Company Quick10K Filing
Quick10K
McDonalds
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$191.70 765 $146,710
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-03-19 Officers
8-K 2019-02-25 Other Events, Exhibits
8-K 2019-01-30 Earnings, Regulation FD, Exhibits
8-K 2019-01-14
8-K 2018-11-29
8-K 2018-10-23
8-K 2018-09-20
8-K 2018-09-20 Regulation FD, Exhibits
8-K 2018-08-15 Other Events, Exhibits
8-K 2018-07-26
8-K 2018-07-19
8-K 2018-05-24
8-K 2018-05-22
8-K 2018-04-30
8-K 2018-03-16
8-K 2018-01-30
SCHW Schwab Charles 60,920
GNTX Gentex 5,630
USM United States Cellular 4,070
EB Eventbrite 1,740
CNXN PC Connection 960
STRS Stratus Properties 210
CVU CPI Aerostructures 76
XELB XCel Brands 27
NLRT Nogales Resources 0
ITKG Integral Technologies 0
MCD 2018-12-31
Part I
Item 1. Business
Item 1A. Risk Factors and Cautionary Statement Regarding Forward-Looking Statements
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 16. Form 10-K Summary
EX-10.R mcd-12312018xex10r.htm
EX-12 mcd-12312018xex12.htm
EX-21 mcd-12312018xex21.htm
EX-23 mcd-12312018xex23.htm
EX-24 mcd-12312018xex24.htm
EX-31.1 mcd-12312018xex311.htm
EX-31.2 mcd-12312018xex312.htm
EX-32.1 mcd-12312018xex321.htm
EX-32.2 mcd-12312018xex322.htm

McDonalds Earnings 2018-12-31

MCD 10K Annual Report

Balance SheetIncome StatementCash Flow

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
 
FORM 10-K
 
 
 
 x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
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)
 
36-2361282
(I.R.S. Employer
Identification No.)
 
 
110 North Carpenter Street
Chicago, Illinois
(Address of principal executive offices)
 
60607
(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
 
Name of each exchange
on which registered
Common stock, $.01 par value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes x  No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ¨  No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x  No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer  x         Accelerated filer  ¨ Non-accelerated filer  ¨
Smaller reporting company  ¨ Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨  No x
The aggregate market value of common stock held by non-affiliates of the registrant as of June 29, 2018 was $121,530,450,454.
The number of shares outstanding of the registrant’s common stock as of January 31, 2019 was 765,317,332.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates information by reference from the registrant’s 2019 definitive proxy statement, which will be filed no later than 120 days after December 31, 2018.
 



McDONALD’S CORPORATION
INDEX

Page reference
 
 
 
 
Part I.
 
 
 
 
Item 1
 
Item 1A
 
Item 1B
 
Item 2
 
Item 3
 
Item 4
 
Additional Item
 
 
 
 
Part II.
 
 
 
 
Item 5
 
Item 6
 
Item 7
 
Item 7A
 
Item 8
 
Item 9
 
Item 9A
 
Item 9B
 
 
 
 
Part III.
 
 
 
 
Item 10
 
Item 11
 
Item 12
 
Item 13
 
Item 14
 
 
 
 
Part IV.
 
 
 
 
Item 15
 
Item 16
 
 
 
 
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 subsidiaries, is referred to herein as the “Company.”
a. General
For the year ended December 31, 2018, there were no material changes to the Company's corporate structure or in its method of conducting business. The business was structured with segments that combine markets with similar characteristics and opportunities for growth. Significant reportable segments included 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.
As detailed in the Company's Form 8-K filed with the U.S. Securities and Exchange Commission ("SEC") on September 24, 2018, the Company announced changes to its global operating structure, effective January 1, 2019. Refer to the Segment and Geographic Information section included in Part II, Item 8, page 49 of this Form 10-K for additional information.
b. Narrative description of business
General
The Company operates and franchises McDonald’s restaurants, which serve a locally-relevant menu of quality food and beverages in more than 100 countries. McDonald’s franchised restaurants are owned and operated under one of the following structures - conventional franchise, developmental license or affiliate. The optimal ownership structure for an individual restaurant, trading area or market (country) is based on a variety of factors, including the availability of individuals with the entrepreneurial experience and financial resources, as well as the local legal and regulatory environment in critical areas such as property ownership and franchising. We continually review our mix of Company-owned and franchised restaurants to help optimize overall performance, with a goal to be approximately 95% franchised over the long term. The business relationship between McDonald’s and its independent franchisees is supported by adhering to standards and policies and is of fundamental importance to overall performance and to protecting the McDonald’s brand.
The Company is primarily a franchisor, with approximately 93% of McDonald's restaurants currently owned and operated by independent franchisees. 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 strength of McDonald’s global brand, operating system and financial resources.
Directly operating McDonald’s restaurants contributes significantly to our ability to act as a credible franchisor. One of the strengths of the franchising model is that the expertise from operating Company-owned restaurants allows McDonald’s to improve the operations and success of all restaurants while innovations from franchisees can be tested and, when viable, efficiently implemented across relevant restaurants. Having Company-owned and operated restaurants provides Company personnel with a venue for restaurant operations training experience. In addition, in our Company-owned and operated restaurants, and in collaboration with franchisees, we are able to further develop and refine operating standards, marketing concepts and product and pricing strategies that will ultimately benefit McDonald’s restaurants.
Conventional Franchise
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 in collaboration with franchisees are designed to cater to consumer preferences, improve local business performance, and increase the value of our brand through the development of modernized, more attractive and higher revenue generating restaurants.
The Company’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 facilitate consistency and high quality at all McDonald’s restaurants. Conventional franchisees contribute to the Company’s revenue, primarily through the payment of rent and royalties based upon a percent of sales, with specified minimum rent payments, along with initial fees paid upon the opening of a new restaurant or grant of a new franchise. This structure enables McDonald’s to generate significant levels of cash flow.
Developmental License or Affiliate
Under a developmental license or affiliate arrangement, licensees are responsible for operating and managing the business, providing capital (including the real estate interest) and developing and opening new restaurants. The Company generally does not invest any capital under a developmental license or affiliate arrangement, and it receives a royalty based upon a percent of sales and generally will receive initial fees upon the opening of a new restaurant or grant of a new term. While developmental license and affiliate arrangements are largely the same, affiliate arrangements are used in a limited number of foreign markets where the Company also has an equity investment and records its share of net results in Equity in earnings of unconsolidated affiliates.
Supply chain, food safety, and quality assurance
The Company and its franchisees purchase food, packaging, equipment and other goods from numerous independent suppliers. The Company has established and enforces high food safety and quality standards. The Company has quality centers around the world designed to promote consistency of its high standards. The quality assurance process not only involves ongoing product reviews, but also

 
McDonald's Corporation 2018 Annual Report 1


on-site supplier visits. A Food Safety Advisory Council, composed of the Company’s internal food safety experts, as well as suppliers and outside academia, provides strategic global leadership for all aspects of food safety. We have ongoing programs to educate employees about food safety practices, and our suppliers and restaurant operators participate in food safety trainings where we share best practices on food safety and quality. In addition, the Company works closely with suppliers to encourage innovation and drive continuous improvement. Leveraging scale, supply chain infrastructure and risk management strategies, the Company also collaborates with suppliers toward a goal of achieving competitive, predictable food and paper costs over the long term.
Independently owned and operated distribution centers, approved by the Company, distribute products and supplies to McDonald’s restaurants. In addition, restaurant personnel are trained in the proper storage, handling and preparation of food for customers.
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, 2018, 2017 and 2016 in Part II, Item 7, pages 15 through 31, and the Consolidated Statement of Cash Flows for the years ended December 31, 2018, 2017 and 2016 in Part II, Item 8, page 35 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.
Competition
McDonald’s restaurants compete with international, national, regional and local retailers of food products. The Company competes on the basis of price, convenience, service, 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 9 million outlets and generated $1.3 trillion in annual sales in 2017, the most recent year for which data is available. McDonald’s Systemwide 2017 restaurant business accounted for 0.4% of those outlets and 7.1% 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 19 million outlets and generated $2.5 trillion in annual sales in 2017. McDonald’s Systemwide restaurant business accounted for 0.2% of those outlets and 3.7% of the sales.


McDonald's Corporation 2018 Annual Report 2


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 Company, its franchisees and suppliers (collectively referred to as 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. In addition, the Company launched its Scale for Good framework in 2018, which includes the environmental-related pillars of climate action, packaging and recycling, and sustainable sourcing. These include goals and initiatives to reduce System greenhouse gas emissions, responsibly source ingredients and packaging, and increase the availability of recycling in restaurants to reduce waste.
Number of employees
The Company’s number of employees worldwide, including its corporate office employees and Company-owned and operated restaurant employees, was approximately 210,000 as of year-end 2018.
c. 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 SEC. Such reports may be obtained by visiting the SEC's website at www.sec.gov.
Financial and other information can also be accessed on the investor section of the Company’s website at www.investor.mcdonalds.com. The Company uses this website as a primary channel for disclosing key information to its investors, some of which may contain material and previously non-public information. The Company makes available, free of charge, copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. Copies of financial and other information are also available free of charge by calling (800) 228-9623.
Also posted on McDonald’s website are the Company’s Corporate Governance Principles; the charters for each of the Committees of the Board of Directors, including the Audit and Finance Committee, Compensation Committee, Governance Committee, Public Policy and Strategy Committee and Sustainability and Corporate Responsibility Committee; the Code of Conduct for the Board of Directors; and the Company’s Standards of Business Conduct, which applies to all officers and employees. Copies of these documents are also available free of charge by calling (800) 228-9623.
Information on the Company’s website is not incorporated into this Form 10-K or the Company’s other securities filings 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,” “anticipate” and “plan” or similar expressions. In particular, statements regarding our plans, strategies, prospects and expectations regarding our business and industry, including those under “Outlook,” 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 evolve and execute against our business strategies, including under the Velocity Growth Plan, we may not be able to increase operating income.
To drive operating income growth, our business strategies must be effective in maintaining and strengthening customer appeal, delivering sustainable guest count growth and driving a higher average check. Whether these strategies are successful depends mainly on our System’s ability to:
Continue to innovate and differentiate the McDonald’s experience, including by preparing and serving our food in a way that balances value and convenience to our customers with profitability;
Capitalize on our global scale, iconic brand and local market presence to enhance our ability to retain, regain and convert key customer groups;
Utilize our new organizational structure to build on our progress and execute against our business strategies;
Augment our digital and delivery initiatives, including mobile ordering, along with Experience of the Future (“EOTF”), particularly in the U.S.;
Identify and develop restaurant sites consistent with our plans for net growth of Systemwide restaurants;

 
McDonald's Corporation 2018 Annual Report 3


Operate restaurants with high service levels and optimal capacity while managing the increasing complexity of our restaurant operations and create efficiencies through innovative use of technology; and
Accelerate our existing strategies through growth opportunities, investments and partnerships.
If we are delayed or unsuccessful in executing our strategies, or if our strategies do not yield the desired results, our business, financial condition and results of operations may suffer.
Our investments to enhance the customer experience, including through technology, may not generate the expected returns.
Our long-term business objectives depend on the successful Systemwide execution of our strategies. We continue to build upon our investments in EOTF, which focus on restaurant modernization and technology, as well as digital engagement and delivery, in order to transform the customer experience. As part of these investments, we are placing renewed emphasis on improving our service model and strengthening relationships with customers, in part through digital channels and loyalty initiatives, as well as mobile ordering and payment systems. We also continue to refine our delivery initiatives and partnerships, which may not generate expected returns. If these initiatives are not well executed, or if we do not fully realize the intended benefits of these significant investments, our business results may suffer.
If we do not anticipate and address evolving consumer preferences and effectively execute our pricing, promotional and marketing plans, our business could suffer.
Our continued success depends on our System’s ability to retain, regain and convert customers. In order to do so, we need to anticipate and respond effectively to continuously shifting consumer demographics, and trends in food sourcing, food preparation, food offerings and consumer preferences in the “informal eating out” (“IEO”) segment. If we are not able to quickly and effectively respond to these changes, or our competitors respond more effectively, our financial results could be adversely impacted.
Our ability to retain, regain and convert customers also depends on the impact of pricing, promotional and marketing plans across the System, and the ability to adjust these plans to respond quickly and effectively to evolving customer preferences, as well as shifting economic and competitive conditions. Existing or future pricing strategies, and the value proposition they represent, are expected to continue to be important components of our business strategy; however, they may not be successful in retaining, regaining and converting customers, or may not be as successful as the efforts of our competitors, and could negatively impact sales, guest counts and market share.
Additionally, we operate in a complex and costly advertising environment. Our marketing and advertising programs may not be successful in retaining, regaining and converting customers. Our success depends in part on whether the allocation of our advertising and marketing resources across different channels 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 an adverse impact on our financial results.
To be successful in the future, we believe we must preserve, enhance and leverage the value of our brand. Brand value is based in part on consumer perceptions. Those perceptions are affected by a variety of factors, including the nutritional content and preparation of our food, the ingredients we use, 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 adverse commentary from third parties, including through social media or conventional media outlets, regarding the quick-service category of the IEO segment, our brand, our operations, our suppliers or our franchisees. If we are unsuccessful in addressing adverse commentary, whether or not accurate, our brand and our financial results may suffer.
Additionally, the ongoing relevance of our brand may depend on the success of our sustainability initiatives, which require Systemwide coordination and alignment. If we are not effective in addressing social and environmental responsibility matters or achieving relevant sustainability goals, consumer trust in our brand may suffer. In particular, business incidents or practices whether actual or perceived, that erode consumer trust or confidence, particularly if such incidents or practices receive considerable publicity or result in litigation, can significantly reduce brand value and have a negative impact on our financial results.
We face intense competition in our markets, which could hurt our business.
We compete primarily in the IEO segment, which is highly competitive. We also face sustained, intense competition from traditional, fast casual and other competitors, which may include many non-traditional market participants such as convenience stores, grocery stores and coffee shops. We expect our environment to continue to be highly competitive, and our results in any particular reporting period may be impacted by 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 or disruptive actions from others which we do not foresee. There can be no assurance these strategies will be effective, and some strategies may be effective at improving some metrics while adversely affecting other metrics, which could have the overall effect of harming our business.


McDonald's Corporation 2018 Annual Report 4


Unfavorable general economic conditions could adversely affect our business and financial results.
Our results of operations are substantially affected by economic conditions, which can vary significantly by market and can impact consumer disposable income levels and spending habits. Economic conditions can also be impacted by a variety of factors including hostilities, epidemics and actions taken by governments to manage national and international economic matters, whether through austerity, stimulus measures or trade measures, and initiatives intended to control wages, unemployment, credit availability, inflation, taxation and other economic drivers. Sustained adverse economic conditions or periodic adverse changes in economic conditions in our markets could pressure our operating performance, and our business and financial results may suffer.
Our results of operations are also affected by fluctuations in currency exchange rates and unfavorable currency fluctuations could adversely affect reported earnings.
Supply chain interruptions may increase costs or reduce revenues.
We depend on the effectiveness of our supply chain management to assure reliable and sufficient supply of quality products on favorable terms. Although many of the products we sell are sourced from a wide variety of suppliers in countries around the world, certain products have limited suppliers, which may increase our reliance on those suppliers. Supply chain interruptions, including shortages and transportation issues, and price increases can adversely affect us as well as our suppliers and franchisees whose performance may have a significant impact on our results. Such shortages or disruptions could be caused by factors beyond the control of our suppliers, franchisees or us. If we experience interruptions in our System’s supply chain, our costs could increase and it could limit the availability of products critical to our System’s operations.
Food safety concerns may have an adverse effect on our business.
Our ability to increase sales and profits depends on our System’s ability to meet expectations for safe food and on our ability to manage the potential impact on McDonald’s of food-borne illnesses and food or product safety issues that may arise in the future. Food safety is a top priority, and we dedicate substantial resources to offer safe food products to our customers, including as our menu and service model evolve. However, food safety events, including instances of food-borne illness, occur within the food industry and our System from time to time and, in addition, 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.
As the Company's business model has evolved to a more heavily franchised structure, our success relies to large degree on the financial success and cooperation of our franchisees, including our developmental licensees and affiliates. Our restaurant margins arise from two sources: fees from franchised restaurants (e.g., rent and royalties based on a percentage of sales) and, to a lesser degree, sales from Company-operated restaurants. Our franchisees and developmental licensees manage their businesses independently, and therefore are responsible for the day-to-day operation of their restaurants. The revenues we realize from franchised restaurants are largely dependent on the ability of our franchisees to grow their sales. Business risks affecting our operations also affect our franchisees. If our franchisees do not experience sales growth, our revenues and margins could be negatively affected as a result. Also, if sales trends worsen for franchisees, their financial results may deteriorate, which could result in, among other things, restaurant closures, or delayed or reduced payments to us.
Our success also relies on the willingness and ability of our independent franchisees and affiliates to implement major initiatives, which may include financial investment, and to remain aligned with us on operating, promotional and capital-intensive reinvestment plans. The ability of franchisees to contribute to the achievement of our plans is dependent in large part on the availability to them of funding at reasonable interest rates and may be negatively impacted by the financial markets in general, by the creditworthiness of our franchisees or the Company or by banks’ lending practices. If our franchisees are unwilling or unable to invest in major initiatives or are unable to obtain financing at commercially reasonable rates, or at all, our future growth and results of operations could be adversely affected.
Our operating performance could also be negatively affected if our franchisees experience food safety or other operational problems or project an image inconsistent with our brand and values, particularly if our contractual and other rights and remedies are limited, costly to exercise or subjected to litigation and potential delays. If franchisees do not successfully operate restaurants in a manner consistent with our required standards, our brand’s image and reputation could be harmed, which in turn could hurt our business and operating results.
Our ownership mix also affects our results and financial condition. The decision to own restaurants or to operate under franchise or license agreements is driven by many factors whose interrelationship is complex. The benefits of our more heavily franchised structure depends on various factors including whether we have effectively selected franchisees, licensees and/or affiliates that meet our rigorous standards, whether we are able to successfully integrate them into our structure and whether their performance and the resulting ownership mix supports our brand and financial objectives.
Challenges with respect to talent management could harm our business.
Effective succession planning is important to our long-term success. Failure to effectively identify, develop and retain key personnel, recruit high-quality candidates and facilitate smooth management and personnel transitions could disrupt our business and adversely affect our results.

 
McDonald's Corporation 2018 Annual Report 5


Challenges with respect to labor availability and cost could impact our business and results of operations.
Our success depends in part on our System’s ability to proactively recruit, motivate and retain 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. Claims of non-compliance with these regulations could result in liability and expense to us. Our potential exposure to reputational and other harm regarding our workplace practices or conditions or those of our independent franchisees or suppliers (or perceptions thereof) could have a negative impact on consumer perceptions of us and our business. Additionally, economic action, such as boycotts, protests, work stoppages or campaigns by labor organizations, could adversely affect us (including our ability to recruit and retain talent) or the franchisees and suppliers that are also part of the McDonald's System and whose performance may have a material impact on our results.
Information technology system failures or interruptions, or breaches of network security, may impact our operations.
We are increasingly reliant on technological systems, such as point-of-sale and other systems or platforms, technologies supporting McDonald’s digital and delivery solutions, as well as technologies that facilitate communication and collaboration internally, with affiliated entities, customers, employees or independent third parties to conduct our business, including technology-enabled systems provided to us by third parties. Any failure of these systems could significantly impact our operations and customer experience and 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. Our increasing reliance on third party systems also present the risks faced by the third party’s business, including the operational, security and credit risks of those parties. If those systems were to fail or otherwise be unavailable, and we were unable to recover in a timely manner, we could experience an interruption in our operations.
Furthermore, security breaches have from time to time occurred and may in the future occur involving our systems, the systems of the parties we communicate or collaborate with (including franchisees), or those of third party providers. These may include such things as unauthorized access, denial of service, computer viruses, introduction of malware or ransomware 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, our employees and other third parties, as well as financial, proprietary and other confidential information related to our business. An actual or alleged security breach could result in disruptions, shutdowns, theft or unauthorized disclosure of personal, financial, proprietary or other confidential information. Further, the General Data Protection Regulation (“GDPR”) requires entities processing the personal data of individuals in the European Union to meet certain requirements regarding the handling of that data. Failure to meet GDPR requirements could result in substantial penalties and materially adversely impact our financial results. The occurrence of any of these incidents could result in reputational damage, adverse publicity, loss of consumer confidence, reduced sales and profits, complications in executing our growth initiatives and regulatory and legal risk, including criminal penalties or civil liabilities.
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 and brand perceptions. Planned initiatives may not have appeal across multiple markets with McDonald's customers and could drive unanticipated changes in customer perceptions and guest counts.
Disruptions in operations or price volatility in a market can also result from governmental actions, such as price, foreign exchange or changes in trade-related tariffs or controls, sanctions and counter sanctions, government-mandated closure of our 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, or the impact of these other measures, 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, including its formal commencement of exit proceedings, 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. The decision created volatility in certain foreign currency exchange rates that may or may not continue. Any of these effects, and others we cannot anticipate, could adversely affect our business, results of operations, financial condition and cash flows.


McDonald's Corporation 2018 Annual Report 6


Changes in tax laws and unanticipated tax liabilities could adversely affect the taxes we pay and our profitability.
We are subject to income and other taxes in the U.S. and foreign jurisdictions, and our operations, plans and results are affected by tax and other initiatives around the world. In particular, we are affected by the impact of changes to tax laws or policy or related authoritative interpretations. We are also impacted by settlements of pending or any future adjustments proposed by taxing and governmental authorities inside and outside of the U.S. in connection with our tax audits, all of which will depend on their timing, nature and scope. Any significant increases in income tax rates, changes in income tax laws or unfavorable resolution of tax matters could have a material adverse impact on our financial results.
Changes in commodity and other operating costs could adversely affect our results of operations.
The profitability of our Company-operated restaurants depends in part on our ability to anticipate and react to changes in commodity costs, including food, paper, supplies, fuel, utilities and distribution, and other operating costs, including labor. Any volatility in certain commodity prices or fluctuation in labor costs could adversely affect our operating results by impacting restaurant profitability. The commodity markets for some of the ingredients we use, such as beef and chicken, are particularly volatile due to factors such as seasonal shifts, climate conditions, industry demand, international commodity markets, food safety concerns, product recalls and government regulation, all of which are beyond our control and, in many instances, unpredictable. We can only partially address future price risk through hedging and other activities, and therefore increases in commodity costs could have an adverse impact on our profitability.
Increasing regulatory 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. Compliance efforts with those regulations may be affected by ordinary variations in food preparation among our own restaurants and the need to rely on the accuracy and completeness of information from third-party suppliers (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 and proceedings, 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). Regardless of whether any claims against us are valid or whether we are found to be liable, claims may be expensive to defend and may divert management's attention away from operations which could have a material adverse effect on our business and financial condition.
Inconsistent standards imposed by governmental authorities can adversely affect our business and increase our exposure to regulatory proceedings or litigation.
Litigation and regulatory action concerning our relationship with franchisees and the legal distinction between our franchisees and us for employment law purposes, if determined adversely, could increase costs, negatively impact our business operations and the business prospects of our franchisees and subject us to incremental liability for their actions. Similarly, although our commercial relationships with our suppliers remain independent, there may be attempts to challenge that independence, which, if determined adversely, could also increase costs, negatively impact the business prospects of our suppliers, and subject us to incremental liability for their actions.
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 associated with our technology-related services and platforms made available to business partners, customers, employees or other third parties.
Our results could also be affected by the following:
The relative level of our defense costs, which vary from period to period depending on the number, nature and procedural status of pending proceedings;
The cost and other effects of settlements, judgments or consent decrees, which may require us to make disclosures or take other actions that may affect perceptions of our brand and products;
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.

 
McDonald's Corporation 2018 Annual Report 7


A judgment significantly in excess of any applicable insurance coverage or third party indemnity could materially adversely affect our financial condition or results of operations. Further, adverse publicity resulting from claims may hurt our business.
We may not be able to adequately protect our intellectual property or adequately confirm we are not infringing the intellectual property of others, which could harm the value of the McDonald’s brand and our business.
The success of our business depends on our continued ability to use our existing trademarks and service marks in order to increase brand awareness and further develop our branded products in both domestic and international markets. We rely on a combination of trademarks, copyrights, service marks, trade secrets, patents and other intellectual property rights to protect our brand and branded products.
We have registered certain trademarks and have other trademark registrations pending in the U.S. and certain foreign jurisdictions. The trademarks that we currently use have not been registered in all of the countries outside of the U.S. in which we do business or may do business in the future and may never be registered in all of these countries. The steps we have taken to protect our intellectual property in the U.S. and foreign countries may not be adequate. In addition, the steps we have taken may not adequately confirm 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 guarantee 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 unpredictable nature of global economic and market conditions;
Governmental action or inaction in light of key indicators of economic activity or events that can significantly influence financial markets, particularly in the U.S., which is the principal trading market for our common stock, and media reports and commentary about economic or other matters, even when the matter in question does not directly relate to our business;
Trading activity in our common stock or trading activity in derivative instruments with respect to our common stock or debt securities, which can be affected by market commentary (including commentary that may be unreliable or incomplete); unauthorized disclosures about our performance, plans or expectations about our business; our actual performance and creditworthiness; investor confidence, driven in part by expectations about our performance; actions by shareholders and others seeking to influence our business strategies; portfolio transactions in our stock by significant shareholders; or trading activity that results from the ordinary course rebalancing of stock indices in which McDonald’s may be included, such as the S&P 500 Index and the Dow Jones Industrial Average;
The impact of our stock repurchase program or dividend rate; and
The impact on our results of corporate actions and market and third-party perceptions and assessments of such actions, such as those we may take from time to time as we implement our strategies in light of changing business, legal and tax considerations and evolve our corporate structure.


McDonald's Corporation 2018 Annual Report 8


Events such as severe weather conditions, natural disasters, hostilities and social unrest, among others, can adversely affect our results and prospects.
Severe weather conditions, natural disasters, hostilities and social unrest, 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 System. To assess potential, the Company analyzes traffic and walking patterns, census data and other relevant data. The Company’s experience and access to advanced technology aid in evaluating this information. The Company generally owns the land and building or secures long-term leases for conventional franchised and Company-operated restaurant sites, which facilitates long-term occupancy rights and helps control related costs. Restaurant profitability for both the Company and franchisees is important; therefore, ongoing efforts are made to control average development costs through construction and design efficiencies, standardization and by leveraging the Company’s global sourcing network.
In addition, the Company owns and leases real estate in connection with its corporate headquarters and field offices.
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 15 through 31 and in Financial statements and supplementary data in Part II, Item 8, pages 31 through 52 of this Form 10-K.
ITEM 3. Legal Proceedings
 
The Company has pending a number of lawsuits that have been filed in various jurisdictions. These lawsuits cover a broad variety of allegations spanning the Company’s entire business. The following is a brief description of the more significant types of claims and lawsuits. In addition, the Company is subject to various national and local laws and regulations that impact various aspects of its business, as discussed below. While the Company does not believe that any such claims, lawsuits or regulations will have a material adverse effect on its financial condition or results of operations, unfavorable rulings could occur. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on net income for the period in which the ruling occurs or for future periods.
Franchising
A substantial number of McDonald’s restaurants are franchised to independent owner/operators under contractual arrangements with the Company. In the course of the franchise relationship, occasional disputes arise between the Company and its current or former franchisees relating to a broad range of subjects including, but not limited to, quality, service and cleanliness issues, menu pricing, contentions regarding grants or terminations of franchises, delinquent payments of rents and fees, and franchisee claims for additional franchises or renewals of franchises. Additionally, occasional disputes arise between the Company and individuals who claim they should have been granted a McDonald’s franchise or who challenge the legal distinction between the Company and its franchisees for employment law purposes.
Suppliers
The Company and its affiliates and subsidiaries generally do not supply food, paper or related items to any McDonald’s restaurants. The Company relies upon numerous independent suppliers, including service providers, that are required to meet and maintain the Company’s high standards and specifications. On occasion, disputes arise between the Company and its suppliers (or former suppliers) which include, for example, compliance with product specifications and the Company’s business relationship with suppliers. In addition, disputes occasionally arise on a number of issues between the Company and individuals or entities who claim that they should be (or should have been) granted the opportunity to supply products or services to the Company’s restaurants.
Employees
Hundreds of thousands of people are employed by the Company and in restaurants owned and operated by subsidiaries of the Company. In addition, thousands of people from time to time seek employment in such restaurants. In the ordinary course of business, disputes arise regarding hiring, termination, promotion and pay practices, including wage and hour disputes, alleged discrimination and compliance with labor and employment laws.
Customers
Restaurants owned by subsidiaries of the Company regularly serve a broad segment of the public. In so doing, disputes arise as to products, service, incidents, pricing, advertising, nutritional and other disclosures, as well as other matters common to an extensive restaurant business such as that of the Company.
Intellectual Property
The Company has registered trademarks and service marks, patents and copyrights, some of which are of material importance to the Company’s business. From time to time, the Company may become involved in litigation to protect its intellectual property and defend against the alleged use of third party intellectual property. 
Government Regulations
Local and national governments have adopted laws and regulations involving various aspects of the restaurant business including, but not limited to, advertising, franchising, health, safety, environment, competition, zoning, employment and taxation. The Company is occasionally

 
McDonald's Corporation 2018 Annual Report 9


involved in litigation or other proceedings regarding these matters. The Company strives to comply with all applicable existing statutory and administrative rules and cannot predict the effect on its operations from these matters or the issuance of additional requirements in the future.
ITEM 4. Mine Safety Disclosures
 
Not applicable.


McDonald's Corporation 2018 Annual Report 10


Executive Officers of the Registrant
The following are the Executive Officers of our Company (as of the date of this filing):
Ian Borden, 50, is President - International Developmental Licensed Markets, a position he has held since January 1, 2019. Prior to that, Mr. Borden served as President - Foundational Markets, from July 2015 through December 2018. From January 2014 through June 2015, Mr. Borden served as Vice President and Chief Financial Officer - McDonald’s Asia/Pacific, Middle East and Africa. Prior to that time, Mr. Borden served as Regional Vice President of Europe’s East Division from April 2011 to December 2013 and as Managing Director - McDonald’s Ukraine from December 2007 to December 2013. He has served the Company for 24 years.
Francesca A. DeBiase, 53, is Corporate Executive Vice President - Worldwide Supply Chain Sustainability, a position she has held since April 1, 2018. Prior to that, Ms. DeBiase served as Corporate Senior Vice President - Worldwide Supply Chain and Sustainability, from March 2015 through March 2018. From August 2007 through February 2015, Ms. DeBiase served as Corporate Vice President - Worldwide Strategic Sourcing. Prior to that, Ms. DeBiase served as Europe Vice President - Supply Chain, from January 2006 through July 2007. Ms. DeBiase has served the Company for 27 years.
Stephen Easterbrook, 51, 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. Mr. Easterbrook has served the Company for 25 years.
Joseph Erlinger, 45, is President - International Operated Markets, a position he has held since January 1, 2019. Prior to that, Mr. Erlinger served as President - High Growth Markets, from September 2016 through December 2018.   From March 2015 to January 2017, Mr. Erlinger served as Vice President and Chief Financial Officer - High Growth Markets (serving in dual roles from September 2016 through January 2017), as Managing Director of McDonald’s Korea from April 2013 to January 2016 (serving in dual roles from March 2015 through January 2016), and US Vice President - GM for the Indianapolis region from December 2010 to March 2013.  He has served the Company for 17 years.
David Fairhurst, 50, 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 13 years.
Robert Gibbs, 47, is Corporate Executive Vice President and Global 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. Mr. Gibbs has been with the Company for 4 years.
Daniel Henry, 48, is Corporate Executive Vice President - Chief Information Officer, a position he has held since May 1, 2018. From October 2017 through April 2018, Mr. Henry served as Corporate Vice President - Chief Information Officer. Prior to that, Mr. Henry served as Vice President of Customer Technology and Enterprise Architecture at American Airlines from April 2012 to October 2017.
Catherine Hoovel, 47, 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 23 years.
Christopher Kempczinski, 50, is President, McDonald’s USA, a position he has held since January 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. Mr. Kempczinski has been with the Company for 3 years.
Jerome Krulewitch, 54, is Corporate Executive Vice President, General Counsel and Secretary, a position he has held since March 2017. From May 2011 until March 2017, Mr. Krulewitch served as Corporate Senior Vice President - Chief Counsel, Global Operations.  Prior to that, Mr. Krulewitch was Corporate Senior Vice President - General Counsel, The Americas from September 2010 to April 2011.  Mr. Krulewitch has served the Company for 17 years. 
Silvia Lagnado, 55, 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 20 years in positions of increased responsibility at Unilever. Ms. Lagnado has been with the Company for 3 years.
Kevin Ozan, 55, 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 21 years.

 
McDonald's Corporation 2018 Annual Report 11


PART II
 
 
ITEM 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
 
MARKET INFORMATION AND DIVIDEND POLICY
The Company’s common stock trades under the symbol MCD and is listed on the New York Stock Exchange in the U.S.
The number of shareholders of record and beneficial owners of the Company’s common stock as of January 31, 2019 was estimated to be 2,150,000.
Given the Company’s returns on incremental invested capital and significant cash provided by operations, management believes it is prudent to reinvest in the business 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 43 consecutive years through 2018 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, 2018*:
Period
Total Number of
Shares Purchased

 
Average Price
Paid per Share

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

 
Approximate Dollar
Value of Shares
that May Yet
Be Purchased Under
the Plans or Programs(1)
 
October 1-31, 2018
1,696,789

 
168.75

 
1,696,789

 
 
$
7,694,783,993

November 1-30, 2018
1,483,658

 
182.15

 
1,483,658

 
 
7,424,533,360

December 1-31, 2018
2,297,726

 
178.44

 
2,297,726

 
 
7,014,533,413

   Total
5,478,173

 
176.44

 
5,478,173

 
 

*
Subject to applicable law, the Company may repurchase shares directly in the open market, in privately negotiated transactions, or pursuant to derivative instruments and plans complying with Rule 10b5-1, among other types of transactions and arrangements.
(1)
On July 27, 2017, the Company's Board of Directors approved a share repurchase program, effective July 28, 2017, that authorized the purchase of up to $15 billion of the Company's outstanding common stock with no specified expiration date.


McDonald's Corporation 2018 Annual Report 12


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, 2018. 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, 2013. For the DJIA companies, returns are weighted for market capitalization as of the beginning of each period indicated. These returns may vary from those of the Dow Jones Industrial Average Index, which is not weighted by market capitalization, and may be composed of different companies during the period under consideration.
chart-36780e8a068755d899c.jpg
Company/Index
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
McDonald's Corporation
$100
$100
$130
$138
$201
$212
S&P 500 Index
100
114
115
129
157
150
Dow Jones Industrials
100
110
110
128
165
159
Source: S&P Capital IQ

 
McDonald's Corporation 2018 Annual Report 13


ITEM 6. Selected Financial Data
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6-Year Summary
Years ended December 31,
 
 
 
 
 
 
 
 
 
 
 
 
In millions, except per share and unit amounts
2018

 
2017

 
2016

 
2015

 
2014

 
2013

Consolidated Statement of Income Data
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
   Sales by Company-operated restaurants
$
10,013

 
$
12,719

 
$
15,295

 
$
16,488

 
$
18,169

 
$
18,875

   Revenues from franchised restaurants
11,012

 
10,101

 
9,327

 
8,925

 
9,272

 
9,231

Total revenues
21,025

 
22,820

 
24,622

 
25,413

 
27,441

 
28,106

Operating income
8,823

 
9,553

 
7,745

 
7,146

 
7,949

 
8,764

Net income
5,924

 
5,192

 
4,687

 
4,529

 
4,758

 
5,586

Consolidated Statement of Cash Flows Data
 
 
 
 
 
 
 
 
 
 
 
Cash provided by operations
$
6,967

 
$
5,551

 
$
6,060

 
$
6,539

 
$
6,730

 
$
7,121

Cash used for (provided by) investing activities
2,455

 
(562
)
 
982

 
1,420

 
2,305

 
2,674

Capital expenditures
2,742

 
1,854

 
1,821

 
1,814

 
2,583

 
2,825

Cash used for (provided by) financing activities
5,950

 
5,311

 
11,262

 
(735
)
 
4,618

 
4,043

Treasury stock purchases(1)
5,247

 
4,651

 
11,142

 
6,182

 
3,175

 
1,810

Common stock dividends
3,256

 
3,089

 
3,058

 
3,230

 
3,216

 
3,115

Financial Position
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
32,811

 
$
33,804

 
$
31,024

 
$
37,939

 
$
34,227

 
$
36,626

Total debt
31,075

 
29,536

 
25,956

 
24,122

 
14,936

 
14,130

Total shareholders’ equity (deficit)
(6,258
)
 
(3,268
)
 
(2,204
)
 
7,088

 
12,853

 
16,010

Shares outstanding
767

 
794

 
819

 
907

 
963

 
990

Per Common Share Data
 
 
 
 
 
 
 
 
 
 
 
Earnings-diluted
$
7.54

 
$
6.37

 
$
5.44

 
$
4.80

 
$
4.82

 
$
5.55

Dividends declared
4.19

 
3.83

 
3.61

 
3.44

 
3.28

 
3.12

Market price at year end
177.57

 
172.12

 
121.72

 
118.44

 
93.70

 
97.03

Restaurant Information and Other Data
 
 
 
 
 
 
 
 
 
 
 
Restaurants at year end
 
 
 
 
 
 
 
 
 
 
 
   Company-operated restaurants
2,770

 
3,133

 
5,669

 
6,444

 
6,714

 
6,738

   Franchised restaurants
35,085

 
34,108

 
31,230

 
30,081

 
29,544

 
28,691

Total Systemwide restaurants
37,855

 
37,241

 
36,899

 
36,525

 
36,258

 
35,429

Franchised sales(2)
$
86,134

 
$
78,191

 
$
69,707

 
$
66,226

 
$
69,617

 
$
70,251

(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 93% of McDonald's restaurants worldwide at December 31, 2018.


McDonald's Corporation 2018 Annual Report 14


ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
DESCRIPTION OF THE BUSINESS
The Company operates and franchises McDonald’s restaurants. Of the 37,855 restaurants in 120 countries at year-end 2018, 35,085 were franchised.
Under McDonald’s 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 in collaboration with franchisees are designed to cater to consumer preferences, improve local business performance, and increase the value of our brand through the development of modernized, more attractive and higher revenue generating restaurants.
Under McDonald's developmental license or affiliate arrangement, licensees provide capital for the entire business, including the real estate interest, and the Company generally has no capital invested. The Company also has an equity investment in a limited number of foreign affiliates (primarily in China and Japan).
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 strength of McDonald's global brand, operating system and financial resources.
Directly operating McDonald’s restaurants contributes significantly to our ability to act as a credible franchisor. One of the strengths of the franchising model is that the expertise from operating Company-owned restaurants allows McDonald’s to improve the operations and success of all restaurants while innovations from franchisees can be tested and, when viable, efficiently implemented across relevant restaurants. Having Company-owned and operated restaurants provides Company personnel with a venue for restaurant operations training experience. In addition, in our Company-owned and operated restaurants, and in collaboration with franchisees, we are able to further develop and refine operating standards, marketing concepts and product and pricing strategies that will ultimately benefit McDonald’s restaurants. 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 developmental licensees and affiliate restaurants include a royalty based on a percent of sales, and generally include initial fees upon the opening of a new restaurant or grant of a new license. 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.
Through the end of 2018, the business was structured into the following segments that combined markets with similar characteristics and ownership structure, and reflected how management reviewed and evaluated 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, most of which operate under a largely franchised model. Corporate activities are also reported within this segment.
Beginning in 2019, the Company changed its global operating structure as detailed in the Company's Form 8-K filed with the SEC on September 24, 2018. Refer to the Strategic Direction and Financial Performance section on the next page for additional information as well as the Segment and Geographic Information section included in Part II, Item 8, page 49 of this Form 10-K.

MANAGEMENT'S VIEW OF THE BUSINESS
In analyzing business trends, management reviews results on a constant currency basis and considers a variety of performance and financial measures which are considered to be non-GAAP, including comparable sales and comparable guest count growth, Systemwide sales growth, 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, and, beginning in 2017, also exclude sales from Venezuela due to its hyper-inflation. Management generally identifies hyper-inflationary markets as those markets whose cumulative

 
McDonald's Corporation 2018 Annual Report 15


inflation rate over a three-year period exceeds 100%. Comparable sales are driven by changes in guest counts and average check, which is affected by changes in pricing and product mix. Typically, pricing has a greater impact on average check than product mix. The goal is to achieve a relatively balanced contribution from both guest counts and average check.
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 foreign exchange rate over the periods included in the calculation.
Free cash flow, defined as cash provided by operations less capital expenditures, and free cash flow conversion rate, defined as free cash flow divided by net income, are measures reviewed by management in order to evaluate the Company’s ability to convert net profits into cash resources, after reinvesting in the core business, that can be used to pursue opportunities to enhance shareholder value.
STRATEGIC DIRECTION AND FINANCIAL PERFORMANCE
The strength of the alignment among the Company, its franchisees and suppliers (collectively referred to as the "System") is key to McDonald's long-term success. By leveraging the System, McDonald’s is able to identify, implement and scale ideas that meet customers' changing needs and preferences. McDonald's continually builds on its competitive advantages of System alignment and geographic diversification to deliver consistent, yet locally-relevant restaurant experiences to customers as an integral part of their communities.
In 2018, the Company continued to evolve to a more heavily franchised business model, and is currently about 93% franchised, with a long-term goal of approximately 95%. The Company will continue to make progress toward this long-term goal in 2019 primarily by refranchising restaurants to conventional licensees. As a result of the continued evolution of the Company’s business model, in September 2018, the Company announced several organizational changes to its global business structure. These changes are designed to continue the Company's efforts toward efficiently driving growth as a better McDonald’s through the Velocity Growth Plan. Effective January 1, 2019, McDonald’s is operating with the following global business segments:

U.S., the Company's largest market.

International Operated Markets (IOM), comprised of wholly-owned markets, or countries in which the Company operates restaurants, including Australia, Canada, France, Germany, Italy, the Netherlands, Russia, Spain and the U.K.

International Developmental Licensed Markets (IDL), comprised primarily of developmental licensee and affiliate markets in the McDonald’s system. Corporate activities will also be reported within this segment.

Australia, Canada, France, Germany, and the U.K. may be collectively referred to as “the Big Five international markets” in the Company’s disclosures.

CUSTOMER-CENTRIC GROWTH STRATEGY
The Velocity Growth Plan (the "Plan"), the Company’s customer-centric strategy, is rooted in extensive customer research and insights, along with a deep understanding of the key drivers of the business. The Plan is designed to drive sustainable guest count growth, which is a reliable long-term measure of the Company's strength and is vital to growing sales and shareholder value. 2018 was a year of broad-based strength around the world along with significant execution against the Plan in the U.S. While the Company made meaningful progress, our focus in 2019 will be to optimize execution of the Plan to unlock further potential and drive long-term sustainable growth.
The Company continues to target the opportunity at the core of its business - its food, value and customer experience. The strategy is built on the following three pillars, all focusing on building a better McDonald’s:

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

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

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

In each pillar, McDonald’s has established sustainable platforms that enable execution of the Plan with greater speed, efficiency and impact while remaining relentlessly focused on the fundamentals of running great restaurants. Additionally, through three identified growth accelerators - Experience of the Future (“EOTF”), digital and delivery - McDonald’s is enhancing the overall customer experience with hospitable, friendly service and ever-improving convenience for customers on their terms. The Company worked to aggressively deploy each of these accelerators in 2018 and will continue further implementation in 2019 and beyond.


McDonald's Corporation 2018 Annual Report 16


Experience of the Future. The Company continues to build upon its investments in EOTF, focusing on restaurant modernization and technology in order to transform the restaurant service experience and enhance the brand in the eyes of our customers. EOTF introduces a new hospitality experience via the restaurant Guest Experience Leaders and table service, both of which have proven to be critical drivers of customer satisfaction. The modernization efforts are designed to provide a better customer experience, leading to increased frequency of customer visits along with higher average check. As of the end of 2018, EOTF is now deployed in about half of the restaurants in our global system, and in 2019, the Company will continue to deploy EOTF in many markets. In 2018, the U.S. converted about 4,500 restaurants to EOTF, exceeding its ambitious target of 4,000 restaurants, resulting in over half of the U.S. restaurants now having EOTF. We expect to convert substantially all of the restaurants in the U.S. to EOTF by the end of 2020.

Digital. As the Company continues its ambitious 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 is redefining how we provide convenience to customers by expanding choices for how customers order, pay and are served through additional functionality on its global mobile app, self-order kiosks, and technologies that enable conveniences such as table service and curb-side pick-up. In 2018, the Company made further progress in rolling out digital platforms to improve convenience for our customers and provide a simpler and more personalized experience. This included having kiosks deployed in nearly 17,000 restaurants, digital menu boards in more than 21,000 restaurants, and availability of Mobile Order & Pay in over 22,000 restaurants. The popularity and utilization of self-order kiosks continues to grow over time, and in France, Italy and Spain, well over half of all in-restaurant visits orders are placed through the kiosk. Germany made a strong push to grow digital engagement in 2018 through digital calendar promotions, and saw success, driving sales and guest count growth, as well as increased app downloads. In 2019, the Company will continue to utilize digital initiatives to engage customers, grow awareness and adoption of digital offerings, and support our menu offerings.

Delivery.  The Company continues to build momentum with its delivery platform as a way of expanding the convenience for its customers. In 2018, McDonald’s expanded the number of restaurants offering delivery and it is now available in over half of the global system. Customers are responding positively, as demonstrated by high satisfaction ratings, high reorder rates, and average checks that are 1.5-2 times higher than average non-delivery transactions. In addition, many of our larger markets, such as the U.S., France and the U.K., have achieved delivery sales growth in the high double digits in restaurants offering the service for more than 12 months. Further, in several of our top markets, delivery now represents as much as 10% of sales in those restaurants offering delivery. While growing customer awareness remains a priority and focus in 2019, we have been effective in markets like Australia, where awareness has more than doubled through a major campaign that promoted delivery with in-restaurant signs, engaging social media outreach, public relations activity and advertising.

The Velocity Growth Plan is a global strategy that is tailored at a market level to allow for the best customer experience and most convenience for our valued customers. While the Plan provides a consistent framework on how to retain, regain, and convert customers, the execution varies across the globe. Markets continue to make progress on the three pillars of the Plan and its growth accelerators. The U.S., for example, remains diligently focused on driving guest count growth in 2019 through actions that collectively transform the customer experience. In addition to continuing its aggressive execution of the growth accelerators of EOTF, digital and delivery, the U.S. will also enhance the customer experience through strong restaurant execution, with a focus on the drive thru experience, and reducing complexity in the restaurants. In 2018, several markets, including key markets outside of the U.S., experienced strong business results, driven by the Velocity Growth Plan, and the markets will continue to hone their execution of the Plan in 2019, focusing on value, quality and convenience.
Our Plan also includes the Company further embedding actions in response to certain social and environmental issues into the core of our business, which we refer to as using our Scale for Good. As one of the world’s largest restaurant companies, our Scale for Good highlights our commitment to global priorities that are consistent with our strategic priorities and provides an opportunity to collaborate with our franchisees and suppliers to drive meaningful progress. We recognize that our success in advancing each of the pillars within our strategy will be demonstrated as customers continue to feel good about visiting McDonald’s restaurants and eating our food.
While we're committed to working to address many challenges facing society today, we are elevating a few global priorities where we believe we can make the greatest difference in driving industry-wide change. Our four global priorities reflect the social and environmental impacts of our food and our business and are: beef sustainability, packaging and recycling, commitment to families and our investment in people. In 2018, the Company demonstrated its dedication to these priorities, pledging commitments related to reducing greenhouse gas emissions and the use of antibiotics, sourcing sustainable packaging, and making a difference for families through our food offerings, reading programs and Ronald McDonald House Charities.
The Company is confident that, with the Velocity Growth Plan in place, the System will work together in 2019 to focus on improving the taste of our delicious food, enhancing convenience, offering compelling value and upholding the trust consumers place in our brand, which we believe will enhance our ability to deliver long-term sustainable growth.

 
McDonald's Corporation 2018 Annual Report 17


2018 FINANCIAL PERFORMANCE
The Company's 2018 financial performance continued to demonstrate that the Velocity Growth Plan is working. By focusing on the aforementioned three pillars, and the identified growth accelerators, the Company has achieved 14 consecutive quarters of positive global comparable sales. In 2018, global comparable sales increased 4.5% and global comparable guest counts increased 0.2%.

Comparable sales in the U.S. increased 2.5% and comparable guest counts decreased 2.2%.  The increase in comparable sales was driven by growth in average check resulting from both product mix shifts and menu price increases.
Comparable sales in the International Lead segment increased 5.8% and comparable guest counts increased 2.4%, reflecting positive results across all markets.
Comparable sales in the High Growth segment increased 4.1% and comparable guest counts increased 1.8%. This performance reflects positive results across most of the segment, led by strong performance in Italy and the Netherlands.
Comparable sales in the Foundational Markets increased 7.1% and comparable guest counts increased 1.5%, reflecting positive sales performance in Japan and across all geographic regions.
In addition to improved comparable sales and consolidated guest count performance, the Company achieved the following financial results in 2018:
Due to the impact of the Company's strategic refranchising initiative, consolidated revenues decreased 8% (8% in constant currencies).
Systemwide sales increased 6% (6% in constant currencies).
Consolidated operating income decreased 8% (8% in constant currencies). 2018 results included non-cash impairment and strategic restructuring charges. 2017 results reflected a gain on the sale of the Company's businesses in China and Hong Kong, partly offset by restructuring and impairment charges. Excluding these items in both years, consolidated operating income increased 2% (2% in constant currencies).
Operating margin, defined as operating income as a percent of total revenues, increased from 41.9% in 2017 to 42.0% in 2018. Excluding the items described in the previous bullet point, operating margin increased from 38.8% in 2017 to 43.1% in 2018.
Diluted earnings per share of $7.54 increased 18% (18% in constant currencies). Refer to the Net Income and Diluted Earnings Per Share section on page 21 for additional details.
Cash provided by operations was $6.97 billion.
Capital expenditures of $2.74 billion were allocated mainly to reinvestment in existing restaurants and, to a lesser extent, to new restaurant openings.
Free cash flow was $4.23 billion.
Across the System, about 1,100 restaurants (including those in our developmental licensee and affiliated markets) were opened.
One-year ROIIC was (80.4%) and three-year ROIIC was 78.0% for the period ended December 31, 2018. Excluding the gain from the sale of businesses in China and Hong Kong, as well as significant investing cash inflows from strategic refranchising initiatives, one year and three year ROIIC were 10.2% and 34.7%, respectively (see reconciliation in Exhibit 12).
The Company increased its quarterly cash dividend per share by 15% to $1.16 for the fourth quarter, equivalent to an annual dividend of $4.64 per share.
The Company returned $8.5 billion to shareholders through share repurchases and dividends for the year and increased the cash return to shareholder target for the 3-year period ending 2019 to about $25 billion.

OUTLOOK
2019 Outlook
The following information is provided to assist in forecasting the Company’s future results.
Changes in Systemwide sales are driven by comparable sales, net restaurant unit expansion and the potential impacts of hyper-inflation. The Company expects net restaurant additions to add approximately 1 percentage point to 2019 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 new International Operated Markets segment would change annual diluted earnings per share by about 6 to 7 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 2019, costs for the total basket of goods are expected to increase about 1% to 2% in the U.S. and about 2% in the Big Five international markets.
The Company expects full year 2019 selling, general and administrative expenses to decrease about 4% in constant currencies.


McDonald's Corporation 2018 Annual Report 18


Based on current interest and foreign currency exchange rates, the Company expects interest expense for the full year 2019 to increase about 10% to 12% due primarily to higher average debt balances.
A significant part of the Company's operating income is generated outside the U.S., and about 40% of its total debt is denominated in foreign currencies. Accordingly, earnings are affected by changes in foreign currency exchange rates, particularly the Euro, British Pound, Australian Dollar and Canadian Dollar. Collectively, these currencies represent approximately 80% of the Company's operating income outside the U.S. If all four of these currencies moved by 10% in the same direction, the Company's annual diluted earnings per share would change by about 35 cents.
The Company expects the effective income tax rate for the full year 2019 to be in the 24% to 26% range. Some volatility may result in a quarterly tax rate outside of the annual range. Primarily due to tax costs associated with new regulations issued in January 2019, the effective income tax rate for the first quarter of 2019 is expected to be in the 28% to 29% range.
The Company expects capital expenditures for 2019 to be approximately $2.3 billion. About $1.5 billion will be dedicated to our U.S. business, nearly two-thirds of which is allocated to approximately 2,000 EOTF projects. Globally, we expect to open roughly 1,200 restaurants. We will spend approximately $600 million in our wholly owned markets to open 300 restaurants and our developmental licensee and affiliated markets will contribute capital toward the remaining 900 restaurant openings in their respective markets. The Company expects about 750 net restaurant additions in 2019.
During 2019, the Company expects to return about $9 billion to shareholders, which will complete its cash return to shareholder target of about $25 billion for the 3-year period ending 2019.

Long-Term Outlook
Over the long-term, the Company expects to achieve the following average annual (constant currency) financial targets:
Systemwide sales growth of 3% to 5%;
Operating margin in the mid-40% range;
Earnings per share growth in the high-single digits; and
Return on incremental invested capital in the mid-20% range.






 
McDonald's Corporation 2018 Annual Report 19


Consolidated Operating Results
Operating results
 
 
 
 
2018

 
 
 
 
2017

 
 
2016

Dollars and shares in millions, except per share data
 
Amount

 
Increase/ (decrease)

 
 
Amount

 
Increase/ (decrease)

 
 
Amount

Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Sales by Company-operated restaurants
 
$
10,013

 
(21
%)
 
 
$
12,719

 
(17
%)
 
 
$
15,295

Revenues from franchised restaurants
 
11,012

 
9

 
 
10,101

 
8

 
 
9,327

Total revenues
 
21,025

 
(8
)
 
 
22,820

 
(7
)
 
 
24,622

Operating costs and expenses
 
 
 
 
 
 
 
 
 
 
 
 
Company-operated restaurant expenses
 
8,266

 
(21
)
 
 
10,410

 
(18
)
 
 
12,699

Franchised restaurants-occupancy expenses
 
1,973

 
10

 
 
1,789

 
4

 
 
1,718

Selling, general & administrative expenses
 
2,200

 
(1
)
 
 
2,231

 
(6
)
 
 
2,384

Other operating (income) expense, net
 
(237
)
 
80

 
 
(1,163
)
 
n/m

 
 
76

Total operating costs and expenses
 
12,202

 
(8
)
 
 
13,267

 
(21
)
 
 
16,877

Operating income
 
8,823

 
(8
)
 
 
9,553

 
23

 
 
7,745

Interest expense
 
981

 
7

 
 
922

 
4

 
 
885

Nonoperating (income) expense, net
 
26

 
(56
)
 
 
58

 
n/m

 
 
(6
)
Income before provision for income taxes
 
7,816

 
(9
)
 
 
8,573

 
25

 
 
6,866

Provision for income taxes
 
1,892

 
(44
)
 
 
3,381

 
55

 
 
2,180

Net income
 
$
5,924

 
14
%
 
 
$
5,192

 
11
%
 
 
$
4,686

Earnings per common share—diluted
 
$
7.54

 
18
%
 
 
$
6.37

 
17
%
 
 
$
5.44

Weighted-average common shares outstanding—
diluted
 
785.6

 
(4
%)
 
 
815.5

 
(5
%)
 
 
861.2

n/m Not meaningful
IMPACT OF FOREIGN CURRENCY TRANSLATION ON REPORTED RESULTS
While changes in foreign currency exchange rates affect reported results, McDonald’s mitigates exposures, where practical, by purchasing goods and services in local currencies, financing in local currencies and hedging certain foreign-denominated cash flows.
In 2018, results reflected a positive foreign currency impact of $0.04, primarily due to the stronger Euro and British Pound. In 2017, results reflected the stronger Euro, offset by the weaker British Pound. In 2016, results were negatively impacted by the weaker British Pound as well as many other currencies.
Impact of foreign currency translation on reported results
 
 
  
 
Reported amount
 
 
 
 
 
Currency translation benefit/(cost)
 
In millions, except per share data
 
2018

 
2017

 
2016

 
 
2018

 
2017

 
2016

Revenues
 
$
21,025

 
$
22,820

 
$
24,622

 
 
$
123

 
$
186

 
$
(692
)
Company-operated margins
 
1,747

 
2,309

 
2,596

 
 
4

 
17

 
(89
)
Franchised margins
 
9,039

 
8,312

 
7,609

 
 
57

 
25

 
(118
)
Selling, general & administrative expenses
 
2,200

 
2,231

 
2,384

 
 
(13
)
 
(10
)
 
28

Operating income
 
8,823

 
9,553

 
7,745

 
 
56

 
28

 
(173
)
Net income
 
5,924

 
5,192

 
4,686

 
 
33

 
2

 
(97
)
Earnings per common share—diluted
 
7.54

 
6.37

 
5.44

 
 
0.04

 

 
(0.11
)
 


McDonald's Corporation 2018 Annual Report 20


NET INCOME AND DILUTED EARNINGS PER COMMON SHARE
In 2018, net income increased 14% (13% in constant currencies) to $5.9 billion and diluted earnings per common share increased 18% (18% in constant currencies) to $7.54. Foreign currency translation had a positive impact of $0.04 on diluted earnings per share.
In 2017, net income increased 11% (11% in constant currencies) to $5.2 billion and diluted earnings per common share increased 17% (17% in constant currencies) to $6.37. Foreign currency translation had no impact on diluted earnings per share.
Results in 2018 reflected a lower effective tax rate, and stronger operating performance due to an increase in sales-driven franchised margin dollars, partly offset by lower Company-operated margin dollars due to the impact of refranchising. Results in 2017 reflected stronger operating performance, G&A savings, improved performance in Japan, and the benefit of a reversal of a valuation allowance on a deferred tax asset in Japan.

Included in the full year 2018 results were:
approximately $140 million, or $0.17 per share, of non-cash impairment charges;
pre-tax strategic restructuring charges of $94 million, or $0.09 per share (of which $85 million relates to the restructuring of the U.S. business); and
approximately $75 million, or $0.10 per share, of net tax cost associated with 2018 adjustments to the provisional amounts recorded in the prior year under the Tax Cuts and Jobs Act ("Tax Act").

Included in the full year 2017 results were:
approximately $700 million, or $0.82 per share, of net tax cost associated with the Tax Act; and
a pre-tax gain of approximately $850 million on the sale of the Company’s businesses in China and Hong Kong, offset in part by $150 million of restructuring and impairment charges in connection with the Company’s global G&A and refranchising initiatives, for a net benefit of $0.53 per share.
Excluding these 2018 and 2017 items, 2018 net income was $6.2 billion, an increase of 14% (14% in constant currencies), and diluted earnings per share was $7.90, an increase of 19% (18% in constant currencies). Excluding items impacting 2017 and the 2016 strategic charges of $342 million, 2017 net income was $5.4 billion, an increase of 10% (10% in constant currencies), and diluted earnings per share was $6.66, an increase of 16% (16% in constant currencies).
The Company repurchased 32.2 million shares of its stock for $5.2 billion in 2018 and 31.4 million shares of its stock for $4.6 billion in 2017, driving reductions in weighted-average shares outstanding on a diluted basis in both periods, which positively benefited earnings per share.

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 has continually reviewed its mix of Company-owned and franchised restaurants to help optimize overall performance, with a goal to be approximately 95% franchised over the long term. Franchised restaurants represent approximately 93% of McDonald's restaurants worldwide at December 31, 2018. Although refranchising allows the Company to generate more stable and predictable revenue and cash flow streams while operating 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 revenues, where the Company receives rent and/or royalty revenue based on a percentage of sales.
Effective January 1, 2018, the Company adopted the guidance issued in Accounting Standards Codification 606, "Revenue Recognition - Revenue from Contracts with Customers." This standard changed the way initial fees from franchisees for new restaurant openings and new franchise terms are recognized. Under the new guidance, initial franchise fees are being recognized evenly over the franchise term rather than immediately upon receipt. Revenues for 2018 reflected a negative impact of approximately $42 million as a result of this new guidance.
In 2018, revenues decreased 8% (8% in constant currencies) and in 2017, revenues decreased 7% (8% in constant currencies). For both periods, the decreases in revenues were due to the Company's strategic refranchising initiatives, partly offset by positive comparable sales.

 
McDonald's Corporation 2018 Annual Report 21


Revenues
 
 
Amount
 
 
Increase/(decrease)
 
 
Increase/(decrease)
excluding currency
translation
 
Dollars in millions
 
2018

 
2017

 
2016

 
2018

 
2017

 
2018

 
2017

Company-operated sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S.
 
$
2,665

 
$
3,260

 
$
3,743

 
(18
%)
 
(13
%)
 
(18
%)
 
(13
%)
International Lead Markets
 
3,962

 
4,080

 
4,278

 
(3
)
 
(5
)
 
(5
)
 
(4
)
High Growth Markets
 
2,848

 
4,592

 
5,378

 
(38
)
 
(15
)
 
(37
)
 
(17
)
Foundational Markets & Corporate
 
538

 
787

 
1,896

 
(32
)
 
(58
)
 
(32
)
 
(59
)
Total
 
$
10,013

 
$
12,719

 
$
15,295

 
(21
%)
 
(17
%)
 
(22
%)
 
(18
%)
Franchised revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S.
 
$
5,001

 
$
4,746

 
$
4,510

 
5
%
 
5
%
 
5
%
 
5
%
International Lead Markets
 
3,638

 
3,260

 
2,945

 
12

 
11

 
9

 
10

High Growth Markets
 
1,141

 
942

 
783

 
21

 
20

 
18

 
18

Foundational Markets & Corporate
 
1,232

 
1,154

 
1,089

 
7

 
6

 
9

 
7

Total
 
$
11,012

 
$
10,102

 
$
9,327

 
9
%
 
8
%
 
8
%
 
8
%
Total revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S.
 
$
7,666

 
$
8,006

 
$
8,253

 
(4
%)
 
(3
%)
 
(4
%)
 
(3
%)
International Lead Markets
 
7,600

 
7,340

 
7,223

 
4

 
2

 
1

 
1

High Growth Markets
 
3,989

 
5,533

 
6,161

 
(28
)
 
(10
)
 
(28
)
 
(13
)
Foundational Markets & Corporate
 
1,770

 
1,941

 
2,985

 
(9
)
 
(35
)
 
(8
)
 
(35
)
Total
 
$
21,025

 
$
22,820

 
$
24,622

 
(8
%)
 
(7
%)
 
(8
%)
 
(8
%)
U.S.: In 2018 and 2017, the decrease in revenues reflected the benefit from positive comparable sales that was more than offset by the impact of refranchising.
International Lead Markets: In 2018 and 2017, the increase in revenues was due to positive comparable sales across all markets, partly offset by the impact of refranchising.
High Growth Markets: In 2018 and 2017, the decrease in revenues reflected positive comparable sales across most markets that were more than offset by the impact of refranchising the Company's businesses in China and Hong Kong in 2017.
The following tables present comparable sales, comparable guest counts and Systemwide sales increases/(decreases):
Comparable sales and guest count increases/(decreases)
 
 
 
 
 
 
 
 
 
2018
 
 
2017
 
 
2016
 
  
 
Sales

 
Guest
Counts

 
Sales

 
Guest
Counts

 
Sales

 
Guest
Counts

U.S.
 
2.5
%
 
(2.2
%)
 
3.6
%
 
1.0
%
 
1.7
%
 
(2.1
%)
International Lead Markets
 
5.8

 
2.4

 
5.3

 
2.3

 
3.4

 
1.5

High Growth Markets
 
4.1

 
1.8

 
5.3

 
1.8

 
2.8

 
(0.8
)
Foundational Markets & Corporate
 
7.1

*
1.5

 
9.0

*
3.3

 
10.0

 
1.9

Total
 
4.5
%
*
0.2
%
 
5.3
%
*
1.9
%
 
3.8
%
 
(0.3
%)
* In 2018 and 2017, the Company excluded sales from markets identified as hyper-inflationary (currently only Venezuela) from the comparable sales calculation as the Company believes this more accurately reflects the underlying business trends. There was no significant impact related to 2016.
Systemwide sales increases/(decreases)*
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Increase/(decrease)
excluding currency
translation
 
 
 
2018

 
2017

 
2018

 
2017

U.S.
 
2
%
 
3
%
 
2
%
 
3
%
International Lead Markets
 
9

 
7

 
7

 
7

High Growth Markets
 
10

 
12

 
8

 
10

Foundational Markets & Corporate
 
6

 
11

 
9

 
14

Total
 
6
%
 
7
%
 
6
%
 
7
%
* Unlike comparable sales, the Company has not excluded hyper-inflationary market results from Systemwide sales as these sales are the basis on which the Company calculates and records revenues. The difference between comparable sales growth rates and Systemwide sales growth rates are due to both restaurant expansion and the hyper-inflationary impact.


McDonald's Corporation 2018 Annual Report 22


Franchised sales are not recorded as revenues by the Company, but are the basis on which the Company calculates and records franchised revenues and are indicative of the financial health of the franchisee base. The following table presents franchised sales and the related increases/(decreases):
Franchised sales
 
 
Amount
 
 
Increase/(decrease)
 
 
Increase/(decrease)
excluding currency
translation
 
Dollars in millions
 
2018

 
2017

 
2016

 
2018

 
2017

 
2018

 
2017

U.S.
 
$
35,860

 
$
34,379

 
$
32,646

 
4
%
 
5
%
 
4
%
 
5
%
International Lead Markets
 
20,972

 
18,820

 
17,049

 
11

 
10

 
9

 
9

High Growth Markets *
 
9,725

 
6,888

 
4,858

 
41

 
42

 
38

 
39

Foundational Markets & Corporate
 
19,577

 
18,104

 
15,154

 
8

 
19

 
11

 
24

Total
 
$
86,134

 
$
78,191

 
$
69,707

 
10
%
 
12
%
 
10
%
 
13
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ownership type
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Conventional franchised
 
$
63,251

 
$
59,151

 
$
56,035

 
7
%
 
6
%
 
6
%
 
5
%
Developmental licensed
 
13,519

 
12,546

 
9,082

 
8

 
38

 
13

 
44

Foreign affiliated *
 
9,364

 
6,494

 
4,590

 
44

 
41

 
42

 
44

Total
 
$
86,134

 
$
78,191

 
$
69,707

 
10
%
 
12
%
 
10
%
 
13
%
* Reflects the impact of refranchising the Company's businesses in China and Hong Kong in the third quarter of 2017.

FRANCHISED MARGINS
Franchised margin dollars represent revenues from franchised restaurants less the Company’s costs associated with those restaurants, primarily occupancy costs (rent and depreciation). Franchised margin dollars represented about 85% of the combined restaurant margins in 2018, about 80% in 2017, and about 75% in 2016.
In 2018, franchised margin dollars increased $727 million or 9% (8% in constant currencies). In 2017, franchised margin dollars increased $703 million or 9% (9% in constant currencies). For both 2018 and 2017, the constant currency increases were due to positive comparable sales performance across all segments, refranchising and expansion.
Franchised margins
 
Amount

% of Revenue

 
Amount

% of Revenue

 
Amount

% of Revenue

 
Increase/(decrease)
 
 
Increase/(decrease) excluding currency translation
 
Dollars in millions
2018
 
2017
 
2016
 
2018

 
2017

 
2018

 
2017

U.S.
$
4,070

81.4
%
 
$
3,913

82.4
%
 
$
3,726

82.6
%
 
4
%
 
5
%
 
4
%
 
5
%
International Lead Markets
2,952

81.1

 
2,634

80.8

 
2,363

80.2

 
12

 
11

 
10

 
10

High Growth Markets
867

76.0

 
693

73.6

 
550

70.2

 
25

 
26

 
22

 
24

Foundational Markets & Corporate
1,150

93.3

 
1,072

92.9

 
970

89.1

 
7

 
10

 
9

 
12

Total
$
9,039

82.1
%
 
$
8,312

82.3
%
 
$
7,609

81.6
%
 
9
%
 
9
%
 
8
%
 
9
%
U.S.: In 2018 and 2017, the decreases in the franchised margin percents were primarily due to higher depreciation costs related to investments in EOTF, partly offset by positive comparable sales.
International Lead Markets: In 2018 and 2017, the increases in the franchised margin percent primarily reflected the benefit from positive comparable sales performance, partly offset by the impact of refranchising and higher occupancy costs.
High Growth Markets: In 2018 and 2017, the increases in the franchised margin percents were primarily due to the impact of refranchising, mainly related to the sale of the Company's businesses in China and Hong Kong in 2017, as well as strong comparable sales performance.
The franchised margin percent in Foundational Markets & Corporate is higher relative to the other segments due to a larger proportion of developmental licensed and affiliated restaurants where the Company receives royalty income with no corresponding occupancy costs.

 
McDonald's Corporation 2018 Annual Report 23


COMPANY-OPERATED MARGINS
Company-operated margin dollars represent sales by Company-operated restaurants less the operating costs of these restaurants. In 2018, Company-operated margin dollars decreased $562 million or 24% (25% in constant currencies). In 2017, Company-operated margin dollars decreased $287 million or 11% (12% in constant currencies).
Company-operated margins
 
Amount

% of Revenue

 
Amount

% of Revenue

 
Amount

% of Revenue

 
Increase/(decrease)
 
 
Increase/(decrease) excluding currency translation
 
Dollars in millions
2018
 
2017
 
2016
 
2018

 
2017

 
2018

 
2017

U.S.
$
397

14.9
%
 
$
523

16.0
%
 
$
618