5.3.2019–0.1; 2018–0.5; 2017–0.1.

CASH AND EQUIVALENTS
The Company considers short-term, highly liquid investments with an original maturity of 90 days or less to be cash equivalents.

SUBSEQUENT EVENTS
Segment and Geographic Information
The Company evaluated subsequent events through the date the financial statements were issued and filed with the U.S. Securities and Exchange Commission ("SEC"). In January 2017, the Company’s Board of Directors approved andOn February 25, 2019, the Company entered into a definitive agreementprovided investors with a developmental licensee organization to sell its existing businesses in Denmark, Finland, Norwaysegment summary financial information and Sweden (referred to as the "Nordics") in connection with the Company's refranchising initiatives. The Nordics comprise nearly 450 restaurants, the vast majority of which are operated by independent franchisees. The Company expects to complete the transaction around the end of the first quarter, subject to satisfaction of customary conditions.
Based on approval by the Board of Directors, the Company concluded the Nordics was “held for sale”other data in accordance with its new organizational structure for the requirements of ASC 360 "Property, Plantpreviously reported years ended December 31, 2016 through 2018. Effective January 1, 2019, McDonald’s operates under an organizational structure with the following global business segments reflecting how management reviews and Equipment". Accordingly,evaluates operating performance:
U.S. - the Company has ceased recording depreciation expense with respect to the Nordics effective January 26, 2017. AsCompany’s largest market. The segment is 95% franchised as of December 31, 2016,2019.
International Operated Markets - comprised of markets, or countries in which the Nordics' totalCompany operates and franchises restaurants, including Australia, Canada, France, Germany, Italy, the Netherlands, Russia, Spain and the U.K. The segment is 84% franchised as of December 31, 2019.
International Developmental Licensed Markets & Corporate - comprised primarily of developmental licensee and affiliate markets in the McDonald’s system. Corporate activities are also reported in this segment. The segment is 98% franchised as of December 31, 2019.
In April and October 2019, the Company completed the acquisitions of Dynamic Yield and Apprente, respectively. The related financial performance is reflected within the International Developmental Licensed Markets & Corporate segment from the dates of acquisition.
All intercompany revenues and expenses are eliminated in computing revenues and operating income. Corporate general and administrative expenses consist of home office support costs in areas such as facilities, finance, human resources, information technology, legal, marketing, restaurant operations, supply chain and training. Corporate assets include corporate cash and total liabilities were $439 millionequivalents, asset portions of financial instruments and $64 million, respectively. Cash proceeds uponhome office facilities.
In millions2019
 2018
 2017
 
U.S.$7,842.7
 $7,665.8
 $8,006.4
 
International Operated Markets11,398.6
 11,506.7
 11,115.9
 
International Developmental Licensed Markets & Corporate1,835.2
 1,852.7
 3,698.1
 
Total revenues$21,076.5
 $21,025.2
 $22,820.4
 
U.S.$4,068.7
 $4,015.6
 $4,022.4
 
International Operated Markets4,789.0
 4,643.2
 4,173.6
 
International Developmental Licensed Markets & Corporate212.1
 163.8
 1,356.7
 
Total operating income$9,069.8
 $8,822.6
 $9,552.7
 
U.S.$21,376.9
 $14,483.8
 $12,648.6
 
International Operated Markets22,847.5
 17,302.3
 16,254.8
 
International Developmental Licensed Markets & Corporate3,286.4
 1,025.1
 4,900.3
 
Total assets *$47,510.8
 $32,811.2
 $33,803.7
 
U.S.$1,480.5
 $1,849.8
 $861.2
 
International Operated Markets886.6
 762.4
 808.0
 
International Developmental Licensed Markets & Corporate26.6
 129.5
 184.5
 
Total capital expenditures$2,393.7
 $2,741.7
 $1,853.7
 
U.S.$730.2
 $598.4
 $524.1
 
International Operated Markets669.3
 703.9
 687.1
 
International Developmental Licensed Markets & Corporate218.4
 179.7
 152.2
 
Total depreciation and amortization$1,617.9
 $1,482.0
 $1,363.4
 

* Total assets increased from 2018 to 2019 primarily due to the completionCompany's right-of-use asset recorded as a result of the sale are estimated to be approximately $450 million. No significant gains or losses are expected to be recognized uponadoption of ASC 842.
Total long-lived assets, primarily property and equipment and beginning in 2019, the close of the transaction. ThereCompany's lease right-of-use asset, were no other subsequent events that required recognition or disclosure.(in millions)–Consolidated: 2019–$38,291.5; 2018– $23,671.1; U.S. based: 2019–$19,487.6; 2018–$12,250.3.


McDonald's Corporation 2019 Annual Report 45

Property and Equipment
 
Net property and equipment consisted of:
In millionsDecember 31, 2019
 2018
Land$6,026.4
 $5,521.4
Buildings and improvements on owned land17,003.7
 15,377.4
Buildings and improvements on leased land12,605.9
 12,863.6
Equipment, signs and seating2,994.5
 2,942.6
Other420.4
 488.6
Property and equipment, at cost39,050.9
 37,193.6
Accumulated depreciation and amortization(14,890.9) (14,350.9)
Net property and equipment$24,160.0
 $22,842.7

In millions
December 31, 2016

 2015
Land$5,465.0
 $5,582.5
Buildings and improvements
on owned land
13,695.2
 14,011.7
Buildings and improvements
on leased land
11,511.9
 12,892.9
Equipment, signs and
seating
3,270.9
 4,658.5
Other500.4
 546.8
Property and equipment, at
cost (1)
34,443.4
 37,692.4
Accumulated depreciation
and amortization (1)
(13,185.8) (14,574.8)
Net property and equipment$21,257.6
 $23,117.6
(1) In 2016, balances exclude $2.3 billion of property and equipment, at cost and $1.2 billion of accumulated depreciation and amortization that was reclassified to assets of businesses held for sale on the consolidated balance sheet in connection with the pending sale of the Company's businesses in China, Hong Kong, and Taiwan.
Depreciation and amortization expense for property and equipment was (in millions): 2016–2019–$1,390.7; 2015–1,392.2; 2018–$1,438.0; 2014–1,302.9; 2017–$1,539.3.1,227.5.
Other Operating (Income) Expense, NetFranchise 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:
In millions2019
 2018
 2017
Rents$7,500.2
 $7,082.2
 $6,496.3
Royalties4,107.1
 3,886.3
 3,518.7
Initial fees48.4
 44.0
 86.5
Revenues from franchised restaurants$11,655.7
 $11,012.5
 $10,101.5

Future gross minimum rent payments due to the Company under existing conventional franchise arrangements are:
In millionsOwned sites  Leased sites
 Total
2020 $1,558.5
 $1,449.8
 $3,008.3
2021 1,501.4
 1,382.5
 2,883.9
2022 1,439.3
 1,310.5
 2,749.8
2023 1,384.8
 1,246.4
 2,631.2
2024 1,344.4
 1,196.7
 2,541.1
Thereafter 11,155.2
 9,354.5
 20,509.7
Total minimum payments $18,383.6
 $15,940.4
 $34,324.0

At December 31, 2019, net property and equipment under franchise arrangements totaled $19.2 billion (including land of $5.4 billion) after deducting accumulated depreciation and amortization of $10.9 billion.


McDonald's Corporation 2019 Annual Report 46

Leasing Arrangements

The Company is the lessee in a significant real estate portfolio, primarily through ground leases (the Company leases the land and generally owns the building) and through improved leases (the Company leases the land and buildings). The Company determines whether an arrangement is a lease at inception. Lease terms for most restaurants, where market conditions allow, are generally for 20 years and, in many cases, provide for rent escalations and renewal options. Renewal options are typically solely at the Company’s discretion. Escalation terms vary by market with examples including fixed-rent escalations, escalations based on an inflation index and fair-value market adjustments. The timing of these escalations generally range from annually to every five years.
The following table provides detail of rent expense:
In millions2019
 2018
 2017
Restaurants$1,530.4
 $1,433.9
 $1,562.5
Other76.4
 87.9
 82.0
Total rent expense$1,606.8
 $1,521.8
 $1,644.5

Rent expense included percent rents in excess of minimum rents (in millions) as follows–Company-operated restaurants: 2019–$74.4; 2018–$82.1; 2017–$115.6. Franchised restaurants: 2019–$200.7; 2018–$200.8; 2017–$204.9.
The amount of the Right of Use Asset and Lease Liability recorded at transition included known escalations and renewal option periods reasonably assured of being exercised. Typically, renewal options are considered reasonably assured of being exercised if the associated asset lives of the building or leasehold improvements exceed that of the initial lease term, and the sales performance of the restaurant remains strong. Therefore, the Right of Use Asset and Lease Liability include an assumption on renewal options that have not yet been exercised by the Company, and are not currently a future obligation.
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.
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 operating leases was 4.0% as of December 31, 2019.
As of December 31, 2019, maturities of lease liabilities for our operating leases were as follows:
In millions2016
 2015
 2014
Gains on sales of restaurant
businesses
$(283.4) $(145.9) $(137.4)
Equity in (earnings) losses of
unconsolidated affiliates
(54.8) 146.8
 8.9
Asset dispositions and other (income) expense, net72.3
 (26.6) 108.2
Impairment and other charges (gains), net341.6
 235.1
 38.9
Total$75.7
 $209.4
 $18.6
In millionsTotal *
2020$1,161.9
20211,132.8
20221,091.4
20231,052.6
20241,010.3
Thereafter13,573.6
Total lease payments19,022.6
Less: imputed interest(5,643.8)
Present value of lease liability$13,378.8
▪*GainsTotal lease payments include option periods that are reasonably assured of being exercised. See contractual cash outflows for operating leases within the Contractual Obligations and Commitments section on sales of restaurant businessespage 19.
The Company’s purchasesincrease in the present value of the lease liability since adoption of ASC 842 is approximately $0.9 billion. The lease liability will continue to be impacted by new leases, lease modifications, lease terminations, reevaluation of likely-term due to new facts and salescircumstances, and foreign currency.
As of businessesDecember 31, 2019, the Weighted Average Lease Term remaining that is included in the maturities of lease liabilities was 20 years.
As of December 31, 2018, prior to the adoption of ASC 842, future minimum payments required under existing operating leases with its franchisees are aimed at achieving an optimal ownership mix in each market. Resulting gainsinitial terms of one year or losses on sales of restaurant businesses are recorded in operating income because these transactions are a recurring part of our business.more were:
In millionsRestaurant  Other
 Total *
2019 $1,093.4
 $51.3
 $1,144.7
2020 1,032.1
 51.0
 1,083.1
2021 955.5
 45.7
 1,001.2
2022 873.8
 35.7
 909.5
2023 806.0
 24.6
 830.6
Thereafter 7,132.3
 164.9
 7,297.2
Total minimum payments $11,893.1
 $373.2
 $12,266.3
▪*Equity in (earnings) losses of unconsolidated affiliatesFuture minimum payments exclude option periods that have not yet been exercised.
Unconsolidated affiliates and partnerships are businesses in which the Company actively participates but does not control. The Company records equity in (earnings) losses from these entities representing McDonald’s share of results. For foreign affiliated markets—primarily Japan—results are reported after interest expense and income taxes.
▪Asset dispositions and other (income) expense, net
Asset dispositions and other (income) expense, net consists of gains or losses on excess property and other asset dispositions, provisions for restaurant closings and uncollectible receivables, asset write-offs due to restaurant reinvestment, and other miscellaneous income and expenses.
▪Impairment and other charges (gains), net
Impairment and other charges (gains), net includes the losses that result from the write down of goodwill and long-lived assets from their carrying value to their fair value. Charges associated with strategic initiatives, such as refranchising and restructuring activities are also included. In addition, as the Company continues to make progress towards its long-term global refranchising targets, the realized gains/losses from the sale of McDonald's businesses in certain markets are reflected in this category.Corporation 2019 Annual Report 47

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


40 McDonald's Corporation 2016 Annual Report

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 that parallel the Company’s underlying leases and escalations (on properties that are leased). Under this 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. These franchisees pay related occupancy costs including property taxes, insurance and maintenance. Affiliates and developmental licensees operating under license agreements pay a royalty to the Company based upon a percent of sales, and may pay initial fees.
Revenues from franchised restaurants consisted of:
In millions2016
 2015
 2014
Rents$6,107.6
 $5,860.6
 $6,106.7
Royalties3,129.9
 2,980.7
 3,085.1
Initial fees89.4
 83.4
 80.2
Revenues from franchised restaurants$9,326.9
 $8,924.7
 $9,272.0
Future gross minimum rent payments due to the Company under existing franchise arrangements are:
In millionsOwned sites  Leased sites
 
Total (1)

2017 $1,319.1
 $1,370.5
 $2,689.6
2018 1,290.6
 1,327.0
 2,617.6
2019 1,261.0
 1,279.1
 2,540.1
2020 1,219.9
 1,205.9
 2,425.8
2021 1,167.5
 1,127.4
 2,294.9
Thereafter 10,018.5
 8,745.2
 18,763.7
Total minimum payments $16,276.6
 $15,055.1
 $31,331.7
(1) Includes future gross minimum rent payments due to the Company from businesses in markets considered held for sale as of the date of the Company's filing of this report on Form 10-K. These rent payments per year (in millions) are as follows: 2017- $91.8; 2018- $90.6; 2019- $87.2; 2020- $84.5; 2021- $81.3; Thereafter- $589.2.
At December 31, 2016, net property and equipment under franchise arrangements totaled $16.3 billion (including land of $4.5 billion) after deducting accumulated depreciation and amortization of $7.6 billion.
Leasing ArrangementsOther Operating (Income) Expense, Net
 
At December 31, 2016,
In millions2019
 2018
 2017
Gains on sales of restaurant businesses$(127.5) $(304.1) $(295.4)
Equity in earnings of unconsolidated affiliates(153.8) (151.5) (183.7)
Asset dispositions and other (income) expense, net23.1
 (12.9) 18.7
Impairment and other charges (gains), net74.3
 231.7
 (702.8)
Total$(183.9) $(236.8) $(1,163.2)

▪Gains on sales of restaurant businesses
The Company’s purchases and sales of businesses with its franchisees are aimed at achieving an optimal ownership mix in each market. Resulting gains or losses on sales of restaurant businesses are recorded in operating income because these transactions are a recurring part of our business.
▪Equity in earnings of unconsolidated affiliates
Unconsolidated affiliates and partnerships are businesses in which the Company wasactively participates but does not control. The Company records equity in (earnings) losses from these entities representing McDonald’s share of results. For foreign affiliated markets—primarily China and Japan—results are reported after interest expense and income taxes.
▪Asset dispositions and other (income) expense, net
Asset dispositions and other (income) expense, net consists of gains or losses on excess property and other asset dispositions, provisions for restaurant closings and uncollectible receivables, asset write-offs due to restaurant reinvestment (including investment in EOTF), strategic sale of properties, and other miscellaneous income and expenses.
▪Impairment and other charges (gains), net
Impairment and other charges (gains), net includes losses that result from the lessee at 14,763 restaurant locations through ground leases (the Company leaseswrite down of goodwill and long-lived assets from their carrying value to their fair value, as well as charges associated with strategic initiatives, such as refranchising and restructuring activities. The realized gains/losses from the land and the Company or franchisee owns the building) and through improved leases (the Company leases land and buildings). Lease terms for most restaurants, where market conditions allow, are generally for 20 years and, in many cases, provide for rent escalations and renewal options, with certain leases providing purchase options. Escalation terms vary by market with examples including fixed-rent escalations, escalations based on an inflation index, and fair-value market adjustments. The timingsale of these escalations generally ranges from annually to every five years. For most locations, the Company is obligated for the related occupancy costs including property taxes, insurance and maintenance; however, for franchised sites, the Company requires the franchisees to pay these costs. In addition, the Company is the lessee under non-cancelable leases covering certain offices and vehicles.
The following table provides detail of rent expense:
In millions2016
 2015
 2014
Company-operated restaurants:     
U.S.$48.6
 $59.2
 $61.3
Outside the U.S.613.3
 652.7
 708.3
Total661.9
 711.9
 769.6
Franchised restaurants:     
U.S.471.2
 463.7
 446.3
Outside the U.S.589.8
 565.0
 610.1
Total1,061.0
 1,028.7
 1,056.4
Other91.3
 98.4
 106.3
Total rent expense$1,814.2
 $1,839.0
 $1,932.3
Rent expense included percent rents in excess of minimum rents (in millions) as follows–Company-operated restaurants: 2016–$135.0; 2015–$146.6; 2014–$164.2. Franchised restaurants: 2016–$186.4; 2015–$178.8; 2014–$182.8.
Future minimum payments required under existing operating leases with initial terms of one year or more are:
In millionsRestaurant  Other  
Total (1)

2017 $1,233.6
  $69.4
 $1,303.0
2018 1,139.4
  60.5
 1,199.9
2019 1,049.9
  52.6
 1,102.5
2020 957.5
  43.3
 1,000.8
2021 854.6
  37.3
 891.9
Thereafter 6,644.1
  110.3
 6,754.4
Total minimum payments $11,879.1
  $373.4
 $12,252.5
(1) Includes future minimum lease payments forMcDonald's businesses in certain markets considered held forare reflected in this category, including the 2017 gain on the sale as of the date of the Company's filing of this report on Form 10-K. These lease payments per year (in millions) are as follows: 2017- $251.1; 2018- $206.7; 2019- $178.6; 2020- $157.3; 2021- $136.4; Thereafter- $593.3.businesses in China and Hong Kong.

McDonald's Corporation 2016 Annual Report 41

Income Taxes
 
Income before provision for income taxes, classified by source of income, was as follows:
In millions2019
 2018
 2017
U.S.$2,159.1
 $2,218.0
 $2,242.0
Outside the U.S.5,859.0
 5,598.1
 6,331.5
Income before provision for income taxes$8,018.1
 $7,816.1
 $8,573.5


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 Act was enacted in the U.S. on December 22, 2017. The Tax Act reduced the U.S. federal corporate income tax rate to 21% from 35% and required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. In 2017, the Company recorded provisional amounts for certain enactment-date effects of the Tax Act by applying the guidance in 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.


McDonald's Corporation 2019 Annual Report 48
In millions2016
 2015
 2014
U.S.$2,059.4
 $2,597.8
 $2,681.9
Outside the U.S.4,806.6
 3,957.9
 4,690.1
Income before provision for income taxes$6,866.0
 $6,555.7
 $7,372.0

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 Act under ASC 740, Income Taxes, primarily for the following aspects: remeasurement of deferred tax assets and liabilities, one-time transition tax, and its accounting position related to indefinite reinvestment of unremitted foreign earnings.
One-time transition tax: The one-time transition tax is based on the Company's total post-1986 earnings and profits ("E&P"), the tax on which it previously deferred from U.S. income taxes under U.S. law. The Company recorded a provisional amount for its one-time transition tax liability 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.
Deferred tax assets and liabilities: As of December 31, 2017, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future (generally 21%), by recording a provisional amount of approximately $500 million. No adjustment to the provisional amount was made in 2018.
The provision for income taxes, classified by the timing and location of payment, was as follows:
In millions2019
 2018
 2017
U.S. federal$521.8
 $292.9
 $2,030.8
U.S. state194.7
 183.9
 169.8
Outside the U.S.1,126.5
 1,312.4
 1,217.0
Current tax provision1,843.0
 1,789.2
 3,417.6
U.S. federal38.5
 145.7
 (120.1)
U.S. state20.0
 18.7
 12.8
Outside the U.S.91.2
 (61.8) 70.9
Deferred tax provision149.7
 102.6
 (36.4)
Provision for income taxes$1,992.7
 $1,891.8
 $3,381.2
In millions2016
 2015
 2014
U.S. federal$1,046.6
 $1,072.3
 $1,124.8
U.S. state121.3
 139.5
 148.4
Outside the U.S.1,550.2
 816.0
 1,431.7
Current tax provision2,718.1
 2,027.8
 2,704.9
U.S. federal(122.1) 6.8
 (81.8)
U.S. state14.1
 (3.9) (6.2)
Outside the U.S.(430.6) (4.3) (2.7)
Deferred tax provision(538.6) (1.4) (90.7)
Provision for income taxes$2,179.5
 $2,026.4
 $2,614.2

Net deferred tax liabilities consisted of:
In millions
December 31, 2019
  2018
Lease right-of-use asset  $3,296.8
 $—
Property and equipment  1,316.4
 1,288.9
Intangible assets  334.8
 312.3
Other  511.1
 347.9
Total deferred tax liabilities  5,459.1
 1,949.1
Lease liability  (3,331.1) —
Intangible assets  (1,051.0) (1,081.5)
Property and equipment  (585.6) (658.9)
Deferred foreign tax credits  (311.2) (216.6)
Employee benefit plans  (192.3) (213.3)
Deferred revenue  (145.5) (138.9)
Operating loss carryforwards  (81.5) (45.7)
Other  (323.6) (269.2)
Total deferred tax assets before valuation allowance  (6,021.8) (2,624.1)
Valuation allowance  741.9
 671.1
Net deferred tax (assets) liabilities  $179.2
 $(3.9)
Balance sheet presentation:     
Deferred income taxes  $1,318.1
 $1,215.5
Other assets-miscellaneous  (1,138.9) (1,219.4)
Net deferred tax (assets) liabilities  $179.2
 $(3.9)

In millions
December 31, 2016
  2015
Property and equipment  $1,459.8
 $1,751.7
Unrealized foreign exchange gains  630.9
 455.6
Intangible liabilities  445.2
 464.7
Other  287.6
 268.5
Total deferred tax liabilities  2,823.5
 2,940.5
Property and equipment  (650.2) (472.7)
Employee benefit plans  (395.0) (390.1)
Intangible assets  (170.7) (222.6)
Deferred foreign tax credits  (316.8) (289.2)
Operating loss carryforwards  (292.7) (419.8)
Other  (338.6) (297.0)
Total deferred tax assets
before valuation allowance
  (2,164.0) (2,091.4)
Valuation allowance  168.0
 322.4
Net deferred tax liabilities  $827.5
 $1,171.5
Balance sheet presentation:     
Deferred income taxes  $1,817.1
 $1,704.3
Other assets-miscellaneous  (804.0) (532.8)
Liabilities of businesses held for sale (185.6) —
Net deferred tax liabilities  $827.5
 $1,171.5


At December 31, 2016,2019, the Company had net operating loss carryforwards of $1.1 billion,$360.3 million, of which $0.8 billion$232.7 million has an indefinite carryforward. The remainder will expire at various dates from 20172020 to 2031.2038.
ThePrior to 2018, the Company's effective income tax rate is typicallywas generally lower than the U.S. statutory tax rate primarily because non-U.S.foreign income iswas generally subject to local statutory country tax rates that arewere below the 35% U.S. statutory tax rate and reflectreflected the impact of global transfer pricing. Beginning in 2018, the Tax Act reduced the U.S. statutory tax rate to 21%. As a result, the Company’s 2019 and 2018 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.

 
McDonald's Corporation 2019 Annual Report 49

The statutory U.S. federal income tax rate reconciles to the effective income tax rates as follows:
 2019
 2018
 2017
Statutory U.S. federal income tax rate21.0 % 21.0 % 35.0 %
State income taxes, net of related federal income tax benefit1.8
 1.8
 1.2
Foreign income taxed at different rates1.6
 1.5
 (4.6)
Transition tax—
 1.0
 13.7
US net deferred tax liability remeasurement—
 —
 (6.0)
Foreign tax credit redetermination regulations(1.0) —
 —
Other, net1.5
 (1.1) 0.1
Effective income tax rates24.9 % 24.2 % 39.4 %
 2016
 2015
 2014
Statutory U.S. federal income tax rate35.0 % 35.0 % 35.0 %
State income taxes, net of related
federal income tax benefit
1.5
 1.6
 1.6
Foreign income taxed at different rates(6.5) (4.9) (4.8)
Taxes related to unfavorable lower tax
court ruling and audit progression
in foreign tax jurisdictions
1.2
 —
 4.1
Cash repatriation—
 (2.3) (1.2)
Other, net0.5
 1.5
 0.8
Effective income tax rates31.7 % 30.9 % 35.5 %

As of December 31, 20162019 and 2015,2018, the Company’s gross unrecognized tax benefits totaled $924.1$1,439.1 million and $781.2$1,342.8 million, respectively. After considering the deferred tax accounting impact, it is expected that about $630$880 million of the total as of December 31, 20162019 would favorably affect the effective tax rate if resolved in the Company’s favor.
The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax benefits:
In millions2016
 2015
2019
 2018
Balance at January 1$781.2
 $988.1
$1,342.8
 $1,180.4
Decreases for positions taken in prior years(37.1) (49.9)(18.3) (64.1)
Increases for positions taken in prior years150.1
 30.5
107.1
 180.8
Increases for positions related to the current year116.6
 83.7
88.3
 75.1
Settlements with taxing authorities(17.7) (258.0)(68.6) (24.1)
Lapsing of statutes of limitations(69.0) (13.2)(12.2) (5.3)
Balance at December 31(1)
$924.1
 $781.2
$1,439.1
 $1,342.8
(1)Of this amount, $890.0$1,285.3 million and $704.0$1,313.7 million are included in Other long-term liabilitiesLong-term income taxes for 20162019 and 2015,2018, respectively, and $9.0$138.8 million and $21.9$12.5 million are included in Current liabilities - income taxesPrepaid expenses and other current assets for 20162019 and 2015,2018, respectively, on the consolidated balance sheet.Consolidated Balance Sheet. The remainder is included in Deferred income taxes on the consolidated balance sheet.Consolidated Balance Sheet.


In 2015, the Internal Revenue Service (“IRS”) issued a Revenue Agent Report (“RAR”) that included certain disagreed transfer pricing adjustments related to the Company’s U.S. Federal income tax returns for 2009 and 2010. Also in 2015, the Company filed a protest with the Internal Revenue Service ("IRS") Appeals OfficeIRS related to certainthese disagreed transfer pricing matters. During 2017, the Company received a response to its protest. In December 2018, the Company met with the IRS Appeals team and, during 2019, the Company and the IRS Appeals team continued to have a dialogue regarding these disagreed transfer pricing matters. As of December 31, 2019, the Company does not yet have a signed closing agreement with the IRS related to the settlement of these issues.
In 2017, the IRS completed its examination of the Company’s U.S. Federal income tax returns for 2011 and 2012. In 2018, the IRS issued a RAR for these years. As expected, the RAR included the same disagreed transfer pricing matters as the 2009 and 2010 RAR. Also in 2018, the Company filed a protest with the IRS related to the Company's U.S. federal income tax return auditsthese disagreed transfer pricing matters. The transfer pricing matters for 2009 and 2010. As of December 31, 2016, the Company has not yet received a response to this protest from the IRS. In addition, the Company's 2011 and 2012 U.S. federal income tax returns are currently under examination.being addressed along with the 2009 and 2010 transfer pricing matters as part of the 2009-2010 appeals process. The Company is also under audit in multiple foreign tax jurisdictions for matters primarily related to transfer pricing, and the Company is under audit in multiple state tax jurisdictions. It is reasonably possible that the total amount of unrecognized tax benefits could decrease up to $250$980 million within the next 12 months, of which up to $10 million couldonly an immaterial amount would favorably affect the effective tax rate. This would be due to the possible settlement of the 2009 and 2010 IRS protest, receipt of the 2011 and 2012 Revenue Agent Report,transfer pricing matters, completion of the aforementioned foreign and state tax audits and the expiration of the statute of limitations in multiple tax jurisdictions.
In addition, it is reasonably possible that, as a result of audit progression in both the U.S. and foreign tax audits within the next 12 months, there may be new information that causes the Company to reassess the total amount of unrecognized tax benefits recorded. While the Company cannot estimate the impact that new information may have on our unrecognized tax benefit


42 McDonald's Corporation 2016 Annual Report

balance, we believeit believes that the liabilities recorded are appropriate and adequate as determined under ASC 740.adequate.
The Company operates within multiple tax jurisdictions and is subject to audit in these jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2009.
The Company had $117.0$174.4 million and $83.6$152.0 million accrued for interest and penalties at December 31, 20162019 and 2015,2018, respectively. The Company recognized interest and penalties related to tax matters of $41.7$39.9 million in 2016, $21.12019, $13.9 million in 2015,2018, and $87.9$34.9 million in 2014,2017, which are included in the provision for income taxes.
Deferred U.S. income taxes have not been recorded for temporary differences related to investments in certainAs of December 31, 2019, the Company has accumulated undistributed earnings generated by our foreign subsidiaries, and corporate joint ventures. These temporary differenceswhich were approximately $16.0 billion at December 31, 2016 and consisted primarilypredominantly taxed in the U.S. as a result of undistributedthe transition tax provisions enacted under the Tax Act. Management does not assert that these previously-taxed unremitted earnings considered permanently investedare indefinitely reinvested in operations outside the U.S. DeterminationAccordingly, the Company has provided deferred taxes for the tax effects incremental to the transition tax. We have not provided for deferred taxes on outside basis differences in our investments in our foreign subsidiaries that are unrelated to these accumulated undistributed earnings, as these outside basis differences are indefinitely reinvested.  A determination of the unrecognized deferred income tax liability ontaxes related to these unremitted earningsother components of our outside basis differences is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.practicable.


McDonald's Corporation 2019 Annual Report 50

Employee Benefit Plans
 
Effective January 1, 2017, the Company’s Profit Sharing and Savings Plan was renamed the McDonald’s 401k Plan. The Company's 401k Plan is maintained for U.S.-based employees and includes a 401(k) feature, as well as an employer match. The 401(k) feature allows participants to make pre-tax contributions that are matched each pay period (with an annual true-up) from cash contributions and through July 31, 2018 from shares released under the leveraged Employee Stock Ownership Plan ("ESOP") and employerPlan. Effective August 1, 2018, the contributions are matched only through cash contributions.
All current account balances, future contributions and related earnings can be invested in eight investment alternatives as well as McDonald’s stock in accordance with each participant’s investment elections. Future participant contributions are limited to 20% investment in McDonald’s stock. Participants may choose to make separate investment choices for current account balances and future contributions.
The Company also maintains certain nonqualified supplemental benefit plans that allow participants to (i) make tax-deferred contributions and (ii) receive Company-provided allocations that cannot be made under the 401k Plan because of IRS limitations. The investment alternatives and returns are based on certain market-rate investment alternatives under the 401k Plan. Total liabilities were $464.9$435.0 million at December 31, 2016,2019 and $487.6$437.4 million at December 31, 2015,2018, and were primarily included in other long-term liabilities on the consolidated balance sheet.Consolidated Balance Sheet.
The Company has entered into derivative contracts to hedge market-driven changes in certain of the liabilities. At December 31, 2016,2019, derivatives with a fair value of $134.3$179.1 million indexed to the Company's stock and a total return swap with a notional amount of $186.9$187.7 million indexed to certain market indices were included at their fair value in Miscellaneous other assets and Prepaid expenses and other current assets, respectively, on the consolidated balance sheet. Consolidated Balance Sheet. Changes in liabilities for these nonqualified plans and in the fair value of the derivatives are recorded primarily in Selling, general & administrative expenses. Changes in fair value of the derivatives indexed to the Company’s stock are recorded in the income statement because the contracts provide the counterparty with a choice to settle in cash or shares.
Total U.S. costs for the 401k Plan, including nonqualified benefits and related hedging activities, were (in millions): 2016–2019–$24.8; 2015–30.4; 2018–$24.0; 2014–18.0; 2017–$29.1.19.3. Certain subsidiaries outside the U.S. also offer profit sharing, stock purchase or other similar benefit plans. Total plan costs outside the U.S. were (in millions): 2016–2019–$46.0; 2015–35.3; 2018–$53.4; 2014–33.7; 2017–$54.4.43.3.
The total combined liabilities for international retirement plans were $65.6$42.3 million and $76.0$40.6 million at December 31, 20162019 and 2015,2018, respectively. Other post-retirement benefits and post- employmentpost-employment benefits were immaterial.
immaterial to the Consolidated Income Statement.


 
McDonald's Corporation 20162019 Annual Report 4351

Segment and Geographic Information
The Company franchises and operates McDonald’s restaurants in the global restaurant industry. The following reporting segments reflect how management reviews and evaluates operating performance:
▪U.S. - the Company's largest segment.
▪International Lead Markets - established markets including Australia, Canada, France, Germany, the U.K. and related markets.
▪High Growth Markets - markets the Company believes have relatively higher restaurant expansion and franchising potential including China, Italy, Korea, Poland, Russia, Spain, Switzerland, the Netherlands and related markets.
▪Foundational Markets & Corporate - the remaining markets in the McDonald's system, each of which the Company believes have the potential to operate under a largely franchised model. Corporate activities are also reported within this segment.
All intercompany revenues and expenses are eliminated in computing revenues and operating income. Corporate general and administrative expenses consist of home office support costs in areas such as facilities, finance, human resources, information technology, legal, marketing, restaurant operations, supply chain and training. Corporate assets include corporate cash and equivalents, asset portions of financial instruments and home office facilities.
In millions2016
 2015
 2014
 
U.S.$8,252.7
 $8,558.9
 $8,651.0
 
International Lead Markets7,223.4
 7,614.9
 8,544.5
 
High Growth Markets6,160.7
 6,172.8
 6,845.2
 
Foundational Markets & Corporate2,985.1
 3,066.4
 3,400.6
 
Total revenues$24,621.9
 $25,413.0
 $27,441.3
 
U.S.$3,768.7
 $3,612.0
 $3,522.5
 
International Lead Markets2,838.4
 2,712.6
 3,034.5
 
High Growth Markets1,048.8
 841.1
 933.9
 
Foundational Markets & Corporate88.6
 (20.2) 458.3
 
Total operating income$7,744.5
 $7,145.5
 $7,949.2
 
U.S.$11,960.6
 $11,806.1
 $11,872.1
 
International Lead Markets9,112.5
 11,136.3
 12,538.4
 
High Growth Markets5,208.6
 5,248.6
 5,866.0
 
Foundational Markets & Corporate4,742.2
 9,747.7
 3,950.9
 
Total assets$31,023.9
 $37,938.7
 $34,227.4
 
U.S.$586.7
 $533.2
 $736.1
 
International Lead Markets635.6
 596.1
 792.1
 
High Growth Markets493.2
 540.5
 804.8
 
Foundational Markets & Corporate105.6
 144.1
 250.4
 
Total capital expenditures$1,821.1
 $1,813.9
 $2,583.4
 
U.S.$510.3
 $515.2
 $512.2
 
International Lead Markets451.6
 460.9
 521.2
 
High Growth Markets362.0
 363.9
 387.8
 
Foundational Markets & Corporate192.6
 215.7
 223.3
 
Total depreciation and amortization$1,516.5
 $1,555.7
 $1,644.5
 
Total long-lived assets, primarily property and equipment, were (in millions)–Consolidated: 2016–$25,200.4; 2015– $27,607.8; 2014–$29,264.7; U.S. based: 2016–$11,689.7; 2015–$11,940.4; 2014–$11,883.1.


44 McDonald's Corporation 2016 Annual Report


Debt Financing
 
LINE OF CREDIT AGREEMENTS
At December 31, 2016,2019, the Company had a $2.5 billion line of credit agreement, expiringof which $3.5 billion expires in December 2019 with2023. The Company incurs fees of 0.070%0.080% per annum on the total commitment, which remained unused. Fees and interest rates on this line are primarily based on the Company’s long-term credit rating assigned by Moody’s and Standard & Poor’s.Poor’s. In addition, the Company's subsidiaries had unused lines of credit that were primarily uncommitted, short-term and denominated in various currencies at local market rates of interest.
The weighted-average interest rate of short-term borrowings was 2.2%1.9% at December 31, 20162019 (based on $192.0$242.4 million of foreign currency bank line borrowings and $799.8$899.3 million of commercial paper)paper outstanding) and 2.0%2.6% at December 31, 20152018 (based on $731.6$253.5 million of foreign currency bank line borrowings and $869.6$99.9 million of commercial paper)paper outstanding).
DEBT OBLIGATIONS
The Company has incurred debt obligations principally through public and private offerings and bank loans. 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. 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. Under certain agreements, the Company has the option to retire debt prior to maturity, either at par or at a premium over par. The Company has no current plans to retire a significant amount of its debt prior to maturity.

The following table summarizes the Company’s debt obligations (interest rates and debt amounts reflected in the table include the effects of interest rate swaps)swaps used to hedge debt).
 
Interest rates(1)
December 31
   
Amounts outstanding
December 31
  
Interest rates(1)
December 31
   
Amounts outstanding
December 31
 
In millions of U.S. DollarsMaturity dates 2016
 2015
 2016
 2015
Maturity dates 2019
 2018
 2019
 2018
Fixed 4.0% 4.0% $13,889.7
 $14,190.6
 4.0% 4.0% $19,340.2
 $18,075.8
Floating 3.4
 3.3
 3,249.8
 3,019.6
 2.2
 3.4
 2,049.3
 1,349.9
Total U.S. Dollars2017-2045     17,139.5
 17,210.2
Total U.S. Dollar2020-2049     21,389.5
 19,425.7
Fixed 1.7
 2.4
 6,127.5
 3,951.9
 1.5
 1.6
 8,671.8
 8,069.1
Floating 0.3
 0.3
 1,170.9
 665.9
 2.3
 —
 337.0
 1,264.1
Total Euro2017-2029     7,298.4
 4,617.8
2020-2031     9,008.8
 9,333.2
Total British Pounds Sterling - Fixed2020-2054 5.3
 5.3
 921.3
 1,100.1
Total Chinese Renminbi - Floating(2)

 —
 4.3
 —
 491.8
Fixed 2.9
 2.9
 106.9
 104.0
 3.4
 —
 771.0
 —
Floating —
 0.3
 —
 208.0
 2.0
 —
 210.6
 —
Total Japanese Yen2030     106.9
 312.0
Total Australian Dollar2024-2029     981.6
 —
Total British Pounds Sterling - Fixed2020-2054 4.6
 5.3
 1,386.3
 952.3
Total Canadian Dollar - Fixed2021-2025 3.1
 3.1
 768.6
 732.0
Total Japanese Yen - Fixed2030 2.9
 2.9
 115.1
 114.0
Fixed 0.5
 2.1
 416.9
 264.7
 0.2
 0.3
 413.8
 414.9
Floating 2.2
 3.1
 182.7
 229.7
 2.2
 2.6
 241.8
 244.2
Total other currencies(3)
2017-2056     599.6
 494.4
Debt obligations before fair value adjustments and deferred debt costs(4)
     26,065.7
 24,226.3
Fair value adjustments(5)
     —
 1.8
Total other currencies(2)
2020-2024     655.6
 659.1
Debt obligations before fair value adjustments and deferred debt costs(3)
     34,305.5
 31,216.3
Fair value adjustments(4)
     12.1
 (12.0)
Deferred debt costs     (110.0) (106.0)     (140.4) (129.0)
Total debt obligations     $25,955.7
 $24,122.1
     $34,177.2
 $31,075.3
(1)Weighted-average effective rate, computed on a semi-annual basis.
(2)2016 excludes $297 million of Short-Term borrowings that was reclassified to liabilities of businesses held for sale on the consolidated balance sheet.
(3)Primarily consistsConsists of Swiss Francs and Korean Won.
(4)(3)
Aggregate maturities for 20162019 debt balances, before fair value adjustments and deferred debt costs, are as follows (in millions): 2017–2020–$77.2; 2018–59.1; 2021–$1,756.0; 2019–2,132.2; 2022–$3,932.7; 2020–2,250.1; 2023–$2,395.8; 2021–6,007.0; 2024–$1,555.2;2,819.0; Thereafter–$16,348.8.21,038.1. These amounts include a reclassification of short-term obligations totaling $2.5$3.5 billion to long-term obligations as they are supported by a long-term line of credit agreement expiring in December 20192023.
(5)(4)The carrying value of underlying items in fair value hedges, in this case debt obligations, are adjusted for fair value changes to the extent they are attributable to the risk designated as being hedged. The related hedging instrument isinstruments are also recorded at fair value in prepaid expenses and other current assets, miscellaneous other assets or other long-term liabilities.on the Consolidated Balance Sheet.



McDonald's Corporation 20162019 Annual Report 4552


Share-based Compensation
 
The Company maintains a share-based compensation plan which authorizes the granting of various equity-based incentives including stock options and restricted stock units (RSUs) to employees and nonemployee directors. The number of shares of common stock reserved for issuance under the plans was 57.542.5 million at December 31, 2016,2019, including 34.126.5 million available for future grants.
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.
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 2016, 20152019, 2018 and 2014,2017, the total intrinsic value of stock options exercised was $184.9$356.1 million,, $202.9 $364.4 million and $258.9$353.6 million,, respectively. Cash received from stock options exercised during 20162019 was $299.4$350.5 million and the tax benefit realized from stock options exercised totaled $54.5 million.$70.5 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, 2016, 20152019, 2018 and 2014,2017, and changes during the years then ended, is presented in the following table:
 2019  2018  2017 
Options
Shares in
millions

 
Weighted-
average
exercise
price
  
Weighted-
average
remaining
contractual
life in years
 
Aggregate
intrinsic
value in
millions
  
Shares in
millions

 
Weighted-
average
exercise
price
  
Shares in
millions

 
Weighted-
average
exercise
price
 
Outstanding at beginning of year16.6
  $113.06
      18.9
  $101.55
 21.5
  $92.25
Granted2.0
  175.17
      2.7
  157.95
 4.0
  128.74
Exercised(3.6)  97.70
      (4.5)  89.31
 (5.6)  81.77
Forfeited/expired(0.4)  154.65
      (0.5)  137.08
 (1.0)  118.38
Outstanding at end of year14.6
  $124.21
 5.9  $1,074.6
 16.6
  $113.06
 18.9
  $101.55
Exercisable at end of year9.2
  $107.51
 4.7  $826.4
 10.0
    11.3
   
 2016  2015  2014 
Options
Shares in
millions

 
Weighted-
average
exercise
price
  
Weighted-
average
remaining
contractual
life in years
 
Aggregate
intrinsic
value in
millions
  
Shares in
millions

 
Weighted-
average
exercise
price
  
Shares in
millions

 
Weighted-
average
exercise
price
 
Outstanding at beginning of year21.9
  $84.76
      23.4
  $77.99
 25.1
  $69.15
Granted4.3
  117.10
      4.3
  97.33
 3.9
  95.13
Exercised(4.0)  75.30
      (5.1)  62.59
 (5.1)  46.09
Forfeited/expired(0.7)  106.50
      (0.7)  96.76
 (0.5)  94.56
Outstanding at end of year21.5
  $92.25
 6.2  $633.9
 21.9
  $84.76
 23.4
  $77.99
Exercisable at end of year13.4
  $83.80
 4.9  $507.5
 13.4
    14.4
   

RSUs
RSUs generally vest 100% on the third anniversary of the grant and are payable in either shares of McDonald’s common stock or cash, at the Company’s discretion. Certain executives have been awarded RSUs that vest based on Company performance. The fair value of each RSU granted is equal to the market price of the Company’s stock at date of grant, lessand prior to 2018 included a reduction for the present value of expected dividends over the vesting period. Separately, Company executives have been awarded RSUs that vest based on Company performance. For performance-based RSUs, the Company includes a relative 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.
A summary of the Company’s RSU activity during the years ended December 31, 2016, 20152019, 2018 and 20142017 is presented in the following table:
 2019  2018  2017 
RSUs
Shares in
millions

 
Weighted-
average
grant date
fair value
  
Shares in
millions

 
Weighted-
average
grant date
fair value
  
Shares in
millions

 
Weighted-
average
grant date
fair value
 
Nonvested at beginning of year1.5
  $132.56
 1.6
  $107.34
 1.9
  $94.13
Granted0.6
  171.48
 0.6
  158.28
 0.6
  123.98
Vested(0.6)  116.42
 (0.6)  91.20
 (0.7)  87.18
Forfeited(0.1)  153.58
 (0.1)  132.14
 (0.2)  117.24
Nonvested at end of year1.4
  $150.95
 1.5
  $132.56
 1.6
  $107.34

 2016  2015  2014 
RSUs
Shares in
millions

 
Weighted-
average
grant date
fair value
  
Shares in
millions

 
Weighted-
average
grant date
fair value
  
Shares in
millions

 
Weighted-
average
grant date
fair value
 
Nonvested at beginning of year2.4
  $83.50
 2.2
  $83.49
 2.0
  $78.89
Granted0.7
  109.86
 0.9
  87.03
 0.9
  85.12
Vested(0.8)  79.54
 (0.5)  88.78
 (0.6)  69.29
Forfeited(0.4)  88.45
 (0.2)  85.82
 (0.1)  85.16
Nonvested at end of year1.9
  $94.13
 2.4
  $83.50
 2.2
  $83.49
The total fair value of RSUs vested during 2016, 20152019, 2018 and 20142017 was $99.3$111.0 million,, $49.4 $117.9 million and $54.9$87.6 million,, respectively. The tax benefit realized from RSUs vested during 20162019 was $29.6 million.$21.3 million.

SUBSEQUENT EVENTS
In December 2019, a novel strain of coronavirus was reported to have surfaced in China. The spread of this virus has caused business disruption beginning in January 2020, due to the closure of some restaurants, modified operating hours in certain restaurants that remain open, and resulting traffic declines in our China market. While the disruption is currently expected to be temporary, there is uncertainty around the duration. Therefore, while we expect this matter to negatively impact our results, the related financial impact cannot be reasonably estimated at this time. For the year ended December 31, 2019, the China market represented approximately 5% of Systemwide sales, 1% of consolidated revenues and 3% of consolidated operating income.


46McDonald's Corporation 20162019 Annual Report53


Quarterly Results (Unaudited)
                    
  
Quarters ended
December 31
   
Quarters ended
September 30
   
Quarters ended
June 30
   
Quarters ended
March 31
 
In millions, except per share data 2019
 2018
  2019
 2018
  2019
 2018
  2019
 2018
Revenues                   
Sales by Company-operated restaurants $2,363.3
 $2,371.2
  $2,416.6
  $2,511.0
   $2,400.4
 $2,594.9
  $2,240.5
 $2,535.6
Revenues from franchised
restaurants
 2,985.7
 2,791.8
  3,014.0
  2,858.4
   2,940.9
 2,759.0
  2,715.1
 2,603.3
Total revenues 5,349.0
 5,163.0
  5,430.6
  5,369.4
   5,341.3
 5,353.9
  4,955.6
 5,138.9
Company-operated margin 423.7
 414.6
  448.9
  463.1
   433.3
 464.4
  354.3
 404.7
Franchised margin 2,422.4
 2,282.1
  2,454.5
  2,359.0
   2,396.2
 2,275.1
  2,182.0
 2,123.0
Operating income 2,292.6
 1,999.5
  2,409.3
  2,417.7
   2,273.9
 2,262.3
  2,094.0
 2,143.1
Net income $1,572.2
 $1,415.3
  $1,607.9
  $1,637.3
   $1,516.9
 $1,496.3
  $1,328.4
 $1,375.4
Earnings per common
share—basic
 $2.10
 $1.84
  $2.13
  $2.12
   $1.99
 $1.92
  $1.74
 $1.74
Earnings per common
share—diluted
 $2.08
 $1.82
  $2.11
  $2.10
   $1.97
 $1.90
  $1.72
 $1.72
Dividends declared per
common share
 $—
 $—
  $2.41
(1) 
$2.17
(1) 
 $1.16
 $1.01
  $1.16
 $1.01
Weighted-average
common shares—basic
 749.2
 769.5
  756.6
  772.8
   761.8
 780.0
  764.9
 790.9
Weighted-average
common shares—diluted
 755.6
 776.6
  763.9
  779.6
   768.7
 787.1
  771.6
 798.7
Quarterly Results (Unaudited)
                    
  
Quarters ended
December 31
   
Quarters ended
September 30
   
Quarters ended
June 30
   
Quarters ended
March 31
 
In millions, except per share data 2016
 2015
  2016
 2015
  2016
 2015
  2016
(1) 
2015
Revenues                   
Sales by Company-operated
restaurants
 $3,652.8
 $4,030.2
  $3,972.1
  $4,282.9
   $3,916.6
 $4,261.1
  $3,753.5
 $3,914.1
Revenues from franchised
restaurants
 2,376.1
 2,311.1
  2,452.0
  2,332.2
   2,348.4
 2,236.6
  2,150.4
 2,044.8
Total revenues 6,028.9
 6,341.3
  6,424.1
  6,615.1
   6,265.0
 6,497.7
  5,903.9
 5,958.9
Company-operated margin 616.9
 611.6
  732.6
  675.2
   668.5
 664.8
  578.2
 559.8
Franchised margin 1,941.3
 1,894.9
  2,014.4
  1,916.1
   1,917.5
 1,825.6
  1,735.3
 1,641.2
Operating income 1,969.0
 1,880.4
  2,137.3
  2,030.3
   1,857.9
 1,849.3
  1,780.3
 1,385.5
Net income $1,193.4
 $1,206.2
  $1,275.4
  $1,309.2
   $1,092.9
 $1,202.4
  $1,124.8
 $811.5
Earnings per common
share—basic
 $1.45
 $1.32
  $1.52
  $1.41
   $1.27
 $1.26
  $1.27
 $0.84
Earnings per common
share—diluted
 $1.44
 $1.31
  $1.50
  $1.40
   $1.25
 $1.26
  $1.25
 $0.84
Dividends declared per
common share
 $—
 $0.89
  $1.83
(2) 
$0.85
  $0.89
 $0.85
  $0.89
 $0.85
Weighted-average
common shares—basic
 823.7
 914.1
  841.4
  930.3
   864.0
 953.2
  888.9
 960.6
Weighted-average
common shares—diluted
 829.7
 919.9
  847.7
  934.8
   871.2
 957.6
  896.3
 965.5
Market price per common
share:
                   
High $124.00
 $120.23
  $128.60
  $101.88
   $131.96
 $101.08
  $126.96
 $101.09
Low 110.33
 97.13
  113.96
  87.50
   116.08
 94.02
  112.71
 88.77
Close 121.72
 118.14
  115.36
  98.53
   120.34
 95.07
  125.68
 97.44

(1) The Company elected to early adopt ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” in the second quarter 2016, which required reflection of any adjustments as of January 1, 2016. As such, the quarter ended March 31, 2016 presented here has been recasted to include the impact of adoption of the recognition of excess tax benefits asIncludes a reduction to the provision for income taxes of $26.2 million,$1.16 and a benefit to earnings per common share - basic and diluted of $0.03 and $0.02, respectively.
(2) Includes an $0.89$1.01 per share dividend declared and paid in third quarter of 2019 and 2018, respectively, and a $0.94$1.25 and $1.16 per share dividend declared in the third quarter and paid in fourth quarter.quarter of 2019 and 2018, respectively.



McDonald's Corporation 20162019 Annual Report 4754


Management’s Assessment of Internal Control Over Financial Reporting
 
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, 2016.2019. 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, 2016,2019, 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, 2016, 20152019, 2018 and 20142017 and the Company’s internal control over financial reporting as of December 31, 2016.2019. 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
March 1, 2017February 26, 2020



48McDonald's Corporation 20162019 Annual Report55


Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Shareholders of McDonald’s Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of McDonald’s Corporation (the Company) as of December 31, 20162019 and 2015,2018, and the related consolidated statements of income, comprehensive income, shareholders’shareholders' equity and cash flows for each of the three years in the period ended December 31, 20162019, and the related notes (collectively referred to as the “consolidated financial statements”). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of McDonald’s Corporationthe Company at December 31, 20162019 and 2015,2018, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016,2019, 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), McDonald’s Corporation’sthe Company's internal control over financial reporting as of December 31, 2016,2019, 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 March 1, 2017,February 26, 2020 expressed an unqualified opinion thereon.

Adoption of New Accounting Standards

As discussed in the Summary of Significant Accounting Policies note to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of ASU No. 2016-02, Leases (Topic 842).

Basis for Opinion

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.

Critical Audit Matters

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.



McDonald's Corporation 2019 Annual Report 56

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 $1,439million at December 31, 2019. 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 Matter in Our Audit
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s process to 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.


ERNST & YOUNG LLP

We have served as the Company’s auditor since 1964.
Chicago, Illinois
March 1, 2017February 26, 2020


 
McDonald's Corporation 20162019 Annual Report 4957


Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
 
The Board of Directors and Shareholders of McDonald’s Corporation

Opinion on Internal Control over Financial Reporting

We have audited McDonald's Corporation'sMcDonald’s Corporation’s internal control over financial reporting as of December 31, 20162019, based on criteria established in Internal Control-IntegratedControl- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, McDonald’s Corporation’sCorporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, 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, 2019 and 2018, 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, 2019, and the related notes and our report dated February 26, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

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 report on Management’s Assessment of Internal Control overOver 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 Public Company Accounting Oversight Board (United States).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.

Definition and Limitations of Internal Control Over Financial Reporting

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.
In our opinion, McDonald’s Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of McDonald’s Corporation as of December 31, 2016 and 2015 and for each of the three years in the period ended December 31, 2016, and our report dated March 1, 2017, expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
Chicago, Illinois
March 1, 2017February 26, 2020




50McDonald's Corporation 20162019 Annual Report58

ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.

ITEM 9A. Controls and Procedures
 
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"), over the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2016.2019. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
INTERNAL CONTROL OVER FINANCIAL REPORTING
DuringThe Company's management, including the third quarter 2016, the Company commenced a phased initiative to transition some transaction-processing activities within certain accounting processes to a third-party service provider. The Company is performing the implementation in the ordinary course of business to increase efficiency. This is not in response to any identified deficiency or weakness in the Company's internal control over financial reporting. Over time, this initiative is expected to continue to enhance the Company's internal control over financial reporting, but in the short-term may increase the Company's risk. Except for these ongoing changes,CEO and CFO, confirm that there has beenwas no change in the Company's internal control over financial reporting during the quarter ended December 31, 20162019 that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over financial reporting.
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 Part II, Item 8 of this Form 10-K.the Consolidated Financial Statements.
ITEM 9B. Other Information
None.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
Information is incorporated herein by reference from the Company’s definitive proxy statement, which will be filed no later than 120 days after December 31, 2016. We will post any amendments to or any waivers for directors and executive officers from provisions of the Company's Standards of Business Conduct or Code of Conduct for the Board of Directors on the Company’s website at www.aboutmcdonalds.com.
Information regarding all of the Company’s executive officers is included in Part I, page 9of this Form 10-K.
ITEM 11. Executive Compensation
Incorporated herein by reference from the Company’s definitive proxy statement, which will be filed no later than 120 days after December 31, 2016.
ITEM 12. 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, 2016.2019. 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
to be issued upon
exercise of
outstanding options,
warrants and rights

 
Weighted-average
exercise price of
outstanding options,
warrants and rights
  
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))

Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights

 
Weighted-average
exercise price of
outstanding options,
warrants and rights
  
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))

Plan category(a)
  (b)
 (c)
(a)
  (b)
 (c)
Equity compensation plans approved by security holders23,430,608
(1) 
 $92.40
 34,112,990
16,029,240
(1) 
 $126.54
 26,481,096
Equity compensation plans not approved by security holders—
 —
 —
—
 —
 —
Total23,430,608
   $92.40
 34,112,990
16,029,240
   $126.54
 26,481,096
(1)Includes 8,407,3421,587,414 stock options granted under the McDonald’s Corporation 2001 Omnibus Stock Ownership Plan and 13,102,84913,049,313 stock options and 1,920,4171,392,513 restricted stock units granted under the McDonald's Corporation 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, 2016.2019.


 
McDonald's Corporation 20162019 Annual Report 5159

ITEM 13. Certain Relationships and Related Transactions, and Director Independence
Incorporated herein by reference from the Company’s definitive proxy statement, which will be filed no later than 120 days after December 31, 2016.

ITEM 14. Principal Accounting Fees and Services
Incorporated herein by reference from the Company’s definitive proxy statement, which will be filed no later than 120 days after December 31, 2016.
PART IV

ITEM 15. Exhibits and Financial Statement Schedules
   
a.(1)All financial statements
  
Consolidated financial statements filed as part of this report and are listed under Part II, Item 8,included on pages 2833 through 4654 of this Form 10-K.
   
 (2)Financial statement schedules
  No schedules are required because either the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto.
   
b. Exhibits
   
  The exhibits listed in the accompanying index are filed as part of this report.


McDonald’s Corporation Exhibit Index (Item 15)
     
Exhibit NumberDescription
 (3)(a)
Restated Certificate of Incorporation, effective as of June 14, 2012,May 23, 2019, incorporated herein by reference from Exhibit 3(a) of Form 10-Q (File No. 001-05231), for the quarter ended June 30, 2012.filed August 6, 2019.
     
  (b)
By-Laws, as amended and restated with effect as of October 26, 2015,December 6, 2019, incorporated herein by reference from Exhibit 3(b)3 of Form 8-K (File No. 001-05231), filed October 28, 2015.December 10, 2019.
   
 (4)Instruments defining the rights of security holders, including Indentures:*
     
  (a)
Senior Debt Securities Indenture, dated as of October 19, 1996, incorporated herein by reference from Exhibit (4)(a) of Form S-3 Registration Statement (File No. 333-14141), filed October 15, 1996.
(i)6 3/8% Debentures due 2028. Supplemental Indenture No. 1, dated January 8, 1998, incorporated herein by reference from Exhibit (4)(a) of Form 8-K (File No. 001-05231), filed January 13, 1998.
(ii)Medium-Term Notes, Series F, Due from 1 Year to 60 Years from Date of Issue. Supplemental Indenture No. 4, incorporated herein by reference from Exhibit (4)(c) of Form S-3 Registration Statement (File No. 333-59145), filed July 15, 1998.
(iii)Medium-Term Notes, Series I, Due from 1 Year to 60 Years from Date of Issue. Supplemental Indenture No. 8, incorporated herein by reference from Exhibit (4)(c) of Form S-3 Registration Statement (File No. 333-139431), filed December 15, 2006.
(iv)Medium-Term Notes, Due from One Year to 60 Years from Date of Issue. Supplemental Indenture No. 9, incorporated herein by reference from Exhibit (4)(c) of Form S-3 Registration Statement (File No. 333-162182), filed September 28, 2009.
     
  (b)
Subordinated Debt Securities Indenture, dated as of October 18, 1996, incorporated herein by reference from Exhibit (4)(b) of Form S-3 Registration Statement (File No. 333-14141), filed October 15, 1996.
(c)
Description of Securities.
     
 (10)Material Contracts
     
  (a)
Directors' Deferred Compensation Plan, amended and restated effective as of May 26, 2016, incorporated herein by reference from Exhibit 10(a)(i) of Form 10-Q (File No. 001-05231), for the quarter ended June 30, 2016.**
     
  (b)
McDonald’s Deferred Compensation Plan, effective January 1, 2017, filed herewith.incorporated herein by reference from Exhibit 10(b) of Form 10-K (File No. 001-05231), for the year ended December 31, 2016.**
(i)
First Amendment to the McDonald's Deferred Compensation Plan, effective as of May 1, 2018, incorporated herein by reference from Exhibit 10(b)(i) of Form 10-Q (File No. 001-05231), for the quarter ended September 30, 2018.**
     
  (c)
McDonald’s Corporation Supplemental Profit Sharing and Savings Plan, effective as of September 1, 2001, incorporated herein by reference from Exhibit 10(c) of Form 10-K (File No. 001-05231), for the year ended December 31, 2001.**
     
   (i)
First Amendment to the McDonald’s Corporation Supplemental Profit Sharing and Savings Plan, effective as of January 1, 2002, incorporated herein by reference from Exhibit 10(c)(i) of Form 10-K (File No. 001-05231), for the year ended December 31, 2002.**
     
   (ii)
Second Amendment to the McDonald’s Corporation Supplemental Profit Sharing and Savings Plan, effective January 1, 2005, incorporated herein by reference from Exhibit 10(c)(ii) of Form 10-K (File No. 001-05231), for the year ended December 31, 2004.**
     


52 McDonald's Corporation 2016 Annual Report

  (d)
McDonald’s Corporation Amended and Restated 2001 Omnibus Stock Ownership Plan, effective July 1, 2008, incorporated herein by reference from Exhibit 10(h) of Form 10-Q (File No. 001-05231), for the quarter ended June 30, 2009.**
     
   (i)
First Amendment to the McDonald’s Corporation Amended and Restated 2001 Omnibus Stock Ownership Plan, incorporated herein by reference from Exhibit 10(h)(i) of Form 10-K (File No. 001-05231), for the year ended December 31, 2008.**
     
   (ii)
Second Amendment to the McDonald’s Corporation Amended and Restated 2001 Omnibus Stock Ownership Plan as amended, effective February 9, 2011, incorporated herein by reference from Exhibit 10(h)(ii) of Form 10-K (File No. 001-05231), for the year ended December 31, 2010.**
     
  (e)
McDonald's Corporation 2012 Omnibus Stock Ownership Plan, effective June 1, 2012, incorporated herein by reference from Exhibit 10(h) of Form 10-Q (File No. 001-05231), for the quarter ended September 30, 2012.**
     
  (f)McDonald’s Corporation 2009 Cash Incentive Plan, effective as of May 27, 2009, incorporated herein by reference from Exhibit 10(j) of Form 10-Q (File No. 001-05231), for the quarter ended June 30, 2009.**
(g)McDonald's Corporation Target Incentive Plan, effective January 1, 2013, incorporated herein by reference from Exhibit 10(j) of Form 10-Q (File No. 001-05231), for the quarter ended March 31, 2013.**
(h)McDonald's Corporation Cash Performance Unit Plan, effective February 13, 2013, incorporated herein by reference from Exhibit 10(k) of Form 10-Q (File No. 001-05231), for the quarter ended March 31, 2013.**
(i)
Form of Executive Stock Option Grant Agreement in connection with the Amended and Restated 2001 Omnibus Stock Ownership Plan, as amended, incorporated herein by reference from Exhibit 10(j) of Form 10-K (File No. 001-05231), for the year ended December 31, 2011.**
     
  (j)(g)
Form of 2013 Executive Stock Option Award Agreement in connection with the 2012 Omnibus Stock Ownership Plan, incorporated herein by reference from Exhibit 10(n) of Form 10-Q (File No. 001-05231), for the quarter ended March 31, 2013.**
     


McDonald's Corporation 2019 Annual Report 60

(k)McDonald’s Corporation Severance Plan, as Amended and Restated, effective September 30, 2015, incorporated herein by reference from Exhibit 10(o) of Form 10-Q (File No. 001-05231), for the quarter ended September 30, 2015.**
  (h)
(i)First Amendment to the McDonald's Corporation Severance Plan, effective June 1, 2016, incorporated herein by reference from Exhibit 10(l)(i) of Form 10-Q (File No. 001-05231), for the quarter ended June 30, 2016.**
(ii)Second Amendment to the McDonald's Corporation Severance Plan, effective June 1, 2016, incorporated herein by reference from Exhibit 10(l)(ii) of Form 10-Q (File No. 001-05231), for the quarter ended June 30, 2016.**
(iii)Third Amendment to the McDonald's Corporation Severance Plan, effective as of July 15, 2016, incorporated herein by reference from Exhibit 10(l)(iii) of Form 10-Q (File No. 001-05231), for the quarter ended June 30, 2016.**
(l)Description of Restricted Stock Units granted to Andrew J. McKenna, incorporated herein by reference from Exhibit 10(r) of Form 10-Q (File No. 001-05231), for the quarter ended September 30, 2015.**
(m)
Form of 2014 Executive Stock Option Award Agreement in connection with the 2012 Omnibus Stock Ownership Plan, incorporated herein by reference from Exhibit 10(z) of Form 10-Q (File No. 001-05231), for the quarter ended March 31, 2014.**
(n)
Retirement and Consulting Agreement between Donald Thompson and the Company, effective March 1, 2015, incorporated herein by reference from Exhibit 99 to Form 8-K (File No. 001-05231), filed on March 3, 2015.**

     
  (o)(i)
Form of 2015 Executive Performance-Based Restricted Stock Unit Award Agreement in connection with the 2012
Omnibus Stock Ownership Plan, incorporated herein by reference from Exhibit 10(aa) of Form 10-Q (File No. 001-05231), for the quarter ended March 31, 2015.**

(p)Offer Letter between Christopher Kempczinski and the Company, dated September 23, 2015, incorporated herein by reference from Exhibit 10(u) of Form 10-Q (File No. 001-05231), for the quarter ended June 30, 2016.**
(j)
Form of Executive Confidentiality, Intellectual Property and Restrictive Covenant Agreement, incorporated herein by reference from Exhibit 10(o) of Form 10-Q (File No. 001-05231), for the quarter ended March 31, 2017.**
(k)
Form of 2018 Executive Stock Option Award Agreement in connection with the 2012 Omnibus Stock Ownership Plan, incorporated herein by reference from Exhibit 10(q) of Form 10-Q (File No. 001-05231), for the quarter ended March 31, 2018. **
(l)
Form of 2018 Executive Performance-Based Restricted Stock Unit Award Agreement in connection with the 2012 Omnibus Stock Ownership Plan, incorporated herein by reference from Exhibit 10(r) of Form 10-Q (File No. 001-05231), for the quarter ended March 31, 2018. **
(m)
Separation Agreement and General Release between Douglas Goare and the Company, dated January 7, 2019, incorporated herein by reference from Exhibit 10(r) of Form 10-K (File No. 001-05231), for the year ended December 31, 2018.**
(n)
McDonald's Corporation Target Incentive Plan, effective as of January 1, 2013, as Amended and Restated February 13, 2019, incorporated herein by reference from Exhibit 10(p) of Form 10-Q (File No. 001-05231), for the quarter ended March 31, 2019.**
(o)
McDonald's Corporation Officer Severance Plan, as Amended and Restated, effective January 1, 2019, incorporated herein by reference from Exhibit 10(q) of Form 10-Q (File No. 001-05231), for the quarter ended March 31, 2019.**
(p)
Form of 2019 Executive Stock Option Award Agreement in connection with the 2012 Omnibus Stock Ownership Plan, incorporated herein by reference from Exhibit 10(r) of Form 10-Q (File No. 001-05231), for the quarter ended March 31, 2019.**
(q)
Form of 2019 Executive Performance-Based Restricted Stock Unit Award Agreement in connection with the 2012 Omnibus Stock Ownership Plan, incorporated herein by reference from Exhibit 10(s) of Form 10-Q (File No. 001-05231), for the quarter ended March 31, 2019.**
(r)
Separation Agreement and General Release between Stephen Easterbrook and the Company, dated October 31, 2019, incorporated herein by reference from Exhibit 10.1 of Form 8-K (File No. 001-05231), filed November 4, 2019.
     
 (12)
Computation of Ratios.
     
 (21)
Subsidiaries of the Registrant.
     
 (23)
Consent of Independent Registered Public Accounting Firm.
     
 (24)
Power of Attorney.
     
 (31.1)
Rule 13a-14(a) Certification of Chief Executive Officer.
     
 (31.2)
Rule 13a-14(a) Certification of Chief Financial Officer.
     
 (32.1)
Certification pursuant to 18 U.S.C. Section 1350 by the Chief Executive Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
 (32.2)
Certification pursuant to 18 U.S.C. Section 1350 by the Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
 (101.INS)
XBRL Instance Document.Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

     
 (101.SCH)Inline XBRL Taxonomy Extension Schema Document.
     

McDonald's Corporation 2016 Annual Report 53

 (101.CAL)Inline XBRL Taxonomy Extension Calculation Linkbase Document.
     
 (101.DEF)Inline XBRL Taxonomy Extension Definition Linkbase Document.
     
 (101.LAB)Inline XBRL Taxonomy Extension Label Linkbase Document.
     
 (101.PRE)Inline XBRL Taxonomy Extension Presentation Linkbase Document.
(104)Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document.
     
*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.
  
**Denotes compensatory plan.

McDonald's Corporation 2019 Annual Report 61

ITEM 16. Form 10-K SummaryCross-Reference Index
 
None.

Page reference
Part I
Item 1BusinessPages 3-5
Item 1ARisk Factors and Cautionary Statement Regarding Forward-Looking StatementsPages 3, 25-30
Item 1BUnresolved Staff CommentsNot applicable
Item 2PropertiesPage 31
Item 3Legal ProceedingsPage 31
Item 4Mine Safety DisclosuresNot applicable
Additional ItemInformation About our Executive OfficersPage 32
Part II
Item 5Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity SecuritiesPage 24
Item 6Selected Financial DataPage 22
Item 7Management’s Discussion and Analysis of Financial Condition and Results of OperationsPages 3-33
Item 7AQuantitative and Qualitative Disclosures About Market RiskPages 17-19
Item 8Financial Statements and Supplementary DataPages 33-58
Item 9Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNot applicable
Item 9AControls and ProceduresPage 59
Item 9BOther InformationNot applicable
Part III
Item 10Directors, Executive Officers and Corporate GovernancePage 32, (a)
Item 11Executive Compensation(a)
Item 12Security Ownership of Certain Beneficial Owners and Management and Related Shareholder MattersPage 59
Item 13Certain Relationships and Related Transactions, and Director Independence(a)
Item 14Principal Accounting Fees and Services(a)
Part IV
Item 15Exhibits and Financial Statement SchedulesPages 60-61
Item 16Form 10-K SummaryNot applicable
SignaturesPage 63
(a) - Incorporated herein by reference from the Company's definitive proxy statement, which will be filed no later than 120 days after December 31, 2019.



54McDonald's Corporation 20162019 Annual Report62


Signatures
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
McDonald’s Corporation
(Registrant)
By/s/ Kevin M. Ozan
 Kevin M. Ozan
 Corporate Executive Vice President and
Chief Financial Officer
 
March 1, 2017
DateFebruary 26, 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 1st26th day of March, 2017:February, 2020:
Signature, Title
By/s/ Lloyd H. DeanBy/s/ Richard H. Lenny
 Lloyd H. DeanRichard H. Lenny
Director Director
  
By/s/ Stephen J. Easterbrook
Stephen J. Easterbrook
President, Chief Executive Officer and Director
(Principal Executive Officer)
  
By/s/ Robert A. Eckert
Robert A. Eckert
Director
By/s/ Margaret H. Georgiadis
Margaret H. Georgiadis
Director
By/s/ Enrique Hernandez, Jr.
Enrique Hernandez, Jr.
Chairman of the Board and Director
By/s/ Catherine Hoovel
Catherine Hoovel
Corporate Vice President – Chief Accounting Officer
(Principal Accounting Officer)
By/s/ Jeanne P. Jackson
Jeanne P. Jackson
Director
By/s/ Richard H. Lenny
Richard H. Lenny
Director
By/s/ Walter E. Massey
Walter E. Massey
Director




Signature, Title
By/s/ John J. Mulligan
 Robert A. EckertJohn J. Mulligan
 DirectorDirector
  
By/s/ Catherine M. EngelbertBy/s/ Kevin M. Ozan
 Catherine M. EngelbertKevin M. Ozan
Director Corporate Executive Vice President and Chief Financial Officer
 (Principal Financial Officer)
  
By/s/ Margaret H. GeorgiadisBy/s/ Sheila A. Penrose
 Margaret H. GeorgiadisSheila A. Penrose
 DirectorDirector
  
By/s/ Enrique Hernandez, Jr.By/s/ John W. Rogers, Jr.
 Enrique Hernandez, Jr.John W. Rogers, Jr.
 Chairman of the Board and DirectorDirector
  
By/s/ Catherine HoovelBy/s/ Paul S. Walsh
Catherine HoovelPaul S. Walsh
Corporate Vice President – Chief Accounting OfficerDirector
(Principal Accounting Officer)
By/s/ Christopher J. KempczinskiBy/s/ Miles D. White
 Christopher J. KempczinskiMiles D. White
 President, Chief Executive Officer and DirectorDirector
(Principal Executive Officer)  
  
  




 
McDonald's Corporation 20162019 Annual Report 5563