Company Quick10K Filing
Quick10K
McDonalds
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$197.73 764 $150,980
10-Q 2019-03-31 Quarter: 2019-03-31
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 2019-05-23 Amend Bylaw, Shareholder Vote, Regulation FD, Exhibits
8-K 2019-04-30 Earnings, Exhibits
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
CR Crane 5,130
SVMK SVMK 2,310
SFL Ship Finance International 1,510
WASH Washington Trust Bancorp 913
GSVC GSV Capital 141
SNES Senestech 42
GBNK Guaranty Bancorp 0
CCFI Community Choice Financial 0
TOMI Tomi Environmental Solutions 0
FMFG Farmers & Merchants Bancshares 0
MCD 2019-03-31
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
EX-10.(P) mcd-3312019xex10p.htm
EX-10.(Q) mcd-3312019xex10q.htm
EX-10.(R) mcd-3312019xex10r.htm
EX-10.(S) mcd-3312019xex10s.htm
EX-31.1 mcd-3312019xex311.htm
EX-31.2 mcd-3312019xex312.htm
EX-32.1 mcd-3312019xex321.htm
EX-32.2 mcd-3312019xex322.htm

McDonalds Earnings 2019-03-31

MCD 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2019
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
 
36-2361282
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
110 North Carpenter Street
Chicago, Illinois
 
60607
(Address of Principal Executive Offices)
 
(Zip Code)
(630) 623-3000
(Registrant’s Telephone Number, Including Area Code)
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 and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  x  No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
MCD
New York Stock Exchange
 
763,556,377
(Number of shares of common stock
outstanding as of 3/31/2019)
 
 
 
 
 


Table of Contents


McDONALD’S CORPORATION
___________________________
INDEX
_______
 
 
 
Page Reference
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1A – Risk Factors
 
 
 
 
Item 6 – Exhibits
 
 
All trademarks used herein are the property of their respective owners and are used with permission.


Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEET
 
 
 
 
 
 
 
 
(unaudited)
 
 
 
In millions, except per share data
 
March 31,
2019
 
 
December 31,
2018
Assets
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and equivalents
 
$
2,289.1

 
 
$
866.0

Accounts and notes receivable
 
1,992.7

 
 
2,441.5

Inventories, at cost, not in excess of market
 
40.8

 
 
51.1

Prepaid expenses and other current assets
 
641.8

 
 
694.6

Total current assets
 
4,964.4

 
 
4,053.2

Other assets
 
 
 
 
 
Investments in and advances to affiliates
 
1,190.2

 
 
1,202.8

Goodwill
 
2,317.8

 
 
2,331.5

Miscellaneous
 
2,385.5

 
 
2,381.0

Total other assets
 
5,893.5

 
 
5,915.3

Lease right-of-use asset, net
 
12,325.2

 
 

Property and equipment
 
 
 
 
 
Property and equipment, at cost
 
37,774.0

 
 
37,193.6

Accumulated depreciation and amortization
 
(14,490.5
)
 
 
(14,350.9
)
Net property and equipment
 
23,283.5

 
 
22,842.7

Total assets
 
$
46,466.6

 
 
$
32,811.2

Liabilities and shareholders’ equity
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accounts payable
 
$
823.6

 
 
$
1,207.9

Lease liability
 
767.9

 
 

Income taxes
 
339.3

 
 
228.3

Other taxes
 
252.8

 
 
253.7

Accrued interest
 
304.8

 
 
297.0

Accrued payroll and other liabilities
 
891.2

 
 
986.6

Total current liabilities
 
3,379.6

 
 
2,973.5

Long-term debt
 
32,892.0

 
 
31,075.3

Long-term lease liability
 
11,629.5

 
 

Long-term income taxes
 
2,138.3

 
 
2,081.2

Deferred revenues - initial franchise fees
 
629.8

 
 
627.8

Other long-term liabilities
 
1,017.3

 
 
1,096.3

Deferred income taxes
 
1,331.0

 
 
1,215.5

Shareholders’ equity (deficit)
 
 
 
 
 
Preferred stock, no par value; authorized – 165.0 million shares; issued – none
 

 
 

Common stock, $.01 par value; authorized – 3.5 billion shares; issued – 1,660.6 million shares
 
16.6

 
 
16.6

Additional paid-in capital
 
7,438.5

 
 
7,376.0

Retained earnings
 
50,928.6

 
 
50,487.0

Accumulated other comprehensive income (loss)
 
(2,520.1
)
 
 
(2,609.5
)
Common stock in treasury, at cost; 897.1 and 893.5 million shares
 
(62,414.5
)
 
 
(61,528.5
)
Total shareholders’ equity (deficit)
 
(6,550.9
)
 
 
(6,258.4
)
Total liabilities and shareholders’ equity (deficit)
 
$
46,466.6

 
 
$
32,811.2

See Notes to condensed consolidated financial statements.

3

Table of Contents

CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
 
 
 
 
 
 
 
 
Quarters Ended
 
 
March 31,
In millions, except per share data
 
2019
 
 
2018
Revenues
 
 
 
 
 
Sales by Company-operated restaurants
 
$
2,240.5

 
 
$
2,535.6

Revenues from franchised restaurants
 
2,715.1

 
 
2,603.3

Total revenues
 
4,955.6

 
 
5,138.9

Operating costs and expenses
 
 
 
 
 
Company-operated restaurant expenses
 
1,886.2

 
 
2,130.9

Franchised restaurants-occupancy expenses
 
533.1

 
 
480.3

Selling, general & administrative expenses
 
499.1

 
 
533.1

Other operating (income) expense, net
 
(56.8
)
 
 
(148.5
)
Total operating costs and expenses
 
2,861.6

 
 
2,995.8

Operating income
 
2,094.0

 
 
2,143.1

Interest expense
 
274.1

 
 
236.8

Nonoperating (income) expense, net
 
(11.4
)
 
 
18.4

Income before provision for income taxes
 
1,831.3

 
 
1,887.9

Provision for income taxes
 
502.9

 
 
512.5

Net income
 
$
1,328.4

 
 
$
1,375.4

Earnings per common share-basic
 
$
1.74

 
 
$
1.74

Earnings per common share-diluted
 
$
1.72

 
 
$
1.72

Dividends declared per common share
 
$
1.16

 
 
$
1.01

Weighted-average shares outstanding-basic
 
764.9

 
 
790.9

Weighted-average shares outstanding-diluted
 
771.6

 
 
798.7

See Notes to condensed consolidated financial statements.

4

Table of Contents

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
 
 
 
 
 
 
 
 
 
 
Quarters Ended
 
 
 
March 31,
 
In millions
 
2019
 
 
2018
 
Net income
 
$
1,328.4

 
 
$
1,375.4

 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
 
Gain (loss) recognized in accumulated other comprehensive
income ("AOCI"), including net investment hedges
43.4

 
 
25.7

 
Reclassification of (gain) loss to net income
45.6

 
 

 
Foreign currency translation adjustments-net of tax
benefit (expense) of $(60.0) and $72.3
89.0

 
 
25.7

 
Cash flow hedges:
 
 
 
 
 
 
Gain (loss) recognized in AOCI
8.3

 
 
(7.5
)
 
Reclassification of (gain) loss to net income
(9.1
)
 
 
12.0

 
Cash flow hedges-net of tax benefit (expense) of $0.2 and $(1.2)
(0.8
)
 
 
4.5

 
Defined benefit pension plans:
 
 
 
 
 
 
Gain (loss) recognized in AOCI

 
 
(1.1
)
 
Reclassification of (gain) loss to net income
1.2

 
 
2.8

 
Defined benefit pension plans-net of tax benefit (expense)
of $0.0 and $(0.9)
1.2

 
 
1.7

 
Total other comprehensive income (loss), net of tax
89.4

 
 
31.9

 
Comprehensive income (loss)
 
$
1,417.8

 
 
$
1,407.3

 
See Notes to condensed consolidated financial statements.

5

Table of Contents

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
 
 
 
 
 
 
 
Quarters Ended
 
 
 
 
March 31,
 
 
In millions
 
2019
 
 
2018
 
 
Operating activities
 
 
 
 
 
 
 
Net income
 
$
1,328.4

 
 
$
1,375.4

 
 
Adjustments to reconcile to cash provided by operations
 
 
 
 
 
 
 
Charges and credits:
 
 
 
 
 
 
 
Depreciation and amortization
 
392.6

 
 
362.9

 
 
Deferred income taxes
 
54.3

 
 
29.2

 
 
Share-based compensation
 
31.6

 
 
39.8

 
 
Other
 
51.5

 
 
(54.9
)
 
 
Changes in working capital items
 
162.2

 
 
(107.2
)
 
 
Cash provided by operations
 
2,020.6

 
 
1,645.2

 
 
Investing activities
 
 
 
 
 
 
 
Capital expenditures
 
(515.3
)
 
 
(552.8
)
 
 
Purchases of restaurant businesses
 
(9.0
)
 
 
(23.7
)
 
 
Sales of restaurant businesses
 
131.9

 
 
186.7

 
 
Sales of property
 
22.3

 
 
71.7

 
 
Other
 
(401.2
)
 
 
(41.0
)
 
 
Cash (used for) investing activities
 
(771.3
)
 
 
(359.1
)
 
 
Financing activities
 
 
 
 
 
 
 
Net short-term borrowings
 
(94.0
)
 
 
556.0

 
 
Long-term financing issuances
 
2,513.3

 
 
1,499.7

 
 
Long-term financing repayments
 
(415.0
)
 
 
(1,001.6
)
 
 
Treasury stock purchases
 
(996.1
)
 
 
(1,632.9
)
 
 
Common stock dividends
 
(886.8
)
 
 
(797.5
)
 
 
Proceeds from stock option exercises
 
110.6

 
 
75.3

 
 
Other
 
(11.3
)
 
 
(5.2
)
 
 
Cash provided by (used for) financing activities
 
220.7

 
 
(1,306.2
)
 
 
Effect of exchange rates on cash and cash equivalents
 
(46.9
)
 
 
24.3

 
 
Cash and equivalents increase
 
1,423.1

 
 
4.2

 
 
Cash and equivalents at beginning of period
 
866.0

 
 
2,463.8

 
 
Cash and equivalents at end of period
 
$
2,289.1

 
 
$
2,468.0

 
 
See Notes to condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
For the quarter ended March 31, 2018
 
Common stock
issued
 
 
 
 
 
 
Accumulated other
comprehensive income (loss)
 
 
Common stock in
treasury
 
Total
shareholders’
equity
 
Additional
paid-in
capital
 
 
Retained
earnings

Pensions
 
Cash flow
hedges
 
Foreign
currency
translation
 
 
In millions, except per share data
Shares

Amount
 
Shares

 
Amount

Balance at December 31, 2017
1,660.6

 
$
16.6

 
$
7,072.4

 
$
48,325.8

 
$
(190.2
)
 
$
(16.5
)
 
$
(1,971.7
)
 
(866.5
)
 
$
(56,504.4
)
 
$
(3,268.0
)
Net income
 
 
 
 
 
 
1,375.4

 
 
 
 
 
 
 
 
 
 
 
1,375.4

Other comprehensive income (loss),
net of tax
 
 
 
 
 
 
 
 
1.7

 
4.5

 
25.7

 
 
 
 
 
31.9

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,407.3

Adoption of ASC 606 (1)
 
 
 
 
 
 
(450.2
)
 
 
 
 
 
 
 
 
 
 
 
(450.2
)
Adoption of ASU 2016-16 (2)
 
 
 
 
 
 
(57.0
)
 
 
 
 
 
 
 
 
 
 
 
(57.0
)
Common stock cash dividends
($1.01 per share)
 
 
 
 
 
 
(797.5
)
 
 
 
 
 
 
 
 
 
 
 
(797.5
)
Treasury stock purchases
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(10.4
)
 
(1,666.8
)
 
(1,666.8
)
Share-based compensation
 
 
 
 
39.8

 
 
 
 
 
 
 
 
 
 
 
 
 
39.8

Stock option exercises and other
 
 
 
 
10.0

 
 
 
 
 
 
 
 
 
1.5

 
63.6

 
73.6

Balance at March 31, 2018
1,660.6

 
16.6

 
7,122.2

 
48,396.5

 
(188.5
)
 
(12.0
)
 
(1,946.0
)
 
(875.4
)
 
(58,107.6
)
 
(4,718.8
)
(1) Accounting Standards Codification ("ASC") 606, "Revenue Recognition - Revenue from Contracts with Customers."
(2) Accounting Standards Update ("ASU") 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory."
For the quarter ended March 31, 2019
 
Common stock
issued
 
 
 
 
 
 
Accumulated other
comprehensive income (loss)
 
 
Common stock in
treasury
 
Total
shareholders’
equity
 
Additional
paid-in
capital
 
 
Retained
earnings

Pensions
 
Cash flow
hedges
 
Foreign
currency
translation
 
 
In millions, except per share data
Shares

Amount
 
Shares

 
Amount

Balance at December 31, 2018
1,660.6

 
$
16.6

 
$
7,376.0

 
$
50,487.0

 
$
(216.6
)
 
$
32.4

 
$
(2,425.3
)
 
(893.5
)
 
$
(61,528.5
)
 
$
(6,258.4
)
Net income
 
 
 
 
 
 
1,328.4

 
 
 
 
 
 
 
 
 
 
 
1,328.4

Other comprehensive income (loss),
net of tax
 
 
 
 
 
 
 

 
1.2

 
(0.8
)
 
89.0

 
 
 
 
 
89.4

Comprehensive income
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
1,417.8

Common stock cash dividends
($1.16 per share)
 
 
 
 
 
 
(886.8
)
 
 
 
 
 
 
 
 
 
 
 
(886.8
)
Treasury stock purchases
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(5.4
)
 
(963.7
)
 
(963.7
)
Share-based compensation
 
 
 
 
31.6

 
 
 
 
 
 
 
 
 
 
 
 
 
31.6

Stock option exercises and other
 
 
 
 
30.9

 
 
 
 
 
 
 
 
 
1.8

 
77.7

 
108.6

Balance at March 31, 2019
1,660.6

 
16.6

 
7,438.5

 
50,928.6

 
(215.4
)
 
31.6

 
(2,336.3
)
 
(897.1
)
 
(62,414.5
)
 
(6,550.9
)

See Notes to condensed consolidated financial statements.




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
McDonald’s Corporation, the registrant, together with its subsidiaries, is referred to herein as the "Company." The Company, its franchisees and suppliers, are referred to herein as the "System."
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements contained in the Company’s December 31, 2018 Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. The results for the quarter ended March 31, 2019, do not necessarily indicate the results that may be expected for the full year.

Restaurant Information
The following table presents restaurant information by ownership type:
Restaurants at March 31,
2019
 
2018
Conventional franchised
21,662

 
21,425

Developmental licensed
7,362

 
6,972

Foreign affiliated
6,254

 
5,882

Total Franchised
35,278

 
34,279

Company-operated
2,693

 
3,007

Systemwide restaurants
37,971

 
37,286


The results of operations of restaurant businesses purchased and sold in transactions with franchisees were not material either individually or in the aggregate to the Condensed Consolidated Financial Statements for the periods prior to purchase and sale.

Per Common Share Information
Diluted earnings per common share is calculated using net income divided by diluted weighted-average shares. Diluted weighted-average shares include weighted-average shares outstanding plus the dilutive effect of share-based compensation, calculated using the treasury stock method, of 6.7 million shares and 7.8 million shares for the quarters 2019 and 2018, respectively. Stock options that would have been antidilutive, and therefore were not included in the calculation of diluted weighted-average shares, totaled 2.0 million shares and 2.5 million shares for the quarters 2019 and 2018, respectively.

Recent Accounting Pronouncements

Recently Adopted Accounting Standards
Income Taxes
In February 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." The guidance permits entities to reclassify the stranded tax effects resulting from the Tax Cuts and Jobs Act ("Tax Act") from AOCI to retained earnings. The Company adopted the provisions of ASU 2018-02 on January 1, 2019, and elected not to reclassify the income tax effects of the Tax Act from AOCI to retained earnings.
Lease Accounting
The Company adopted ASU 2016-02, "Leases (Topic 842)” as of January 1, 2019, using the modified retrospective method. As discussed further in the “Franchise Arrangements” and “Leasing Arrangements” footnotes, the Company is engaged in a significant amount of leasing activity, both from a lessor and a lessee perspective.
The Company has elected the package of practical expedients, which allows the Company to retain the classification of existing leases; therefore, there was minimal initial impact in the Consolidated Statement of Income, and no cumulative adjustment to retained earnings was recognized upon adoption. As the Company enters into new ground leases or as existing ground leases are modified, many of these may be reclassified from operating classification to financing classification, which will change the timing and classification of a portion of lease expense between Operating income and Interest expense. It is not possible to quantify the impact at this time, due to the unknown timing of new leases and lease modifications, however the Company does not expect the impact to be material to any given year. The Company has also made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. These types of leases primarily relate to leases of office equipment, and are not significant in comparison to the Company’s overall lease portfolio. Payments related to those leases will continue to be recognized in the Consolidated Statement of Income on a straight-line basis over the lease term.
The Company has certain leases subject to index adjustments. Historically, the Company has calculated and disclosed future minimum payments for these leases using the index as of the end of the reporting period. As part of the transition, the Company used the

8

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index in effect at transition for adoption of Topic 842 in its disclosure of future minimum lease payments and its calculation of the lease liability. For leases entered into after January 1, 2019, the index at lease inception date will be used to calculate the lease liability until lease modification.
The Company recorded a Right of Use Asset and Lease Liability on the Condensed Consolidated Balance Sheet of $12.5 billion upon adoption. The Lease Liability reflects the present value of the Company's estimated future minimum lease payments over the lease term, which includes options that are reasonably assured of being exercised, discounted using a collateralized incremental borrowing rate. The impact of the new lease guidance is non-cash in nature, therefore, it does not affect the Company’s cash flows.

Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value. Fair value disclosures are reflected in a three-level hierarchy, maximizing the use of observable inputs and minimizing the use of unobservable inputs. The Company did not have any significant changes to the valuation techniques used to measure fair value as described in the Company's December 31, 2018 Annual Report on Form 10-K.
At March 31, 2019, the fair value of the Company’s debt obligations was estimated at $34.7 billion, compared to a carrying amount of $32.9 billion. The fair value was based upon quoted market prices, Level 2 within the valuation hierarchy. The carrying amounts of cash and equivalents, short-term investments and notes receivable approximate fair value.

Financial Instruments and Hedging Activities
The Company is exposed to global market risks, including the effect of changes in interest rates and foreign currency fluctuations. The Company uses foreign currency denominated debt and derivative instruments to mitigate the impact of these changes. The Company does not hold or issue derivatives for trading purposes.
The following table presents the fair values of derivative instruments included on the Condensed Consolidated Balance Sheet:
  
Derivative Assets
 
Derivative Liabilities
In millions
Balance Sheet Classification
 
March 31, 2019
 
December 31, 2018
 
Balance Sheet Classification
 
March 31, 2019
 
December 31, 2018
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
Foreign currency
Prepaid expenses and other current assets
 
$
29.0

 
$
30.9

 
Accrued payroll and other liabilities
 
$
(0.4
)
 
$
(0.7
)
Interest rate
Prepaid expenses and other current assets
 
 
 
 
 
Accrued payroll and other liabilities
 

 
(0.1
)
Foreign currency
Miscellaneous other assets
 
8.0

 
3.8

 
Other long-term liabilities
 

 
(1.3
)
Interest rate
Miscellaneous other assets

 
 
 
 
 
Other long-term liabilities
 
(4.7
)
 
(11.8
)
Total derivatives designated as hedging instruments
 
$
37.0

 
$
34.7

 
 
 
$
(5.1
)
 
$
(13.9
)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
Equity
Prepaid expenses and other current assets


 
$
179.6

 
$
167.1

 
Accrued payroll and other liabilities
 
$
(0.2
)
 
$
(2.7
)
Foreign currency
Prepaid expenses and other current assets


 
4.0

 
4.5

 
Accrued payroll and other liabilities
 
(5.0
)
 

Total derivatives not designated as hedging instruments
 
$
183.6

 
$
171.6

 
 
 
$
(5.2
)
 
$
(2.7
)
Total derivatives
 
$
220.6

 
$
206.3

 
 
 
$
(10.3
)
 
$
(16.6
)

    

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The following table presents the pre-tax amounts from derivative instruments affecting income and AOCI for the quarters ended March 31, 2019 and 2018, respectively:
 
Location of Gain or Loss
Recognized in Income on
Derivative
 
Gain (Loss)
Recognized in AOCI
 
Gain (Loss)
Reclassified into Income from AOCI
 
Gain (Loss) Recognized in
Income on Derivative
 
 
 
 
 
 
 
 
In millions
 
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Foreign currency
Nonoperating income/expense
 
$
10.7

 
$
(9.8
)
 
$
12.0

 
$
(15.3
)
 
 
 
 
Interest rate
Interest expense
 


 


 
(0.3
)
 
(0.2
)
 
 
 
 
Cash flow hedges
 
$
10.7

 
$
(9.8
)
 
$
11.7

 
$
(15.5
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency denominated debt
Nonoperating income/expense
 
$
245.2

 
$
(404.5
)
 
 
 
 
 
 
 
 
Foreign currency derivatives
Nonoperating income/expense
 
9.0

 

 
 
 
 
 
 
 
 
Foreign currency derivatives(1)
Interest expense
 
 
 
 
 
 
 
 
 
$
2.5

 
$

Net investment hedges
 
$
254.2

 
$
(404.5
)
 
 
 
 
 
$
2.5

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency
Nonoperating income/expense
 
 
 
 
 
 
 
 
 
$
(5.6
)
 
$
3.2

Equity
Selling, general & administrative expenses
 
 
 
 
 
 
 
 
 
35.3

 
(16.3
)
Undesignated derivatives
 
 
 
 
 
 
 
 
 
$
29.7

 
$
(13.1
)
(1)The amount of gain (loss) recognized in income related to components excluded from effectiveness testing.


Fair Value Hedges
The Company enters into fair value hedges to reduce the exposure to changes in fair values of certain liabilities. The Company enters into fair value hedges that convert a portion of its fixed rate debt into floating rate debt by use of interest rate swaps.  At March 31, 2019, the carrying amount of fixed-rate debt that was effectively converted was $645.3 million, which included a decrease of $4.7 million of cumulative hedging adjustments. For the first quarter 2019, the Company recognized a $7.2 million gain on the fair value of interest rate swaps, and a corresponding loss on the fair value of the related hedged debt instrument to interest expense.
Cash Flow Hedges
The Company enters into cash flow hedges to reduce the exposure to variability in certain expected future cash flows. To protect against the reduction in value of forecasted foreign currency cash flows (such as royalties denominated in foreign currencies), the Company uses foreign currency forwards to hedge a portion of anticipated exposures. The hedges cover the next 18 months for certain exposures and are denominated in various currencies. As of March 31, 2019, the Company had derivatives outstanding with an equivalent notional amount of $697.2 million that hedged a portion of forecasted foreign currency denominated cash flows.
Based on market conditions at March 31, 2019, the $31.6 million in cumulative cash flow hedging gains, after tax, is not expected to have a significant effect on earnings over the next 12 months.
Net Investment Hedges
The Company primarily uses foreign currency denominated debt (third party and intercompany) to hedge its investments in certain foreign subsidiaries and affiliates. Realized and unrealized translation adjustments from these hedges are included in shareholders' equity in the foreign currency translation component of Other comprehensive income ("OCI") and offset translation adjustments on the underlying net assets of foreign subsidiaries and affiliates, which also are recorded in OCI. As of March 31, 2019, $13.5 billion of the Company's third party foreign currency denominated debt and $3.5 billion of intercompany foreign currency denominated debt was designated to hedge investments in certain foreign subsidiaries and affiliates.
Undesignated Derivatives
The Company enters into certain derivatives that are not designated for hedge accounting, therefore the changes in the fair value of these derivatives are recognized immediately in earnings together with the gain or loss from the hedged balance sheet position. As an example, the Company enters into equity derivative contracts, including total return swaps, to hedge market-driven changes in certain of its supplemental benefit plan liabilities. Changes in the fair value of these derivatives are recorded in selling, general & administrative expenses together with the changes in the supplemental benefit plan liabilities. In addition, the Company uses foreign currency forwards to mitigate the change in fair value of certain foreign currency denominated assets and liabilities. The changes in the fair value of these derivatives are recognized in Nonoperating (income) expense, net, along with the currency gain or loss from the hedged balance sheet position.

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Credit Risk
The Company is exposed to credit-related losses in the event of non-performance by its derivative counterparties. The Company did not have significant exposure to any individual counterparty at March 31, 2019 and has master agreements that contain netting arrangements. For financial reporting purposes, the Company presents gross derivative balances in the financial statements and supplementary data, including for counterparties subject to netting arrangements. Some of these agreements also require each party to post collateral if credit ratings fall below, or aggregate exposures exceed, certain contractual limits. At March 31, 2019, the Company was required to post an immaterial amount of collateral due to the negative fair value of certain derivative positions. The Company's counterparties were not required to post collateral on any derivative position, other than on certain hedges of the Company’s supplemental benefit plan liabilities where the counterparties were required to post collateral on their liability positions.
Franchise Arrangements
Conventional franchise arrangements generally include a lease and a license and provide for payment of initial fees, as well as continuing rent and royalties to the Company based upon a percent of sales with minimum rent payments. Minimum rent payments are based on the Company's underlying investment in owned sites and parallel the Company’s underlying leases and escalations on properties that are leased. Under the franchise arrangement, franchisees are granted the right to operate a restaurant using the McDonald’s System and, in most cases, the use of a restaurant facility, generally for a period of 20 years. At the end of the 20-year franchise arrangement, the Company maintains control of the underlying real estate and building and can either enter into a new 20-year franchise arrangement with the existing franchisee or a different franchisee, or close the restaurant. Franchisees generally pay related occupancy costs including property taxes, insurance and site maintenance.
McDonald’s has elected to allocate consideration in the franchise contract among lease and non-lease components in the same manner that it has historically: rental income (lease), royalty income (non-lease) and initial fee income (non-lease). This disaggregation and presentation of revenue is based on the nature, amount, timing and certainty of the revenue and cash flows. The allocation has been determined based on a mix of both observable and estimated standalone selling prices (the price at which an entity would sell a promised good or service separately to a customer).
Revenues from franchised restaurants consisted of (in millions):
Quarters ended March 31,
2019

 
2018

Rents
$
1,747.6

 
$
1,661.3

Royalties
956.7

 
932.0

Initial fees
10.8

 
10.0

Revenues from franchised restaurants
$
2,715.1

 
$
2,603.3


As of March 31, 2019, future gross minimum rent payments due to the Company under existing conventional franchise arrangements were:
In millions
Owned sites
 
 
Leased sites

 
Total

2019
 
$
1,100.1

 
$
1,143.4

 
$
2,243.5

2020
 
1,417.1

 
1,438.5

 
2,855.6

2021
 
1,374.0

 
1,360.3

 
2,734.3

2022
 
1,322.8

 
1,275.0

 
2,597.8

2023
 
1,275.5

 
1,205.9

 
2,481.4

Thereafter
 
11,116.4

 
9,680.1

 
20,796.5

Total minimum payments
 
$
17,605.9

 
$
16,103.2

 
$
33,709.1


Leasing Arrangements
The Company is the lessee in a significant real estate portfolio, primarily through ground leases (the Company leases the land and the Company generally owns the building) and through improved leases (the Company leases land and buildings). The Company determines whether an arrangement is a lease at inception. Lease terms for most restaurants, where market conditions allow, are generally for 20 years and, in many cases, provide for rent escalations and renewal options. Renewal options are typically solely at the Company’s discretion. Escalation terms vary by market with examples including fixed-rent escalations, escalations based on an inflation index and fair-value market adjustments. The timing of these escalations generally range from annually to every five years.
The following table provides detail of rent expense (in millions):
Quarters ended March 31,
2019

 
2018

Restaurants
$
378.2

 
$
359.8

Other
19.7

 
18.8

Total rent expense
$
397.9

 
$
378.6


Rent expense included percent rents in excess of minimum rents (in millions) as follows - 2019 - $62.1; 2018 - $69.7.

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The amount of the Right of Use Asset and Lease Liability recorded at transition ($12.5 billion) included known escalations and renewal option periods reasonably assured of being exercised. Typically, renewal options are considered reasonably assured of being exercised if the associated asset lives of the building or leasehold improvements exceed that of the initial lease term, and the sales performance of the restaurant remains strong. Therefore, the Right of Use Asset and Lease Liability include an assumption on renewal options that have not yet been exercised by the Company, and are not currently a future obligation.
The Company has elected not to separate non-lease components from lease components in our lessee portfolio. To the extent that occupancy costs, such as site maintenance, are included in the Asset and Liability, the impact is immaterial and is generally limited to Company-owned restaurant locations. For franchised locations, which represent the majority of the restaurant portfolio, the related occupancy costs including property taxes, insurance and site maintenance are generally required to be paid by the franchisees as part of the franchise arrangement.
In addition, the Company is the lessee under non-restaurant related leases such as office buildings, vehicles and office equipment. These leases are not a material subset of the Company’s lease portfolio.
As the rate implicit in each lease is not readily determinable, the Company uses an incremental borrowing rate to calculate the lease liability that represents an estimate of the interest rate the Company would incur to borrow on a collateralized basis over the term of a lease within a particular currency environment. The weighted average discount rate used for operating leases was 4.1% as of March 31, 2019.
As of March 31, 2019, maturities of lease liabilities for our operating leases were as follows:
In millions
Total *

2019
$
858.1

2020
1,106.9

2021
1,065.6

2022
1,020.2

2023
980.0

Thereafter
13,593.8

Total lease payments
$
18,624.6

Less: imputed interest
(6,227.2
)
Present value of lease liability
$
12,397.4

*
Total lease payments include option periods that are reasonably assured of being exercised.
As of March 31, 2019, Weighted Average Lease Term remaining that is included in the maturities of lease liabilities was 20 years.
As of December 31, 2018, future minimum payments required under existing operating leases with initial terms of one year or more were:
In millions
Restaurant
 
 
Other

 
Total *

2019
 
$
1,093.4

 
$
51.3

 
$
1,144.7

2020
 
1,032.1

 
51.0

 
1,083.1

2021
 
955.5

 
45.7

 
1,001.2

2022
 
873.8

 
35.7

 
909.5

2023
 
806.0

 
24.6

 
830.6

Thereafter
 
7,132.3

 
164.9

 
7,297.2

Total minimum payments
 
$
11,893.1

 
$
373.2

 
$
12,266.3

*
Future minimum payments exclude option periods that have not yet been exercised.



12

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Segment Information
On February 25, 2019, the Company provided investors with segment summary financial information and other data in accordance with its new organizational structure for the previously reported years ended December 31, 2016 through 2018 and quarters ended March 31, 2018 through December 31, 2018. Effective January 1, 2019, the Company operates under an organizational structure with the following global business segments reflecting how management reviews and evaluates operating performance:
U.S. - the Company's largest market.
International Operated Markets - 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 & Corporate - comprised of primarily developmental licensee and affiliate markets in the McDonald’s system. Corporate activities are also reported within this segment.
The following table presents the Company’s revenues and operating income by segment:
 
Quarters Ended
  
March 31,
In millions
2019
 
2018
Revenues
 
 
 
U.S.
$
1,846.2

 
$
1,867.2

International Operated Markets
2,663.0

 
2,810.0

International Developmental Licensed Markets & Corporate
446.4

 
461.7

Total revenues
$
4,955.6

 
$
5,138.9

Operating Income
 
 
 
U.S.
$
951.9

 
$
998.0

International Operated Markets
1,048.0

 
1,049.1

International Developmental Licensed Markets & Corporate
94.1

 
96.0

Total operating income
$
2,094.0

 
$
2,143.1



Subsequent Events
The Company evaluated subsequent events through the date the financial statements were issued and filed with the Securities and Exchange Commission. There were no subsequent events that required recognition or disclosure.

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Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company franchises and operates McDonald’s restaurants. Of the 37,971 restaurants in 120 countries at March 31, 2019, 35,278 were licensed to franchisees.
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, and marketing and pricing decisions, while also benefiting from the strength of McDonald's global brand, operating system and financial resources.
Directly operating McDonald’s restaurants contributes significantly to our ability to act as a credible franchisor. One of the strengths of the franchising model is that the expertise from operating Company-owned restaurants allows McDonald’s to improve the operations and success of all restaurants while innovations from franchisees can be tested and, when viable, efficiently implemented across relevant restaurants. Having Company-owned and operated restaurants provides Company personnel with a venue for restaurant operations training experience. In addition, in our Company-owned and operated restaurants, and in collaboration with franchisees, we are able to further develop and refine operating standards, marketing concepts and product and pricing strategies that will ultimately benefit McDonald’s restaurants.
The Company’s revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. 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.
The Company’s reporting segments are aligned with its strategic priorities and reflect how management reviews and evaluates operating performance. The organizational structure is designed to support the Company's efforts toward efficiently driving growth through the Velocity Growth Plan (the "Plan"). Effective January 1, 2019, significant reportable segments include the United States ("U.S.") and International Operated Markets. In addition, throughout this report we present the International Developmental Licensed Markets & Corporate segment, which includes markets in over 80 countries, as well as Corporate activities.
Strategic Direction
The Company remains focused on delivering long-term growth through Systemwide execution of its customer-centric growth strategy - the Velocity Growth Plan. The Plan is designed to drive sustainable guest count growth, a reliable long-term measure of the Company's strength that is vital to growing sales and shareholder value.
The Company is focused on elevating the customer experience through improved restaurant execution and creating excitement around our food and value offerings, while leveraging technology to enable greater convenience. These actions are focused on retaining existing customers, regaining customers who visit less often and converting casual customers to committed customers.
With broad-based momentum, the Company continues to scale and optimize the Plan through the following growth accelerators:
Experience of the Future ("EOTF"). Focuses 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 with higher average check. McDonald’s currently has EOTF deployed in over half of restaurants globally, and we expect to convert substantially all of the restaurants in the U.S. to EOTF by the end of 2020.

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Digital. Emphasizes improving the Company's existing service model (i.e., eat in, take out, or drive-thru) with customers through technology. By evolving the technology platform, the Company is 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 the first quarter of 2019, the Company built on its digital foundation, announcing the acquisition of Dynamic Yield, a leader in personalization and decision logic technology. The Company has begun implementing the decision logic technology in U.S. drive-thrus, providing our customers with a more personalized experience.
Delivery. Offers a platform of added convenience, bringing McDonald's food to customers wherever they are. Delivery is now available from over 20,000 McDonald's restaurants in over 75 countries. Customers are responding positively to delivery, as demonstrated by high satisfaction ratings, high reorder rates, and average checks that are generally 1.5 - 2 times higher than average non-delivery transactions. In 2019, the Company will continue to prioritize growing customer awareness of delivery in order to maximize its potential.
Under the Velocity Growth Plan, the Company will continue to focus on improving the taste of our delicious food, enhancing convenience, and offering compelling value, which we believe will enhance our ability to deliver long-term sustainable growth.
Financial Performance
Financial performance in the first quarter reflected meaningful top-line performance across all segments. Strong global comparable sales of 5.4% in the quarter marked the Company's 15th consecutive quarter of positive global comparable sales.
U.S. comparable sales increased 4.5% for the quarter, reflecting successful promotions, as well as a net positive impact from our EOTF deployment.
International Operated segment comparable sales increased 6.0% for the quarter, reflecting positive results across all markets, primarily driven by the U.K. and France.
Results for the quarter in constant currencies primarily reflected stronger operating performance due to an increase in sales-driven franchised margin dollars, partly offset by lower gains on sales of restaurant businesses, mostly in the U.S.
First Quarter 2019 Highlights:
Global comparable sales increased 5.4%, reflecting strong comparable sales across all segments.
Consolidated revenues decreased 4% (increased 2% in constant currencies), reflecting strong comparable sales, partly offset by the impact of the Company's strategic refranchising initiative.
Systemwide sales increased 6% in constant currencies.
Consolidated operating income decreased 2% (increased 3% in constant currencies).
Diluted earnings per share of $1.72 was flat with the prior year (increased 5% in constant currencies).
The Company returned $1.9 billion to shareholders through share repurchases and dividends.
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 International Operated 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 2% to 3% 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 be relatively flat in constant currencies as the Company reinvests in technology growth opportunities, including operating costs associated with newly acquired Dynamic Yield.
Based on current interest and foreign currency exchange rates, the Company expects interest expense for the full year 2019 to increase about 15% to 17% reflecting the impact of interest incurred on certain Euro denominated deposits due to the current interest rate environment and 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

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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 exist within the quarters, resulting in a quarterly tax rate outside of the annual 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 towards 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.
In addition, the Company has other long-term targets that are detailed in its Form 10-K for the year ended December 31, 2018.
The Following Definitions Apply to these Terms as Used Throughout this Form 10-Q:
Comparable sales represent sales at all restaurants and comparable guest counts represent the number of transactions at all restaurants, whether operated by the Company or by franchisees, in operation at least thirteen months including those temporarily closed. 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 sales from hyper-inflationary markets (currently, only Venezuela). Management generally identifies hyper-inflationary markets as those markets whose cumulative inflation rate over a three-year period exceeds 100%. Management believes that these exclusions more accurately reflect the underlying business trends. Comparable sales are driven by changes in guest counts and average check, which is affected by changes in pricing and product mix. Management reviews the increase or decrease in comparable sales and comparable guest counts compared with the same period in the prior year to assess business trends.
Systemwide sales include sales at all restaurants, whether operated by the Company or by franchisees. While franchised sales are not recorded as revenues by the Company, management believes the information is important in understanding the Company's financial performance, because these sales are the basis on which the Company calculates and records franchised revenues and are indicative of the financial health of the franchisee base.
Information in constant currency is calculated by translating current year results at prior year average exchange rates. Management reviews and analyzes business results excluding the effect of foreign currency translation, impairment and other strategic charges and gains, as well as income tax provision adjustments related to the Tax Act, and bases incentive compensation plans on these results, because the Company believes this better represents underlying business trends.



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CONSOLIDATED OPERATING RESULTS
 
 
 
 
 
 
Quarter Ended
Dollars in millions, except per share data
March 31, 2019
 
Amount
 
 
Increase/
(Decrease)

Revenues
 
 
 
 
Sales by Company-operated restaurants
 
$
2,240.5

 
(12
)%
Revenues from franchised restaurants
 
2,715.1

 
4

Total revenues
 
4,955.6

 
(4
)
Operating costs and expenses
 
 
 
 
Company-operated restaurant expenses
 
1,886.2

 
(11
)
Franchised restaurants-occupancy expenses
 
533.1

 
11

Selling, general & administrative expenses
 
499.1

 
(6
)
Other operating (income) expense, net
 
(56.8
)
 
62

Total operating costs and expenses
 
2,861.6

 
(4
)
Operating income
 
2,094.0

 
(2
)
Interest expense
 
274.1

 
16

Nonoperating (income) expense, net
 
(11.4
)
 
n/m

Income before provision for income taxes
 
1,831.3

 
(3
)
Provision for income taxes
 
502.9

 
(2
)
Net income
 
$
1,328.4

 
(3
)%
Earnings per common share-basic
 
$
1.74

 
0
 %
Earnings per common share-diluted
 
$
1.72

 
0
 %
n/m Not meaningful

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Impact of Foreign Currency Translation
While changes in foreign currency exchange rates affect reported results, McDonald's mitigates exposures, where practical, by purchasing goods and services in local currencies, financing in local currencies and hedging certain foreign-denominated cash flows. Results excluding the effect of foreign currency translation (also referred to as constant currency) are calculated by translating current year results at prior year average exchange rates.
IMPACT OF FOREIGN CURRENCY TRANSLATION
 
 
 
 
 
 
 
 
Dollars in millions, except per share data
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency
Translation
Benefit/ (Cost)
 
Quarters Ended March 31,
 
2019

 
 
2018

 
 
2019

Revenues
 
$
4,955.6

 
 
$
5,138.9

 
 
$
(262.4
)
Company-operated margins
 
354.3

 
 
404.7

 
 
(23.4
)
Franchised margins
 
2,182.0

 
 
2,123.0

 
 
(94.9
)
Selling, general & administrative expenses
 
499.1

 
 
533.1

 
 
12.0

Operating income
 
2,094.0

 
 
2,143.1

 
 
(107.9
)
Net income
 
1,328.4

 
 
1,375.4

 
 
(68.4
)
Earnings per share-diluted
 
$
1.72

 
 
$
1.72

 
 
$
(0.09
)
The negative impact of foreign currency translation on consolidated operating results primarily reflected the weakening of the Euro and most major currencies.
Net Income and Diluted Earnings per Common Share
For the quarter, net income decreased 3% (increased 2% in constant currencies) to $1,328.4 million, and diluted earnings per share was flat at $1.72 with the prior year (increased 5% in constant currencies). Foreign currency translation had a negative impact of $0.09 on diluted earnings per share.
Results for the quarter in constant currencies primarily reflected stronger operating performance due to an increase in sales-driven franchised margin dollars, partly offset by lower gains on sales of restaurant businesses, mostly in the U.S.
Results in 2019 included $47 million, or $0.06 per share, of additional income tax costs due to regulations issued in January 2019 related to the Tax Act. Results in 2018 included $52 million, or $0.07 per share, of additional income tax costs associated with adjustments to the provisional amounts recorded in December 2017 under the Tax Act.
Diluted earnings per share benefited from a decrease in diluted weighted average shares outstanding due to share repurchases. During the quarter, the Company repurchased 5.4 million shares of stock for $963.6 million and paid a quarterly dividend of $1.16 per share, or $886.8 million.

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Revenues
Revenues consist of sales by Company-operated restaurants and fees from franchised restaurants operated by conventional franchisees, developmental licensees and foreign affiliates. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales with minimum rent payments, and initial fees. Revenues from restaurants licensed to developmental licensees and foreign affiliates include a royalty based on a percent of sales, and may include initial fees. Initial franchise fees are recognized evenly over the franchise term.
Franchised restaurants represent approximately 93% of McDonald's restaurants worldwide at March 31, 2019. The Company's current mix of Company-owned and franchised restaurants allows the Company to generate more stable and predictable revenue and cash flow streams while operating with a less resource-intensive structure. A significant shift in any period 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 percent of sales.
REVENUES