UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
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
McDONALD’S CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
One McDonald’s Plaza
Oak Brook, Illinois
(Address of principal executive offices)
36-2361282
(I.R.S. Employer
Identification No.)
60523
(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 class
Common stock, $.01 par value
Name of each exchange
on which registered
New York Stock Exchange
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. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
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
No
for the past 90 days. Yes
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 during the preceding 12 months (or for such shorter period that the registrant was required
No
to submit and post such files). Yes
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
No
Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
(do not check if a smaller reporting company) Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2016 was $102,676,655,213.
The number of shares outstanding of the registrant’s common stock as of January 31, 2017 was 818,993,182.
DOCUMENTS INCORPORATED BY REFERENCE
No
Part III of this Form 10-K incorporates information by reference from the registrant’s 2017 definitive proxy statement, which will be filed no later than 120 days after
December 31, 2016.
McDONALD’S CORPORATION
INDEX
Page reference
Part I.
Part II.
Part III.
Part IV.
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Additional Item Executive Officers of the Registrant
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors and Cautionary Statement Regarding Forward-Looking Statements . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Item 10
Item 11
Item 12
Item 13
Item 14
Item 15
Item 16
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . .
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters. . .
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Exhibits
All trademarks used herein are the property of their respective owners.
PART I
ITEM 1. Business
McDonald’s Corporation, the registrant, together with its sub-
sidiaries, is referred to herein as the “Company.”
a. General
During 2016, there were no material changes to the Company's
corporate structure or in its method of conducting business. The
business is structured with segments that combine markets with
similar characteristics and opportunities for growth. Significant
reportable segments include the United States ("U.S."),
International Lead Markets and High Growth Markets. In addition,
throughout this report we present the Foundational 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 description of business
General
The Company operates and franchises McDonald’s restaurants,
which serve a locally-relevant menu of quality food and beverages
sold at various price points in more than 100 countries.
McDonald’s global system is comprised of both Company-owned
and franchised 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 of fundamental importance to overall performance
and to 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. 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. One of the strengths of this 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 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.
Under a conventional franchise arrangement, the Company
generally owns the land and building or secures a long-term lease
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-
invests with franchisees to fund improvements to their restaurants
or their operating systems. These investments, developed with
input from McDonald’s with the aim of improving local business
performance, 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. The
Company requires franchisees to meet rigorous standards and
generally does not work with passive investors. The business
relationship with franchisees is designed to assure consistency
and high quality at all McDonald’s restaurants. Conventional
franchisees contribute to the Company’s revenue 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 levels of
cash flow.
Under a developmental license arrangement, licensees
provide capital for the entire business, including the real estate
interest. The Company does not invest any capital under a
developmental license arrangement. The Company receives a
royalty based upon a percent of sales as well as initial fees upon
the opening of a new restaurant or grant of a new license. We use
the developmental license ownership structure in over 80
countries with a total 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 in
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, 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
The Company and its franchisees purchase food, packaging,
equipment and other goods from numerous independent
suppliers. The Company has established and enforces high quality
standards and product specifications. The Company has quality
centers around the world designed to ensure that its high
standards are consistently met. 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, safety and supply chain specialists, as well
as suppliers and outside academia, provides strategic global
leadership for all aspects of food safety. 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
McDonald's Corporation 2016 Annual Report 1
McDONALD’S CORPORATION
INDEX
Page reference
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Item 10
Item 11
Item 12
Item 13
Item 14
Item 15
Item 16
Part I.
Part II.
Part III.
Part IV.
Exhibits
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors and Cautionary Statement Regarding Forward-Looking Statements . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Item Executive Officers of the Registrant
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . .
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters. . .
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All trademarks used herein are the property of their respective owners.
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3
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PART I
ITEM 1. Business
McDonald’s Corporation, the registrant, together with its sub-
sidiaries, is referred to herein as the “Company.”
a. General
During 2016, there were no material changes to the Company's
corporate structure or in its method of conducting business. The
business is structured with segments that combine markets with
similar characteristics and opportunities for growth. Significant
reportable segments include the United States ("U.S."),
International Lead Markets and High Growth Markets. In addition,
throughout this report we present the Foundational 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 description of business
General
The Company operates and franchises McDonald’s restaurants,
which serve a locally-relevant menu of quality food and beverages
sold at various price points in more than 100 countries.
McDonald’s global system is comprised of both Company-owned
and franchised 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 of fundamental importance to overall performance
and to 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. 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. One of the strengths of this 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 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.
Under a conventional franchise arrangement, the Company
generally owns the land and building or secures a long-term lease
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-
invests with franchisees to fund improvements to their restaurants
or their operating systems. These investments, developed with
input from McDonald’s with the aim of improving local business
performance, 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. The
Company requires franchisees to meet rigorous standards and
generally does not work with passive investors. The business
relationship with franchisees is designed to assure consistency
and high quality at all McDonald’s restaurants. Conventional
franchisees contribute to the Company’s revenue 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 levels of
cash flow.
Under a developmental license arrangement, licensees
provide capital for the entire business, including the real estate
interest. The Company does not invest any capital under a
developmental license arrangement. The Company receives a
royalty based upon a percent of sales as well as initial fees upon
the opening of a new restaurant or grant of a new license. We use
the developmental license ownership structure in over 80
countries with a total 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 in
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, 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
The Company and its franchisees purchase food, packaging,
equipment and other goods from numerous independent
suppliers. The Company has established and enforces high quality
standards and product specifications. The Company has quality
centers around the world designed to ensure that its high
standards are consistently met. 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, safety and supply chain specialists, as well
as suppliers and outside academia, provides strategic global
leadership for all aspects of food safety. 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
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.
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,
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, choice and nutrition are increasingly important to our
customers and we are continuously evolving our menu to meet our
customers' needs.
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
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” and “The Golden Arches
Logo” to be of material importance to its business. Depending on
the jurisdiction, trademarks and service marks generally are valid
as long as they are used and/or registered. Patents, copyrights
and licenses are of varying durations.
Seasonal operations
The Company does not consider its operations to be seasonal to
any material degree.
Working capital practices
Information about the Company’s working capital practices is
incorporated herein by reference to Management’s Discussion and
Analysis of Financial Condition and Results of Operations for the
years ended December 31, 2016, 2015, and 2014 in Part II,
Item 7, pages 13 through 27, and the consolidated statement of
cash flows for the years ended December 31, 2016, 2015, and
2014 in Part II, Item 8, page 32 of this Form 10-K.
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
No material portion of the business is subject to renegotiation of
profits or termination of contracts or subcontracts at government
election.
2 McDonald’s Corporation 2016 Annual Report
2 McDonald's Corporation 2016 Annual Report
Competition
Number of employees
McDonald’s restaurants compete with international, national,
regional and local retailers of food products. The Company
competes on the basis of price, convenience, service, menu
variety and product quality in a highly fragmented global
restaurant industry.
In measuring the Company’s competitive position,
management reviews data compiled by Euromonitor International,
a leading source of market data with respect to the global
restaurant industry. The Company’s primary competition, which is
referred to as the informal eating out ("IEO") segment, includes
the following restaurant categories defined by Euromonitor
International: quick-service eating establishments, casual dining
full-service restaurants, street stalls or kiosks, cafés,100% home
delivery/takeaway providers, 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.
Based on data from Euromonitor International, the global IEO
segment was composed of approximately 8 million outlets and
generated $1.2 trillion in annual sales in 2015, the most recent
year for which data is available. McDonald’s Systemwide 2015
restaurant business accounted for 0.4% of those outlets and 7.0%
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 18 million outlets and generated $2.3
trillion in annual sales in 2015. McDonald’s Systemwide restaurant
business accounted for 0.2% of those outlets and 3.5% of the
sales.
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 endeavors to improve its social
responsibility and environmental practices to achieve long-term
sustainability, which benefits McDonald’s and the communities it
serves.
Increased focus by certain governmental authorities on
environmental matters may lead to new governmental initiatives.
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 for the Company. Also, there is a possibility that
governmental initiatives, or actual or perceived effects 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.
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.
The Company’s number of employees worldwide, including its
corporate office employees and company-owned restaurant
employees, was approximately 375,000 as of year-end 2016.
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 13 through 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.
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
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 2016 Annual Report 3
McDonald's Corporation 2016 Annual Report 3
Information on the Company’s website is not incorporated into
efficiencies through the consolidation of global, back-office
achieving competitive, predictable food and paper costs over the
Competition
Number of employees
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.
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,
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, choice and nutrition are increasingly important to our
customers and we are continuously evolving our menu to meet our
customers' needs.
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
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” and “The Golden Arches
Logo” to be of material importance to its business. Depending on
the jurisdiction, trademarks and service marks generally are valid
as long as they are used and/or registered. Patents, copyrights
The Company does not consider its operations to be seasonal to
serves.
and licenses are of varying durations.
Seasonal operations
any material degree.
Working capital practices
Information about the Company’s working capital practices is
incorporated herein by reference to Management’s Discussion and
Analysis of Financial Condition and Results of Operations for the
years ended December 31, 2016, 2015, and 2014 in Part II,
Item 7, pages 13 through 27, and the consolidated statement of
cash flows for the years ended December 31, 2016, 2015, and
2014 in Part II, Item 8, page 32 of this Form 10-K.
The Company’s business is not dependent upon either a single
customer or small group of customers.
Customers
Backlog
Company-operated restaurants have no backlog orders.
Government contracts
No material portion of the business is subject to renegotiation of
profits or termination of contracts or subcontracts at government
election.
2 McDonald's Corporation 2016 Annual Report
McDonald’s restaurants compete with international, national,
regional and local retailers of food products. The Company
competes on the basis of price, convenience, service, menu
variety and product quality in a highly fragmented global
restaurant industry.
In measuring the Company’s competitive position,
management reviews data compiled by Euromonitor International,
a leading source of market data with respect to the global
restaurant industry. The Company’s primary competition, which is
referred to as the informal eating out ("IEO") segment, includes
the following restaurant categories defined by Euromonitor
International: quick-service eating establishments, casual dining
full-service restaurants, street stalls or kiosks, cafés,100% home
delivery/takeaway providers, 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.
Based on data from Euromonitor International, the global IEO
segment was composed of approximately 8 million outlets and
generated $1.2 trillion in annual sales in 2015, the most recent
year for which data is available. McDonald’s Systemwide 2015
restaurant business accounted for 0.4% of those outlets and 7.0%
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 18 million outlets and generated $2.3
trillion in annual sales in 2015. McDonald’s Systemwide restaurant
business accounted for 0.2% of those outlets and 3.5% of the
sales.
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 endeavors to improve its social
responsibility and environmental practices to achieve long-term
sustainability, which benefits McDonald’s and the communities it
Increased focus by certain governmental authorities on
environmental matters may lead to new governmental initiatives.
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 for the Company. Also, there is a possibility that
governmental initiatives, or actual or perceived effects 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.
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.
The Company’s number of employees worldwide, including its
corporate office employees and company-owned restaurant
employees, was approximately 375,000 as of year-end 2016.
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 13 through 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 2016 Annual Report 3
McDonald's Corporation 2016 Annual Report 3
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.
4 McDonald’s Corporation 2016 Annual Report
4 McDonald's Corporation 2016 Annual Report
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.
Food safety concerns may have an adverse effect on our
business.
our business.
Challenges with respect to talent management could harm
Our ability to increase sales and profits depends on our
Effective succession planning is important to our long-
Our success increasingly relies on the financial success
workforce, which includes our staff and employees working in
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.
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.
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
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
McDonald's Corporation 2016 Annual Report 5
We face intense competition in our markets, which could hurt
To be successful in the future, we believe we must
If we do not anticipate and address evolving consumer
results.
preferences, our business could suffer.
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.
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
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.
4 McDonald's Corporation 2016 Annual Report
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
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.
revenues.
Supply chain interruptions may increase costs or reduce
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.
and margins. Further, the promotion of menu offerings may yield
We depend on the effectiveness of our supply chain
Food safety concerns may have an adverse effect on our
business.
Challenges with respect to talent management could harm
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.
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
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
6 McDonald’s Corporation 2016 Annual Report
6 McDonald's Corporation 2016 Annual Report
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).
Inconsistent standards imposed by governmental
not it has merit, could be time-consuming, result in costly
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.
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
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
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
McDonald's Corporation 2016 Annual Report 7
A judgment significantly in excess of any applicable
new operating or financial covenants.
foreign exchange or changes in trade-related tariffs or controls,
timely way, we could experience an interruption in our
government-mandated closure of our, our franchisees' or our
operations.
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.
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
We are subject to income and other taxes in the United
practices; and compliance efforts may be affected by ordinary
States and foreign jurisdictions, and our operations, plans and
variations in food preparation among our own restaurants and
results are affected by tax and other initiatives around the world.
the need to rely on the accuracy and completeness of
In particular, we are affected by the impact of changes to tax
information from third-party suppliers (particularly given varying
laws or policy or related authoritative interpretations, including to
requirements and practices for testing and disclosure).
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
6 McDonald's Corporation 2016 Annual Report
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).
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
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 Comments
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 27 and
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
8 McDonald’s Corporation 2016 Annual Report
8 McDonald's Corporation 2016 Annual Report
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.
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
McDonald's Corporation 2016 Annual Report 9
performance; actions by shareholders and others seeking to
adverse impact on net income for the period in which the ruling
Executive Officers of the Registrant
influence our business strategies; portfolio transactions in
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,
The impact on our results of corporate actions and market
but not limited to, quality, service and cleanliness issues, menu
and third-party perceptions and assessments of such
actions, such as those we may take from time to time as we
pricing, contentions regarding grants or terminations of franchises,
delinquent payments of rents and fees, and franchisee claims for
implement our strategies in light of changing business, legal
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
leveraging the Company’s global sourcing network. Additional
The Company has registered trademarks and service marks,
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 27 and
in Financial statements and supplementary data in Part II, Item 8,
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.
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
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 Comments
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
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
8 McDonald's Corporation 2016 Annual Report
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
McDonald's Corporation 2016 Annual Report 9
PART II
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.
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:
Dollars per share
Quarter:
First
Second
Third
Fourth
Year
High
Low
2016
Dividend
High
Low
Dividend
2015
126.96
131.96
128.60
124.00
131.96
112.71
116.08
113.96
110.33
110.33
0.89
0.89
1.83 *
—
3.61
101.09
101.08
101.88
120.23
120.23
88.77
94.02
87.50
97.13
87.50
0.85
0.85
0.85
0.89
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
October 1-31, 2016
November 1-30, 2016
December 1-31, 2016
Total
Total Number of
Shares Purchased
Average Price
Paid per Share
5,902,572
3,076,425
2,915,083
11,894,080
113.43
116.25
121.76
116.20
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs(1)
5,902,572
3,076,425
2,915,083
11,894,080
Approximate Dollar
Value of Shares
that May Yet
Be Purchased Under
the Plans or Programs(1)
$ 4,571,138,206
4,213,514,184
3,858,569,963
*
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.
Company/Index
12/31/2011
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
McDonald's Corporation
S&P 500 Index
Dow Jones Industrials
Source: S&P Capital IQ
$100
100
100
$91
116
110
$103
154
143
$103
175
157
$134
177
158
$143
198
184
10 McDonald’s Corporation 2016 Annual Report
10 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 11
McDonald's Corporation 2016 Annual Report 11
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.
PART II
Equity Securities
Quarter:
First
Second
Third
Fourth
Year
be 1,658,000.
December 31, 2016*:
Period
October 1-31, 2016
November 1-30, 2016
December 1-31, 2016
Total
ITEM 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of
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:
Dollars per share
High
Low
Dividend
High
Low
Dividend
2015
126.96
131.96
128.60
124.00
131.96
112.71
116.08
113.96
110.33
110.33
101.09
101.08
101.88
120.23
120.23
88.77
94.02
87.50
97.13
87.50
0.85
0.85
0.85
0.89
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
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
2016
1.83 *
0.89
0.89
—
3.61
Total Number of
Shares Purchased
Average Price
Paid per Share
5,902,572
3,076,425
2,915,083
11,894,080
113.43
116.25
121.76
116.20
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs(1)
5,902,572
3,076,425
2,915,083
11,894,080
Approximate Dollar
Value of Shares
that May Yet
Be Purchased Under
the Plans or Programs(1)
$ 4,571,138,206
4,213,514,184
3,858,569,963
*
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.
Company/Index
12/31/2011
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
McDonald's Corporation
S&P 500 Index
Dow Jones Industrials
Source: S&P Capital IQ
$100
100
100
$91
116
110
$103
154
143
$103
175
157
$134
177
158
$143
198
184
10 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 11
McDonald's Corporation 2016 Annual Report 11
Years ended December 31,
ITEM 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
2016
2015
2014
2013
2012
2011
Overview
ITEM 6. Selected Financial Data
6-Year Summary
In millions, except per share and unit amounts
Consolidated Statement of Income Data
Revenues
Sales by Company-operated restaurants
Revenues from franchised restaurants
Total revenues
Operating income
Net income
Consolidated Statement of Cash Flows Data
Cash provided by operations
Cash used for investing activities
Capital expenditures
Cash used for (provided by) financing activities
Treasury stock purchases(1)
Common stock dividends
Financial Position
Total assets
Total debt
Total shareholders’ equity (deficit)
Shares outstanding
Per Common Share Data
Earnings-diluted
Dividends declared
Market price at year end
Restaurant Information and Other Data
Restaurants at year end
Company-operated restaurants
Franchised restaurants
Total Systemwide restaurants
Franchised sales(2)
$ 15,295
9,327
24,622
7,745
4,687
$ 16,488
8,925
25,413
7,146
4,529
$ 18,169
9,272
27,441
7,949
4,758
$ 18,875
9,231
28,106
8,764
5,586
$ 18,603
8,964
27,567
8,605
5,465
$ 18,293
8,713
27,006
8,530
5,503
$
$
6,060
982
1,821
11,262
11,142
3,058
$
6,539
1,420
1,814
(735)
6,182
3,230
$
6,730
2,305
2,583
4,618
3,175
3,216
$
7,121
2,674
2,825
4,043
1,810
3,115
6,966 $
3,167
3,049
3,850
2,605
2,897
7,150
2,571
2,730
4,533
3,373
2,610
$ 31,024
25,956
(2,204)
819
$ 37,939
24,122
7,088
907
$ 34,227
14,936
12,853
963
$ 36,626
14,130
16,010
990
$ 35,386 $ 32,990
12,500
14,390
1,021
13,633
15,294
1,003
$
5.44
3.61
121.72
$
4.80
3.44
118.44
$
$
4.82
3.28
93.70
$
5.55
3.12
97.03
5.36
2.87
88.21
$
5.27
2.53
100.33
5,669
31,230
36,899
$ 69,707
6,444
30,081
36,525
$ 66,226
6,714
29,544
36,258
$ 69,617
6,738
28,691
35,429
$ 70,251
6,598
27,882
34,480
$ 69,687
6,435
27,075
33,510
$ 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
12 McDonald's Corporation 2016 Annual Report
DESCRIPTION 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.
• 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 currencies 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 comparable sales and comparable guest
counts represent the percent change in sales and
transactions, respectively, from the same period in the prior
year for all restaurants, whether operated by the Company or
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.
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.
•
Systemwide sales include sales at all restaurants. 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.
• 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
McDonald's Corporation 2016 Annual Report 13
Years ended December 31,
ITEM 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
2016
2015
2014
2013
2012
2011
Overview
$ 15,295
$ 16,488
$ 18,169
$ 18,875
$ 18,603
$
6,060
$
$
$
$
6,966 $
9,327
24,622
7,745
4,687
982
1,821
11,262
11,142
3,058
8,925
25,413
7,146
4,529
6,539
1,420
1,814
(735)
6,182
3,230
25,956
(2,204)
819
24,122
7,088
907
9,272
27,441
7,949
4,758
6,730
2,305
2,583
4,618
3,175
3,216
14,936
12,853
963
$ 31,024
$ 37,939
$ 34,227
$ 36,626
8,964
27,567
8,605
5,465
$ 18,293
8,713
27,006
8,530
5,503
3,167
3,049
3,850
2,605
2,897
7,150
2,571
2,730
4,533
3,373
2,610
13,633
$ 35,386 $ 32,990
12,500
14,390
1,021
15,294
1,003
$
$
5.44
3.61
$
4.80
3.44
121.72
118.44
4.82
3.28
93.70
$
$
$
5.36
2.87
88.21
5.27
2.53
100.33
5,669
31,230
36,899
6,444
30,081
36,525
6,714
29,544
36,258
$ 69,707
$ 66,226
$ 69,617
$ 70,251
$ 69,687
6,598
27,882
34,480
6,435
27,075
33,510
$ 67,648
9,231
28,106
8,764
5,586
7,121
2,674
2,825
4,043
1,810
3,115
14,130
16,010
990
5.55
3.12
97.03
6,738
28,691
35,429
(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.
DESCRIPTION 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:
ITEM 6. Selected Financial Data
6-Year Summary
In millions, except per share and unit amounts
Consolidated Statement of Income Data
Revenues
Sales by Company-operated restaurants
Revenues from franchised restaurants
Total revenues
Operating income
Net income
Consolidated Statement of Cash Flows Data
Cash used for (provided by) financing activities
Cash provided by operations
Cash used for investing activities
Capital expenditures
Treasury stock purchases(1)
Common stock dividends
Financial Position
Total assets
Total debt
Shares outstanding
Per Common Share Data
Earnings-diluted
Dividends declared
Market price at year end
Total shareholders’ equity (deficit)
Restaurants at year end
Company-operated restaurants
Franchised restaurants
Total Systemwide restaurants
Franchised sales(2)
Restaurant Information and Other Data
12 McDonald's Corporation 2016 Annual Report
• 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.
• 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 currencies 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 comparable sales and comparable guest
counts represent the percent change in sales and
transactions, respectively, from the same period in the prior
year for all restaurants, whether operated by the Company or
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.
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.
•
Systemwide sales include sales at all restaurants. 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.
• 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
McDonald's Corporation 2016 Annual Report 13
foreign exchange rate over the periods included in the
calculation.
against its refranchising targets, have resulted in savings of
more than $200 million.
restaurants were opened and over 1,700 existing locations
Company is conducting various pilot tests in the U.S.,
were reimaged.
Europe and Asia and plans to scale quickly based on results
•
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.
• 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.
2016 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, global
comparable sales increased 3.8%, including positive comparable
sales across all segments. Comparable guest counts were
negative 0.3%, as positive guest traffic in the Foundational
Markets and International Lead Markets was more than offset by
negative guest traffic in the U.S. and High Growth Markets.
• 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.
Building on these initial steps, the Company made purposeful
• Comparable sales in the International Lead Markets
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
14 McDonald’s Corporation 2016 Annual Report
14 McDonald's Corporation 2016 Annual Report
increased 3.4% 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%. The
increase in comparable sales reflected positive results
across most of the segment, led by China.
• Comparable sales in the Foundational Markets increased
10.0% and comparable guest counts increased 1.9%, led by
very strong performance in Japan and certain markets in
Latin America, as well as solid results across the remainder
of the segment.
In addition to improved comparable sales performance, the
Company achieved the following financial results in 2016:
• Consolidated revenues decreased 3% (flat in constant
currencies) due to the impact of refranchising, partly offset
by positive comparable sales.
•
Systemwide sales increased 3% (5% in constant
currencies).
• Consolidated operating income increased 8% (11% in
constant currencies).
• Operating margin, defined as operating income as a percent
of total revenues, increased from 28.1% in 2015 to 31.5% in
2016.
• Diluted earnings per share of $5.44 increased 13% (16% in
constant currencies).
• Cash provided by operations was $6.1 billion.
• Capital expenditures of $1.8 billion were allocated mainly to
reinvestment in existing restaurants and, to a lesser extent,
to new restaurant openings. Across the System, about 900
•
Free cash flow was $4.2 billion and the Company's free cash
flow conversion rate was 90% (see reconciliation in Exhibit
12).
in Exhibit 12).
• One-year ROIIC was 62.7% and three-year ROIIC was 5.1%
for the period ended December 31, 2016 (see reconciliation
•
The Company increased its quarterly cash dividend per
share by 6% to $0.94 for the fourth quarter, equivalent to an
annual dividend of $3.76 per share.
•
The Company returned $14.2 billion to shareholders through
dividends and share repurchases for the year, achieving the
Company's targeted return of $30 billion for the three-year
period ended 2016.
STRATEGIC DIRECTION
Building on the momentum established in 2016, the Company is
beginning to shift focus from revitalizing the business to longer-
term growth. The Company will move with increased velocity to
drive sustainable guest count growth, a reliable long-term
measure of the Company's strength that is vital to growing the
Company’s sales and shareholder value.
In order to drive guest count growth in an ever-changing
customer environment, the Company developed a customer-
centric growth strategy for 2017 and beyond, informed by deep
customer research across multiple markets. The Company's
greatest opportunities are at the heart of the brand - in its food,
value and customer experience - and within defined customer
groups. This 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,
of these pilots.
AREAS OF FOCUS BY SEGMENT
U.S.
While the U.S. has begun to build sales momentum, its greatest
opportunity is guest count growth, by focusing on actions that
collectively transform the customer experience.
A focus on food taste 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. 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. 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.
namely quality, convenience and value.
High Growth Markets
• Converting casual to committed customers. The
McDonald’s High Growth Markets have leveraged learnings from
Company will focus on building stronger relationships with
the International Lead Markets to enhance the customer
customers so they visit more often, by elevating and
experience through design, digital, people, menu innovation and
leveraging the McCafé coffee brand and enhancing snack
value.
and treat offerings.
The Company will continue to build upon its investments in
Experience of 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
of the following two initiatives designed to further drive growth.
• 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
licensee.
In addition to driving operational growth in existing
restaurants, targeted new restaurant development and
refranchising initiatives are top priorities. In early 2017, the
Company announced the planned sale of its businesses in China
and Hong Kong to a developmental licensee.
Foundational Markets
The Foundational Markets is a diverse group of markets that share
common goals of enhancing the critical elements that differentiate
McDonald’s - the menu and the customer experience. The
segment is committed to running great restaurants and increasing
convenience 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
McDonald’s Corporation 2016 Annual Report 15
McDonald's Corporation 2016 Annual Report 15
foreign exchange rate over the periods included in the
against its refranchising targets, have resulted in savings of
calculation.
more than $200 million.
restaurants were opened and over 1,700 existing locations
were reimaged.
•
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.
• 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.
2016 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, global
comparable sales increased 3.8%, including positive comparable
sales across all segments. Comparable guest counts were
negative 0.3%, as positive guest traffic in the Foundational
Markets and International Lead Markets was more than offset by
negative guest traffic in the U.S. and High Growth Markets.
• 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.
Building on these initial steps, the Company made purposeful
• Comparable sales in the International Lead Markets
changes in 2016. The Company continued to right-size the
increased 3.4% and comparable guest counts increased
organization and put the appropriate talent in place by blending
1.5%, reflecting solid comparable sales performance across
executives with deep McDonald’s experience with new executives
most of the segment, led by the U.K.
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
14 McDonald's Corporation 2016 Annual Report
•
In the High Growth Markets, comparable sales increased
2.8%, while comparable guest counts declined 0.8%. The
increase in comparable sales reflected positive results
across most of the segment, led by China.
• Comparable sales in the Foundational Markets increased
10.0% and comparable guest counts increased 1.9%, led by
very strong performance in Japan and certain markets in
Latin America, as well as solid results across the remainder
of the segment.
In addition to improved comparable sales performance, the
Company achieved the following financial results in 2016:
• Consolidated revenues decreased 3% (flat in constant
currencies) due to the impact of refranchising, partly offset
by positive comparable sales.
•
Systemwide sales increased 3% (5% in constant
currencies).
• Consolidated operating income increased 8% (11% in
constant currencies).
• Operating margin, defined as operating income as a percent
of total revenues, increased from 28.1% in 2015 to 31.5% in
2016.
• Diluted earnings per share of $5.44 increased 13% (16% in
constant currencies).
• Cash provided by operations was $6.1 billion.
• Capital expenditures of $1.8 billion were allocated mainly to
reinvestment in existing restaurants and, to a lesser extent,
to new restaurant openings. Across the System, about 900
•
Free cash flow was $4.2 billion and the Company's free cash
flow conversion rate was 90% (see reconciliation in Exhibit
12).
• One-year ROIIC was 62.7% and three-year ROIIC was 5.1%
for the period ended December 31, 2016 (see reconciliation
in Exhibit 12).
•
•
The Company increased its quarterly cash dividend per
share by 6% to $0.94 for the fourth quarter, equivalent to an
annual dividend of $3.76 per share.
The Company returned $14.2 billion to shareholders through
dividends and share repurchases for the year, achieving the
Company's targeted return of $30 billion for the three-year
period ended 2016.
STRATEGIC DIRECTION
Building on the momentum established in 2016, the Company is
beginning to shift focus from revitalizing the business to longer-
term growth. The Company will move with increased velocity to
drive sustainable guest count growth, a reliable long-term
measure of the Company's strength that is vital to growing the
Company’s sales and shareholder value.
In order to drive guest count growth in an ever-changing
customer environment, the Company developed a customer-
centric growth strategy for 2017 and beyond, informed by deep
customer research across multiple markets. The Company's
greatest opportunities are at the heart of the brand - in its food,
value and customer experience - and within defined customer
groups. This 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 focus 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.
The Company will continue to build upon its investments in
Experience of 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
of the following two initiatives designed to further drive growth.
• 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
Company is conducting various pilot tests in the U.S.,
Europe and Asia and plans to scale quickly based on results
of these pilots.
AREAS OF FOCUS BY SEGMENT
U.S.
While the U.S. has begun to build sales momentum, its greatest
opportunity is guest count growth, by focusing on actions that
collectively transform the customer experience.
A focus on food taste 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. 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. 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 enhance the customer
experience through design, digital, people, menu innovation and
value.
In addition to driving operational growth in existing
restaurants, targeted new restaurant development and
refranchising initiatives are top priorities. In early 2017, the
Company announced the planned sale of its businesses in China
and Hong Kong to a developmental licensee.
Foundational Markets
The Foundational Markets is a diverse group of markets that share
common goals of enhancing the critical elements that differentiate
McDonald’s - the menu and the customer experience. The
segment is committed to running great restaurants and increasing
convenience 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.
McDonald’s Corporation 2016 Annual Report 15
McDonald's Corporation 2016 Annual Report 15
OUTLOOK
2017 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. The Company
expects net restaurant additions to add approximately 1
percentage point to 2017 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 2017 selling, general and
administrative expenses to decrease about 7-8%, 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, the Company expects interest expense for 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%
in the same direction, the Company's annual diluted
earnings per share would change by about 25 cents.
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.
The Company expects capital expenditures for 2017 to be
approximately $1.7 billion, about one-third of which will be
used to open new restaurants. The Company expects to
open about 900 restaurants, including about 500 restaurants
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.
Long-Term Outlook
Consolidated Operating Results
•
•
•
•
The Company expects to refranchise about 4,000 restaurants
in 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% from 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:
•
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.
Operating results
Dollars and shares in millions, except per share data
Revenues
Sales by Company-operated restaurants
Revenues from franchised restaurants
Total revenues
Operating costs and expenses
Company-operated restaurant expenses
Franchised restaurants-occupancy expenses
Selling, general & administrative expenses
Other operating (income) expense, net
Total operating costs and expenses
Operating income
Interest expense
Nonoperating (income) expense, net
Income before provision for income taxes
Provision for income taxes
Net income
Earnings per common share—diluted
Weighted-average common shares outstanding—
diluted
n/m Not meaningful
2016
Increase/
(decrease)
(7%)
5
(3)
(9)
4
(2)
(64)
(8)
8
39
87
5
8
3%
13%
(9%)
Amount
$15,295
9,327
24,622
12,699
1,718
2,384
76
16,877
7,745
885
(6)
6,866
2,180
$ 4,686
$
5.44
861.2
Amount
$16,488
8,925
25,413
13,977
1,647
2,434
209
18,267
7,146
638
(48)
6,556
2,027
$ 4,529
$
4.80
944.6
2015
Increase/
(decrease)
(9%)
(4)
(7)
(9)
(3)
(2)
n/m
(6)
(10)
11
n/m
(11)
(22)
(5%)
0%
(4%)
2014
Amount
$18,169
9,272
27,441
15,288
1,697
2,488
19
19,492
7,949
576
1
7,372
2,614
$ 4,758
$
4.82
986.3
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 operating results in each of the last three years. In 2016, results
were negatively impacted 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
In millions, except per share data
Revenues
Company-operated margins
Franchised margins
Selling, general & administrative expenses
Operating income
Net income
Earnings per common share—diluted
Reported amount
2016
$ 24,622
2015
2014
$ 25,413
$ 27,441
2016
$ (692)
2,596
7,609
2,384
7,745
4,686
5.44
2,511
7,278
2,434
7,146
4,529
4.80
2,881
7,575
2,488
7,949
4,758
4.82
(89)
(118)
28
(173)
(97)
(0.11)
Currency translation
benefit/(cost)
2015
2014
$ (2,829)
$ (570)
(331)
(626)
158
(771)
(473)
(0.50)
(60)
(119)
21
(152)
(114)
(0.12)
NET INCOME AND DILUTED EARNINGS PER COMMON SHARE
In 2016, net income increased 3% (6% in constant currencies) to
$4.7 billion and diluted earnings per common share increased
13% (16% in constant currencies) to $5.44. Foreign currency
translation had a negative impact of $0.11 on diluted earnings per
share.
In 2015, net income decreased 5% (increased 5% in constant
currencies) to $4.5 billion and diluted earnings per common share
was relatively flat (increased 10% in constant currencies) at $4.80.
Foreign currency translation had a negative impact of $0.50 on
diluted earnings per share.
Results in 2016 benefited from stronger operating
performance and higher gains on sales of restaurant businesses,
mostly in the U.S., while results in 2015 benefited from higher
franchised margins and a gain on the strategic sale of a unique
restaurant property in the U.S.
Both 2016 and 2015 results were partly offset by net pre-tax
impairment 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 property in the U.S. had a net negative impact
on diluted earnings per share of $0.18 in 2015, while the 2016
charges had a net negative impact on diluted earnings per share
of $0.28 in 2016.
The Company repurchased 92.3 million shares of its stock for
$11.1 billion in 2016 and 61.8 million shares of its stock for $6.2
billion in 2015, driving reductions in weighted-average shares
outstanding on a diluted basis in both periods, which positively
benefited earnings per share.
16 McDonald’s Corporation 2016 Annual Report
16 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 17
McDonald's Corporation 2016 Annual Report 17
OUTLOOK
2017 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. The Company
expects net restaurant additions to add approximately 1
percentage point to 2017 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.
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%
in the same direction, the Company's annual diluted
earnings per share would change by about 25 cents.
•
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.
•
The Company expects capital expenditures for 2017 to be
approximately $1.7 billion, about one-third of which will be
used to open new restaurants. The Company expects to
open about 900 restaurants, including about 500 restaurants
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.
Long-Term Outlook
Consolidated Operating Results
•
The Company expects to refranchise about 4,000 restaurants
in 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% from 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
• With about 75% of McDonald's grocery bill comprised of 10
completed.
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 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
•
The Company expects full-year 2017 selling, general and
within current ranges.
administrative expenses to decrease about 7-8%, in
constant currencies with fluctuations expected between the
Long-Term Financial Targets
quarters. This includes incentive-based compensation costs
of less than $300 million.
•
Based on current interest and foreign currency exchange
rates, the Company expects interest expense for the full-
of refranchising:
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
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.
Operating results
Dollars and shares in millions, except per share data
Revenues
Sales by Company-operated restaurants
Revenues from franchised restaurants
Total revenues
Operating costs and expenses
Company-operated restaurant expenses
Franchised restaurants-occupancy expenses
Selling, general & administrative expenses
Other operating (income) expense, net
Total operating costs and expenses
Operating income
Interest expense
Nonoperating (income) expense, net
Income before provision for income taxes
Provision for income taxes
Net income
Earnings per common share—diluted
Weighted-average common shares outstanding—
diluted
n/m Not meaningful
2016
Increase/
(decrease)
(7%)
5
(3)
(9)
4
(2)
(64)
(8)
8
39
87
5
8
3%
13%
Amount
$15,295
9,327
24,622
12,699
1,718
2,384
76
16,877
7,745
885
(6)
6,866
2,180
$ 4,686
5.44
$
Amount
$16,488
8,925
25,413
13,977
1,647
2,434
209
18,267
7,146
638
(48)
6,556
2,027
$ 4,529
4.80
$
861.2
(9%)
944.6
2015
Increase/
(decrease)
(9%)
(4)
(7)
(9)
(3)
(2)
n/m
(6)
(10)
11
n/m
(11)
(22)
(5%)
0%
(4%)
2014
Amount
$18,169
9,272
27,441
15,288
1,697
2,488
19
19,492
7,949
576
1
7,372
2,614
$ 4,758
4.82
$
986.3
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 operating results in each of the last three years. In 2016, results
were negatively impacted 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
In millions, except per share data
Revenues
Company-operated margins
Franchised margins
Selling, general & administrative expenses
Operating income
Net income
Earnings per common share—diluted
2016
$ 24,622
2,596
7,609
2,384
7,745
4,686
5.44
Reported amount
2015
$ 25,413
2,511
7,278
2,434
7,146
4,529
4.80
2014
$ 27,441
2,881
7,575
2,488
7,949
4,758
4.82
2016
$ (692)
(89)
(118)
28
(173)
(97)
(0.11)
Currency translation
benefit/(cost)
2014
$ (570)
(60)
(119)
21
(152)
(114)
(0.12)
2015
$ (2,829)
(331)
(626)
158
(771)
(473)
(0.50)
NET INCOME AND DILUTED EARNINGS PER COMMON SHARE
In 2016, net income increased 3% (6% in constant currencies) to
$4.7 billion and diluted earnings per common share increased
13% (16% in constant currencies) to $5.44. Foreign currency
translation had a negative impact of $0.11 on diluted earnings per
share.
In 2015, net income decreased 5% (increased 5% in constant
currencies) to $4.5 billion and diluted earnings per common share
was relatively flat (increased 10% in constant currencies) at $4.80.
Foreign currency translation had a negative impact of $0.50 on
diluted earnings per share.
Results in 2016 benefited from stronger operating
performance and higher gains on sales of restaurant businesses,
mostly in the U.S., while results in 2015 benefited from higher
franchised margins and a gain on the strategic sale of a unique
restaurant property in the U.S.
Both 2016 and 2015 results were partly offset by net pre-tax
impairment 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 property in the U.S. had a net negative impact
on diluted earnings per share of $0.18 in 2015, while the 2016
charges had a net negative impact on diluted earnings per share
of $0.28 in 2016.
The Company repurchased 92.3 million shares of its stock for
$11.1 billion in 2016 and 61.8 million shares of its stock for $6.2
billion in 2015, driving reductions in weighted-average shares
outstanding on a diluted basis in both periods, which positively
benefited earnings per share.
16 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 17
McDonald's Corporation 2016 Annual Report 17
REVENUES
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, minimum rent payments and initial fees.
Revenues from franchised restaurants that are licensed to foreign affiliates and developmental licensees include a royalty based on a
percent of sales, and generally include initial fees.
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 shift to a greater percentage of
franchised restaurants negatively impacts consolidated revenues as Company-operated sales are replaced by franchised sales, where the
Company receives rent and/or royalty revenue based on a percentage of sales.
In 2016, revenues decreased 3% (flat in constant currencies) due to the impact of refranchising, partly offset by positive comparable
sales. In 2015, revenues decreased 7% (increased 3% in constant currencies), partly due to foreign currency translation. In constant
currencies, revenue growth was driven by positive comparable sales and the benefit from expansion.
Revenues
Dollars in millions
Company-operated sales:
U.S.
International Lead Markets
High Growth Markets
Foundational Markets & Corporate
Total
Franchised revenues:
U.S.
International Lead Markets
High Growth Markets
Foundational Markets & Corporate
Total
Total revenues:
U.S.
International Lead Markets
High Growth Markets
Foundational Markets & Corporate
Total
Amount
Increase/(decrease)
Increase/(decrease)
excluding currency
translation
2016
2015
2014
2016
2015
2016
2015
$ 3,743
4,278
5,378
1,896
$15,295
$ 4,510
2,945
783
1,089
$ 9,327
$ 8,253
7,223
6,161
2,985
$24,622
$ 4,198
4,798
5,442
2,050
$16,488
$ 4,361
2,817
731
1,016
$ 8,925
$ 8,559
7,615
6,173
3,066
$25,413
$ 4,351
5,443
6,071
2,304
$18,169
$ 4,300
3,101
774
1,097
$ 9,272
$ 8,651
8,544
6,845
3,401
$27,441
(11%)
(11)
(1)
(8)
(7%)
3%
5
7
7
5%
(4%)
(5)
0
(3)
(3%)
(4%)
(12)
(10)
(11)
(9%)
1%
(9)
(5)
(7)
(4%)
(1%)
(11)
(10)
(10)
(7%)
(11%)
(6)
4
(5)
(4%)
3%
8
9
11
6%
(4%)
(1)
4
1
0%
(4%)
1
6
5
2%
1%
6
9
10
5%
(1%)
3
6
7
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.
• 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 in China and most other markets,
and continued expansion in Russia. In constant currencies,
2015 revenues increased due to expansion and positive
comparable sales, primarily driven by Russia and China.
The following tables present comparable sales, comparable guest counts and Systemwide sales increases/(decreases):
Comparable sales and guest count increases/(decreases)
U.S.
International Lead Markets
High Growth Markets
Foundational Markets & Corporate
Total
Systemwide sales increases/(decreases)
U.S.
International Lead Markets
High Growth Markets
Foundational Markets & Corporate
Total
2016
Guest
Counts
(2.1%)
1.5
(0.8)
1.9
Sales
1.7%
3.4
2.8
10.0
2015
Guest
Counts
(3.0%)
1.0
(2.2)
(3.7)
Sales
0.5%
3.4
1.8
0.7
2014
Guest
Counts
(4.1%)
(1.2)
(2.9)
(4.8)
Sales
(2.1%)
0.8
(2.8)
(0.1)
3.8%
(0.3%)
1.5%
(2.3%)
(1.0%)
(3.6%)
Increase/(decrease)
excluding currency
translation
2016
2%
1
3
8
3%
2015
1%
(10)
(7)
(13)
(6%)
2016
2%
5
6
11
5%
2015
1%
5
8
3
3%
Franchised sales are not recorded as revenues by the Company, but are the basis on which the Company calculates and records
franchised revenues and are indicative of the financial health of the franchisee base. The following table presents franchised sales and the
related increases/(decreases):
Franchised sales
Dollars in millions
U.S.
International Lead Markets
High Growth Markets
Foundational Markets & Corporate
Total
2016
2015
$32,646
$31,639
$31,096
17,049
4,858
15,154
16,313
4,525
13,749
Amount
2014
17,921
4,678
15,922
$69,707
$66,226
$69,617
Increase/(decrease)
2016
3%
5
7
10
5%
2015
2%
(9)
(3)
(14)
(5%)
Increase/(decrease)
excluding currency
translation
2016
3%
8
10
14
7%
2015
2%
6
10
3
4%
18 McDonald’s Corporation 2016 Annual Report
18 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 19
McDonald's Corporation 2016 Annual Report 19
REVENUES
The following tables present comparable sales, comparable guest counts and Systemwide sales increases/(decreases):
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, minimum rent payments and initial fees.
Revenues from franchised restaurants that are licensed to foreign affiliates and developmental licensees include a royalty based on a
percent of sales, and generally include initial fees.
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 shift to a greater percentage of
franchised restaurants negatively impacts consolidated revenues as Company-operated sales are replaced by franchised sales, where the
Company receives rent and/or royalty revenue based on a percentage of sales.
In 2016, revenues decreased 3% (flat in constant currencies) due to the impact of refranchising, partly offset by positive comparable
sales. In 2015, revenues decreased 7% (increased 3% in constant currencies), partly due to foreign currency translation. In constant
currencies, revenue growth was driven by positive comparable sales and the benefit from expansion.
Revenues
Dollars in millions
Company-operated sales:
U.S.
International Lead Markets
High Growth Markets
Foundational Markets & Corporate
Total
U.S.
Franchised revenues:
International Lead Markets
High Growth Markets
Foundational Markets & Corporate
Total
U.S.
Total revenues:
International Lead Markets
High Growth Markets
Foundational Markets & Corporate
Total
• 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.
Amount
Increase/(decrease)
Increase/(decrease)
excluding currency
translation
2016
2015
2014
2016
2015
2016
2015
$ 3,743
$ 4,198
$ 4,351
$15,295
$16,488
$18,169
$ 4,510
$ 4,361
$ 4,300
4,278
5,378
1,896
2,945
783
1,089
7,223
6,161
2,985
4,798
5,442
2,050
2,817
731
1,016
7,615
6,173
3,066
5,443
6,071
2,304
3,101
774
1,097
8,544
6,845
3,401
(11%)
(11)
(1)
(8)
(7%)
3%
5
7
7
5%
(5)
0
(3)
(4%)
(12)
(10)
(11)
(9%)
1%
(9)
(5)
(7)
(4%)
(11)
(10)
(10)
$ 9,327
$ 8,925
$ 9,272
$ 8,253
$ 8,559
$ 8,651
(4%)
(1%)
$24,622
$25,413
$27,441
(3%)
(7%)
(11%)
(6)
4
(5)
(4%)
3%
8
9
11
6%
(4%)
(1)
4
1
0%
(4%)
1
6
5
2%
1%
6
9
10
5%
(1%)
3
6
7
3%
• 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 in China and most other markets,
and continued expansion in Russia. In constant currencies,
2015 revenues increased due to expansion and positive
comparable sales, primarily driven by Russia and China.
Comparable sales and guest count increases/(decreases)
U.S.
International Lead Markets
High Growth Markets
Foundational Markets & Corporate
Total
Systemwide sales increases/(decreases)
U.S.
International Lead Markets
High Growth Markets
Foundational Markets & Corporate
Total
2016
Guest
Counts
(2.1%)
1.5
(0.8)
1.9
(0.3%)
Sales
1.7%
3.4
2.8
10.0
3.8%
2015
Guest
Counts
(3.0%)
1.0
(2.2)
(3.7)
(2.3%)
Sales
0.5%
3.4
1.8
0.7
1.5%
2014
Guest
Counts
(4.1%)
(1.2)
(2.9)
(4.8)
(3.6%)
Sales
(2.1%)
0.8
(2.8)
(0.1)
(1.0%)
Increase/(decrease)
excluding currency
translation
2016
2%
1
3
8
3%
2015
1%
(10)
(7)
(13)
(6%)
2016
2%
5
6
11
5%
2015
1%
5
8
3
3%
Franchised sales are not recorded as revenues by the Company, but are the basis on which the Company calculates and records
franchised revenues and are indicative of the financial health of the franchisee base. The following table presents franchised sales and the
related increases/(decreases):
Franchised sales
Dollars in millions
U.S.
International Lead Markets
High Growth Markets
Foundational Markets & Corporate
Total
2016
$32,646
17,049
4,858
15,154
$69,707
2015
$31,639
16,313
4,525
13,749
$66,226
Amount
2014
$31,096
17,921
4,678
15,922
$69,617
Increase/(decrease)
2016
3%
5
7
10
5%
2015
2%
(9)
(3)
(14)
(5%)
Increase/(decrease)
excluding currency
translation
2016
3%
8
10
14
7%
2015
2%
6
10
3
4%
18 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 19
McDonald's Corporation 2016 Annual Report 19
FRANCHISED MARGINS
Franchised margin dollars represent revenues from franchised restaurants less the Company’s occupancy costs (rent and depreciation)
associated with those sites. Franchised margin dollars represented about 75% of the combined restaurant margins in 2016, 2015 and 2014.
In 2016, franchised margin dollars increased $331 million or 5% (6% in constant currencies). In 2015, franchised margin dollars
decreased $297 million or 4% (increased 4% in constant currencies), due to foreign currency translation. For both 2016 and 2015, the
constant currency increases were due to positive comparable sales performance, expansion and 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
Dollars in millions
U.S.
International Lead Markets
High Growth Markets
Foundational Markets & Corporate
Total
Amount
% of
Revenue
Amount
% of
Revenue
Amount
% of
Revenue
Increase/
(decrease)
2016
2015
2014
$3,726
2,363
550
970
$7,609
82.6% $3,606
2,254
80.2
520
70.2
898
89.1
81.6% $7,278
82.7% $3,572
2,486
80.0
555
71.1
88.3
962
81.5% $7,575
83.1%
80.1
71.7
87.7
81.7%
2016
3%
5
6
8
5%
2015
1%
(9)
(6)
(7)
(4%)
Increase/(decrease)
excluding currency
translation
2016
3%
8
8
12
6%
2015
1%
6
7
11
4%
• U.S.: In 2016 and 2015, the decreases in the franchised
• High Growth Markets: In 2016, the decrease in the
margin percent were due to higher occupancy costs, partly
offset by positive comparable sales.
•
International Lead Markets: In 2016, the increase in the
franchised margin percent reflected the benefit from positive
comparable sales performance, partly offset by higher
occupancy costs and the impact of refranchising. In 2015, the
slight decrease reflected the benefit from positive comparable
sales performance and the negative impact from higher
occupancy costs and refranchising.
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.
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,
Company-operated margin dollars increased $85 million or 3% (7% in constant currencies). In 2015, Company-operated margin dollars
decreased $370 million or 13% (1% in constant currencies).
Company-operated margins
Dollars in millions
U.S.
International Lead Markets
High Growth Markets
Foundational Markets & Corporate
Total
Amount
% of
Revenue
Amount
% of
Revenue
Amount
% of
Revenue
Increase/
(decrease)
2016
2015
2014
$ 618
886
796
296
$2,596
16.5% $ 632
961
20.7
659
14.8
259
15.6
17.0% $2,511
15.1% $ 756
1,080
20.0
12.1
780
265
12.7
15.2% $2,881
17.4%
19.8
12.9
11.5
15.9%
2016
(2%)
(8)
21
14
2015
(16%)
(11)
(16)
(2)
3% (13%)
Increase/(decrease)
excluding currency
translation
2016
(2%)
(3)
26
17
7%
2015
(16%)
2
3
15
(1%)
• U.S.: In 2016, the increase in the Company-operated margin
• High Growth Markets: In 2016, the increase in the
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.
•
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.
20 McDonald’s Corporation 2016 Annual Report
20 McDonald's Corporation 2016 Annual Report
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.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses decreased 2% (1% in constant currencies) in 2016 and decreased 2% (increased
4% in constant currencies) in 2015. The decrease in 2016 was due to 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 from the Company's restructuring initiatives.
Selling, general & administrative expenses
Amount
Increase/(decrease)
Dollars in millions
U.S.
International Lead Markets
High Growth Markets
Foundational Markets & Corporate(1)
2016
$ 741
2015
2014
$ 766
$ 772
464
294
885
534
326
808
621
389
706
Total (Selling, General & Administrative Expenses)
$2,384
$2,434
$2,488
Less: Incentive-Based Compensation(2)
418
317
171
Total (Excluding Incentive-Based Compensation)
2016
(3%)
(13)
(10)
10
(2%)
32%
(7%)
2015
(1%)
(14)
(16)
15
(2%)
85%
(9%)
$1,966
$2,117
$2,317
(6%) (3)
(2%) (4)
Increase/(decrease)
excluding currency
translation
2016
(3%)
(10)
(6)
10
(1%)
33%
2015
(1%)
(1)
(5)
20
4%
95%
(1)
Included in Foundational Markets & Corporate are home office support costs in areas such as facilities, finance, human resources, information technology, 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% in 2016, 2.9% in 2015 and 2.8% in 2014.
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.
(55)
147
9
•
Impairment and other charges (gains), net
• 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 included pre-tax
impairment charges incurred primarily in Foundational Markets
and Corporate, and charges incurred in connection with global
restructuring activities.
OTHER OPERATING (INCOME) EXPENSE, NET
Other operating (income) expense, net
In millions
Gains on sales of restaurant
businesses
Equity in (earnings) losses of
unconsolidated affiliates
Asset dispositions and other (income)
expense, net
Impairment and other charges (gains),
net
Total
2016
2015
2014
$ (283) $ (146) $ (137)
72
(27)
108
342
235
39
$ 76
$ 209
$ 19
• Gains on sales of restaurant businesses
In 2016, the Company realized higher gains on sales of restaurant
businesses, primarily 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.
McDonald’s Corporation 2016 Annual Report 21
McDonald's Corporation 2016 Annual Report 21
higher franchised margin dollars.
Franchised margins
FRANCHISED MARGINS
Franchised margin dollars represent revenues from franchised restaurants less the Company’s occupancy costs (rent and depreciation)
associated with those sites. Franchised margin dollars represented about 75% of the combined restaurant margins in 2016, 2015 and 2014.
In 2016, franchised margin dollars increased $331 million or 5% (6% in constant currencies). In 2015, franchised margin dollars
decreased $297 million or 4% (increased 4% in constant currencies), due to foreign currency translation. For both 2016 and 2015, the
constant currency increases were due to positive comparable sales performance, expansion and 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
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses decreased 2% (1% in constant currencies) in 2016 and decreased 2% (increased
4% in constant currencies) in 2015. The decrease in 2016 was due to 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 from the Company's restructuring initiatives.
Selling, general & administrative expenses
Dollars in millions
U.S.
International Lead Markets
High Growth Markets
Foundational Markets & Corporate
$3,726
2,363
550
970
80.2
70.2
89.1
Amount
Revenue
Amount
Revenue
Amount
Revenue
% of
% of
% of
2016
2015
2014
82.6% $3,606
82.7% $3,572
83.1%
2,254
520
898
80.0
71.1
88.3
2,486
555
962
80.1
71.7
87.7
Increase/
(decrease)
2016
3%
2015
1%
5
6
8
(9)
(6)
(7)
Increase/(decrease)
excluding currency
translation
2016
3%
8
8
12
2015
1%
6
7
11
4%
Total
$7,609
81.6% $7,278
81.5% $7,575
81.7%
5%
(4%)
6%
• U.S.: In 2016 and 2015, the decreases in the franchised
• High Growth Markets: In 2016, the decrease in the
margin percent were due to higher occupancy costs, partly
offset by positive comparable sales.
•
International Lead Markets: In 2016, the increase in the
franchised margin percent reflected the benefit from positive
comparable sales performance, partly offset by higher
occupancy costs and the impact of refranchising. In 2015, the
slight decrease reflected the benefit from positive comparable
sales performance and the negative impact from higher
occupancy costs and refranchising.
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.
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,
Company-operated margin dollars increased $85 million or 3% (7% in constant currencies). In 2015, Company-operated margin dollars
decreased $370 million or 13% (1% in constant currencies).
Company-operated margins
Dollars in millions
U.S.
Amount
Revenue
Amount
Revenue
Amount
Revenue
% of
% of
% of
2016
2015
2014
$ 618
16.5% $ 632
15.1% $ 756
17.4%
International Lead Markets
High Growth Markets
Foundational Markets & Corporate
886
796
296
20.7
14.8
15.6
961
659
259
20.0
12.1
12.7
1,080
780
265
19.8
12.9
11.5
Increase/
(decrease)
2016
(2%)
2015
(16%)
(8)
21
14
(11)
(16)
(2)
Increase/(decrease)
excluding currency
translation
2016
(2%)
(3)
26
17
7%
2015
(16%)
2
3
15
(1%)
Total
$2,596
17.0% $2,511
15.2% $2,881
15.9%
3% (13%)
• U.S.: In 2016, the increase in the Company-operated margin
• High Growth Markets: In 2016, the increase in the
percent was due to a higher average check and lower
Company-operated margin percent was primarily due to
commodity costs, partly offset by the impact of negative guest
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.
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.
•
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.
20 McDonald's Corporation 2016 Annual Report
Dollars in millions
U.S.
International Lead Markets
High Growth Markets
Foundational Markets & Corporate(1)
Total (Selling, General & Administrative Expenses)
2016
$ 741
464
294
885
$2,384
2015
$ 766
534
326
808
$2,434
Amount
2014
$ 772
621
389
706
$2,488
Less: Incentive-Based Compensation(2)
418
317
171
Total (Excluding Incentive-Based Compensation)
$1,966
$2,117
$2,317
Increase/(decrease)
Increase/(decrease)
excluding currency
translation
2016
(3%)
(13)
(10)
10
(2%)
32%
(7%)
2015
(1%)
(14)
(16)
15
(2%)
85%
(9%)
2016
(3%)
(10)
(6)
10
(1%)
33%
2015
(1%)
(1)
(5)
20
4%
95%
(6%) (3)
(2%) (4)
(1)
Included in Foundational Markets & Corporate are home office support costs in areas such as facilities, finance, human resources, information technology, 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% in 2016, 2.9% in 2015 and 2.8% in 2014.
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.
OTHER OPERATING (INCOME) EXPENSE, NET
Other operating (income) expense, net
In millions
Gains on sales of restaurant
businesses
Equity in (earnings) losses of
unconsolidated affiliates
Asset dispositions and other (income)
expense, net
Impairment and other charges (gains),
net
Total
2016
2015
2014
$ (283) $ (146) $ (137)
(55)
147
9
72
(27)
108
342
$ 76
235
$ 209
39
$ 19
• Gains on sales of restaurant businesses
In 2016, the Company realized higher gains on sales of restaurant
businesses, primarily 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
•
Impairment and other charges (gains), net included pre-tax
impairment charges incurred primarily in Foundational Markets
and Corporate, and charges incurred in connection with global
restructuring activities.
McDonald’s Corporation 2016 Annual Report 21
McDonald's Corporation 2016 Annual Report 21
OPERATING INCOME
Operating income
Dollars in millions
U.S.
International Lead Markets
High Growth Markets
Foundational Markets & Corporate
Total
2016
$3,769
2,838
1,049
89
$7,745
2015
$3,612
2,713
841
(20)
$7,146
Amount
2014
$3,523
3,034
934
458
$7,949
Increase/(decrease)
2016
4%
5
25
n/m
8%
2015
3%
(11)
(10)
n/m
(10%)
Increase/(decrease)
excluding currency
translation
2016
4%
9
29
n/m
11%
2015
3%
4
9
(74)
0%
INTEREST EXPENSE
Interest expense increased 39% and 11% in 2016 and 2015,
respectively, primarily due to higher average debt balances in
connection with the Company's strategy to optimize its capital
structure, partly offset by lower average interest rates.
NONOPERATING (INCOME) EXPENSE, NET
Nonoperating (income) expense, net
In millions
Interest income
Foreign currency and hedging activity
Other expense
Total
2016
$ (4)
(24)
22
$ (6)
2015
$ (9)
(56)
17
$ (48)
2014
$ (20)
20
1
$ 1
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.
• 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.
22 McDonald’s Corporation 2016 Annual Report
22 McDonald's Corporation 2016 Annual Report
PROVISION FOR INCOME TAXES
In 2016, 2015 and 2014, the reported effective income tax rates
were 31.7%, 30.9% and 35.5%, respectively.
In 2014, the higher effective income tax rate was primarily due
U.S.
Systemwide restaurants at year end
to a change in tax reserves for 2003-2010 resulting from an
unfavorable lower tax court ruling in a foreign tax jurisdiction, as
well as the impact of changes in tax reserves related to audit
progression in multiple foreign tax jurisdictions. These items had a
negative impact of 4.1% on the effective tax rate.
Consolidated net deferred tax liabilities included tax assets,
net of valuation allowance, of $2.0 billion in 2016 and $1.8 billion
in 2015. 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, page 34 of this Form 10-K.
Cash Flows
The Company generates significant cash from its operations and
has substantial credit availability and capacity to fund operating
and discretionary spending such as capital expenditures, debt
repayments, dividends and share repurchases.
Cash provided by operations totaled $6.1 billion and free cash
flow was $4.2 billion in 2016, while cash provided by operations
totaled $6.5 billion and free cash flow was $4.7 billion in 2015. In
2016, cash provided by operations decreased $480 million or 7%
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 2014
primarily due to lower operating results, including the impact from
weaker foreign currencies, and other operating activity, partly
offset by changes in working capital.
Cash used for investing activities totaled $982 million in 2016,
a decrease of $438 million compared with 2015. The decrease
primarily reflected higher proceeds from sales of restaurant
businesses. Cash used for investing activities totaled $1.4 billion
in 2015, a decrease of $885 million compared with 2014. The
decrease primarily reflected lower capital expenditures.
Cash used for financing activities totaled $11.3 billion in 2016,
an increase of $12.0 billion compared with 2015, 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 and $7.7 billion at year end 2016 and 2015, 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, the Company opened 896 restaurants and closed 522
restaurants. In 2015, the Company opened 989 restaurants and
closed 722 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.
International Lead Markets
High Growth Markets
Foundational Markets &
Corporate
Total
2016
14,155
6,851
5,552
10,341
36,899
2015
14,259
6,802
5,266
10,198
36,525
2014
14,350
6,717
5,031
10,160
36,258
Approximately 85% of the restaurants at year-end 2016 were
franchised, including 92% in the U.S., 84% in International Lead
Markets, 48% in High Growth Markets and 94% in Foundational
Markets.
Capital expenditures in 2016 were essentially flat with 2015,
primarily due to higher reinvestment related to reimages, offset by
fewer new restaurant openings. Capital expenditures decreased
$769 million or 30% in 2015, primarily due to fewer new restaurant
openings and lower reinvestment at existing restaurants.
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 millions
New restaurants
Existing restaurants
Other(1)
Total capital expenditures
Total assets
2016
2015
2014
$
674
$
1,108
39
892
842
80
$ 1,435
1,044
104
$ 1,821
$ 1,814
$ 2,583
$31,024
$37,939
$34,227
(1) Primarily corporate equipment and other office-related expenditures
New restaurant investments in all years were concentrated in
markets with strong returns 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,
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 million in 2016.
The Company owned approximately 45% of the land and
about 70% of the buildings for restaurants in its consolidated
markets at year-end 2016 and 2015.
SHARE REPURCHASES AND DIVIDENDS
In 2016, the Company returned $14.2 billion to shareholders
through a combination of shares repurchased and dividends paid,
marking the achievement of the Company's targeted return of $30
billion for the three-year period ended 2016.
Shares repurchased and dividends
In millions, except per share data
Number of shares repurchased
Shares outstanding at year end
2016
92.3
819
2015
61.8
907
2014
33.1
963
Dividends declared per share
$ 3.61
$ 3.44
$ 3.28
Treasury stock purchases (in
Shareholders' equity)
Dividends paid
$11,142
$6,182
$3,175
3,058
3,230
3,216
Total returned to shareholders
$14,200
$9,412
$6,391
McDonald’s Corporation 2016 Annual Report 23
McDonald's Corporation 2016 Annual Report 23
• U.S.: In 2016, the increase in operating income reflected
higher sales-driven franchised margin dollars and higher
INTEREST EXPENSE
2016
$3,769
2,838
1,049
89
$7,745
2015
$3,612
2,713
841
(20)
Amount
2014
$3,523
3,034
934
458
$7,146
$7,949
Increase/(decrease)
2016
4%
5
25
n/m
8%
2015
3%
(11)
(10)
n/m
(10%)
Increase/(decrease)
excluding currency
translation
2016
4%
9
29
n/m
11%
2015
3%
4
9
(74)
0%
Interest expense increased 39% and 11% in 2016 and 2015,
respectively, primarily due to higher average debt balances in
connection with the Company's strategy to optimize its capital
structure, partly offset by lower average interest rates.
NONOPERATING (INCOME) EXPENSE, NET
Nonoperating (income) expense, net
In millions
Interest income
Other expense
Total
Foreign currency and hedging activity
2016
$ (4)
(24)
22
2015
$ (9)
(56)
17
$ (6)
$ (48)
2014
$ (20)
20
1
$ 1
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.
OPERATING INCOME
Operating income
Dollars in millions
U.S.
International Lead Markets
High Growth Markets
Foundational Markets & Corporate
Total
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
29.0% in 2014.
Operating margin was 31.5% in 2016, 28.1% in 2015 and
22 McDonald's Corporation 2016 Annual Report
PROVISION FOR INCOME TAXES
In 2016, 2015 and 2014, the reported effective income tax rates
were 31.7%, 30.9% and 35.5%, respectively.
In 2014, the higher effective income tax rate was primarily due
to a change in tax reserves for 2003-2010 resulting from an
unfavorable lower tax court ruling in a foreign tax jurisdiction, as
well as the impact of changes in tax reserves related to audit
progression in multiple foreign tax jurisdictions. These items had a
negative impact of 4.1% on the effective tax rate.
Consolidated net deferred tax liabilities included tax assets,
net of valuation allowance, of $2.0 billion in 2016 and $1.8 billion
in 2015. 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, page 34 of this Form 10-K.
Cash Flows
The Company generates significant cash from its operations and
has substantial credit availability and capacity to fund operating
and discretionary spending such as capital expenditures, debt
repayments, dividends and share repurchases.
Cash provided by operations totaled $6.1 billion and free cash
flow was $4.2 billion in 2016, while cash provided by operations
totaled $6.5 billion and free cash flow was $4.7 billion in 2015. In
2016, cash provided by operations decreased $480 million or 7%
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 2014
primarily due to lower operating results, including the impact from
weaker foreign currencies, and other operating activity, partly
offset by changes in working capital.
Cash used for investing activities totaled $982 million in 2016,
a decrease of $438 million compared with 2015. The decrease
primarily reflected higher proceeds from sales of restaurant
businesses. Cash used for investing activities totaled $1.4 billion
in 2015, a decrease of $885 million compared with 2014. The
decrease primarily reflected lower capital expenditures.
Cash used for financing activities totaled $11.3 billion in 2016,
an increase of $12.0 billion compared with 2015, 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 and $7.7 billion at year end 2016 and 2015, 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, the Company opened 896 restaurants and closed 522
restaurants. In 2015, the Company opened 989 restaurants and
closed 722 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
U.S.
International Lead Markets
High Growth Markets
Foundational Markets &
Corporate
Total
2016
14,155
6,851
5,552
10,341
36,899
2015
14,259
6,802
5,266
10,198
36,525
2014
14,350
6,717
5,031
10,160
36,258
Approximately 85% of the restaurants at year-end 2016 were
franchised, including 92% in the U.S., 84% in International Lead
Markets, 48% in High Growth Markets and 94% in Foundational
Markets.
Capital expenditures in 2016 were essentially flat with 2015,
primarily due to higher reinvestment related to reimages, offset by
fewer new restaurant openings. Capital expenditures decreased
$769 million or 30% in 2015, primarily due to fewer new restaurant
openings and lower reinvestment at existing restaurants.
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 millions
New restaurants
Existing restaurants
Other(1)
Total capital expenditures
Total assets
$
2016
674
1,108
39
$
2015
892
842
80
$ 1,821
$31,024
$ 1,814
$37,939
2014
$ 1,435
1,044
104
$ 2,583
$34,227
(1) Primarily corporate equipment and other office-related expenditures
New restaurant investments in all years were concentrated in
markets with strong returns 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,
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 million in 2016.
The Company owned approximately 45% of the land and
about 70% of the buildings for restaurants in its consolidated
markets at year-end 2016 and 2015.
SHARE REPURCHASES AND DIVIDENDS
In 2016, the Company returned $14.2 billion to shareholders
through a combination of shares repurchased and dividends paid,
marking the achievement of the Company's targeted return of $30
billion for the three-year period ended 2016.
Shares repurchased and dividends
In millions, except per share data
Number of shares repurchased
Shares outstanding at year end
Dividends declared per share
2016
92.3
819
$ 3.61
2015
61.8
907
$ 3.44
2014
33.1
963
$ 3.28
Treasury stock purchases (in
Shareholders' equity)
Dividends paid
Total returned to shareholders
$11,142
3,058
$14,200
$6,182
3,230
$9,412
$3,175
3,216
$6,391
McDonald’s Corporation 2016 Annual Report 23
McDonald's Corporation 2016 Annual Report 23
In December 2015, the Company’s Board of Directors
approved a $15 billion share repurchase program, effective
January 1, 2016, 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 41
consecutive years and has increased the dividend amount every
year. The 2016 full year dividend of $3.61 per share reflects the
quarterly dividend paid for each of the first three quarters of $0.89
per share, with an increase to $0.94 per share paid in the fourth
quarter. This 6% increase in the quarterly dividend equates to a
$3.76 per share annual dividend and reflects the Company’s
confidence in the ongoing strength and reliability of its cash flow.
As in the past, future dividend amounts will be considered after
reviewing profitability expectations and financing needs, and will
be declared at the discretion of the Company’s Board of Directors.
Financial Position and Capital Resources
TOTAL ASSETS AND RETURNS
Total assets decreased $6.9 billion or 18% in 2016 primarily due to
lower cash and equivalents. Nearly 85% of total assets were in the
U.S., International Lead markets and High Growth 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.
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, 2016
totaled $26.0 billion, compared with $24.1 billion at December 31,
2015. The net increase in 2016 was primarily due to net long-term
issuances of $2.7 billion.
Debt highlights(1)
Fixed-rate debt as a percent of total
debt(2,3)
Weighted-average annual interest
rate of total debt(3)
Foreign currency-denominated debt
as a percent of total debt(2)
Total debt as a percent of total
capitalization (total debt and total
Shareholders' equity)(2)
Cash provided by operations as a
percent of total debt(2)
2016
2015
2014
82% 81% 74%
3.5
34
109
23
3.8
4.0
29
40
77
27
54
45
(1) All percentages are as of December 31, except for the weighted-average
annual interest rate, which is for the year.
24 McDonald’s Corporation 2016 Annual Report
24 McDonald's Corporation 2016 Annual Report
(2) Based on debt obligations before the effects of fair value hedging
adjustments and deferred debt costs. These effects are excluded as they
have no impact on the obligation at maturity. See Debt financing note to
the consolidated financial statements.
(3)
Includes the effect of interest rate swaps.
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 from the
Company’s Board of Directors, at December 31, 2016, the
Company had $15.0 billion of authority remaining to borrow funds,
including through (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") and a
Global Medium-Term Notes program, the Company has
$2.5 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. The Company plans to issue long-term debt
to refinance this maturing debt. As of December 31, 2016, the
Company's subsidiaries also had $489 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.
The Company uses major capital markets, bank financings
and derivatives to meet its financing requirements and reduce
interest expense. 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 billion and
$7.0 billion for the years ended December 31, 2016 and 2015,
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, the Company was required to post an
immaterial amount of collateral due to negative fair value of certain
derivative positions. The Company's counterparties were not
required to post collateral on any derivative position, other than on
hedges of certain of the Company’s supplemental benefit plan
liabilities where the counterparties were required to post collateral
on their liability positions.
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
The Company’s net asset exposure is diversified among a
to additional U.S. income taxes (net of an adjustment for foreign
broad basket of currencies. The Company’s largest net asset
exposures (defined as foreign currency assets less foreign
currency liabilities) at year end were as follows:
Foreign currency net asset exposures
In millions of U.S. Dollars
Euro
British Pounds Sterling
Australian Dollars
Canadian Dollars
Japanese Yen
2016
$ 1,968
1,340
1,393
1,190
490
2015
$ 3,974
1,333
1,316
1,096
363
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 2016 levels nor a 10%
adverse change in foreign currency rates from 2016 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% of our operating income. A significant portion
of these historical earnings are considered to be indefinitely
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 million as of December 31, 2016. We do not
intend, nor do we foresee a need, to repatriate these funds.
Consistent with prior years, we expect existing domestic cash
and equivalents, domestic cash flows from operations, annual
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.
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. 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.
Contractual cash outflows
Contractual cash inflows
Operating
leases (1)
$ 1,303
$
Debt
Minimum rent under
obligations (2)
franchise arrangements (3)
In millions
2017
2018
2019
2020
2021
Thereafter
1,200
1,103
1,001
892
6,754
77
1,756
3,933
2,396
1,555
16,349
$
$
2,690
2,617
2,540
2,426
2,295
18,764
31,332
Total
$12,253
$ 26,066
(1)
Includes future minimum lease payments for businesses in markets
considered held for 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.
(2) The maturities include reclassifications of short-term obligations to long-
term obligations of $2.5 billion, as they are supported by a long-term line
of credit agreement expiring in December 2019. Debt obligations do not
include the impact of noncash 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, total liabilities for the supplemental plans were $465 million.
In addition, total liabilities for gross unrecognized tax benefits
were $924 million at December 31, 2016.
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
McDonald's Corporation 2016 Annual Report 25
In December 2015, the Company’s Board of Directors
approved a $15 billion share repurchase program, effective
January 1, 2016, 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 41
consecutive years and has increased the dividend amount every
year. The 2016 full year dividend of $3.61 per share reflects the
quarterly dividend paid for each of the first three quarters of $0.89
per share, with an increase to $0.94 per share paid in the fourth
quarter. This 6% increase in the quarterly dividend equates to a
$3.76 per share annual dividend and reflects the Company’s
confidence in the ongoing strength and reliability of its cash flow.
As in the past, future dividend amounts will be considered after
reviewing profitability expectations and financing needs, and will
be declared at the discretion of the Company’s Board of Directors.
Financial Position and Capital Resources
TOTAL ASSETS AND RETURNS
Total assets decreased $6.9 billion or 18% in 2016 primarily due to
lower cash and equivalents. Nearly 85% of total assets were in the
U.S., International Lead markets and High Growth 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.
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, 2016
totaled $26.0 billion, compared with $24.1 billion at December 31,
2015. The net increase in 2016 was primarily due to net long-term
issuances of $2.7 billion.
Debt highlights(1)
Fixed-rate debt as a percent of total
debt(2,3)
Weighted-average annual interest
rate of total debt(3)
Foreign currency-denominated debt
as a percent of total debt(2)
Total debt as a percent of total
capitalization (total debt and total
Shareholders' equity)(2)
Cash provided by operations as a
percent of total debt(2)
2016
2015
2014
82% 81% 74%
3.5
34
109
23
3.8
4.0
29
40
77
27
54
45
(1) All percentages are as of December 31, except for the weighted-average
annual interest rate, which is for the year.
24 McDonald's Corporation 2016 Annual Report
(2) Based on debt obligations before the effects of fair value hedging
adjustments and deferred debt costs. These effects are excluded as they
have no impact on the obligation at maturity. See Debt financing note to
the consolidated financial statements.
(3)
Includes the effect of interest rate swaps.
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 from the
Company’s Board of Directors, at December 31, 2016, the
Company had $15.0 billion of authority remaining to borrow funds,
including through (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") and a
Global Medium-Term Notes program, the Company has
$2.5 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. The Company plans to issue long-term debt
to refinance this maturing debt. As of December 31, 2016, the
Company's subsidiaries also had $489 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.
The Company uses major capital markets, bank financings
and derivatives to meet its financing requirements and reduce
interest expense. 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 billion and
$7.0 billion for the years ended December 31, 2016 and 2015,
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, the Company was required to post an
immaterial amount of collateral due to negative fair value of certain
derivative positions. The Company's counterparties were not
required to post collateral on any derivative position, other than on
hedges of certain of the Company’s supplemental benefit plan
liabilities where the counterparties were required to post collateral
on their liability positions.
The Company’s net asset exposure is diversified among a
broad basket of currencies. The Company’s largest net asset
exposures (defined as foreign currency assets less foreign
currency liabilities) at year end were as follows:
Foreign currency net asset exposures
In millions of U.S. Dollars
Euro
British Pounds Sterling
Australian Dollars
Canadian Dollars
Japanese Yen
2016
$ 1,968
1,340
1,393
1,190
490
2015
$ 3,974
1,333
1,316
1,096
363
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 2016 levels nor a 10%
adverse change in foreign currency rates from 2016 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% of our operating income. A significant portion
of these historical earnings are considered to be indefinitely
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 million as of December 31, 2016. We do not
intend, nor do we foresee a need, to repatriate these funds.
Consistent with prior years, we expect existing domestic cash
and equivalents, domestic cash flows from operations, annual
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. 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.
Contractual cash outflows
Contractual cash inflows
Operating
leases (1)
Debt
obligations (2)
Minimum rent under
franchise arrangements (3)
$ 1,303
1,200
1,103
1,001
892
6,754
$12,253
$
77
1,756
3,933
2,396
1,555
16,349
$ 26,066
$
$
2,690
2,617
2,540
2,426
2,295
18,764
31,332
In millions
2017
2018
2019
2020
2021
Thereafter
Total
(1)
Includes future minimum lease payments for businesses in markets
considered held for 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.
(2) The maturities include reclassifications of short-term obligations to long-
term obligations of $2.5 billion, as they are supported by a long-term line
of credit agreement expiring in December 2019. Debt obligations do not
include the impact of noncash 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, total liabilities for the supplemental plans were $465 million.
In addition, total liabilities for gross unrecognized tax benefits
were $924 million at December 31, 2016.
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
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. Such commitments are generally shorter term in nature
and will be funded from operating cash flows.
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 ensure 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 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 organization. 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” 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 book value of the businesses and an estimated
$1.5 billion of cash proceeds to be received at closing, subject to
adjustments.
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 less the present value of expected dividends over the
vesting period.
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 at risk of future
impairment as the fair values of certain reporting units were not
substantially in excess of their carrying amounts.
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 each 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.
Income taxes
•
The Company records a valuation allowance to reduce its deferred
tax assets if it is more likely than not that some portion or all of the
deferred 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.
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
The Company operates within multiple taxing jurisdictions and
matter is adversely resolved, Luxembourg may be required to
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.
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.
In 2016, the Company increased the balance of unrecognized
While the Company cannot predict the ultimate resolution of
tax benefits related to tax positions taken in prior years by $150
million. In 2015, the Company decreased the balance of
unrecognized tax benefits related to settlements with taxing
authorities by $258 million. See 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.
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 Accounting
Standards Codification (“ASC”).
Deferred U.S. income taxes have not been recorded for
temporary differences totaling $16.0 billion related to investments
in certain foreign subsidiaries and corporate affiliates. The
In 2015, the Company received an unfavorable decision
temporary differences consist primarily of undistributed earnings
that are considered permanently invested in operations outside
the U.S. If management's intentions change in the future, deferred
taxes may need to be provided.
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.
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.
In 2015, the Internal Revenue Service (“IRS”) issued a
Revenue Agent Report for certain agreed 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. Also in 2015, the Company filed a protest with the
IRS Appeals Office related to certain disagreed transfer pricing
matters related to the Company’s U.S. Federal income tax returns
for 2009 and 2010. As of December 31, 2016, the Company had
not yet received a response to this protest from the IRS. The
Company expects resolution on these issues in either 2017 or
2018. In addition, the Company's 2011 and 2012 U.S. federal
income tax returns are currently under examination and the
completion of the field audit is expected in 2017.
26 McDonald’s Corporation 2016 Annual Report
26 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 27
McDonald's Corporation 2016 Annual Report 27
estimable or determinable. The amounts related to these
As a result of this sale, the Company expects to record a gain
commitments are not significant to the Company’s financial
of approximately $700-$900 million reflecting the difference
position. Such commitments are generally shorter term in nature
and will be funded from operating cash flows.
between the net book value of the businesses and an estimated
$1.5 billion of cash proceeds to be received at closing, subject to
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 ensure 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 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 organization. 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” 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.
adjustments.
•
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 less the present value of expected dividends over the
vesting period.
•
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 at risk of future
impairment as the fair values of certain reporting units were not
substantially in excess of their carrying amounts.
•
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 each 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.
Income taxes
•
The Company records a valuation allowance to reduce its deferred
tax assets if it is more likely than not that some portion or all of the
deferred 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.
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.
In 2016, the Company increased the balance of unrecognized
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 Accounting
Standards Codification (“ASC”).
Deferred U.S. income taxes have not been recorded for
temporary differences totaling $16.0 billion related to investments
in certain foreign subsidiaries and corporate affiliates. The
temporary differences consist primarily of undistributed earnings
that are considered permanently invested in operations outside
the U.S. If management's intentions change in the future, deferred
taxes may need to be provided.
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.
tax benefits related to tax positions taken in prior years by $150
million. In 2015, the Company decreased the balance of
unrecognized tax benefits related to settlements with taxing
authorities by $258 million. See 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.
In 2015, the Internal Revenue Service (“IRS”) issued a
Revenue Agent Report for certain agreed 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. Also in 2015, the Company filed a protest with the
IRS Appeals Office related to certain disagreed transfer pricing
matters related to the Company’s U.S. Federal income tax returns
for 2009 and 2010. As of December 31, 2016, the Company had
not yet received a response to this protest from the IRS. The
Company expects resolution on these issues in either 2017 or
2018. In addition, the Company's 2011 and 2012 U.S. federal
income tax returns are currently under examination and the
completion of the field audit is expected in 2017.
26 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 27
McDonald's Corporation 2016 Annual Report 27
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.
Consolidated Statement of Income
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about market risk are included in Part II, Item 7, page 24 of the Form 10-K.
ITEM 8. Financial Statements and Supplementary Data
Index to consolidated financial statements
Page reference
Consolidated statement of income for each of the three years in the period ended December 31, 2016
Consolidated statement of comprehensive income for each of the three years in the period ended December 31, 2016
Consolidated balance sheet at December 31, 2016 and 2015
Consolidated statement of cash flows for each of the three years in the period ended December 31, 2016
Consolidated statement of shareholders’ equity for each of the three years in the period ended December 31, 2016
Notes to consolidated financial statements
Quarterly results (unaudited)
Management’s assessment of internal control over financial reporting
Report of independent registered public accounting firm
Report of independent registered public accounting firm on internal control over financial reporting
29
30
31
32
33
34
47
48
49
50
In millions, except per share data
REVENUES
Sales by Company-operated restaurants
Revenues from franchised restaurants
Total revenues
OPERATING COSTS AND EXPENSES
Company-operated restaurant expenses
Food & paper
Payroll & employee benefits
Occupancy & other operating expenses
Franchised restaurants-occupancy expenses
Selling, general & administrative expenses
Other operating (income) expense, net
Total operating costs and expenses
Operating income
Interest expense-net of capitalized interest of $7.1, $9.4 and $14.7
Nonoperating (income) expense, net
Income before provision for income taxes
Provision for income taxes
Net income
Earnings per common share–basic
Earnings per common share–diluted
Dividends declared per common share
Weighted-average shares outstanding–basic
Weighted-average shares outstanding–diluted
See Notes to consolidated financial statements.
Years ended December 31, 2016
2015
2014
$ 15,295.0
$ 16,488.3
$ 18,169.3
9,326.9
24,621.9
8,924.7
25,413.0
9,272.0
27,441.3
4,896.9
4,134.2
3,667.7
1,718.4
2,384.5
75.7
16,877.4
7,744.5
884.8
(6.3)
6,866.0
2,179.5
5,552.2
4,400.0
4,024.7
1,646.9
2,434.3
209.4
18,267.5
7,145.5
638.3
(48.5)
6,555.7
2,026.4
6,129.7
4,756.0
4,402.6
1,697.3
2,487.9
18.6
19,492.1
7,949.2
576.4
0.8
7,372.0
2,614.2
$ 4,686.5
$ 4,529.3
$ 4,757.8
$
$
$
$
$
$
5.49
5.44
3.61
854.4
861.2
$
$
$
4.82
4.80
3.44
939.4
944.6
4.85
4.82
3.28
980.5
986.3
28 McDonald’s Corporation 2016 Annual Report
28 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 29
McDonald's Corporation 2016 Annual Report 29
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.
Consolidated Statement of Income
Years ended December 31, 2016
2015
2014
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about market risk are included in Part II, Item 7, page 24 of the Form 10-K.
ITEM 8. Financial Statements and Supplementary Data
Index to consolidated financial statements
Page reference
Consolidated statement of income for each of the three years in the period ended December 31, 2016
Consolidated statement of comprehensive income for each of the three years in the period ended December 31, 2016
Consolidated balance sheet at December 31, 2016 and 2015
Consolidated statement of cash flows for each of the three years in the period ended December 31, 2016
Consolidated statement of shareholders’ equity for each of the three years in the period ended December 31, 2016
Notes to consolidated financial statements
Quarterly results (unaudited)
Management’s assessment of internal control over financial reporting
Report of independent registered public accounting firm
Report of independent registered public accounting firm on internal control over financial reporting
29
30
31
32
33
34
47
48
49
50
In millions, except per share data
REVENUES
Sales by Company-operated restaurants
Revenues from franchised restaurants
Total revenues
OPERATING COSTS AND EXPENSES
Company-operated restaurant expenses
Food & paper
Payroll & employee benefits
Occupancy & other operating expenses
Franchised restaurants-occupancy expenses
Selling, general & administrative expenses
Other operating (income) expense, net
Total operating costs and expenses
Operating income
Interest expense-net of capitalized interest of $7.1, $9.4 and $14.7
Nonoperating (income) expense, net
Income before provision for income taxes
Provision for income taxes
Net income
Earnings per common share–basic
Earnings per common share–diluted
Dividends declared per common share
Weighted-average shares outstanding–basic
Weighted-average shares outstanding–diluted
See Notes to consolidated financial statements.
$ 15,295.0
9,326.9
24,621.9
$ 16,488.3
8,924.7
25,413.0
$ 18,169.3
9,272.0
27,441.3
4,896.9
4,134.2
3,667.7
1,718.4
2,384.5
75.7
16,877.4
7,744.5
884.8
(6.3)
6,866.0
2,179.5
$ 4,686.5
5.49
$
5.44
$
3.61
$
854.4
861.2
5,552.2
4,400.0
4,024.7
1,646.9
2,434.3
209.4
18,267.5
7,145.5
638.3
(48.5)
6,555.7
2,026.4
$ 4,529.3
4.82
$
4.80
$
3.44
$
939.4
944.6
6,129.7
4,756.0
4,402.6
1,697.3
2,487.9
18.6
19,492.1
7,949.2
576.4
0.8
7,372.0
2,614.2
$ 4,757.8
4.85
$
4.82
$
3.28
$
980.5
986.3
28 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 29
McDonald's Corporation 2016 Annual Report 29
Consolidated Statement of Comprehensive Income
Consolidated Balance Sheet
In millions
Net income
Years ended December 31, 2016
2015
2014
$4,686.5 $4,529.3 $4,757.8
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments:
Gain (loss) recognized in accumulated other comprehensive
income (AOCI), including net investment hedges
Reclassification of (gain) loss to net income
Foreign currency translation adjustments-net of tax
benefit (expense) of $(264.4), $(209.8), and $(196.0)
Cash flow hedges:
Gain (loss) recognized in AOCI
Reclassification of (gain) loss to net income
Cash flow hedges-net of tax benefit (expense) of $(1.6), $6.2,
and $(18.2)
Defined benefit pension plans:
Gain (loss) recognized in AOCI
Reclassification of (gain) loss to net income
Defined benefit pension plans-net of tax benefit (expense)
of $(10.0), $1.3, and $7.7
Total other comprehensive income (loss), net of tax
Comprehensive income
See Notes to consolidated financial statements.
(272.8)
(1,347.4)
94.0
1.3
(1,971.6)
15.2
(178.8)
(1,346.1)
(1,956.4)
18.5
(15.6)
22.2
(33.2)
40.1
(6.8)
2.9
(11.0)
33.3
(47.1)
9.9
(37.2)
(5.4)
2.4
(26.6)
2.4
(3.0)
(24.2)
(213.1)
(1,360.1)
(1,947.3)
$4,473.4 $3,169.2 $2,810.5
In millions, except per share data
ASSETS
Current assets
Cash and equivalents
Accounts and notes receivable
Inventories, at cost, not in excess of market
Prepaid expenses and other current assets
Assets of businesses held for sale
Total current assets
Other assets
Investments in and advances to affiliates
Goodwill
Miscellaneous
Total other assets
Property and equipment
Property and equipment, at cost
Accumulated depreciation and amortization
Net property and equipment
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable
Income taxes
Other taxes
Accrued interest
Accrued payroll and other liabilities
Current maturities of long-term debt
Liabilities of businesses held for sale
Total current liabilities
Long-term debt
Other long-term liabilities
Deferred income taxes
Shareholders’ equity (deficit)
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 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Common stock in treasury, at cost; 841.3 and 753.8 million shares
Total shareholders’ equity (deficit)
Total liabilities and shareholders’ equity (deficit)
See Notes to consolidated financial statements.
December 31, 2016
2015
$ 1,223.4
1,474.1
$ 7,685.5
1,298.7
58.9
565.2
1,527.0
4,848.6
725.9
2,336.5
1,855.3
4,917.7
100.1
558.7
—
9,643.0
792.7
2,516.3
1,869.1
5,178.1
34,443.4
(13,185.8)
21,257.6
$ 31,023.9
37,692.4
(14,574.8)
23,117.6
$ 37,938.7
$
$
756.0
267.2
266.3
247.5
1,159.3
77.2
694.8
3,468.3
25,878.5
2,064.3
1,817.1
—
16.6
6,757.9
46,222.7
(3,092.9)
(52,108.6)
(2,204.3)
874.7
154.8
309.0
233.1
1,378.8
—
—
2,950.4
24,122.1
2,074.0
1,704.3
—
16.6
6,533.4
44,594.5
(2,879.8)
(41,176.8)
7,087.9
$ 31,023.9
$ 37,938.7
30 McDonald’s Corporation 2016 Annual Report
30 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 31
McDonald's Corporation 2016 Annual Report 31
Consolidated Statement of Comprehensive Income
Consolidated Balance Sheet
In millions
Net income
Years ended December 31, 2016
2015
2014
$4,686.5 $4,529.3 $4,757.8
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments:
Gain (loss) recognized in accumulated other comprehensive
income (AOCI), including net investment hedges
Reclassification of (gain) loss to net income
Foreign currency translation adjustments-net of tax
benefit (expense) of $(264.4), $(209.8), and $(196.0)
Cash flow hedges:
Gain (loss) recognized in AOCI
Reclassification of (gain) loss to net income
Cash flow hedges-net of tax benefit (expense) of $(1.6), $6.2,
and $(18.2)
Defined benefit pension plans:
Gain (loss) recognized in AOCI
Reclassification of (gain) loss to net income
Defined benefit pension plans-net of tax benefit (expense)
of $(10.0), $1.3, and $7.7
Total other comprehensive income (loss), net of tax
Comprehensive income
See Notes to consolidated financial statements.
(272.8)
(1,347.4)
94.0
1.3
(1,971.6)
15.2
(178.8)
(1,346.1)
(1,956.4)
18.5
(15.6)
22.2
(33.2)
40.1
(6.8)
2.9
(11.0)
33.3
(47.1)
9.9
(37.2)
(5.4)
2.4
(26.6)
2.4
(3.0)
(24.2)
(213.1)
(1,360.1)
(1,947.3)
$4,473.4 $3,169.2 $2,810.5
In millions, except per share data
ASSETS
Current assets
Cash and equivalents
Accounts and notes receivable
Inventories, at cost, not in excess of market
Prepaid expenses and other current assets
Assets of businesses held for sale
Total current assets
Other assets
Investments in and advances to affiliates
Goodwill
Miscellaneous
Total other assets
Property and equipment
Property and equipment, at cost
Accumulated depreciation and amortization
Net property and equipment
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable
Income taxes
Other taxes
Accrued interest
Accrued payroll and other liabilities
Current maturities of long-term debt
Liabilities of businesses held for sale
Total current liabilities
December 31, 2016
2015
$ 1,223.4
1,474.1
58.9
565.2
1,527.0
4,848.6
725.9
2,336.5
1,855.3
4,917.7
$ 7,685.5
1,298.7
100.1
558.7
—
9,643.0
792.7
2,516.3
1,869.1
5,178.1
34,443.4
(13,185.8)
21,257.6
$ 31,023.9
37,692.4
(14,574.8)
23,117.6
$ 37,938.7
$
756.0
267.2
266.3
247.5
1,159.3
77.2
694.8
3,468.3
25,878.5
2,064.3
1,817.1
—
16.6
6,757.9
46,222.7
(3,092.9)
(52,108.6)
(2,204.3)
$ 31,023.9
$
874.7
154.8
309.0
233.1
1,378.8
—
—
2,950.4
24,122.1
2,074.0
1,704.3
—
16.6
6,533.4
44,594.5
(2,879.8)
(41,176.8)
7,087.9
$ 37,938.7
Long-term debt
Other long-term liabilities
Deferred income taxes
Shareholders’ equity (deficit)
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 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Common stock in treasury, at cost; 841.3 and 753.8 million shares
Total shareholders’ equity (deficit)
Total liabilities and shareholders’ equity (deficit)
See Notes to consolidated financial statements.
30 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 31
McDonald's Corporation 2016 Annual Report 31
Years ended December 31, 2016
2015
2014
Consolidated Statement of Shareholders’ Equity
Consolidated Statement of Cash Flows
In millions
Operating activities
Net income
Adjustments to reconcile to cash provided by operations
Charges and credits:
Depreciation and amortization
Deferred income taxes
Share-based compensation
Other
Changes in working capital items:
Accounts receivable
Inventories, prepaid expenses and other current assets
Accounts payable
Income taxes
Other accrued liabilities
Cash provided by operations
Investing activities
Capital expenditures
Purchases of restaurant businesses
Sales of restaurant businesses
Sales of property
Other
Cash used for investing activities
Financing activities
Net short-term borrowings
Long-term financing issuances
Long-term financing repayments
Treasury stock purchases
Common stock dividends
Proceeds from stock option exercises
Excess tax benefit on share-based compensation
Other
Cash provided by (used for) financing activities
Effect of exchange rates on cash and equivalents
Cash and equivalents increase (decrease)
Cash balance of businesses held for sale at end of year
Cash and equivalents at beginning of year
Cash and equivalents at end of year
Supplemental cash flow disclosures
Interest paid
Income taxes paid
See Notes to consolidated financial statements.
$
4,686.5
$ 4,529.3
$ 4,757.8
1,516.5
(538.6)
131.3
96.9
(159.0)
28.1
89.8
169.7
38.4
6,059.6
(1,821.1)
(109.5)
975.6
82.9
(109.5)
(981.6)
(286.2)
3,779.5
(822.9)
(11,171.0)
(3,058.2)
299.4
—
(3.0)
(11,262.4)
(103.7)
(6,288.1)
(174.0)
7,685.5
1,223.4
1,555.7
(1.4)
110.0
177.6
(180.6)
44.9
(15.0)
(64.4)
383.0
6,539.1
(1,813.9)
(140.6)
341.1
213.1
(19.7)
(1,420.0)
589.7
10,220.0
(1,054.5)
(6,099.2)
(3,230.3)
317.2
51.1
(58.7)
735.3
(246.8)
5,607.6
—
2,077.9
$ 7,685.5
1,644.5
(90.7)
112.8
369.5
27.0
(4.9)
(74.7)
3.3
(14.3)
6,730.3
(2,583.4)
(170.5)
403.1
86.8
(40.9)
(2,304.9)
510.4
1,540.6
(548.1)
(3,198.6)
(3,216.1)
235.4
70.9
(12.8)
(4,618.3)
(527.9)
(720.8)
—
2,798.7
$ 2,077.9
873.5
2,387.5
$ 640.8
1,985.4
$ 573.2
2,388.3
$
$
($3.28 per share)
net of tax
Comprehensive income
Common stock cash dividends
Balance at December 31, 2014
Net income
Other comprehensive income (loss),
Treasury stock purchases
Share-based compensation
Stock option exercises and other
(including tax benefits of $70.2)
In millions, except per share data
Balance at December 31, 2013
Net income
Other comprehensive income (loss),
Common stock
issued
Shares Amount
Additional
paid-in
capital
Retained
Cash flow
earnings Pensions
hedges
translation
Shares
Foreign
currency
Common stock in
treasury
Amount
shareholders’
Total
equity
1,660.6
$16.6
$ 5,994.1
$41,751.2
$ (142.7)
$ (2.3) $
572.6
(670.2) $ (32,179.8)
$16,009.7
Accumulated other
comprehensive income (loss)
(24.2)
33.3
(1,956.4)
112.8
132.2
110.0
184.3
4,757.8
(3,216.1)
1.6
4,529.3
(3,230.3)
1.0
4,686.5
(3,058.2)
1,660.6
16.6
6,239.1
43,294.5
(166.9)
31.0
(1,383.8)
(697.7)
(35,177.1)
(3.0)
(11.0)
(1,346.1)
1,660.6
16.6
6,533.4
44,594.5
(169.9)
20.0
(2,729.9)
(753.8)
(41,176.8)
(37.2)
2.9
(178.8)
(33.1)
(3,175.3)
5.6
178.0
(61.8)
(6,182.2)
5.7
182.5
4,757.8
(1,947.3)
2,810.5
(3,216.1)
(3,175.3)
112.8
311.8
12,853.4
4,529.3
(1,360.1)
3,169.2
(3,230.3)
(6,182.2)
110.0
367.8
7,087.9
4,686.5
(213.1)
4,473.4
(3,058.2)
131.3
302.8
Treasury stock purchases
Share-based compensation
Stock option exercises and other
(including tax benefits of $44.8)
Balance at December 31, 2015
Net income
Other comprehensive income (loss),
net of tax
Comprehensive income
Common stock cash dividends
($3.61 per share)
Treasury stock purchases
Share-based compensation
Stock option exercises and other
(including tax benefits of $0.6)
Balance at December 31, 2016
See Notes to consolidated financial statements.
131.3
93.2
(0.1)
(92.3)
(11,141.5)
(11,141.5)
4.8
209.7
1,660.6
$16.6
$ 6,757.9
$46,222.7
$ (207.1)
$22.9
$(2,908.7)
(841.3) $ (52,108.6)
$ (2,204.3)
net of tax
Comprehensive income
Common stock cash dividends
($3.44 per share)
32 McDonald’s Corporation 2016 Annual Report
32 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 33
McDonald's Corporation 2016 Annual Report 33
Consolidated Statement of Cash Flows
Consolidated Statement of Shareholders’ Equity
Years ended December 31, 2016
2015
2014
Accumulated other
comprehensive income (loss)
In millions, except per share data
Balance at December 31, 2013
Net income
Other comprehensive income (loss),
net of tax
Comprehensive income
Common stock cash dividends
($3.28 per share)
Treasury stock purchases
Share-based compensation
Stock option exercises and other
(including tax benefits of $70.2)
Balance at December 31, 2014
Net income
Other comprehensive income (loss),
net of tax
Comprehensive income
Common stock cash dividends
($3.44 per share)
Treasury stock purchases
Share-based compensation
Stock option exercises and other
(including tax benefits of $44.8)
Balance at December 31, 2015
Net income
Other comprehensive income (loss),
net of tax
Comprehensive income
Common stock cash dividends
($3.61 per share)
Treasury stock purchases
Share-based compensation
Stock option exercises and other
(including tax benefits of $0.6)
Balance at December 31, 2016
Common stock
issued
Shares Amount
$16.6
1,660.6
Additional
paid-in
capital
$ 5,994.1
Retained
earnings Pensions
Cash flow
hedges
Foreign
currency
translation
$41,751.2
4,757.8
$ (142.7)
$ (2.3) $
572.6
Common stock in
treasury
Amount
Shares
(670.2) $ (32,179.8)
Total
shareholders’
equity
$16,009.7
4,757.8
112.8
132.2
1,660.6
16.6
6,239.1
110.0
184.3
1,660.6
16.6
6,533.4
(24.2)
33.3
(1,956.4)
(33.1)
(3,175.3)
5.6
178.0
(166.9)
31.0
(1,383.8)
(697.7)
(35,177.1)
(3.0)
(11.0)
(1,346.1)
(61.8)
(6,182.2)
5.7
182.5
(169.9)
20.0
(2,729.9)
(753.8)
(41,176.8)
(37.2)
2.9
(178.8)
(92.3)
(11,141.5)
(3,216.1)
1.6
43,294.5
4,529.3
(3,230.3)
1.0
44,594.5
4,686.5
(3,058.2)
(1,947.3)
2,810.5
(3,216.1)
(3,175.3)
112.8
311.8
12,853.4
4,529.3
(1,360.1)
3,169.2
(3,230.3)
(6,182.2)
110.0
367.8
7,087.9
4,686.5
(213.1)
4,473.4
(3,058.2)
(11,141.5)
131.3
131.3
93.2
(0.1)
1,660.6
$16.6
$ 6,757.9
$46,222.7
$ (207.1)
$22.9
$(2,908.7)
(841.3) $ (52,108.6)
$ (2,204.3)
4.8
209.7
302.8
See Notes to consolidated financial statements.
$
4,686.5
$ 4,529.3
$ 4,757.8
1,516.5
(538.6)
131.3
96.9
(159.0)
28.1
89.8
169.7
38.4
6,059.6
1,555.7
(1.4)
110.0
177.6
(180.6)
44.9
(15.0)
(64.4)
383.0
6,539.1
(1,821.1)
(109.5)
(1,813.9)
(140.6)
975.6
82.9
(109.5)
(981.6)
(286.2)
3,779.5
(822.9)
(11,171.0)
(3,058.2)
299.4
—
(3.0)
(11,262.4)
(103.7)
(6,288.1)
(174.0)
7,685.5
1,223.4
341.1
213.1
(19.7)
(1,420.0)
589.7
10,220.0
(1,054.5)
(6,099.2)
(3,230.3)
317.2
51.1
(58.7)
735.3
(246.8)
5,607.6
—
2,077.9
$ 7,685.5
1,644.5
(90.7)
112.8
369.5
27.0
(4.9)
(74.7)
3.3
(14.3)
6,730.3
(2,583.4)
(170.5)
403.1
86.8
(40.9)
(2,304.9)
510.4
1,540.6
(548.1)
(3,198.6)
(3,216.1)
235.4
70.9
(12.8)
(4,618.3)
(527.9)
(720.8)
—
2,798.7
$ 2,077.9
873.5
2,387.5
$ 640.8
1,985.4
$ 573.2
2,388.3
$
$
In millions
Operating activities
Net income
Adjustments to reconcile to cash provided by operations
Charges and credits:
Depreciation and amortization
Deferred income taxes
Share-based compensation
Other
Changes in working capital items:
Accounts receivable
Inventories, prepaid expenses and other current assets
Accounts payable
Income taxes
Other accrued liabilities
Cash provided by operations
Investing activities
Capital expenditures
Purchases of restaurant businesses
Sales of restaurant businesses
Sales of property
Other
Financing activities
Net short-term borrowings
Long-term financing issuances
Long-term financing repayments
Treasury stock purchases
Common stock dividends
Cash used for investing activities
Proceeds from stock option exercises
Excess tax benefit on share-based compensation
Other
Cash provided by (used for) financing activities
Effect of exchange rates on cash and equivalents
Cash and equivalents increase (decrease)
Cash balance of businesses held for sale at end of year
Cash and equivalents at beginning of year
Cash and equivalents at end of year
Supplemental cash flow disclosures
Interest paid
Income taxes paid
See Notes to consolidated financial statements.
32 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 33
McDonald's Corporation 2016 Annual Report 33
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 franchise arrangements, and foreign affiliates
and developmental licensees under license agreements.
The following table presents restaurant information by
ownership type:
Restaurants at December 31,
Conventional franchised
Developmental licensed
Foreign affiliated
Franchised
Company-operated
Systemwide restaurants
2016
21,559
6,300
3,371
31,230
5,669
36,899
2015
21,147
5,529
3,405
30,081
6,444
36,525
2014
20,774
5,228
3,542
29,544
6,714
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 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 ACCOUNTING STANDARDS
Employee Share-Based Payment Accounting
In March 2016, the Financial 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 adjustments as
of January 1, 2016. The primary impact 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
taxes and minimum statutory withholding tax requirements had no
impact to retained earnings, where the cumulative effect of these
changes are required to be recorded. The Company also elected
34 McDonald’s Corporation 2016 Annual Report
34 McDonald's Corporation 2016 Annual Report
to continue estimating forfeitures when determining the amount of
compensation costs to be recognized in each period.
The presentation requirements for cash flows related to
excess tax benefits were applied prospectively; 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 presented in the consolidated
statement of cash flows, since such cash flows have historically
been presented in financing activities.
Lease Accounting
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic
842),” to increase transparency and comparability among
organizations by recognizing lease assets and lease liabilities 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. The Company
anticipates ASU 2016-02 to have a material impact on the
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’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 include a royalty based on a percent of sales, and may
include initial fees. Continuing rent and royalties are recognized in
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.
In May 2014, the FASB issued guidance codified in the
ADVERTISING COSTS
Accounting Standards Codification ("ASC") 606, "Revenue
Recognition - Revenue from Contracts with Customers," which
amends the guidance in former ASC 605, "Revenue Recognition".
The core principal of the standard is to recognize revenue when
promised goods or services 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, timing 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, which are
based on a percent of sales. While we continue to assess the
potential impacts to other less significant revenue transactions, we
currently believe the standard will change the way initial fees from
franchisees for new restaurant openings or new franchise terms
are recognized.
As noted above, the Company's current accounting policy is
to recognize initial franchise fees when "earned" per the contract
terms, which is currently when a new store opens or 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, initial fees received will likely be recognized over the
franchise term.
We do not anticipate this impact to be material to the
Company’s consolidated statement of income, and the cumulative
catch-up adjustment to be recorded as deferred revenue upon
adoption is expected to be approximately 2% of the Company's
consolidated long-term liabilities. No impact to the Company's
consolidated statement of cash flows is expected as the initial fees
will continue to be collected upon store opening date or the
beginning of a new franchise term.
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 included in operating expenses of Company-
operated restaurants primarily consist of contributions to
advertising cooperatives and were (in millions): 2016–$645.8;
2015–$718.7; 2014–$808.2. 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 included in Selling, general &
administrative expenses were (in millions): 2016–$88.8; 2015–
$113.8; 2014–$98.7. Costs related to the Olympics sponsorship
are included in these expenses for 2016 and 2014. In addition,
significant advertising costs are incurred by franchisees through
contributions to advertising cooperatives in individual markets.
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 data
Share-based compensation expense $ 131.3
After tax
Earnings per common share-diluted
2016
$ 89.6
$ 0.11
2015
$ 110.0
$ 76.0
$ 0.08
2014
$ 112.8
$ 72.8
$ 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 of each stock option granted is estimated 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 2016, 2015 and 2014 stock option
grants. The expected life of the options represents the period of
time the options are expected to be outstanding and is based on
historical trends. Expected stock price volatility is generally based
on the historical volatility of the Company’s stock for a period
approximating the expected life. The expected dividend yield is
based on the Company’s most recent annual dividend rate. The
risk-free interest rate is based on the U.S. Treasury yield curve in
effect at the time of grant with a term equal to the expected life.
Weighted-average assumptions
Expected dividend yield
Expected stock price volatility
Risk-free interest rate
Expected life of options
(in years)
2016
2015
2014
3.0%
19.2%
1.2%
5.9
3.6%
18.8%
1.7%
6.0
3.3%
20.0%
2.0%
6.1
Fair value per option granted
$13.65
$10.43
$12.23
McDonald’s Corporation 2016 Annual Report 35
McDonald's Corporation 2016 Annual Report 35
CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Investments in affiliates owned 50%
or less (primarily McDonald’s Japan) are accounted for by the
Income Taxes
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 franchise arrangements, and foreign affiliates
and developmental licensees under license agreements.
The following table presents restaurant information by
ownership type:
Restaurants at December 31,
Conventional franchised
Developmental licensed
Foreign affiliated
Franchised
Company-operated
Systemwide restaurants
2016
21,559
6,300
3,371
31,230
5,669
36,899
2015
2014
21,147
20,774
5,529
3,405
30,081
6,444
36,525
5,228
3,542
29,544
6,714
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.
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 ACCOUNTING STANDARDS
Employee Share-Based Payment Accounting
In March 2016, the Financial 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 adjustments as
of January 1, 2016. The primary impact 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
taxes and minimum statutory withholding tax requirements had no
impact to retained earnings, where the cumulative effect of these
changes are required to be recorded. The Company also elected
34 McDonald's Corporation 2016 Annual Report
to continue estimating forfeitures when determining the amount of
compensation costs to be recognized in each period.
The presentation requirements for cash flows related to
excess tax benefits were applied prospectively; 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 presented in the consolidated
statement of cash flows, since such cash flows have historically
been presented in financing activities.
Lease Accounting
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic
842),” to increase transparency and comparability among
organizations by recognizing lease assets and lease liabilities 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. The Company
anticipates ASU 2016-02 to have a material impact on the
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.
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’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 include a royalty based on a percent of sales, and may
include initial fees. Continuing rent and royalties are recognized in
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.
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 principal of the standard is to recognize revenue when
promised goods or services 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, timing 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, which are
based on a percent of sales. While we continue to assess the
potential impacts to other less significant revenue transactions, we
currently believe the standard will change the way initial fees from
franchisees for new restaurant openings or new franchise terms
are recognized.
As noted above, the Company's current accounting policy is
to recognize initial franchise fees when "earned" per the contract
terms, which is currently when a new store opens or 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, initial fees received will likely be recognized over the
franchise term.
We do not anticipate this impact to be material to the
Company’s consolidated statement of income, and the cumulative
catch-up adjustment to be recorded as deferred revenue upon
adoption is expected to be approximately 2% of the Company's
consolidated long-term liabilities. No impact to the Company's
consolidated statement of cash flows is expected as the initial fees
will continue to be collected upon store opening date or the
beginning of a new franchise term.
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–$645.8;
2015–$718.7; 2014–$808.2. 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 included in Selling, general &
administrative expenses were (in millions): 2016–$88.8; 2015–
$113.8; 2014–$98.7. Costs related to the Olympics sponsorship
are included in these expenses for 2016 and 2014. In addition,
significant advertising costs are incurred by franchisees through
contributions to advertising cooperatives in individual markets.
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 data
2016
Share-based compensation expense $ 131.3
After tax
$ 89.6
Earnings per common share-diluted
$ 0.11
2015
$ 110.0
$ 76.0
$ 0.08
2014
$ 112.8
$ 72.8
$ 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 of each stock option granted is estimated 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 2016, 2015 and 2014 stock option
grants. The expected life of the options represents the period of
time the options are expected to be outstanding and is based on
historical trends. Expected stock price volatility is generally based
on the historical volatility of the Company’s stock for a period
approximating the expected life. The expected dividend yield is
based on the Company’s most recent annual dividend rate. The
risk-free interest rate is based on the U.S. Treasury yield curve in
effect at the time of grant with a term equal to the expected life.
Weighted-average assumptions
Expected dividend yield
Expected stock price volatility
Risk-free interest rate
Expected life of options
(in years)
2016
2015
2014
3.0%
19.2%
1.2%
5.9
3.6%
18.8%
1.7%
6.0
3.3%
20.0%
2.0%
6.1
Fair value per option granted
$13.65
$10.43
$12.23
McDonald’s Corporation 2016 Annual Report 35
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” 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 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:
In millions
Balance at December 31, 2015
Net restaurant purchases (sales)
Impairment losses
Currency translation
Assets of businesses held for sale
Balance at December 31, 2016
U.S.
$ 1,293.4
(10.1)
—
—
$ 1,283.3
International
Lead Markets
High Growth
Markets
Foundational Markets
& Corporate
Consolidated
$ 698.1
3.3
—
(20.2)
—
$ 681.2
$ 322.4
3.0
—
(7.7)
(37.6)
$ 280.1
$ 202.4
(67.1)
(39.9)
(4.0)
0.5
$ 91.9
$2,516.3
(70.9)
(39.9)
(31.9)
(37.1)
$2,336.5
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 measured as the difference
between the implied fair value of the reporting unit's goodwill and the carrying amount of goodwill. Historically, goodwill impairment has not
significantly impacted the consolidated financial statements. Accumulated impairment losses at December 31, 2016 and 2015 were $96.6
million and $94.1 million, respectively.
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
In millions
Derivative assets
Derivative liabilities
December 31, 2015
In millions
Derivative assets
Derivative liabilities
Level 1*
Level 2
Carrying
Value
$ 134.3
$ 47.0
$ 181.3
$
(5.6)
$
(5.6)
Level 1*
Level 2
Carrying
Value
$ 139.9
$ 65.4
$ 205.3
$ (44.4)
$ (44.4)
*
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,
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, the fair value of the Company’s debt
obligations was estimated at $27.5 billion, compared to a carrying
amount of $26.0 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 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 accumulated other
comprehensive income ("AOCI") and/or current earnings.
36 McDonald’s Corporation 2016 Annual Report
36 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 37
McDonald's Corporation 2016 Annual Report 37
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” 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
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
As a result of this sale, the Company expects to record a gain
be considered “available for sale."
of approximately $700-$900 million reflecting the difference
was current.
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:
In millions
Balance at December 31, 2015
Net restaurant purchases (sales)
Impairment losses
Currency translation
Assets of businesses held for sale
U.S.
$ 1,293.4
(10.1)
—
—
International
Lead Markets
$ 698.1
3.3
—
(20.2)
—
Markets
$ 322.4
3.0
—
(7.7)
(37.6)
Balance at December 31, 2016
$ 1,283.3
$ 681.2
$ 280.1
$ 91.9
High Growth
Foundational Markets
& Corporate
Consolidated
$ 202.4
(67.1)
(39.9)
(4.0)
0.5
$2,516.3
(70.9)
(39.9)
(31.9)
(37.1)
$2,336.5
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 measured as the difference
between the implied fair value of the reporting unit's goodwill and the carrying amount of goodwill. Historically, goodwill impairment has not
significantly impacted the consolidated financial statements. Accumulated impairment losses at December 31, 2016 and 2015 were $96.6
million and $94.1 million, respectively.
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
In millions
Derivative assets
Derivative liabilities
December 31, 2015
In millions
Derivative assets
Derivative liabilities
Level 1*
$ 134.3
Level 2
$ 47.0
(5.6)
$
Carrying
Value
$ 181.3
(5.6)
$
Level 1*
$ 139.9
Level 2
$ 65.4
$ (44.4)
Carrying
Value
$ 205.3
$ (44.4)
*
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,
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, the fair value of the Company’s debt
obligations was estimated at $27.5 billion, compared to a carrying
amount of $26.0 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 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 accumulated other
comprehensive income ("AOCI") and/or current earnings.
36 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 37
McDonald's Corporation 2016 Annual Report 37
The following table presents the fair values of derivative instruments included on the consolidated balance sheet as of December 31,
2016 and 2015:
Derivative Assets
Derivative Liabilities
In millions
Derivatives designated as hedging instruments
Balance Sheet Classification
Foreign currency
Interest rate
Foreign currency
Interest rate
Prepaid expenses and other
current assets
Prepaid expenses and other
current assets
Miscellaneous other assets
Miscellaneous other assets
2016
2015 Balance Sheet Classification
2016
2015
$ 31.7
$ 55.0
liabilities
$
(2.0) $ (22.5)
Accrued payroll and other
1.0
2.5
1.7
—
0.6 Other long-term liabilities
5.3 Other long-term liabilities
(0.1)
(13.0)
(3.4)
(1.6)
(3.7) $ (38.9)
$
Total derivatives designated as hedging instruments
$ 36.9
$ 60.9
Derivatives not designated as hedging instruments
Equity
Foreign currency
Equity
Prepaid expenses and other
current assets
Prepaid expenses and other
current assets
Miscellaneous other assets
Total derivatives not designated as hedging instruments
Total derivatives
Accrued payroll and other
$ 134.3
$
0.3
liabilities
$
(1.9) $
—
10.1
4.2
liabilities
—
(5.5)
Accrued payroll and other
— 139.9
$ 144.4
$ 144.4
$ 181.3
$ 205.3
$
$
(1.9) $
(5.5)
(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's fair
value hedges convert a portion of its fixed-rate debt into floating-rate debt by use of interest rate swaps. At December 31, 2016, $2.5 billion
of the Company's outstanding fixed-rate debt was effectively converted. All of the Company’s interest rate swaps meet the shortcut method
requirements. Accordingly, changes in 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 to interest rate swaps designated as fair value hedges for the
year ended December 31, 2016.
Derivatives in Hedging
Relationships
In millions
Interest rate
Gain (Loss)
Recognized In Earnings
on Hedging Derivative
2016
$ (1.8)
2015
$ (3.4)
Gain (Loss)
Recognized In Earnings
on Hedged Items
2016
$ 1.8
2015
$ 3.4
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.
Derivatives in Hedging
Relationships
In millions
Foreign currency
Interest rate(1)
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)
2016
$ 28.6
—
$ 28.6
2015
$ 35.3
—
$ 35.3
2016
$ 24.6
(0.5)
$ 24.1
2015
$ 53.0
(0.5)
$ 52.5
2016
$ —
—
$ —
2015
$ 22.9
—
$ 22.9
(1)The amount of gain (loss) reclassified from AOCI into earnings is recorded in interest expense.
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, the Company had
derivatives outstanding with an equivalent notional amount of
$632.0 million that were used to hedge a portion of forecasted
foreign currency denominated royalties.
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 rates at December 31, 2016, there is $22.9 million in
after-tax cumulative cash flow hedging gains which is not
expected to have a significant effect on earnings over the next
12 months.
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 the
foreign currency translation component of AOCI, as well as the
offset translation adjustments on the underlying net assets of
foreign subsidiaries and affiliates. The cumulative translation gains
or losses will remain in AOCI until the foreign subsidiaries and
affiliates are liquidated or sold. As of December 31, 2016, $8.6
billion of third party foreign currency denominated debt, $3.3 billion
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
In millions
Foreign currency denominated debt
Foreign currency derivatives
Gain (Loss)
Recognized in AOCI
(Effective Portion)
2016
$ 654.9
9.9
2015
$ 668.1
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, 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
Derivatives Not Designated
for Hedge Accounting
Gain (Loss)
Recognized in Earnings
2016
$
4.3
26.0
$ 30.3
2015
$ 14.6
38.9
$ 53.5
sheet position.
In millions
Foreign currency
Equity
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. The Company
did not have significant exposure to any individual counterparty at
December 31, 2016 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, even 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, the Company was required to post an
immaterial amount of collateral due to negative fair value of certain
derivative positions. The Company's counterparties were not
required to post collateral on any derivative position, other than on
hedges of certain of the Company’s supplemental benefit plan
liabilities where the counterparties were required to post collateral
on their liability positions.
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.
38 McDonald’s Corporation 2016 Annual Report
38 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 39
McDonald's Corporation 2016 Annual Report 39
The following table presents the fair values of derivative instruments included on the consolidated balance sheet as of December 31,
In millions
Balance Sheet Classification
2016
2015 Balance Sheet Classification
2016
2015
Derivative Assets
Derivative Liabilities
Derivatives designated as hedging instruments
Total derivatives designated as hedging instruments
$ 36.9
$ 60.9
Derivatives not designated as hedging instruments
Prepaid expenses and other
current assets
Prepaid expenses and other
current assets
Miscellaneous other assets
Miscellaneous other assets
$ 31.7
$ 55.0
liabilities
$
(2.0) $ (22.5)
Accrued payroll and other
—
1.0
2.5
1.7
0.6 Other long-term liabilities
5.3 Other long-term liabilities
(0.1)
(1.6)
(13.0)
(3.4)
$
(3.7) $ (38.9)
Prepaid expenses and other
current assets
Prepaid expenses and other
current assets
$ 134.3
$
0.3
liabilities
$
(1.9) $
—
Accrued payroll and other
Accrued payroll and other
10.1
4.2
liabilities
—
(5.5)
Total derivatives not designated as hedging instruments
Miscellaneous other assets
— 139.9
$ 144.4
$ 144.4
$ 181.3
$ 205.3
$
$
(1.9) $
(5.5)
(5.6) $ (44.4)
2016 and 2015:
Foreign currency
Interest rate
Foreign currency
Interest rate
Equity
Equity
Foreign currency
Total derivatives
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's fair
value hedges convert a portion of its fixed-rate debt into floating-rate debt by use of interest rate swaps. At December 31, 2016, $2.5 billion
of the Company's outstanding fixed-rate debt was effectively converted. All of the Company’s interest rate swaps meet the shortcut method
requirements. Accordingly, changes in 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 to interest rate swaps designated as fair value hedges for the
year ended December 31, 2016.
Derivatives in Hedging
Relationships
In millions
Interest rate
Cash Flow Hedges
Gain (Loss)
Recognized In Earnings
on Hedging Derivative
Gain (Loss)
Recognized In Earnings
on Hedged Items
2016
$ (1.8)
2015
$ (3.4)
2016
$ 1.8
2015
$ 3.4
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.
Derivatives in Hedging
Relationships
In millions
Foreign currency
Interest rate(1)
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)
2016
$ 28.6
—
$ 28.6
2015
$ 35.3
—
$ 35.3
2016
$ 24.6
(0.5)
$ 24.1
2015
$ 53.0
(0.5)
$ 52.5
2016
$ —
—
$ —
2015
$ 22.9
—
$ 22.9
(1)The amount of gain (loss) reclassified from AOCI into earnings is recorded in interest expense.
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, the Company had
derivatives outstanding with an equivalent notional amount of
$632.0 million that were used to hedge a portion of forecasted
foreign currency denominated royalties.
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 rates at December 31, 2016, there is $22.9 million in
after-tax cumulative cash flow hedging gains which is not
expected to have a significant effect on earnings over the next
12 months.
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 the
foreign currency translation component of AOCI, as well as the
offset translation adjustments on the underlying net assets of
foreign subsidiaries and affiliates. The cumulative translation gains
or losses will remain in AOCI until the foreign subsidiaries and
affiliates are liquidated or sold. As of December 31, 2016, $8.6
billion of third party foreign currency denominated debt, $3.3 billion
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
In millions
Foreign currency denominated debt
Foreign currency derivatives
Gain (Loss)
Recognized in AOCI
(Effective Portion)
2016
$ 654.9
9.9
$ 664.8
2015
$ 668.1
79.1
$ 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, 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.
Derivatives Not Designated
for Hedge Accounting
In millions
Foreign currency
Equity
Gain (Loss)
Recognized in Earnings
2015
$ 14.6
38.9
$ 53.5
2016
4.3
26.0
$ 30.3
$
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. The Company
did not have significant exposure to any individual counterparty at
December 31, 2016 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, even 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, the Company was required to post an
immaterial amount of collateral due to negative fair value of certain
derivative positions. The Company's counterparties were not
required to post collateral on any derivative position, other than on
hedges of certain of the Company’s supplemental benefit plan
liabilities where the counterparties were required to post collateral
on their liability positions.
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.
38 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 39
McDonald's Corporation 2016 Annual Report 39
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): 2016–6.8;
2015–5.2; 2014–5.8. Stock options 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.
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
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 and the Company
entered into a definitive agreement with a developmental licensee
organization to sell its existing businesses in Denmark, Finland,
Norway 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” in accordance with the
requirements of ASC 360 "Property, Plant and Equipment".
Accordingly, the Company has ceased recording depreciation
expense with respect to the Nordics effective January 26, 2017. As
of December 31, 2016, the Nordics' total assets and total liabilities
were $439 million and $64 million, respectively. Cash proceeds
upon the completion of the sale are estimated to be approximately
$450 million. No significant gains or losses are expected to be
recognized upon the close of the transaction. There were no other
subsequent events that required recognition or disclosure.
Property and Equipment
Net property and equipment consisted of:
December 31, 2016
5,465.0
$
2015
$ 5,582.5
In millions
Land
Buildings and improvements
on owned land
Buildings and improvements
on leased land
Equipment, signs and
seating
Other
Property and equipment, at
cost (1)
Accumulated depreciation
and amortization (1)
13,695.2
14,011.7
11,511.9
12,892.9
3,270.9
500.4
4,658.5
546.8
34,443.4
37,692.4
(13,185.8)
21,257.6
(14,574.8)
$ 23,117.6
Net property and equipment
$
(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–$1,390.7; 2015–$1,438.0;
2014–$1,539.3.
40 McDonald’s Corporation 2016 Annual Report
40 McDonald's Corporation 2016 Annual Report
Other Operating (Income) Expense, Net
Franchise Arrangements
Leasing Arrangements
In millions
2016
2015
2014
Gains on sales of restaurant
businesses
Equity in (earnings) losses of
unconsolidated affiliates
Asset dispositions and other
(income) expense, net
Impairment and other charges
(gains), net
Total
$ (283.4) $ (145.9) $ (137.4)
(54.8)
146.8
8.9
72.3
(26.6)
108.2
341.6
235.1
38.9
$ 75.7
$ 209.4
$ 18.6
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) losses of unconsolidated affiliates
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.
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 each 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.
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 millions
Rents
Royalties
Initial fees
Revenues from franchised
restaurants
2016
2015
2014
$ 6,107.6
$ 5,860.6
$ 6,106.7
3,129.9
2,980.7
3,085.1
89.4
83.4
80.2
$ 9,326.9
$ 8,924.7
$ 9,272.0
Future gross minimum rent payments due to the Company
under existing franchise arrangements are:
In millions
2017
2018
2019
2020
2021
Thereafter
Total minimum
payments
$ 1,319.1
$
1,370.5
$ 2,689.6
1,290.6
1,261.0
1,219.9
1,167.5
10,018.5
1,327.0
1,279.1
1,205.9
1,127.4
8,745.2
2,617.6
2,540.1
2,425.8
2,294.9
18,763.7
$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.
Owned sites
Leased sites
Total (1)
Franchised restaurants:
At December 31, 2016, the Company was the lessee at 14,763
restaurant locations through ground leases (the Company leases
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 timing 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 millions
Company-operated
restaurants:
U.S.
Outside the U.S.
Total
U.S.
Outside the U.S.
Total
Other
Total rent expense
2016
2015
2014
$
48.6
$
59.2
$
613.3
661.9
471.2
589.8
652.7
711.9
463.7
565.0
61.3
708.3
769.6
446.3
610.1
1,061.0
1,028.7
1,056.4
91.3
98.4
106.3
$ 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 millions
2017
2018
2019
2020
2021
Thereafter
Restaurant
$ 1,233.6
Other
Total (1)
$ 69.4
$ 1,303.0
1,139.4
1,049.9
957.5
854.6
6,644.1
60.5
52.6
43.3
37.3
110.3
1,199.9
1,102.5
1,000.8
891.9
6,754.4
Total minimum payments
$11,879.1
$ 373.4
$12,252.5
(1) Includes future minimum lease payments for businesses in markets
considered held for 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.
McDonald’s Corporation 2016 Annual Report 41
McDonald's Corporation 2016 Annual Report 41
Other Operating (Income) Expense, Net
Franchise Arrangements
Leasing Arrangements
average shares include weighted-average shares outstanding plus
In millions
2016
2015
2014
Gains on sales of restaurant
businesses
Equity in (earnings) losses of
unconsolidated affiliates
Asset dispositions and other
(income) expense, net
Impairment and other charges
(gains), net
Total
$ (283.4) $ (145.9) $ (137.4)
(54.8)
146.8
8.9
72.3
(26.6)
108.2
341.6
235.1
38.9
$ 75.7
$ 209.4
$ 18.6
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) losses of unconsolidated affiliates
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.
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 each 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.
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 millions
Rents
Royalties
Initial fees
Revenues from franchised
restaurants
2016
$ 6,107.6
3,129.9
89.4
2015
$ 5,860.6
2,980.7
83.4
2014
$ 6,106.7
3,085.1
80.2
$ 9,326.9
$ 8,924.7
$ 9,272.0
Future gross minimum rent payments due to the Company
under existing franchise arrangements are:
In millions
2017
2018
2019
2020
2021
Thereafter
Total minimum
payments
Owned sites
Leased sites
Total (1)
$
$ 1,319.1
1,290.6
1,261.0
1,219.9
1,167.5
10,018.5
1,370.5
1,327.0
1,279.1
1,205.9
1,127.4
8,745.2
$ 2,689.6
2,617.6
2,540.1
2,425.8
2,294.9
18,763.7
$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.
PER COMMON SHARE INFORMATION
Diluted earnings per common share is calculated using net income
divided by diluted weighted-average shares. Diluted weighted-
the dilutive effect of share-based compensation calculated using
the treasury stock method, of (in millions of shares): 2016–6.8;
2015–5.2; 2014–5.8. Stock options 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.
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
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 and the Company
entered into a definitive agreement with a developmental licensee
organization to sell its existing businesses in Denmark, Finland,
Norway 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” in accordance with the
requirements of ASC 360 "Property, Plant and Equipment".
Accordingly, the Company has ceased recording depreciation
expense with respect to the Nordics effective January 26, 2017. As
of December 31, 2016, the Nordics' total assets and total liabilities
were $439 million and $64 million, respectively. Cash proceeds
upon the completion of the sale are estimated to be approximately
$450 million. No significant gains or losses are expected to be
recognized upon the close of the transaction. There were no other
subsequent events that required recognition or disclosure.
Property and Equipment
Net property and equipment consisted of:
In millions
Land
Buildings and improvements
on owned land
Buildings and improvements
on leased land
Equipment, signs and
seating
Other
cost (1)
Property and equipment, at
Accumulated depreciation
and amortization (1)
December 31, 2016
2015
$
5,465.0
$ 5,582.5
13,695.2
14,011.7
11,511.9
12,892.9
3,270.9
500.4
4,658.5
546.8
34,443.4
37,692.4
(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–$1,390.7; 2015–$1,438.0;
2014–$1,539.3.
40 McDonald's Corporation 2016 Annual Report
At December 31, 2016, the Company was the lessee at 14,763
restaurant locations through ground leases (the Company leases
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 timing 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 millions
Company-operated
restaurants:
U.S.
Outside the U.S.
Total
Franchised restaurants:
U.S.
Outside the U.S.
Total
Other
Total rent expense
2016
2015
2014
$
48.6
613.3
661.9
$
59.2
652.7
711.9
$
61.3
708.3
769.6
471.2
589.8
1,061.0
91.3
$ 1,814.2
463.7
565.0
1,028.7
98.4
$ 1,839.0
446.3
610.1
1,056.4
106.3
$ 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:
Restaurant
$ 1,233.6
1,139.4
1,049.9
957.5
854.6
6,644.1
$11,879.1
In millions
2017
2018
2019
2020
2021
Thereafter
Total minimum payments
(1) Includes future minimum lease payments for businesses in markets
considered held for 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.
Total (1)
$ 1,303.0
1,199.9
1,102.5
1,000.8
891.9
6,754.4
$12,252.5
Other
$ 69.4
60.5
52.6
43.3
37.3
110.3
$ 373.4
McDonald’s Corporation 2016 Annual Report 41
McDonald's Corporation 2016 Annual Report 41
1.5
1.6
1.6
The Company had $117.0 million and $83.6 million accrued
Plan. Total liabilities were $464.9 million at December 31, 2016,
Income Taxes
The statutory U.S. federal income tax rate reconciles to the
effective income tax rates as follows:
Income before provision for income taxes, classified by source of
income, was as follows:
In millions
U.S.
Outside the U.S.
Income before provision for
income taxes
2016
$ 2,059.4
4,806.6
2015
$ 2,597.8
3,957.9
2014
$ 2,681.9
4,690.1
$ 6,866.0
$ 6,555.7
$ 7,372.0
The provision for income taxes, classified by the timing and
location of payment, was as follows:
In millions
U.S. federal
U.S. state
Outside the U.S.
Current tax provision
U.S. federal
U.S. state
Outside the U.S.
Deferred tax provision
Provision for income taxes
2016
$ 1,046.6
121.3
1,550.2
2,718.1
(122.1)
14.1
(430.6)
(538.6)
$ 2,179.5
2015
$ 1,072.3
139.5
816.0
2,027.8
6.8
(3.9)
(4.3)
(1.4)
$ 2,026.4
2014
$ 1,124.8
148.4
1,431.7
2,704.9
(81.8)
(6.2)
(2.7)
(90.7)
$ 2,614.2
Net deferred tax liabilities consisted of:
In millions
Property and equipment
Unrealized foreign exchange
gains
Intangible liabilities
Other
Total deferred tax liabilities
Property and equipment
Employee benefit plans
Intangible assets
Deferred foreign tax credits
Operating loss carryforwards
Other
Total deferred tax assets
before valuation allowance
Valuation allowance
Net deferred tax liabilities
Balance sheet presentation:
Deferred income taxes
Other assets-miscellaneous
Liabilities of businesses held for
sale
Net deferred tax liabilities
December 31, 2016
$ 1,459.8
2015
$ 1,751.7
630.9
445.2
287.6
2,823.5
(650.2)
(395.0)
(170.7)
(316.8)
(292.7)
(338.6)
455.6
464.7
268.5
2,940.5
(472.7)
(390.1)
(222.6)
(289.2)
(419.8)
(297.0)
(2,164.0)
168.0
$ 827.5
(2,091.4)
322.4
$ 1,171.5
$ 1,817.1
(804.0)
$ 1,704.3
(532.8)
(185.6)
$ 827.5
—
$ 1,171.5
At December 31, 2016, the Company had net operating loss
carryforwards of $1.1 billion, of which $0.8 billion has an indefinite
carryforward. The remainder will expire at various dates from 2017
to 2031.
The Company's effective income tax rate is typically lower
than the U.S. statutory tax rate primarily because non-U.S. income
is generally subject to local statutory country tax rates that are
below the 35% U.S. statutory tax rate and reflect the impact of
global transfer pricing.
42 McDonald’s Corporation 2016 Annual Report
42 McDonald's Corporation 2016 Annual Report
Statutory U.S. federal income tax rate
State income taxes, net of related
federal income tax benefit
Foreign income taxed at different
rates
Taxes related to unfavorable lower tax
court ruling and audit progression
in foreign tax jurisdictions
Cash repatriation
Other, net
Effective income tax rates
2014
2015
2016
35.0% 35.0% 35.0%
(6.5)
(4.9)
(4.8)
1.2
—
0.5
—
(2.3)
1.5
31.7% 30.9% 35.5%
4.1
(1.2)
0.8
As of December 31, 2016 and 2015, the Company’s gross
unrecognized tax benefits totaled $924.1 million and $781.2
million, respectively. After considering the deferred tax accounting
impact, it is expected that about $630 million of the total as of
December 31, 2016 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 millions
Balance at January 1
Decreases for positions taken in prior years
Increases for positions taken in prior years
Increases for positions related to the current
year
Settlements with taxing authorities
Lapsing of statutes of limitations
Balance at December 31(1)
2016
$ 781.2
(37.1)
150.1
2015
$ 988.1
(49.9)
30.5
116.6
(17.7)
(69.0)
83.7
(258.0)
(13.2)
$ 924.1
$ 781.2
(1) Of this amount, $890.0 million and $704.0 million are included in Other
long-term liabilities for 2016 and 2015, respectively, and $9.0 million and
$21.9 million are included in Current liabilities - income taxes for 2016 and
2015, respectively, on the consolidated balance sheet. The remainder is
included in Deferred income taxes on the consolidated balance sheet.
In 2015, the Company filed a protest with the Internal
Revenue Service ("IRS") Appeals Office related to certain
disagreed transfer pricing matters related to the Company's U.S.
federal income tax return audits 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. 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 million within the next 12
months, of which up to $10 million could 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, 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
balance, we believe that the liabilities recorded are appropriate
and adequate as determined under ASC 740.
The Company also maintains certain nonqualified
supplemental benefit plans that allow participants to (i) make tax-
The Company operates within multiple tax jurisdictions and is
deferred contributions and (ii) receive Company-provided
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.
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
for interest and penalties at December 31, 2016 and 2015,
respectively. The Company recognized interest and penalties
related to tax matters of $41.7 million in 2016, $21.1 million in
2015, and $87.9 million in 2014, which are included in the
provision for income taxes.
and $487.6 million at December 31, 2015, and were primarily
included in other long-term liabilities on the consolidated balance
sheet.
The Company has entered into derivative contracts to hedge
market-driven changes in certain of the liabilities. At December 31,
Deferred U.S. income taxes have not been recorded for
2016, derivatives with a fair value of $134.3 million indexed to the
temporary differences related to investments in certain foreign
subsidiaries and corporate joint ventures. These temporary
differences were approximately $16.0 billion at December 31,
2016 and consisted primarily of undistributed earnings considered
permanently invested in operations outside the U.S. Determination
of the deferred income tax liability on these unremitted earnings is
not practicable because such liability, if any, is dependent on
circumstances existing if and when remittance occurs.
Employee Benefit Plans
Effective January 1, 2017, the Company’s Profit Sharing and
Savings Plan was renamed the McDonald’s 401k Plan. The 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 shares released
under the leveraged Employee Stock Ownership Plan ("ESOP")
and employer 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.
Company's stock and a total return swap with a notional amount of
$186.9 million indexed to certain market indices were included at
their fair value in Prepaid expenses and other current assets on
the 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–
$24.8; 2015–$24.0; 2014–$29.1. 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–$46.0; 2015–$53.4; 2014–$54.4.
The total combined liabilities for international retirement plans
were $65.6 million and $76.0 million at December 31, 2016 and
2015, respectively. Other post-retirement benefits and post-
employment benefits were immaterial.
McDonald’s Corporation 2016 Annual Report 43
McDonald's Corporation 2016 Annual Report 43
Income Taxes
The statutory U.S. federal income tax rate reconciles to the
effective income tax rates as follows:
In millions
December 31, 2016
2015
$ 1,459.8
$ 1,751.7
year
2016
2015
2014
State income taxes, net of related
2016
2015
2014
Effective income tax rates
Income before provision for income taxes, classified by source of
income, was as follows:
In millions
U.S.
Outside the U.S.
Income before provision for
income taxes
$ 2,059.4
$ 2,597.8
$ 2,681.9
4,806.6
3,957.9
4,690.1
$ 6,866.0
$ 6,555.7
$ 7,372.0
The provision for income taxes, classified by the timing and
location of payment, was as follows:
In millions
U.S. federal
U.S. state
Outside the U.S.
Current tax provision
U.S. federal
U.S. state
Outside the U.S.
Deferred tax provision
$ 1,046.6
$ 1,072.3
$ 1,124.8
121.3
1,550.2
2,718.1
(122.1)
14.1
(430.6)
(538.6)
139.5
816.0
2,027.8
148.4
1,431.7
2,704.9
6.8
(3.9)
(4.3)
(1.4)
(81.8)
(6.2)
(2.7)
(90.7)
Provision for income taxes
$ 2,179.5
$ 2,026.4
$ 2,614.2
Net deferred tax liabilities consisted of:
Total deferred tax liabilities
2,823.5
2,940.5
Property and equipment
Unrealized foreign exchange
gains
Other
Intangible liabilities
Property and equipment
Employee benefit plans
Intangible assets
Deferred foreign tax credits
Operating loss carryforwards
Other
Total deferred tax assets
before valuation allowance
Valuation allowance
Net deferred tax liabilities
Balance sheet presentation:
Deferred income taxes
Other assets-miscellaneous
Liabilities of businesses held for
sale
630.9
445.2
287.6
(650.2)
(395.0)
(170.7)
(316.8)
(292.7)
(338.6)
455.6
464.7
268.5
(472.7)
(390.1)
(222.6)
(289.2)
(419.8)
(297.0)
(2,164.0)
(2,091.4)
168.0
322.4
$ 827.5
$ 1,171.5
$ 1,817.1
$ 1,704.3
(804.0)
(532.8)
Net deferred tax liabilities
$ 827.5
$ 1,171.5
At December 31, 2016, the Company had net operating loss
carryforwards of $1.1 billion, of which $0.8 billion has an indefinite
carryforward. The remainder will expire at various dates from 2017
to 2031.
The Company's effective income tax rate is typically lower
than the U.S. statutory tax rate primarily because non-U.S. income
is generally subject to local statutory country tax rates that are
below the 35% U.S. statutory tax rate and reflect the impact of
global transfer pricing.
42 McDonald's Corporation 2016 Annual Report
Statutory U.S. federal income tax rate
federal income tax benefit
Foreign income taxed at different
rates
Taxes related to unfavorable lower tax
court ruling and audit progression
in foreign tax jurisdictions
Cash repatriation
Other, net
2015
2016
2014
35.0% 35.0% 35.0%
1.5
1.6
1.6
(6.5)
(4.9)
(4.8)
1.2
—
0.5
—
(2.3)
1.5
4.1
(1.2)
0.8
31.7% 30.9% 35.5%
As of December 31, 2016 and 2015, the Company’s gross
unrecognized tax benefits totaled $924.1 million and $781.2
million, respectively. After considering the deferred tax accounting
impact, it is expected that about $630 million of the total as of
December 31, 2016 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 millions
Balance at January 1
Decreases for positions taken in prior years
Increases for positions taken in prior years
Increases for positions related to the current
Settlements with taxing authorities
Lapsing of statutes of limitations
Balance at December 31(1)
2016
$ 781.2
(37.1)
150.1
2015
$ 988.1
(49.9)
30.5
116.6
(17.7)
(69.0)
83.7
(258.0)
(13.2)
$ 924.1
$ 781.2
(1) Of this amount, $890.0 million and $704.0 million are included in Other
long-term liabilities for 2016 and 2015, respectively, and $9.0 million and
$21.9 million are included in Current liabilities - income taxes for 2016 and
2015, respectively, on the consolidated balance sheet. The remainder is
included in Deferred income taxes on the consolidated balance sheet.
In 2015, the Company filed a protest with the Internal
Revenue Service ("IRS") Appeals Office related to certain
disagreed transfer pricing matters related to the Company's U.S.
federal income tax return audits 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. 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 million within the next 12
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, 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
(185.6)
—
months, of which up to $10 million could favorably affect the
balance, we believe that the liabilities recorded are appropriate
and adequate as determined under ASC 740.
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 million and $83.6 million accrued
for interest and penalties at December 31, 2016 and 2015,
respectively. The Company recognized interest and penalties
related to tax matters of $41.7 million in 2016, $21.1 million in
2015, and $87.9 million in 2014, 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 certain foreign
subsidiaries and corporate joint ventures. These temporary
differences were approximately $16.0 billion at December 31,
2016 and consisted primarily of undistributed earnings considered
permanently invested in operations outside the U.S. Determination
of the deferred income tax liability on these unremitted earnings is
not practicable because such liability, if any, is dependent on
circumstances existing if and when remittance occurs.
Employee Benefit Plans
Effective January 1, 2017, the Company’s Profit Sharing and
Savings Plan was renamed the McDonald’s 401k Plan. The 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 shares released
under the leveraged Employee Stock Ownership Plan ("ESOP")
and employer 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 million at December 31, 2016,
and $487.6 million at December 31, 2015, and were primarily
included in other long-term liabilities on the consolidated balance
sheet.
The Company has entered into derivative contracts to hedge
market-driven changes in certain of the liabilities. At December 31,
2016, derivatives with a fair value of $134.3 million indexed to the
Company's stock and a total return swap with a notional amount of
$186.9 million indexed to certain market indices were included at
their fair value in Prepaid expenses and other current assets on
the 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–
$24.8; 2015–$24.0; 2014–$29.1. 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–$46.0; 2015–$53.4; 2014–$54.4.
The total combined liabilities for international retirement plans
were $65.6 million and $76.0 million at December 31, 2016 and
2015, respectively. Other post-retirement benefits and post-
employment benefits were immaterial.
McDonald’s Corporation 2016 Annual Report 43
McDonald's Corporation 2016 Annual Report 43
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 millions
U.S.
International Lead Markets
High Growth Markets
Foundational Markets &
Corporate
Total revenues
U.S.
International Lead Markets
High Growth Markets
Foundational Markets &
Corporate
Total operating income
U.S.
International Lead Markets
High Growth Markets
Foundational Markets &
Corporate
Total assets
U.S.
International Lead Markets
High Growth Markets
Foundational Markets &
Corporate
Total capital
expenditures
U.S.
International Lead Markets
High Growth Markets
Foundational Markets &
Corporate
Total depreciation and
amortization
2016
$ 8,252.7
2015
$ 8,558.9
2014
$ 8,651.0
7,223.4
6,160.7
7,614.9
6,172.8
8,544.5
6,845.2
2,985.1
$ 24,621.9
$ 3,768.7
3,066.4
$ 25,413.0
$ 3,612.0
3,400.6
$ 27,441.3
$ 3,522.5
2,838.4
1,048.8
2,712.6
841.1
3,034.5
933.9
88.6
$ 7,744.5
$ 11,960.6
(20.2)
$ 7,145.5
$ 11,806.1
458.3
$ 7,949.2
$ 11,872.1
9,112.5
5,208.6
11,136.3
5,248.6
12,538.4
5,866.0
4,742.2
$ 31,023.9
586.7
$
9,747.7
$ 37,938.7
533.2
$
3,950.9
$ 34,227.4
736.1
$
635.6
493.2
105.6
596.1
540.5
792.1
804.8
144.1
250.4
$ 1,821.1
510.3
$
$ 1,813.9
515.2
$
$ 2,583.4
512.2
$
451.6
362.0
192.6
460.9
363.9
521.2
387.8
215.7
223.3
$ 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.
Debt Financing
LINE OF CREDIT AGREEMENTS
At December 31, 2016, the Company had a $2.5 billion line of credit agreement expiring in December 2019 with fees of 0.070% per annum
on the total commitment, which remained unused. Fees and interest rates on this line are based on the Company’s long-term credit rating
assigned by Moody’s and Standard & 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% at December 31, 2016 (based on $192.0 million of foreign
currency bank line borrowings and $799.8 million of commercial paper) and 2.0% at December 31, 2015 (based on $731.6 million of foreign
currency bank line borrowings and $869.6 million of commercial paper).
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).
Interest rates(1)
December 31
2016
4.0%
3.4
2015
4.0%
3.3
1.7
0.3
5.3
—
2.9
—
0.5
2.2
2.4
0.3
5.3
4.3
2.9
0.3
2.1
3.1
2017-2045
2017-2029
2020-2054
2030
2017-2056
In millions of U.S. Dollars
Maturity dates
Fixed
Floating
Fixed
Floating
Fixed
Floating
Fixed
Floating
Total U.S. Dollars
Total Euro
Total British Pounds Sterling - Fixed
Total Chinese Renminbi - Floating(2)
Total Japanese Yen
Total other currencies(3)
Debt obligations before fair value adjustments and deferred
debt costs(4)
Fair value adjustments(5)
Deferred debt costs
Total debt obligations
Amounts outstanding
December 31
2016
$13,889.7
3,249.8
17,139.5
6,127.5
1,170.9
7,298.4
921.3
106.9
—
—
106.9
416.9
182.7
599.6
2015
$14,190.6
3,019.6
17,210.2
3,951.9
665.9
4,617.8
1,100.1
491.8
104.0
208.0
312.0
264.7
229.7
494.4
26,065.7
24,226.3
—
(110.0)
1.8
(106.0)
$25,955.7
$24,122.1
(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 consists of Swiss Francs and Korean Won.
(4) Aggregate maturities for 2016 debt balances, before fair value adjustments and deferred debt costs, are as follows (in millions): 2017–$77.2; 2018–$1,756.0;
2019–$3,932.7; 2020–$2,395.8; 2021–$1,555.2; Thereafter–$16,348.8. These amounts include a reclassification of short-term obligations totaling $2.5 billion to
long-term obligations as they are supported by a long-term line of credit agreement expiring in December 2019.
(5) 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 is also recorded at fair value in prepaid expenses and other current assets, miscellaneous
other assets or other long-term liabilities.
44 McDonald’s Corporation 2016 Annual Report
44 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 45
McDonald's Corporation 2016 Annual Report 45
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.
U.S.
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
U.S.
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 millions
U.S.
International Lead Markets
High Growth Markets
Foundational Markets &
Corporate
Total revenues
International Lead Markets
High Growth Markets
Foundational Markets &
Corporate
2016
2015
$ 8,252.7
$ 8,558.9
7,223.4
6,160.7
7,614.9
6,172.8
2,985.1
3,066.4
$ 24,621.9
$ 25,413.0
$ 3,768.7
$ 3,612.0
2,838.4
1,048.8
2,712.6
841.1
88.6
(20.2)
Total operating income
$ 7,744.5
$ 7,145.5
U.S.
International Lead Markets
High Growth Markets
Foundational Markets &
Corporate
Total assets
$ 11,960.6
$ 11,806.1
9,112.5
5,208.6
11,136.3
5,248.6
4,742.2
9,747.7
$ 31,023.9
$ 37,938.7
533.2
596.1
540.5
International Lead Markets
High Growth Markets
Foundational Markets &
Corporate
Total capital
expenditures
U.S.
International Lead Markets
High Growth Markets
Foundational Markets &
Corporate
Total depreciation and
amortization
$
$
$
$
586.7
635.6
493.2
105.6
510.3
451.6
362.0
192.6
$ 1,821.1
$ 1,813.9
2014
$ 8,651.0
8,544.5
6,845.2
3,400.6
$ 27,441.3
$ 3,522.5
3,034.5
933.9
458.3
$ 7,949.2
$ 11,872.1
12,538.4
5,866.0
3,950.9
$ 34,227.4
736.1
$
792.1
804.8
144.1
250.4
$ 2,583.4
512.2
$
521.2
387.8
515.2
460.9
363.9
215.7
223.3
Debt Financing
LINE OF CREDIT AGREEMENTS
At December 31, 2016, the Company had a $2.5 billion line of credit agreement expiring in December 2019 with fees of 0.070% per annum
on the total commitment, which remained unused. Fees and interest rates on this line are based on the Company’s long-term credit rating
assigned by Moody’s and Standard & 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% at December 31, 2016 (based on $192.0 million of foreign
currency bank line borrowings and $799.8 million of commercial paper) and 2.0% at December 31, 2015 (based on $731.6 million of foreign
currency bank line borrowings and $869.6 million of commercial paper).
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).
In millions of U.S. Dollars
Maturity dates
Fixed
Floating
Total U.S. Dollars
Fixed
Floating
Total Euro
Total British Pounds Sterling - Fixed
Total Chinese Renminbi - Floating(2)
Fixed
Floating
2017-2045
2017-2029
2020-2054
2030
2017-2056
Interest rates(1)
December 31
2016
4.0%
3.4
2015
4.0%
3.3
1.7
0.3
5.3
—
2.9
—
0.5
2.2
2.4
0.3
5.3
4.3
2.9
0.3
2.1
3.1
Amounts outstanding
December 31
2016
$13,889.7
3,249.8
17,139.5
6,127.5
1,170.9
7,298.4
921.3
—
106.9
—
106.9
416.9
182.7
599.6
2015
$14,190.6
3,019.6
17,210.2
3,951.9
665.9
4,617.8
1,100.1
491.8
104.0
208.0
312.0
264.7
229.7
494.4
26,065.7
24,226.3
—
(110.0)
1.8
(106.0)
$25,955.7
$24,122.1
$ 1,516.5
$ 1,555.7
$ 1,644.5
Total Japanese Yen
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.
Fixed
Floating
Total other currencies(3)
Debt obligations before fair value adjustments and deferred
debt costs(4)
Fair value adjustments(5)
Deferred debt costs
Total debt obligations
(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 consists of Swiss Francs and Korean Won.
(4) Aggregate maturities for 2016 debt balances, before fair value adjustments and deferred debt costs, are as follows (in millions): 2017–$77.2; 2018–$1,756.0;
2019–$3,932.7; 2020–$2,395.8; 2021–$1,555.2; Thereafter–$16,348.8. These amounts include a reclassification of short-term obligations totaling $2.5 billion to
long-term obligations as they are supported by a long-term line of credit agreement expiring in December 2019.
(5) 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 is also recorded at fair value in prepaid expenses and other current assets, miscellaneous
other assets or other long-term liabilities.
44 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 45
McDonald's Corporation 2016 Annual Report 45
Share-based Compensation
Quarterly Results (Unaudited)
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 57.5 million at December 31, 2016, including 34.1 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, 2015 and 2014, the total intrinsic value of stock options exercised was $184.9 million, $202.9 million and $258.9 million,
respectively. Cash received from stock options exercised during 2016 was $299.4 million and the tax benefit realized from stock options
exercised totaled $54.5 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, 2015 and 2014, and changes during the years
then ended, is presented in the following table:
Options
Outstanding at beginning of year
Granted
Exercised
Forfeited/expired
Outstanding at end of year
Exercisable at end of year
Shares in
millions
21.9
4.3
(4.0)
(0.7)
21.5
13.4
Weighted-
average
exercise
price
$ 84.76
117.10
75.30
106.50
$ 92.25
$ 83.80
Weighted-
average
remaining
contractual
life in years
2016
Aggregate
intrinsic
value in
millions
6.2
4.9
$ 633.9
$ 507.5
2015
Weighted-
average
exercise
price
$ 77.99
97.33
62.59
96.76
$ 84.76
Shares in
millions
23.4
4.3
(5.1)
(0.7)
21.9
13.4
2014
Weighted-
average
exercise
price
$ 69.15
95.13
46.09
94.56
$ 77.99
Shares in
millions
25.1
3.9
(5.1)
(0.5)
23.4
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 less the present value of expected dividends over the
vesting period.
A summary of the Company’s RSU activity during the years ended December 31, 2016, 2015 and 2014 is presented in the following
In millions, except per share data
2016
2015
2016
2015
2016
2015
Quarters ended
December 31
Quarters ended
September 30
Quarters ended
June 30
Quarters ended
March 31
(1)
2016
2015
Revenues
Sales by Company-operated
restaurants
Revenues from franchised
restaurants
Total revenues
Company-operated margin
Franchised margin
Operating income
Net income
Earnings per common
share—basic
Earnings per common
share—diluted
Dividends declared per
common share
Weighted-average
common shares—basic
Weighted-average
common shares—diluted
Market price per common
share:
High
Low
Close
$ 3,652.8
$ 4,030.2
$ 3,972.1 $ 4,282.9
$ 3,916.6
$ 4,261.1
$ 3,753.5
$3,914.1
$ 1,193.4
$ 1,206.2
$ 1,275.4 $ 1,309.2
$ 1,092.9
$ 1,202.4
$ 1,124.8
$ 811.5
2,376.1
6,028.9
616.9
1,941.3
1,969.0
2,311.1
6,341.3
611.6
1,894.9
1,880.4
2,452.0
2,332.2
6,424.1
6,615.1
732.6
2,014.4
2,137.3
675.2
1,916.1
2,030.3
2,348.4
6,265.0
668.5
1,917.5
1,857.9
2,236.6
6,497.7
664.8
1,825.6
1,849.3
$
$
$
1.45
1.44
$
$
1.32
1.31
1.52 $
1.41
1.50 $
1.40
— $
0.89
1.83
(2) $
0.85
$
$
$
$
$
$
1.27
1.25
0.89
$
$
$
1.26
1.26
0.85
823.7
914.1
841.4
930.3
864.0
953.2
829.7
919.9
847.7
934.8
871.2
957.6
2,150.4
5,903.9
578.2
1,735.3
1,780.3
$
$
$
1.27
1.25
0.89
888.9
896.3
2,044.8
5,958.9
559.8
1,641.2
1,385.5
$
$
$
0.84
0.84
0.85
960.6
965.5
$ 124.00
$ 120.23
$ 128.60 $ 101.88
$ 131.96
$ 101.08
$ 126.96
$ 101.09
110.33
121.72
97.13
118.14
113.96
115.36
87.50
98.53
116.08
120.34
94.02
95.07
112.71
125.68
88.77
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 as a reduction to the provision for income taxes of $26.2 million,
and a benefit to earnings per common share - basic and diluted of $0.03 and $0.02, respectively.
(2) 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.
table:
RSUs
Nonvested at beginning of year
Granted
Vested
Forfeited
Nonvested at end of year
2016
Weighted-
average
grant date
fair value
$ 83.50
109.86
79.54
88.45
$ 94.13
Shares in
millions
2.4
0.7
(0.8)
(0.4)
1.9
2015
Weighted-
average
grant date
fair value
$ 83.49
87.03
88.78
85.82
$ 83.50
Shares in
millions
2.2
0.9
(0.5)
(0.2)
2.4
2014
Weighted-
average
grant date
fair value
$ 78.89
85.12
69.29
85.16
$ 83.49
Shares in
millions
2.0
0.9
(0.6)
(0.1)
2.2
The total fair value of RSUs vested during 2016, 2015 and 2014 was $99.3 million, $49.4 million and $54.9 million, respectively. The tax
benefit realized from RSUs vested during 2016 was $29.6 million.
46 McDonald’s Corporation 2016 Annual Report
46 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 47
McDonald's Corporation 2016 Annual Report 47
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 57.5 million at December 31, 2016, including 34.1 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, 2015 and 2014, the total intrinsic value of stock options exercised was $184.9 million, $202.9 million and $258.9 million,
respectively. Cash received from stock options exercised during 2016 was $299.4 million and the tax benefit realized from stock options
exercised totaled $54.5 million. The Company uses treasury shares purchased under the Company’s share repurchase program to satisfy
share-based exercises.
then ended, is presented in the following table:
A summary of the status of the Company’s stock option grants as of December 31, 2016, 2015 and 2014, and changes during the years
Shares in
millions
21.9
4.3
(4.0)
(0.7)
21.5
13.4
Weighted-
average
exercise
price
$ 84.76
117.10
75.30
106.50
$ 92.25
$ 83.80
Weighted-
average
remaining
contractual
life in years
2016
Aggregate
intrinsic
value in
millions
6.2
4.9
$ 633.9
$ 507.5
Shares in
millions
Shares in
millions
2015
Weighted-
average
exercise
price
$ 77.99
97.33
62.59
96.76
$ 84.76
23.4
4.3
(5.1)
(0.7)
21.9
13.4
2014
Weighted-
average
exercise
price
$ 69.15
95.13
46.09
94.56
$ 77.99
25.1
3.9
(5.1)
(0.5)
23.4
14.4
Quarterly Results (Unaudited)
Quarters ended
December 31
In millions, except per share data
2016
2015
2016
Quarters ended
September 30
2015
Quarters ended
June 30
2016
2015
Quarters ended
March 31
(1)
2016
2015
Revenues
Sales by Company-operated
restaurants
Revenues from franchised
restaurants
Total revenues
Company-operated margin
Franchised margin
Operating income
Net income
Earnings per common
share—basic
Earnings per common
share—diluted
Dividends declared per
common share
Weighted-average
common shares—basic
Weighted-average
common shares—diluted
Market price per common
share:
High
Low
Close
$ 3,652.8
$ 4,030.2
$ 3,972.1 $ 4,282.9
$ 3,916.6
$ 4,261.1
$ 3,753.5
$3,914.1
2,376.1
6,028.9
616.9
1,941.3
1,969.0
$ 1,193.4
2,311.1
6,341.3
611.6
1,894.9
1,880.4
$ 1,206.2
$
$
$
1.45
1.44
$
$
1.32
1.31
— $
0.89
2,452.0
6,424.1
732.6
2,014.4
2,137.3
2,332.2
6,615.1
675.2
1,916.1
2,030.3
$ 1,275.4 $ 1,309.2
2,348.4
6,265.0
668.5
1,917.5
1,857.9
$ 1,092.9
2,236.6
6,497.7
664.8
1,825.6
1,849.3
$ 1,202.4
$
$
$
1.52 $
1.41
1.50 $
1.40
1.83
(2) $
0.85
$
$
$
1.27
1.25
0.89
$
$
$
1.26
1.26
0.85
823.7
914.1
841.4
930.3
864.0
953.2
829.7
919.9
847.7
934.8
871.2
957.6
2,150.4
5,903.9
578.2
1,735.3
1,780.3
$ 1,124.8
$
$
$
1.27
1.25
0.89
888.9
896.3
2,044.8
5,958.9
559.8
1,641.2
1,385.5
$ 811.5
$
$
$
0.84
0.84
0.85
960.6
965.5
$ 124.00
110.33
121.72
$ 120.23
97.13
118.14
$ 128.60 $ 101.88
87.50
98.53
113.96
115.36
$ 131.96
116.08
120.34
$ 101.08
94.02
95.07
$ 126.96
112.71
125.68
$ 101.09
88.77
97.44
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 less the present value of expected dividends over the
A summary of the Company’s RSU activity during the years ended December 31, 2016, 2015 and 2014 is presented in the following
(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 as a reduction to the provision for income taxes of $26.2 million,
and a benefit to earnings per common share - basic and diluted of $0.03 and $0.02, respectively.
(2) 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.
Shares in
millions
Shares in
millions
Shares in
millions
2016
Weighted-
average
grant date
fair value
$ 83.50
109.86
79.54
88.45
$ 94.13
2.4
0.7
(0.8)
(0.4)
1.9
2015
Weighted-
average
grant date
fair value
$ 83.49
87.03
88.78
85.82
$ 83.50
2.2
0.9
(0.5)
(0.2)
2.4
2014
Weighted-
average
grant date
fair value
$ 78.89
85.12
69.29
85.16
$ 83.49
2.0
0.9
(0.6)
(0.1)
2.2
The total fair value of RSUs vested during 2016, 2015 and 2014 was $99.3 million, $49.4 million and $54.9 million, respectively. The tax
benefit realized from RSUs vested during 2016 was $29.6 million.
Outstanding at beginning of year
Options
Granted
Exercised
Forfeited/expired
Outstanding at end of year
Exercisable at end of year
RSUs
vesting period.
table:
RSUs
Granted
Vested
Forfeited
Nonvested at beginning of year
Nonvested at end of year
46 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 47
McDonald's Corporation 2016 Annual Report 47
Management’s Assessment of Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
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. 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, 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, 2015 and 2014 and the Company’s internal control over financial reporting as of December 31, 2016. 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, 2017
The Board of Directors and Shareholders of McDonald’s Corporation
We have audited the accompanying consolidated balance sheets of McDonald’s Corporation as of December 31, 2016 and 2015, 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, 2016. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of
McDonald’s Corporation at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2016, 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), McDonald’s
Corporation’s internal control over financial reporting as of December 31, 2016, 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, expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
Chicago, Illinois
March 1, 2017
48 McDonald’s Corporation 2016 Annual Report
48 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 49
McDonald's Corporation 2016 Annual Report 49
Management’s Assessment of Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
The financial statements were prepared by management, which is responsible for their integrity and objectivity and for establishing and
The Board of Directors and Shareholders of McDonald’s Corporation
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. 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, 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, 2015 and 2014 and the Company’s internal control over financial reporting as of December 31, 2016. 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, 2017
We have audited the accompanying consolidated balance sheets of McDonald’s Corporation as of December 31, 2016 and 2015, 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, 2016. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of
McDonald’s Corporation at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2016, 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), McDonald’s
Corporation’s internal control over financial reporting as of December 31, 2016, 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, expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
Chicago, Illinois
March 1, 2017
48 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 49
McDonald's Corporation 2016 Annual Report 49
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
The Board of Directors and Shareholders of McDonald’s Corporation
We have audited McDonald's Corporation's internal control over financial reporting as of December 31, 2016 based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) (the COSO criteria). McDonald’s Corporation’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 over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
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, 2017
ITEM 9. Changes in and Disagreements With
Accountants on Accounting and Financial
Disclosure
control over financial reporting.
MANAGEMENT’S REPORT
is reasonably likely to materially affect, the Company's internal
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. 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
During 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, there has been no change in
the Company's internal control over financial reporting during the
quarter ended December 31, 2016 that has materially affected, or
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.
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 9 of 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. 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
Plan category
Total
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
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))
(a)
—
23,430,608 (1)
23,430,608
$ 92.40
(b)
—
$ 92.40
(c)
—
34,112,990
34,112,990
(1)
Includes 8,407,342 stock options granted under the McDonald’s Corporation 2001 Omnibus Stock Ownership Plan and 13,102,849 stock options and 1,920,417
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.
50 McDonald’s Corporation 2016 Annual Report
50 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 51
McDonald's Corporation 2016 Annual Report 51
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
The Board of Directors and Shareholders of McDonald’s Corporation
We have audited McDonald's Corporation's internal control over financial reporting as of December 31, 2016 based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) (the COSO criteria). McDonald’s Corporation’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 over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
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, 2017
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. 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
During 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, there has been no change in
the Company's internal control over financial reporting during the
quarter ended December 31, 2016 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.
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 9 of 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. 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
Plan category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
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))
(a)
23,430,608 (1)
—
23,430,608
(b)
$ 92.40
—
$ 92.40
(c)
34,112,990
—
34,112,990
(1)
Includes 8,407,342 stock options granted under the McDonald’s Corporation 2001 Omnibus Stock Ownership Plan and 13,102,849 stock options and 1,920,417
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.
50 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 51
McDonald's Corporation 2016 Annual Report 51
ITEM 13. Certain Relationships and Related
Transactions, and Director Independence
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.
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 are listed under Part II, Item 8, pages 28 through 46 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 Number
Description
(3)
(a) Restated Certificate of Incorporation, effective as of June 14, 2012, incorporated herein by reference from Exhibit 3(a)
of Form 10-Q (File No. 001-05231), for the quarter ended June 30, 2012.
(b) By-Laws, as amended and restated with effect as of October 26, 2015, incorporated herein by reference from Exhibit
3(b) of Form 8-K (File No. 001-05231), filed October 28, 2015.
(4)
Instruments defining the rights of security holders, including Indentures:*
(a) Senior Debt Securities Indenture, incorporated herein by reference from Exhibit (4)(a) of Form S-3 Registration
Statement (File No. 333-14141), filed October 15, 1996.
(i)
(ii)
(iii)
(iv)
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.
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.
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.
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, incorporated herein by reference from Exhibit (4)(b) of Form S-3 Registration
Statement (File No. 333-14141), filed October 15, 1996.
(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.**
(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)
(ii)
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.**
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.**
(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)
(ii)
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.**
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)
Form of 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
(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,
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.**
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,
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,
(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
(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) 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.**
31, 2013.**
2015.**
(i)
(ii)
(iii)
2016.**
2016.**
31, 2014.**
(12)
(21)
(23)
(24)
(31.1)
(31.2)
(32.1)
Computation of Ratios.
Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm.
Power of Attorney.
Rule 13a-14(a) Certification of Chief Executive Officer.
Rule 13a-14(a) Certification of Chief Financial Officer.
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.
(101.SCH)
XBRL Taxonomy Extension Schema Document.
52 McDonald’s Corporation 2016 Annual Report
52 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 53
McDonald's Corporation 2016 Annual Report 53
ITEM 13. Certain Relationships and Related
Transactions, and Director Independence
Services
ITEM 14. Principal Accounting Fees and
Incorporated herein by reference from the Company’s definitive
proxy statement, which will be filed no later than 120 days after
Incorporated herein by reference from the Company’s definitive
proxy statement, which will be filed no later than 120 days after
December 31, 2016.
December 31, 2016.
Consolidated financial statements filed as part of this report are listed under Part II, Item 8, pages 28 through 46 of this Form 10-K.
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
ITEM 15. Exhibits and Financial Statement Schedules
PART IV
a.
(1) All financial statements
(2) Financial statement schedules
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 Number
Description
(3)
(a) Restated Certificate of Incorporation, effective as of June 14, 2012, incorporated herein by reference from Exhibit 3(a)
of Form 10-Q (File No. 001-05231), for the quarter ended June 30, 2012.
(b) By-Laws, as amended and restated with effect as of October 26, 2015, incorporated herein by reference from Exhibit
3(b) of Form 8-K (File No. 001-05231), filed October 28, 2015.
(4)
Instruments defining the rights of security holders, including Indentures:*
(a) Senior Debt Securities Indenture, incorporated herein by reference from Exhibit (4)(a) of Form S-3 Registration
Statement (File No. 333-14141), filed October 15, 1996.
(10)
Material Contracts
(i)
(ii)
(i)
(ii)
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.
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, incorporated herein by reference from Exhibit (4)(b) of Form S-3 Registration
Statement (File No. 333-14141), filed October 15, 1996.
(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.**
(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.**
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.**
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.**
(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)
(ii)
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.**
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)
(j)
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.**
Form of 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.**
(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.**
(i)
(ii)
(iii)
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.**
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.**
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) 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.**
Computation of Ratios.
Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm.
Power of Attorney.
Rule 13a-14(a) Certification of Chief Executive Officer.
Rule 13a-14(a) Certification of Chief Financial Officer.
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.
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.
(12)
(21)
(23)
(24)
(31.1)
(31.2)
(32.1)
(32.2)
(101.INS)
XBRL Instance Document.
(101.SCH)
XBRL Taxonomy Extension Schema Document.
52 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 53
McDonald's Corporation 2016 Annual Report 53
/s/ Kevin M. Ozan
Kevin M. Ozan
Corporate Executive Vice President and
Chief Financial Officer
March 1, 2017
Date
Corporate Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
By
By
By
By
By
Signature, Title
/s/ John J. Mulligan
John J. Mulligan
Director
/s/ Kevin M. Ozan
Kevin M. Ozan
/s/ Sheila A. Penrose
Sheila A. Penrose
Director
/s/ John W. Rogers, Jr.
John W. Rogers, Jr.
Director
/s/ Miles D. White
Miles D. White
Director
(101.CAL)
XBRL Taxonomy Extension Calculation Linkbase Document.
(101.DEF)
XBRL Taxonomy Extension Definition Linkbase Document.
(101.LAB)
XBRL Taxonomy Extension Label Linkbase Document.
(101.PRE)
XBRL Taxonomy Extension Presentation Linkbase Document.
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.
* 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.
McDonald’s Corporation
(Registrant)
By
** Denotes compensatory plan.
ITEM 16. Form 10-K Summary
None.
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 1st day of March, 2017:
By
By
By
By
By
By
By
By
By
Signature, Title
/s/ Lloyd H. Dean
Lloyd H. Dean
Director
/s/ Stephen J. Easterbrook
Stephen J. Easterbrook
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Robert A. Eckert
Robert A. Eckert
Director
/s/ Margaret H. Georgiadis
Margaret H. Georgiadis
Director
/s/ Enrique Hernandez, Jr.
Enrique Hernandez, Jr.
Chairman of the Board and Director
/s/ Catherine Hoovel
Catherine Hoovel
Corporate Vice President – Chief Accounting Officer
(Principal Accounting Officer)
/s/ Jeanne P. Jackson
Jeanne P. Jackson
Director
/s/ Richard H. Lenny
Richard H. Lenny
Director
/s/ Walter E. Massey
Walter E. Massey
Director
54 McDonald’s Corporation 2016 Annual Report
54 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 55
McDonald's Corporation 2016 Annual Report 55
By
By
By
By
By
Signature, Title
/s/ John J. Mulligan
John J. Mulligan
Director
/s/ Kevin M. Ozan
Kevin M. Ozan
Corporate Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Sheila A. Penrose
Sheila A. Penrose
Director
/s/ John W. Rogers, Jr.
John W. Rogers, Jr.
Director
/s/ Miles D. White
Miles D. White
Director
been filed with the Commission.
** Denotes compensatory plan.
ITEM 16. Form 10-K Summary
None.
(101.CAL)
XBRL Taxonomy Extension Calculation Linkbase Document.
(101.DEF)
XBRL Taxonomy Extension Definition Linkbase Document.
(101.LAB)
XBRL Taxonomy Extension Label Linkbase Document.
(101.PRE)
XBRL Taxonomy Extension Presentation Linkbase Document.
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.
* 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
McDonald’s Corporation
(Registrant)
By
/s/ Kevin M. Ozan
Kevin M. Ozan
Corporate Executive Vice President and
Chief Financial Officer
March 1, 2017
Date
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 1st day of March, 2017:
By
By
By
By
By
By
By
By
By
Signature, Title
/s/ Lloyd H. Dean
Lloyd H. Dean
Director
/s/ Stephen J. Easterbrook
Stephen J. Easterbrook
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Robert A. Eckert
Robert A. Eckert
Director
/s/ Margaret H. Georgiadis
Margaret H. Georgiadis
Director
/s/ Enrique Hernandez, Jr.
Enrique Hernandez, Jr.
Chairman of the Board and Director
/s/ Catherine Hoovel
Catherine Hoovel
Corporate Vice President – Chief Accounting Officer
(Principal Accounting Officer)
/s/ Jeanne P. Jackson
Jeanne P. Jackson
Director
/s/ Richard H. Lenny
Richard H. Lenny
Director
/s/ Walter E. Massey
Walter E. Massey
Director
54 McDonald's Corporation 2016 Annual Report
McDonald’s Corporation 2016 Annual Report 55
McDonald's Corporation 2016 Annual Report 55
Exhibit 12. Computation of Ratios
Ratio of Earnings to Fixed Charges
Dollars in millions
Earnings available for fixed charges
Income before provision for income taxes
Noncontrolling interest expense in operating results
of majority-owned subsidiaries less equity in
undistributed operating results of less than
50%-owned affiliates
Income tax provision (benefit) of 50%-owned
affiliates included in income from continuing
operations before provision for income taxes
Portion of rent charges (after reduction for rental
income from subleased properties) considered
to be representative of interest factors*
Interest expense, amortization of debt discount and
issuance costs, and depreciation of capitalized
interest*
Fixed charges
Portion of rent charges (after reduction for rental
income from subleased properties) considered
to be representative of interest factors*
Interest expense, amortization of debt discount
and issuance costs*
Capitalized interest*
Ratio of earnings to fixed charges
Years ended December 31, 2016
2015
2014
2013
2012
$ 6,866.0
$ 6,555.7
$ 7,372.0
$ 8,204.5
$8,079.0
12.5
3.3
7.3
3.7
6.3
9.0
11.1
(0.1)
23.8
64.0
342.6
365.1
374.6
374.6
358.1
904.8
$ 8,129.2
660.4
$ 7,592.2
596.1
$ 8,348.9
548.9
$ 9,160.8
550.1
$9,062.3
Foreign Currency-Denominated Debt as a Percent of Total Debt(1)
Dollars in millions
Total debt obligations
Fair value adjustments
Deferred debt costs
Debt obligations before fair value adjustments and deferred debt
costs
Foreign currency-denominated debt
Foreign currency-denominated debt as a percent of total debt
$25,955.7
$24,122.1
$14,935.7
—
110.0
(1.8)
106.0
(4.7)
54.0
$26,065.7
$ 8,926.2
$24,226.3
$ 7,016.1
$14,985.0
$ 5,930.3
34%
29%
40%
Years ended December 31, 2016
2015
2014
(1) Based on debt obligations before the effects of fair value hedging adjustments and deferred debt costs. These effects are excluded as they have no impact on the
obligation at maturity. See Debt financing note to the consolidated financial statements.
Total Debt as a Percent of Total Capitalization(1)(2)
Dollars in millions
Total debt obligations
Fair value adjustments
Deferred debt costs
Debt obligations before fair value adjustments and deferred debt
costs
Total capitalization
Total debt as a percent of total capitalization
Years ended December 31, 2016
2015
2014
$25,955.7
$24,122.1
$14,935.7
—
110.0
(1.8)
106.0
(4.7)
54.0
$26,065.7
$23,861.4
$24,226.3
$31,314.2
$14,985.0
$27,838.4
109%
77%
54%
$ 342.6
$ 365.1
$ 374.6
$ 374.6
$ 358.1
(1) 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
888.2
7.1
$ 1,237.9
6.57
643.7
9.4
$ 1,018.2
7.46
579.8
14.8
$ 969.2
8.61
532.1
15.6
$ 922.3
9.93
532.8
16.1
$ 907.0
9.99
*
Includes amounts of the Company and its majority-owned subsidiaries, and one-half of the amounts of 50%-owned affiliates. The Company records interest
expense on unrecognized tax benefits in the provision for income taxes. This interest is not included in the computation of fixed charges.
Return on Average Assets
Dollars in millions
Operating income
Average assets(1)
Return on average assets
Years ended December 31, 2016
$ 7,744.5
$33,686.2
2015
$ 7,145.5
$ 34,137.6
2014
$ 7,949.2
$36,456.0
23.0%
20.9%
21.8%
(1) Represents the average of the month-end balances of total assets for the past 13 months.
Fixed-Rate Debt as a Percent of Total Debt(1)(2)
Dollars in millions
Total debt obligations
Fair value adjustments
Deferred debt costs
Debt obligations before fair value adjustments and deferred debt
costs
Fixed-rate debt
Fixed-rate debt as a percent of total debt
Years ended December 31, 2016
$25,955.7
—
110.0
$26,065.7
$21,462.3
2015
$24,122.1
(1.8)
106.0
$ 24,226.3
$19,611.3
2014
$14,935.7
(4.7)
54.0
$14,985.0
$11,155.3
82%
81%
74%
(1) Based on debt obligations before the effects of fair value hedging adjustments and deferred debt costs. These effects are excluded as they have no impact on the
obligation at maturity. See Debt financing note to the consolidated financial statements.
(2)
Includes the effect of interest rate swaps.
obligation at maturity. See Debt financing note to the consolidated financial statements.
(2) Total capitalization represents debt obligations before fair value adjustments and deferred debt costs, and total shareholders' equity.
Cash Provided by Operations as a Percent of Total Debt(1)
Dollars in millions
Total debt obligations
Fair value adjustments
Deferred debt costs
Debt obligations before fair value adjustments and deferred debt
costs
Cash provided by operations
Cash provided by operations as a percent of total debt
Years ended December 31, 2016
2015
2014
$25,955.7
$24,122.1
$14,935.7
—
110.0
(1.8)
106.0
(4.7)
54.0
$26,065.7
$ 6,059.6
$24,226.3
$ 6,539.1
$14,985.0
$ 6,730.3
23%
27%
45%
(1) Based on debt obligations before the effects of fair value hedging adjustments and deferred debt costs. These effects are excluded as they have no impact on the
obligation at maturity. See Debt financing note to the consolidated financial statements.
Free Cash Flow and Free Cash Flow Conversion Rate
Dollars in millions
Years ended December 31, 2016
2015
2014
Cash provided by operations
Less: Capital expenditures
Free cash flow
Divided by: Net income
Free cash flow conversion rate
$ 6,059.6
$ 6,539.1
$ 6,730.3
1,821.0
1,814.0
2,583.0
$ 4,238.6
$ 4,725.1
$ 4,147.3
4,686.5
4,529.3
4,757.8
90.4%
104.3%
87.2%
Exhibit 12. Computation of Ratios
Ratio of Earnings to Fixed Charges
Earnings available for fixed charges
Income before provision for income taxes
Noncontrolling interest expense in operating results
of majority-owned subsidiaries less equity in
undistributed operating results of less than
50%-owned affiliates
Income tax provision (benefit) of 50%-owned
affiliates included in income from continuing
operations before provision for income taxes
Portion of rent charges (after reduction for rental
income from subleased properties) considered
to be representative of interest factors*
Interest expense, amortization of debt discount and
issuance costs, and depreciation of capitalized
interest*
Fixed charges
Portion of rent charges (after reduction for rental
income from subleased properties) considered
to be representative of interest factors*
Interest expense, amortization of debt discount
and issuance costs*
Capitalized interest*
Ratio of earnings to fixed charges
Dollars in millions
Years ended December 31, 2016
2015
2014
2013
2012
Foreign Currency-Denominated Debt as a Percent of Total Debt(1)
Dollars in millions
Total debt obligations
Fair value adjustments
Years ended December 31, 2016
$25,955.7
—
$ 6,866.0
$ 6,555.7
$ 7,372.0
$ 8,204.5
$ 8,079.0
12.5
3.3
7.3
3.7
6.3
9.0
11.1
(0.1)
23.8
64.0
342.6
365.1
374.6
374.6
358.1
904.8
660.4
596.1
548.9
$ 8,129.2
$ 7,592.2
$ 8,348.9
$ 9,160.8
550.1
$9,062.3
Deferred debt costs
Debt obligations before fair value adjustments and deferred debt
costs
Foreign currency-denominated debt
Foreign currency-denominated debt as a percent of total debt
2015
$24,122.1
(1.8)
106.0
2014
$14,935.7
(4.7)
54.0
110.0
$26,065.7
$ 8,926.2
$24,226.3
$ 7,016.1
$14,985.0
$ 5,930.3
34%
29%
40%
(1) Based on debt obligations before the effects of fair value hedging adjustments and deferred debt costs. These effects are excluded as they have no impact on the
obligation at maturity. See Debt financing note to the consolidated financial statements.
Total Debt as a Percent of Total Capitalization(1)(2)
Dollars in millions
Total debt obligations
Fair value adjustments
Deferred debt costs
Debt obligations before fair value adjustments and deferred debt
costs
Total capitalization
Total debt as a percent of total capitalization
Years ended December 31, 2016
$25,955.7
—
110.0
$26,065.7
$23,861.4
2015
$24,122.1
(1.8)
106.0
$24,226.3
$31,314.2
2014
$14,935.7
(4.7)
54.0
$14,985.0
$27,838.4
109%
77%
54%
$ 342.6
$ 365.1
$ 374.6
$ 374.6
$ 358.1
(1) 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
*
Includes amounts of the Company and its majority-owned subsidiaries, and one-half of the amounts of 50%-owned affiliates. The Company records interest
expense on unrecognized tax benefits in the provision for income taxes. This interest is not included in the computation of fixed charges.
Return on Average Assets
Dollars in millions
Operating income
Average assets(1)
Return on average assets
Dollars in millions
Total debt obligations
Fair value adjustments
Deferred debt costs
costs
Fixed-rate debt
(1) Represents the average of the month-end balances of total assets for the past 13 months.
Fixed-Rate Debt as a Percent of Total Debt(1)(2)
Debt obligations before fair value adjustments and deferred debt
888.2
7.1
643.7
9.4
579.8
14.8
532.1
15.6
$ 1,237.9
$ 1,018.2
$ 969.2
$ 922.3
6.57
7.46
8.61
9.93
532.8
16.1
$ 907.0
9.99
Years ended December 31, 2016
$ 7,744.5
$33,686.2
2015
$ 7,145.5
$34,137.6
2014
$ 7,949.2
$36,456.0
23.0%
20.9%
21.8%
Years ended December 31, 2016
$25,955.7
—
110.0
$26,065.7
$21,462.3
2015
$24,122.1
(1.8)
106.0
$24,226.3
$19,611.3
2014
$14,935.7
(4.7)
54.0
$ 14,985.0
$ 11,155.3
Fixed-rate debt as a percent of total debt
82%
81%
74%
(1) Based on debt obligations before the effects of fair value hedging adjustments and deferred debt costs. These effects are excluded as they have no impact on the
obligation at maturity. See Debt financing note to the consolidated financial statements.
(2)
Includes the effect of interest rate swaps.
obligation at maturity. See Debt financing note to the consolidated financial statements.
(2) Total capitalization represents debt obligations before fair value adjustments and deferred debt costs, and total shareholders' equity.
Cash Provided by Operations as a Percent of Total Debt(1)
Dollars in millions
Total debt obligations
Fair value adjustments
Years ended December 31, 2016
$25,955.7
—
Deferred debt costs
Debt obligations before fair value adjustments and deferred debt
costs
Cash provided by operations
Cash provided by operations as a percent of total debt
2015
$24,122.1
(1.8)
106.0
2014
$14,935.7
(4.7)
54.0
110.0
$26,065.7
$ 6,059.6
$24,226.3
$ 6,539.1
$14,985.0
$ 6,730.3
23%
27%
45%
(1) Based on debt obligations before the effects of fair value hedging adjustments and deferred debt costs. These effects are excluded as they have no impact on the
obligation at maturity. See Debt financing note to the consolidated financial statements.
Free Cash Flow and Free Cash Flow Conversion Rate
Dollars in millions
Years ended December 31, 2016
2015
2014
Cash provided by operations
Less: Capital expenditures
Free cash flow
Divided by: Net income
Free cash flow conversion rate
$ 6,059.6
$ 6,539.1
$ 6,730.3
1,821.0
1,814.0
2,583.0
$ 4,238.6
$ 4,725.1
$ 4,147.3
4,686.5
4,529.3
4,757.8
90.4%
104.3%
87.2%
Reconciliation of Returns on Incremental Invested Capital
ROIIC is a measure reviewed by management over one-year and three-year time periods to evaluate the overall profitability of our markets,
the effectiveness of capital deployed and the future allocation of capital. This measure is calculated using operating income and constant
foreign exchange rates to exclude the impact of foreign currency translation. The numerator is the Company’s incremental operating income
plus depreciation and amortization from the base period.
The denominator is the weighted-average cash used for investing activities during the applicable one-or three-year period. The
weighted-average cash used for investing activities is based on a weighting applied on a quarterly basis. These weightings are used to
reflect the estimated contribution of each quarter’s investing activities to incremental operating income. For example, fourth quarter 2016
investing activities are weighted less because the assets purchased have only recently been deployed and would have generated little
incremental operating income (12.5% of fourth quarter 2016 investing activities are included in the one-year and three-year calculations). In
contrast, fourth quarter 2015 is heavily weighted because the assets purchased were deployed more than 12 months ago, and therefore
have a full-year impact on 2016 operating income, with little or no impact to the base period (87.5% and 100.0% of fourth quarter 2015
investing activities are included in the one-year and three-year calculations, respectively). Cash used for investing activities can vary
significantly by quarter, resulting in a weighted-average that may be higher or lower than the simple average of the periods presented.
Management believes that weighting cash used for investing activities provides a more accurate reflection of the relationship between its
investments and returns than a simple average.
The reconciliations to the most comparable measurements, in accordance with accounting principles generally accepted in the U.S., for
the numerator and denominator of the one-year and three-year ROIIC are as follows:
One-year ROIIC calculation (dollars in millions):
Three-year ROIIC calculation (dollars in millions):
Years ended December 31,
2016
2015
NUMERATOR:
Operating income
Depreciation and amortization
Currency translation(1)
$ 7,744.5
$7,145.5
1,516.5
1,555.7
Change in operating income plus depreciation and
amortization (at constant foreign exchange rates)
DENOMINATOR:
Weighted-average cash used for
investing activities(2)
Currency translation(1)
Weighted-average cash used for investing activities
(at constant foreign exchange rates)
One-year ROIIC(3)
Increase/
(decrease)
$ 599.0
(39.2)
196.9
$ 756.7
$1,207.0
0.7
$1,207.7
62.7%
Years ended December 31,
2016
2013
Increase/
(decrease)
NUMERATOR:
Operating income
Depreciation and amortization
Currency translation(1)
$ 7,744.5
$8,764.3
$(1,019.8)
1,516.5
1,585.1
Change in operating income plus depreciation and
amortization (at constant foreign exchange rates)
DENOMINATOR:
Weighted-average cash used for
investing activities(2)
Currency translation(1)
Weighted-average cash used for investing activities
(at constant foreign exchange rates)
Three-year ROIIC(3)
(68.6)
1,380.9
$
292.5
$ 5,750.9
(53.1)
$ 5,697.8
5.1%
(1) Represents the effect of foreign currency translation by translating results at an average exchange rate for the periods measured.
(2) Represents one-year and three-year, respectively, weighted-average cash used for investing activities, determined by applying the weightings below to the cash
used for investing activities for each quarter in the two-year and four-year periods ended December 31, 2016.
Cash used for
investing activities
AS A PERCENT
Quarters ended:
March 31
June 30
September 30
December 31
Years ended December 31,
2016
2015
$ 981.6
$1,420.0
87.5%
12.5%
62.5
37.5
12.5
37.5
62.5
87.5
Cash used for
investing activities
AS A PERCENT
Quarters ended:
March 31
June 30
September 30
December 31
Years ended December 31,
2016
2015
2014
2013
$ 981.6
$1,420.0
$2,304.9
$2,673.8
87.5% 100.0% 100.0%
62.5
37.5
100.0
100.0
100.0
100.0
12.5
100.0
100.0
12.5%
37.5
62.5
87.5
Exhibit 21. Subsidiaries of the Registrant
Name of Subsidiary [State or Country of Incorporation]
Domestic Subsidiaries
McD Asia Pacific, LLC [Delaware]
McD Europe Franchising LLC [Delaware]
McDonald's Deutschland LLC [Delaware]
McDonald's Development Italy LLC [Delaware]
McDonald's Europe, Inc. [Delaware]
McDonald's International Property Company, Ltd. [Delaware]
McDonald's Real Estate Company [Delaware]
McDonald's Sistemas de Espana, Inc. [Delaware]
McDonald's USA, LLC [Delaware]
Foreign Subsidiaries
3267114 Nova Scotia Company [Canada]
Closed Joint Stock Company "Moscow-McDonald's" [Russia]
Guangdong Sanyuan McDonald's Food Company Limited [China]*
HanGook McDonald's Co. Ltd. [South Korea]
Limited Liability Company "McDonald's" [Russia]
Lux MC Holdings S.àr.l. [Luxembourg]
McD APMEA Holdings Pte. Ltd. [Singapore]
MCD Europe Limited [United Kingdom]
MCDI Holdings Limited [United Kingdom]
MCD Investments Limited [United Kingdom]
McDonald's Australia Limited [Australia]
McDonald's Central Europe GmbH [Austria]
McDonald's (China) Company Limited [China]
McDonald's France S.A.S. [France]
McDonald's Franchise GmbH [Austria]
McDonald's Gesellschaft m.b.H. [Austria]
McDonald's GmbH [Germany]
McDonald's Immobilien Gesellschaft mit beschrankter Haftung [Germany]
McDonald's Liegenschaftsverwaltung Gesellschaft m.b.H. [Austria]
McDonald's Nederland B.V. [Netherlands]
McDonald's Polska Sp. z o.o [Poland]
McDonald's Real Estate LLP [United Kingdom]
McDonald's Restaurants (Hong Kong) Limited [Hong Kong]
McDonald's Restaurants Limited [United Kingdom]
McDonald's Restaurants (New Zealand) Limited [New Zealand]
McDonald's Restaurants of Canada Limited [Canada]
McDonald's Restaurants (Shenzhen) Company Limited [China]
McDonald's Restaurants (Taiwan) Co., Ltd. [Taiwan]
McDonald's Suisse Development Sàrl [Switzerland]
McDonald's Suisse Restaurants Sàrl [Switzerland]
McDonald's (Tianjin) Foods Company Limited [China]
Restaurantes McDonald's, S.A. [Spain]
Shanghai McDonald's Food Co., Ltd. [China]
Sistemas McDonald's Portugal, LDA [Portugal]
Svenska McDonald's AB [Sweden]
(3) Significant investing cash inflows resulting from the Company's refranchising initiatives benefited the one-year and three-year ROIIC calculation by 20.3% and
0.7%, respectively.
The names of certain subsidiaries have been omitted because they do not constitute significant subsidiaries. These include, but are not limited to: McDonald's
APMEA, LLC [Delaware]; McDonald's Global Markets LLC [Delaware]; McDonald's International, LLC [Delaware]; McDonald's Latin America, LLC [Delaware];
MCD Global Franchising Limited [United Kingdom]; and other domestic and foreign, direct and indirect subsidiaries of the registrant, including 49 wholly-
owned subsidiaries of McDonald's USA, LLC, each of which operates one or more McDonald's restaurants within the United States and the District of
Columbia.
[ ] Brackets indicate state or country of incorporation and do not form part of corporate name.
*
This subsidiary is not wholly owned by the registrant.
Reconciliation of Returns on Incremental Invested Capital
ROIIC is a measure reviewed by management over one-year and three-year time periods to evaluate the overall profitability of our markets,
the effectiveness of capital deployed and the future allocation of capital. This measure is calculated using operating income and constant
foreign exchange rates to exclude the impact of foreign currency translation. The numerator is the Company’s incremental operating income
plus depreciation and amortization from the base period.
The denominator is the weighted-average cash used for investing activities during the applicable one-or three-year period. The
weighted-average cash used for investing activities is based on a weighting applied on a quarterly basis. These weightings are used to
reflect the estimated contribution of each quarter’s investing activities to incremental operating income. For example, fourth quarter 2016
investing activities are weighted less because the assets purchased have only recently been deployed and would have generated little
incremental operating income (12.5% of fourth quarter 2016 investing activities are included in the one-year and three-year calculations). In
contrast, fourth quarter 2015 is heavily weighted because the assets purchased were deployed more than 12 months ago, and therefore
have a full-year impact on 2016 operating income, with little or no impact to the base period (87.5% and 100.0% of fourth quarter 2015
investing activities are included in the one-year and three-year calculations, respectively). Cash used for investing activities can vary
significantly by quarter, resulting in a weighted-average that may be higher or lower than the simple average of the periods presented.
Management believes that weighting cash used for investing activities provides a more accurate reflection of the relationship between its
investments and returns than a simple average.
The reconciliations to the most comparable measurements, in accordance with accounting principles generally accepted in the U.S., for
the numerator and denominator of the one-year and three-year ROIIC are as follows:
One-year ROIIC calculation (dollars in millions):
Three-year ROIIC calculation (dollars in millions):
Years ended December 31,
2016
2015
Years ended December 31,
2016
2013
Increase/
(decrease)
$ 7,744.5
$7,145.5
$ 599.0
$ 7,744.5
$8,764.3
$(1,019.8)
(68.6)
1,380.9
$
292.5
$ 5,750.9
(53.1)
$ 5,697.8
5.1%
Depreciation and amortization
1,516.5
1,555.7
Depreciation and amortization
1,516.5
1,585.1
Change in operating income plus depreciation and
amortization (at constant foreign exchange rates)
Change in operating income plus depreciation and
amortization (at constant foreign exchange rates)
NUMERATOR:
Operating income
Currency translation(1)
DENOMINATOR:
Weighted-average cash used for
investing activities(2)
Currency translation(1)
Increase/
(decrease)
(39.2)
196.9
$ 756.7
$1,207.0
0.7
$1,207.7
62.7%
NUMERATOR:
Operating income
Currency translation(1)
DENOMINATOR:
Weighted-average cash used for
investing activities(2)
Currency translation(1)
Weighted-average cash used for investing activities
(at constant foreign exchange rates)
Weighted-average cash used for investing activities
(at constant foreign exchange rates)
One-year ROIIC(3)
Three-year ROIIC(3)
(1) Represents the effect of foreign currency translation by translating results at an average exchange rate for the periods measured.
(2) Represents one-year and three-year, respectively, weighted-average cash used for investing activities, determined by applying the weightings below to the cash
used for investing activities for each quarter in the two-year and four-year periods ended December 31, 2016.
Years ended December 31,
2016
2015
Years ended December 31,
2016
2015
2014
2013
$ 981.6
$1,420.0
$ 981.6
$1,420.0
$2,304.9
$2,673.8
87.5% 100.0% 100.0%
12.5%
62.5
37.5
12.5
100.0
100.0
100.0
100.0
100.0
100.0
37.5
62.5
87.5
Cash used for
investing activities
AS A PERCENT
Quarters ended:
March 31
June 30
September 30
December 31
0.7%, respectively.
Cash used for
investing activities
AS A PERCENT
Quarters ended:
March 31
June 30
September 30
December 31
87.5%
12.5%
62.5
37.5
12.5
37.5
62.5
87.5
(3) Significant investing cash inflows resulting from the Company's refranchising initiatives benefited the one-year and three-year ROIIC calculation by 20.3% and
Exhibit 21. Subsidiaries of the Registrant
Name of Subsidiary [State or Country of Incorporation]
Domestic Subsidiaries
McD Asia Pacific, LLC [Delaware]
McD Europe Franchising LLC [Delaware]
McDonald's Deutschland LLC [Delaware]
McDonald's Development Italy LLC [Delaware]
McDonald's Europe, Inc. [Delaware]
McDonald's International Property Company, Ltd. [Delaware]
McDonald's Real Estate Company [Delaware]
McDonald's Sistemas de Espana, Inc. [Delaware]
McDonald's USA, LLC [Delaware]
Foreign Subsidiaries
3267114 Nova Scotia Company [Canada]
Closed Joint Stock Company "Moscow-McDonald's" [Russia]
Guangdong Sanyuan McDonald's Food Company Limited [China]*
HanGook McDonald's Co. Ltd. [South Korea]
Limited Liability Company "McDonald's" [Russia]
Lux MC Holdings S.àr.l. [Luxembourg]
McD APMEA Holdings Pte. Ltd. [Singapore]
MCD Europe Limited [United Kingdom]
MCDI Holdings Limited [United Kingdom]
MCD Investments Limited [United Kingdom]
McDonald's Australia Limited [Australia]
McDonald's Central Europe GmbH [Austria]
McDonald's (China) Company Limited [China]
McDonald's France S.A.S. [France]
McDonald's Franchise GmbH [Austria]
McDonald's Gesellschaft m.b.H. [Austria]
McDonald's GmbH [Germany]
McDonald's Immobilien Gesellschaft mit beschrankter Haftung [Germany]
McDonald's Liegenschaftsverwaltung Gesellschaft m.b.H. [Austria]
McDonald's Nederland B.V. [Netherlands]
McDonald's Polska Sp. z o.o [Poland]
McDonald's Real Estate LLP [United Kingdom]
McDonald's Restaurants (Hong Kong) Limited [Hong Kong]
McDonald's Restaurants Limited [United Kingdom]
McDonald's Restaurants (New Zealand) Limited [New Zealand]
McDonald's Restaurants of Canada Limited [Canada]
McDonald's Restaurants (Shenzhen) Company Limited [China]
McDonald's Restaurants (Taiwan) Co., Ltd. [Taiwan]
McDonald's Suisse Development Sàrl [Switzerland]
McDonald's Suisse Restaurants Sàrl [Switzerland]
McDonald's (Tianjin) Foods Company Limited [China]
Restaurantes McDonald's, S.A. [Spain]
Shanghai McDonald's Food Co., Ltd. [China]
Sistemas McDonald's Portugal, LDA [Portugal]
Svenska McDonald's AB [Sweden]
The names of certain subsidiaries have been omitted because they do not constitute significant subsidiaries. These include, but are not limited to: McDonald's
APMEA, LLC [Delaware]; McDonald's Global Markets LLC [Delaware]; McDonald's International, LLC [Delaware]; McDonald's Latin America, LLC [Delaware];
MCD Global Franchising Limited [United Kingdom]; and other domestic and foreign, direct and indirect subsidiaries of the registrant, including 49 wholly-
owned subsidiaries of McDonald's USA, LLC, each of which operates one or more McDonald's restaurants within the United States and the District of
Columbia.
[ ] Brackets indicate state or country of incorporation and do not form part of corporate name.
*
This subsidiary is not wholly owned by the registrant.
Exhibit 23. Consent of Independent Registered Public Accounting Firm
Exhibit 24. Power of Attorney
We consent to the incorporation by reference in the Registration Statements of McDonald's Corporation (listed below) and in the related
prospectuses of our reports dated March 1, 2017 with respect to the consolidated financial statements of McDonald's Corporation and the
effectiveness of internal control over financial reporting of McDonald's Corporation, included in this Annual Report (Form 10-K) for the year
ended December 31, 2016.
Commission File No. for Registration Statements
Form S-3
333-205731
Form S-8
333-71656
333-115770
333-149990
333-177314
333-193015
ERNST & YOUNG LLP
Chicago, Illinois
March 1, 2017
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned, being a director or officer, or both, of McDonald's
Corporation, a Delaware corporation (the “Company”), hereby constitutes and appoints Denise A. Horne, Catherine Hoovel, Kevin M. Ozan
and Gloria Santona, and each one of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any and all capacities to execute any and all amendments to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016, to be filed with the U.S. Securities and Exchange
Commission by the Company under the Securities Exchange Act of 1934, as amended, with all exhibits thereto, and other documents in
connection therewith, granting unto said attorneys-in-fact and agents, and each one of them, full power and authority to do and perform
each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his or
her substitutes, may lawfully do or cause to be done by virtue hereof.
This Power of Attorney may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney on and as of the 1st day of March, 2017.
Corporate Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Walter E. Massey
Walter E. Massey
Director
/s/ John J. Mulligan
John J. Mulligan
Director
/s/ Kevin M. Ozan
Kevin M. Ozan
/s/ Sheila A. Penrose
Sheila A. Penrose
Director
/s/ John W. Rogers, Jr.
John W. Rogers, Jr.
Director
/s/ Miles D. White
Miles D. White
Director
/s/ Lloyd H. Dean
Lloyd H. Dean
Director
/s/ Stephen J. Easterbrook
Stephen J. Easterbrook
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Robert A. Eckert
Robert A. Eckert
Director
/s/ Margaret H. Georgiadis
Margaret H. Georgiadis
Director
/s/ Enrique Hernandez, Jr.
Enrique Hernandez, Jr.
Chairman of the Board and Director
/s/ Catherine Hoovel
Catherine Hoovel
/s/ Jeanne P. Jackson
Jeanne P. Jackson
Director
/s/ Richard H. Lenny
Richard H. Lenny
Director
Corporate Vice President – Chief Accounting Officer
(Principal Accounting Officer)
Exhibit 23. Consent of Independent Registered Public Accounting Firm
Exhibit 24. Power of Attorney
We consent to the incorporation by reference in the Registration Statements of McDonald's Corporation (listed below) and in the related
prospectuses of our reports dated March 1, 2017 with respect to the consolidated financial statements of McDonald's Corporation and the
effectiveness of internal control over financial reporting of McDonald's Corporation, included in this Annual Report (Form 10-K) for the year
ended December 31, 2016.
Commission File No. for Registration Statements
Form S-3
333-205731
Form S-8
333-71656
333-115770
333-149990
333-177314
333-193015
ERNST & YOUNG LLP
Chicago, Illinois
March 1, 2017
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned, being a director or officer, or both, of McDonald's
Corporation, a Delaware corporation (the “Company”), hereby constitutes and appoints Denise A. Horne, Catherine Hoovel, Kevin M. Ozan
and Gloria Santona, and each one of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any and all capacities to execute any and all amendments to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016, to be filed with the U.S. Securities and Exchange
Commission by the Company under the Securities Exchange Act of 1934, as amended, with all exhibits thereto, and other documents in
connection therewith, granting unto said attorneys-in-fact and agents, and each one of them, full power and authority to do and perform
each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his or
her substitutes, may lawfully do or cause to be done by virtue hereof.
This Power of Attorney may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney on and as of the 1st day of March, 2017.
/s/ Walter E. Massey
Walter E. Massey
Director
/s/ John J. Mulligan
John J. Mulligan
Director
/s/ Kevin M. Ozan
Kevin M. Ozan
Corporate Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Sheila A. Penrose
Sheila A. Penrose
Director
/s/ John W. Rogers, Jr.
John W. Rogers, Jr.
Director
/s/ Miles D. White
Miles D. White
Director
/s/ Lloyd H. Dean
Lloyd H. Dean
Director
/s/ Stephen J. Easterbrook
Stephen J. Easterbrook
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Robert A. Eckert
Robert A. Eckert
Director
/s/ Margaret H. Georgiadis
Margaret H. Georgiadis
Director
/s/ Enrique Hernandez, Jr.
Enrique Hernandez, Jr.
Chairman of the Board and Director
/s/ Catherine Hoovel
Catherine Hoovel
Corporate Vice President – Chief Accounting Officer
(Principal Accounting Officer)
/s/ Jeanne P. Jackson
Jeanne P. Jackson
Director
/s/ Richard H. Lenny
Richard H. Lenny
Director
Exhibit 31.1. Rule 13a-14(a) Certification of Chief Executive Officer
Exhibit 31.2. Rule 13a-14(a) Certification of Chief Financial Officer
I, Stephen J. Easterbrook, certify that:
(1)
(2)
(3)
(4)
I have reviewed this annual report on Form 10-K of McDonald’s Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
I, Kevin M. Ozan, certify that:
(1)
(2)
I have reviewed this annual report on Form 10-K of McDonald’s Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
(3)
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
(4)
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(5)
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
(5)
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
the equivalent functions):
information; and
Date: March 1, 2017
Date: March 1, 2017
/s/ Stephen J. Easterbrook
Stephen J. Easterbrook
President and Chief Executive Officer
/s/ Kevin M. Ozan
Kevin M. Ozan
Corporate Executive Vice President and
Chief Financial Officer
Exhibit 31.1. Rule 13a-14(a) Certification of Chief Executive Officer
Exhibit 31.2. Rule 13a-14(a) Certification of Chief Financial Officer
I, Stephen J. Easterbrook, certify that:
I, Kevin M. Ozan, certify that:
I have reviewed this annual report on Form 10-K of McDonald’s Corporation;
(1)
(2)
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
(3)
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
(4)
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(1)
(2)
(3)
(4)
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(5)
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
(5)
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
information; and
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
I have reviewed this annual report on Form 10-K of McDonald’s Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 1, 2017
Date: March 1, 2017
/s/ Stephen J. Easterbrook
Stephen J. Easterbrook
President and Chief Executive Officer
/s/ Kevin M. Ozan
Kevin M. Ozan
Corporate Executive Vice President and
Chief Financial Officer
Exhibit 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
Exhibit 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
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States
Code), the undersigned officer of McDonald’s Corporation (the “Company”), does hereby certify, to such officer’s knowledge, that the Annual
Report on Form 10-K for the year ended December 31, 2016 of the Company fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States
Code), the undersigned officer of McDonald’s Corporation (the “Company”), does hereby certify, to such officer’s knowledge, that the Annual
Report on Form 10-K for the year ended December 31, 2016 of the Company fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: March 1, 2017
Date: March 1, 2017
/s/ Stephen J. Easterbrook
Stephen J. Easterbrook
President and Chief Executive Officer
/s/ Kevin M. Ozan
Kevin M. Ozan
Corporate Executive Vice President and
Chief Financial Officer
Exhibit 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
Exhibit 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
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States
Code), the undersigned officer of McDonald’s Corporation (the “Company”), does hereby certify, to such officer’s knowledge, that the Annual
Report on Form 10-K for the year ended December 31, 2016 of the Company fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material respects, the financial
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States
Code), the undersigned officer of McDonald’s Corporation (the “Company”), does hereby certify, to such officer’s knowledge, that the Annual
Report on Form 10-K for the year ended December 31, 2016 of the Company fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ Stephen J. Easterbrook
Stephen J. Easterbrook
President and Chief Executive Officer
Date: March 1, 2017
/s/ Kevin M. Ozan
Kevin M. Ozan
Corporate Executive Vice President and
Chief Financial Officer
condition and results of operations of the Company.
Date: March 1, 2017
McDonald’s Corporation
One McDonald’s Plaza, Oak Brook, IL 60523
corporate.mcdonalds.com