MCDONALDS CORP (MCD) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, some of which are considered to be non-GAAP, including comparable sales and guest count growth, Systemwide sales growth, after-tax return on invested capital from continuing operations, free cash flow and free cash flow conversion rate, as described below. Management believes these measures are important in understanding the financial performance of the Company.
•Constant currency results exclude the effects of foreign currency translation and are calculated by translating current year results at prior year average exchange rates. Management reviews and analyzes business results excluding the effect of foreign currency translation, impairment and other charges and gains, as well as material regulatory and other income tax impacts, and bases incentive compensation plans on these results because the Company believes this better represents underlying business trends.
•Comparable sales and comparable guest counts are compared to the same period in the prior year and represent sales and transactions, respectively, 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, natural disasters and acts of war, terrorism or other hostilities (including restaurants temporarily closed due to COVID-19, as well as those that remain closed in Ukraine). Restaurants in Russia were treated as permanently closed as of April 1, 2022 and therefore excluded from the calculation of comparable sales and comparable guest counts beginning in the second quarter of 2022. Comparable sales exclude the impact of currency translation and the sales of any market considered hyper-inflationary (generally identified as those markets whose cumulative inflation rate over a three-year period exceeds 100%), which management believes more accurately reflects the underlying business trends. Comparable sales are driven by changes in guest counts and average check, the latter of which is affected by changes in pricing and product mix.
•Systemwide sales include sales at all restaurants, whether operated by the Company or by franchisees. This includes sales from digital channels, which are comprised of the mobile app, delivery and kiosk at both Company-operated and franchised 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. The Company's revenues consist of sales by Company-operated restaurants and fees from franchised restaurants operated by conventional franchisees, developmental licensees and affiliates. Changes in Systemwide sales are primarily driven by comparable sales and net restaurant unit expansion.
•The Company’s after-tax return on invested capital ("ROIC") from continuing operations is a metric that management believes measures capital-allocation effectiveness over time. Other companies may calculate ROIC differently, limiting the usefulness of the measure for comparisons with other companies. Refer to the reconciliation in Exhibit 99.1 to this Form 10-K for further information on the Company's calculation of ROIC.
•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. Refer to the reconciliations in Exhibit 99.1 to this Form 10-K for further information on the Company's calculations of free cash flow and free cash flow conversion rate.
2022 FINANCIAL PERFORMANCE
In 2022, global comparable sales increased 10.9%, primarily due to strong sales performance across all segments from continued execution of the Accelerating the Arches strategy.
•Comparable sales in the U.S. increased 5.9%, benefiting primarily from strong average check growth driven by strategic menu price increases, successful menu and marketing promotions and continued digital and delivery growth.
•Comparable sales in the International Operated segment increased 13.3%, reflecting positive comparable sales across the segment, primarily driven by France, Germany and the U.K.
•Comparable sales in the International Developmental Licensed segment increased 16.0%, reflecting positive comparable sales across the segment, led by Japan and Brazil, partly offset by negative comparable sales in China due to continued COVID-19 related government restrictions.
Earnings and cash flow growth rates presented below were impacted in 2022 by charges from the sale of the Company's business in Russia, the settlement of a tax audit in France and a gain on the sale of the Company's Dynamic Yield business. Additionally, 2021 results were impacted by gains on the Company's sale of McDonald's Japan stock, the remeasurement of deferred taxes as a result of a change in the U.K. statutory income tax rate and charges from the sale of McD Tech Labs.
Current year and prior year charges and gains are detailed along with reconciliations to the non-GAAP measures in the Net Income and Diluted Earnings Per Share section on page 12 and Operating Income section on page 17 in this Form 10-K.
In addition to the comparable sales results above, the Company had the following financial results in 2022:
•Consolidated revenues were flat (increased 6% in constant currencies) at $23.2 billion.
•Systemwide sales increased 5% (11% in constant currencies) to $118.2 billion.
McDonald's Corporation 2022 Annual Report 8
•Consolidated operating income decreased 10% (3% in constant currencies) to $9.4 billion.
•Operating margin, defined as operating income as a percent of total revenues, decreased from 44.6% in 2021 to 40.4% in 2022.
•Diluted earnings per share of $8.33 decreased 17% (12% in constant currencies).
•Cash provided by operations was $7.4 billion, a 19% decrease from the prior year.
•Capital expenditures of $1.9 billion were allocated approximately 50% to each of reinvestment in existing restaurants and new restaurant openings.
•Free cash flow was $5.5 billion, a 23% decrease from the prior year.
•Across the System, over 1,500 new restaurants (including those in our developmental licensee and affiliated markets) were opened.
•The Company increased its quarterly cash dividend per share by 10% to $1.52 for the fourth quarter, equivalent to an annual dividend of $6.08 per share. The Company returned a total of $8.1 billion to shareholders through dividends and share repurchases in 2022.
STRATEGIC DIRECTION
In early 2023, the Company announced an evolution of its successful Accelerating the Arches strategy (the “Strategy”). The Strategy, which encompasses all aspects of McDonald’s business as the leading global omni-channel restaurant brand, continues to reflect the Company’s purpose, mission and values. Enhancements to the Strategy include the additions of Restaurant Development to the MCD growth pillars and an internal effort, Accelerating the Organization, both of which are aimed at elevating the Company’s performance. The Company's guiding purpose, mission and values are discussed in a dedicated section on page 4 of this Form 10-K.
GROWTH PILLARS
The following growth pillars, MCD, build on historic strengths and articulate areas of further opportunity. Under the Strategy, the Company will:
•Maximize our Marketing by investing in new, culturally relevant approaches, grounded in fan truths, to effectively communicate the story of our brand, food and purpose. This is exemplified by campaigns that elevate the entire brand, such as the Famous Orders platform that has been repeatedly adopted by markets across the globe, the FIFA World Cup campaign that debuted in 75 markets, the UK’s Raise Your Arches campaign that was picked up by 30 markets around the globe and The Cactus Plant Flea Market Box in the U.S. The Company is committed to a marketing strategy that highlights value at every tier of the menu, as affordability remains a cornerstone of the McDonald’s brand and is especially important to our customers in uncertain economic environments.
•Commit to the Core menu by tapping into customer demand for the familiar and focusing on serving our iconic products such as our World Famous Fries, the Big Mac, our Chicken McNuggets and the McFlurry. Around the world, McDonald’s possesses 10 of these "billion-dollar brand equities." The Company will continue to improve on its classics by implementing a series of operational and formulation changes designed to deliver hotter, juicer, tastier burgers across the globe. While leaning into core icons like Chicken McNuggets, ongoing focus will include scaling emerging equities such as the McSpicy and McCrispy Chicken Sandwiches. The Company also continues to see a significant opportunity with coffee, demonstrated by markets leveraging the McCafé brand, customer experience, value and quality to drive long-term growth.
•Double Down on the 4D's: Digital, Delivery, Drive Thru and the recent addition of Restaurant Development by leveraging competitive strengths and building a powerful digital experience growth engine to deliver a personalized and convenient customer experience. To unlock further growth, the Company expects to continue to accelerate the pace of restaurant openings and technology innovation so that whenever and however customers choose to interact with McDonald’s, they can enjoy a fast, easy experience that meets their needs. In 2022, digital channels (the mobile app, delivery and kiosk) comprised nearly 35% of Systemwide sales in the Company’s top six markets, representing over $25 billion in digital Systemwide sales.
◦Digital: The Company’s digital experience growth engine — “MyMcDonald’s” — is transforming its offerings across drive thru, takeaway, delivery, curbside pick-up and dine-in with digital enhancements. Through the digital tools, customers can access personalized offers, participate in a loyalty program, order through the mobile app and receive McDonald's food through the channel of their choice. The Company has successful loyalty programs in over 50 markets around the world, including its top six markets. As of December 31, 2022, the Company’s loyalty customers have proven to be highly engaged, with nearly 50 million active loyalty members across the top six markets in the last 90 days, including 28 million in the U.S.
◦Delivery: The Company has continued to expand the number of restaurants offering delivery to nearly 35,000, representing over 85% of McDonald's restaurants. Delivery is available in about 100 markets, and the Company is continuing to build on and enhance the delivery experience for customers by adding the ability to place a delivery order on the McDonald's mobile app in some of its largest markets. This capability is now available in the U.S., the U.K., Canada and Australia. The Company has also put in place long-term strategic partnerships with UberEats, DoorDash, Just Eat Takeaway.com and Deliveroo. These partnerships are expected to benefit the Company, its customers and franchisees by optimizing operational efficiencies and creating a seamless customer experience.
◦Drive Thru: The Company has drive thru locations in over 26,000 restaurants globally, including nearly 95% of the over 13,000 locations in the U.S. This channel remains a competitive advantage, and we expect that it will become even more critical to meeting customers’ demand for flexibility and choice. The Company continues to build on its drive thru advantage, as the vast majority of new restaurant openings in the U.S. and International Operated Market segments will include a drive thru.
McDonald's Corporation 2022 Annual Report 9
◦Restaurant Development: The Company will accelerate the pace of restaurant openings with the recent addition of this component to the MCD growth pillars. In 2023, the Company plans to open approximately 1,900 new restaurant units across the globe, which will contribute to nearly 4% net unit growth. The Company believes there is opportunity for further growth in many of its largest markets and to explore new formats under the McDonald’s brand over the coming years.
FOUNDATION
Foundational to the Strategy is keeping the customer and restaurant crew at the center of everything we do, along with a relentless focus on running great restaurants, empowering our people and modernizing ways of working through Accelerating the Organization.
•Running Great Restaurants: The Company offers the speed, choice and personalization that its customers expect and serves delicious food people feel good about eating, with convenient locations and hours and affordable prices.
•Empowering our People: The Company believes the employee experience is critical to its success and, in 2022, implemented Global Brand Standards which are designed to create a culture of safety for both employees and customers in McDonald’s restaurants around the world.
•Accelerating the Organization: The Company will unlock further growth as it modernizes the way it works by focusing on becoming faster, more innovative and more efficient at solving problems for its customers and people. This work is guided by a commitment to provide people with career paths for growth and development that capitalize on the global nature of the Company's business.
These efforts, coupled with investments in innovation, are designed to enhance the customer experience and deliver long-term profitable growth for all stakeholders. The Strategy is aligned with the Company’s capital allocation philosophy of investing in opportunities to grow the business (through new restaurants and reinvesting in existing restaurants) and returning free cash flow to shareholders over time through dividends and share repurchases.
The Company believes the Strategy builds on its inherent strengths by harnessing its competitive advantages while leveraging its size, scale and agility to adapt and adjust to uncertain economic and operating environments to meet consumer demands. The Strategy is supported by a strong global senior leadership team aimed at executing against the MCD growth pillars and accelerating the Company’s broad-based business momentum.
OUTLOOK
Based on current conditions, the following is provided to assist in forecasting the Company's future results for 2023.
•The Company expects net restaurant unit expansion will contribute nearly 1.5% to 2023 Systemwide sales growth, in constant currencies.
•The Company expects full year 2023 selling, general and administrative expenses of about 2.2% to 2.3% of Systemwide sales.
•The Company expects 2023 operating margin percent to be about 45%.
•Based on current interest and foreign currency exchange rates, the Company expects interest expense for the full year 2023 to increase between 10% and 12%, driven primarily by higher average interest rates.
•The Company expects the effective income tax rate for the full year 2023 to be in the 20% to 22% range. Some volatility may result in a quarterly tax rate outside of the annual range.
•The Company expects 2023 capital expenditures to be between $2.2 and $2.4 billion, about half of which will be directed towards new restaurant unit expansion across the U.S. and International Operated Markets. Globally, the Company expects to open about 1,900 restaurants. The Company will open more than 400 restaurants in the U.S. and International Operated Markets segments, and developmental licensees and affiliates will contribute capital towards about 1,500 restaurant openings in their respective markets. The Company expects about 1,500 net restaurant additions in 2023.
•The Company expects to achieve a free cash flow conversion rate greater than 90%.
McDonald's Corporation 2022 Annual Report 10
CONSOLIDATED OPERATING RESULTS
The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes beginning on page 35 of this Form 10-K. This section generally discusses 2022 and 2021 items and the year-to-year comparisons between the years ended December 31, 2022 and 2021. Discussions of 2020 items and the year-to-year comparisons between the years ended December 31, 2021 and 2020 are not included in their entirety in this Form 10-K and can be found in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 24, 2022.
Impact of COVID-19 Restrictions
During the last three years, markets experienced varying levels of governmental restrictions on restaurant operations in response to the COVID-19 pandemic, including restrictions related to operating hours, dine-in capacity, and dining room and restaurant closures. These restrictions affected the Company’s revenues for all three years, with a more limited impact in 2022 due to the lesser extent of the restrictions. As most revenues and the Company's share of net results in equity investments are based on a percent of sales, consumer sentiment and government restrictions as a result of COVID-19 may continue to have an impact on results.
Impact of the War in Ukraine
During the first quarter of 2022, McDonald’s temporarily closed restaurants in Russia and Ukraine due to the ongoing war in the region. Restaurants remained closed in Russia through the Company's sale of its Russian business in the second quarter 2022.
Beginning in September 2022, the Company began reopening restaurants in Ukraine.
| Operating results | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | |||||||||||||||||
| Dollars and shares in millions, except per share data | Amount | Increase/ (decrease) | Amount | Increase/ (decrease) | Amount | ||||||||||||||
| Revenues | |||||||||||||||||||
| Sales by Company-operated restaurants | $ | 8,748 | (11 | %) | $ | 9,787 | 20 | % | $ | 8,139 | |||||||||
| Revenues from franchised restaurants | 14,106 | 8 | 13,085 | 22 | 10,726 | ||||||||||||||
| Other revenues | 329 | (6) | 351 | 2 | 343 | ||||||||||||||
| Total revenues | 23,183 | — | 23,223 | 21 | 19,208 | ||||||||||||||
| Operating costs and expenses | |||||||||||||||||||
| Company-operated restaurant expenses | 7,381 | (8) | 8,047 | 15 | 6,981 | ||||||||||||||
| Franchised restaurants-occupancy expenses | 2,350 | 1 | 2,335 | 6 | 2,208 | ||||||||||||||
| Other restaurant expenses | 245 | (6) | 260 | (2) | 267 | ||||||||||||||
| Selling, general & administrative expenses | |||||||||||||||||||
| Depreciation and amortization | 370 | 12 | 330 | 10 | 301 | ||||||||||||||
| Other | 2,492 | 5 | 2,378 | 6 | 2,245 | ||||||||||||||
| Other operating (income) expense, net | 974 | n/m | (483) | n/m | (118) | ||||||||||||||
| Total operating costs and expenses | 13,812 | 7 | 12,867 | 8 | 11,884 | ||||||||||||||
| Operating income | 9,371 | (10) | 10,356 | 41 | 7,324 | ||||||||||||||
| Interest expense | 1,207 | 2 | 1,186 | (3) | 1,218 | ||||||||||||||
| Nonoperating (income) expense, net | 339 | n/m | 42 | n/m | (35) | ||||||||||||||
| Income before provision for income taxes | 7,825 | (14) | 9,128 | 49 | 6,141 | ||||||||||||||
| Provision for income taxes | 1,648 | 4 | 1,583 | 12 | 1,410 | ||||||||||||||
| Net income | $ | 6,177 | (18 | %) | $ | 7,545 | 59 | % | $ | 4,731 | |||||||||
| Earnings per common share—diluted | $ | 8.33 | (17 | %) | $ | 10.04 | 59 | % | $ | 6.31 | |||||||||
| Weighted-average common shares outstanding—diluted | 741.3 | (1 | %) | 751.8 | — | % | 750.1 |
n/m Not meaningful
IMPACT OF FOREIGN CURRENCY TRANSLATION ON REPORTED RESULTS
The impact of foreign currency translation on consolidated operating results in 2022 reflected the weakening of all major currencies against the U.S. Dollar, driven by the Euro, British Pound, and Australian Dollar.
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 (referred to as constant currency) are calculated by translating current year results at prior year average exchange rates.
McDonald's Corporation 2022 Annual Report 11
Impact of foreign currency translation on reported results
| Reported amount | Currency translation benefit/(cost) | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In millions, except per share data | 2022 | 2021 | 2020 | 2022 | 2021 | 2020 | ||||||||||||||||||
| Revenues | $ | 23,183 | $ | 23,223 | $ | 19,208 | $ | (1,419) | $ | 488 | $ | (75) | ||||||||||||
| Company-operated margins | 1,368 | 1,740 | 1,158 | (99) | 42 | (1) | ||||||||||||||||||
| Franchised margins | 11,756 | 10,750 | 8,519 | (646) | 223 | 32 | ||||||||||||||||||
| Selling, general & administrative expenses | 2,862 | 2,708 | 2,546 | 63 | (28) | (2) | ||||||||||||||||||
| Operating income | 9,371 | 10,356 | 7,324 | (652) | 231 | 35 | ||||||||||||||||||
| Net income | 6,177 | 7,545 | 4,731 | (386) | 150 | 26 | ||||||||||||||||||
| Earnings per common share—diluted | 8.33 | 10.04 | 6.31 | (0.52) | 0.20 | 0.04 |
NET INCOME AND DILUTED EARNINGS PER COMMON SHARE
In 2022, net income decreased 18% (13% in constant currencies) to $6.2 billion and diluted earnings per common share decreased 17% (12% in constant currencies) to $8.33. Foreign currency translation had a negative impact of $0.52 on diluted earnings per share.
2022 results included:
•Net pre-tax charges of $1,281 million, or $1.44 per share, related to the sale of the Company's business in Russia
•Net pre-tax gain of $271 million, or $0.40 per share, related to the Company's sale of its Dynamic Yield business
•$537 million, or $0.73 per share, of nonoperating expense related to the settlement of a tax audit in France
2021 results included:
•Net pre-tax gains of $339 million, or $0.33 per share, primarily related to the sale of McDonald's Japan stock
•Pre-tax charges of $54 million, or $0.05 per share, primarily related to the sale of McD Tech Labs
•$364 million, or $0.48 per share, of income tax benefit related to the remeasurement of deferred taxes as a result of a change in the U.K. statutory income tax rate
Outlined below is additional information for the full year 2022 and 2021:
| Net Income Reconciliation | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | Increase/(decrease) | Increase/(decrease) excluding currency translation | ||||||||||||||
| 2022 | 2021 | 2022 | 2022 | |||||||||||||
| GAAP net income | $ | 6,177.4 | $ | 7,545.2 | (18 | %) | (13 | %) | ||||||||
| (Gains) charges | 770.7 | (202.7) | ||||||||||||||
| Income tax (benefit) cost, net | — | (363.7) | ||||||||||||||
| France tax settlement | 537.2 | — | ||||||||||||||
| Non-GAAP net income | $ | 7,485.3 | $ | 6,978.8 | 7 | % | 13 | % |
| Diluted Earnings Per Common Share Reconciliation | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | Increase/(decrease) | Increase/(decrease) excluding currency translation | |||||||||||||
| 2022 | 2021 | 2022 | 2022 | ||||||||||||
| GAAP earnings per share-diluted | $ | 8.33 | $ | 10.04 | (17 | %) | (12 | %) | |||||||
| (Gains) charges | 1.04 | (0.28) | |||||||||||||
| Income tax (benefit) cost, net | — | (0.48) | |||||||||||||
| France tax settlement | 0.73 | — | |||||||||||||
| Non-GAAP earnings per share-diluted | $ | 10.10 | $ | 9.28 | 9 | % | 15 | % |
In constant currencies, after consideration of the adjustments to reconcile our GAAP to Non-GAAP results above, 2022 reflected strong operating performance driven by higher sales-driven Franchised margins. Company-operated margins were negatively impacted by the permanent restaurant closures as a result of the sale of the Company's business in Russia and the temporary restaurant closures in Ukraine, as well as by inflationary cost pressures. In addition, net income reflected an income tax benefit associated with global tax audit progression.
The Company repurchased 15.8 million shares of its stock for $3.9 billion in 2022 and 3.4 million shares of its stock for $846 million in 2021.
McDonald's Corporation 2022 Annual Report 12
REVENUES
The Company's revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees, developmental licensees and affiliates. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales with minimum rent payments, and initial fees. Revenues from restaurants licensed to developmental licensees and affiliates include a royalty based on a percent of sales, and generally include initial fees. The Company’s Other revenues are comprised of fees paid by franchisees to recover a portion of costs incurred by the Company for various technology platforms, revenues from brand licensing arrangements to market and sell consumer packaged goods using the McDonald’s brand and, for periods prior to its sale on April 1, 2022, third-party revenues for the Company's Dynamic Yield business.
Franchised restaurants represented 95% of McDonald's restaurants worldwide at December 31, 2022. The Company's heavily franchised business model is designed to generate stable and predictable revenue, which is largely a function of franchisee sales, and resulting cash flow streams.
| Revenues | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | Increase/(decrease) | Increase/(decrease) excluding currency translation | ||||||||||||||||||||||
| Dollars in millions | 2022 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||
| Company-operated sales: | ||||||||||||||||||||||||
| U.S. | $ | 2,836 | $ | 2,617 | $ | 2,395 | 8 | % | 9 | % | 8 | % | 9 | % | ||||||||||
| International Operated Markets | 5,179 | 6,456 | 5,114 | (20) | 26 | (11) | 23 | |||||||||||||||||
| International Developmental Licensed Markets & Corporate | 733 | 715 | 630 | 3 | 13 | 16 | 10 | |||||||||||||||||
| Total | $ | 8,748 | $ | 9,788 | $ | 8,139 | (11 | %) | 20 | % | (4 | %) | 18 | % | ||||||||||
| Franchised revenues: | ||||||||||||||||||||||||
| U.S. | $ | 6,585 | $ | 6,094 | $ | 5,261 | 8 | % | 16 | % | 8 | % | 16 | % | ||||||||||
| International Operated Markets | 5,985 | 5,638 | 4,348 | 6 | 30 | 18 | 24 | |||||||||||||||||
| International Developmental Licensed Markets & Corporate | 1,536 | 1,353 | 1,117 | 14 | 21 | 22 | 20 | |||||||||||||||||
| Total | $ | 14,106 | $ | 13,085 | $ | 10,726 | 8 | % | 22 | % | 14 | % | 19 | % | ||||||||||
| Total Company-operated sales and Franchised revenues: | ||||||||||||||||||||||||
| U.S. | $ | 9,421 | $ | 8,711 | $ | 7,656 | 8 | % | 14 | % | 8 | % | 14 | % | ||||||||||
| International Operated Markets | 11,164 | 12,094 | 9,462 | (8) | 28 | 2 | 23 | |||||||||||||||||
| International Developmental Licensed Markets & Corporate | 2,269 | 2,068 | 1,747 | 10 | 18 | 20 | 16 | |||||||||||||||||
| Total | $ | 22,854 | $ | 22,873 | $ | 18,865 | — | % | 21 | % | 6 | % | 19 | % | ||||||||||
| Total Other revenues | $ | 329 | $ | 350 | $ | 343 | (6 | %) | 2 | % | (3 | %) | — | % | ||||||||||
| Total Revenues | $ | 23,183 | $ | 23,223 | $ | 19,208 | — | % | 21 | % | 6 | % | 18 | % |
In 2022, total Company-operated sales and franchised revenues were flat (increased 6% in constant currencies). In the International Operated Markets segment, results reflected positive constant currency sales performance, driven by France, Germany and the U.K., offset by lower Company-operated sales due to permanent restaurant closures as a result of the sale of the Company's business in Russia and the temporary restaurant closures in Ukraine. The International Developmental Licensed Markets segment reflected strong sales performance across all geographic regions.
TOTAL REVENUES BY SEGMENT
| U.S. | ||
|---|---|---|
| International Operated Markets | ||
| International Developmental Licensed Markets & Corporate |
The following tables present comparable sales and Systemwide sales increases/(decreases):
McDonald's Corporation 2022 Annual Report 13
| Comparable sales increases/(decreases)* | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | |||||||||||
| U.S. | 5.9 | % | 13.8 | % | 0.4 | % | |||||||
| International Operated Markets | 13.3 | 21.6 | (15.0) | ||||||||||
| International Developmental Licensed Markets & Corporate | 16.0 | 16.6 | (10.5) | ||||||||||
| Total | 10.9 | % | 17.0 | % | (7.7 | %) |
*For both International Operated Markets and Total comparable sales calculations for 2022, restaurants in Russia were treated as permanently closed starting April 1, 2022 and therefore excluded from the calculations beginning in the second quarter of 2022. Restaurants from Ukraine were treated as temporarily closed and therefore included in the calculations. Beginning in September 2022, the Company began reopening restaurants in Ukraine. Due to the more significant impact of COVID-19 in 2020, comparable sales growth from 2020 to 2021 may not be fully indicative of the Company's performance.
| Systemwide sales increases/(decreases)** | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase/(decrease) excluding currency translation | ||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||
| U.S. | 6 | % | 13 | % | 6 | % | 13 | % | ||||
| International Operated Markets | — | 29 | 11 | 24 | ||||||||
| International Developmental Licensed Markets & Corporate | 10 | 21 | 21 | 20 | ||||||||
| Total | 5 | % | 21 | % | 11 | % | 18 | % |
** Unlike comparable sales, the Company has not excluded sales from hyperinflationary markets from Systemwide sales as these sales are the basis on which the Company calculates and records revenues. 2022 results reflect the impact of the permanent restaurant closures as a result of the sale of the Company's business in Russia and the temporary restaurant closures in Ukraine.
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 | 2022 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||
| U.S. | $ | 45,898 | $ | 43,344 | $ | 38,123 | 6 | % | 14 | % | 6 | % | 14 | % | ||||||||||
| International Operated Markets | 34,537 | 33,097 | 25,446 | 4 | 30 | 15 | 24 | |||||||||||||||||
| International Developmental Licensed Markets & Corporate | 29,038 | 26,234 | 21,609 | 11 | 21 | 21 | 21 | |||||||||||||||||
| Total | $ | 109,473 | $ | 102,675 | $ | 85,178 | 7 | % | 21 | % | 13 | % | 18 | % | ||||||||||
| Ownership type | ||||||||||||||||||||||||
| Conventional franchised | $ | 80,066 | $ | 75,956 | $ | 63,297 | 5 | % | 20 | % | 10 | % | 18 | % | ||||||||||
| Developmental licensed | 18,444 | 15,151 | 11,781 | 22 | 29 | 31 | 28 | |||||||||||||||||
| Foreign affiliated | 10,963 | 11,568 | 10,100 | (5) | 15 | 6 | 13 | |||||||||||||||||
| Total | $ | 109,473 | $ | 102,675 | $ | 85,178 | 7 | % | 21 | % | 13 | % | 18 | % |
McDonald's Corporation 2022 Annual Report 14
RESTAURANT MARGINS
Franchised restaurant margins are measured as revenues from franchised restaurants less franchised restaurant occupancy costs. Franchised revenues include rent and royalties based on a percent of sales, and initial fees. Franchised restaurant occupancy costs include lease expense and depreciation, as the Company generally owns or secures a long-term lease on the land and building for the restaurant location.
Company-operated restaurant margins are measured as sales from Company-operated restaurants less costs for food & paper, payroll & employee benefits and occupancy & other operating expenses necessary to run an individual restaurant. Company-operated margins exclude costs that are not allocated to individual restaurants, primarily payroll & employee benefit costs of non-restaurant support staff, which are included in Selling, general and administrative expenses.
Restaurant margins
| Amount | Increase/(decrease) | Increase/(decrease) excluding currency translation | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dollars in millions | 2022 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||
| Franchised: | |||||||||||||||||||||||
| U.S. | $ | 5,341 | $ | 4,906 | $ | 4,097 | 9 | % | 20 | % | 9 | % | 20 | % | |||||||||
| International Operated Markets | 4,900 | 4,516 | 3,329 | 8 | 36 | 20 | 29 | ||||||||||||||||
| International Developmental Licensed Markets & Corporate | 1,515 | 1,328 | 1,093 | 14 | 22 | 23 | 20 | ||||||||||||||||
| Total | $ | 11,756 | $ | 10,750 | $ | 8,519 | 9 | % | 26 | % | 15 | % | 24 | % | |||||||||
| Company-operated: | |||||||||||||||||||||||
| U.S. | $ | 429 | $ | 511 | $ | 405 | (16 | %) | 26 | % | (16 | %) | 26 | % | |||||||||
| International Operated Markets | 913 | 1,208 | 748 | (24) | 61 | (17) | 56 | ||||||||||||||||
| International Developmental Licensed Markets & Corporate | n/m | n/m | n/m | n/m | n/m | n/m | n/m | ||||||||||||||||
| Total | $ | 1,368 | $ | 1,740 | $ | 1,158 | (21 | %) | 50 | % | (16 | %) | 47 | % | |||||||||
| Total restaurant margins: | |||||||||||||||||||||||
| U.S. | $ | 5,770 | $ | 5,417 | $ | 4,502 | 7 | % | 20 | % | 7 | % | 20 | % | |||||||||
| International Operated Markets | 5,813 | 5,724 | 4,077 | 2 | 40 | 12 | 34 | ||||||||||||||||
| International Developmental Licensed Markets & Corporate | n/m | n/m | n/m | n/m | n/m | n/m | n/m | ||||||||||||||||
| Total | $ | 13,124 | $ | 12,490 | $ | 9,677 | 5 | % | 29 | % | 11 | % | 26 | % |
n/m Not meaningful
In 2022, total restaurant margins increased 5% (11% in constant currencies), which reflected strong sales performance across all segments.
Franchised margins represented nearly 90% of restaurant margin dollars.
Total restaurant margin growth was negatively impacted in both periods by foreign currency translation due to the weakening of all major currencies against the U.S. Dollar.
Franchised margins in the U.S. reflected higher depreciation costs related to investments in restaurant modernization.
Company-operated margins in the U.S. and International Operated Markets segment reflected positive sales performance driven by strategic menu price increases, and the negative impact of inflationary pressures. Results in the International Operated Markets segment were also negatively impacted by the restaurant closures in Russia and Ukraine.
Total restaurant margins included $1,501 million of depreciation and amortization expenses in 2022.
RESTAURANT MARGINS BY TYPE (In millions)
McDonald's Corporation 2022 Annual Report 15
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general & administrative expenses
| Amount | Increase/(decrease) | Increase/(decrease) excluding currency translation | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dollars in millions | 2022 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||
| U.S. | $ | 692 | $ | 696 | $ | 625 | (1 | %) | 11 | % | (1 | %) | 11 | % | |||||||||
| International Operated Markets | 629 | 692 | 700 | (9) | (1) | — | (5) | ||||||||||||||||
| International Developmental Licensed Markets & Corporate(1) | 1,541 | 1,320 | 1,221 | 17 | 8 | 17 | 8 | ||||||||||||||||
| Total Selling, General & Administrative Expenses | $ | 2,862 | $ | 2,708 | $ | 2,546 | 6 | % | 6 | % | 8 | % | 5 | % | |||||||||
| Less: Incentive-Based Compensation(2) | 404 | 439 | 158 | (8) | n/m | (6) | n/m | ||||||||||||||||
| Total Excluding Incentive-Based Compensation | $ | 2,458 | $ | 2,269 | $ | 2,388 | 8 | % | (5 | %) | 11 | % | (6 | %) |
(1)Includes home office support costs in areas such as facilities, finance, human resources, investments in strategic technology initiatives, legal, marketing, restaurant operations, supply chain and training.
(2)Includes all cash incentives and share-based compensation expense.
In 2022, consolidated selling, general and administrative expenses increased 6% (8% in constant currencies), reflecting higher costs for investments in restaurant technology, incremental costs related to strategic initiatives, the Company's 2022 Worldwide Owner/Operator convention and proxy contest, as well as the impact of inflationary cost pressures.
Management believes that analyzing selling, general & administrative expenses as a percent of Systemwide sales is meaningful because these costs are incurred to support the overall McDonald's business.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES AS A PERCENT OF SYSTEMWIDE SALES
OTHER OPERATING (INCOME) EXPENSE, NET
Other operating (income) expense, net
| In millions | 2022 | 2021 | 2020 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Gains on sales of restaurant businesses | $ | (60) | $ | (96) | $ | (23) | ||||
| Equity in earnings of unconsolidated affiliates | (113) | (177) | (117) | |||||||
| Asset dispositions and other (income) expense, net | 137 | 75 | 290 | |||||||
| Impairment and other charges (gains), net | 1,010 | (285) | (268) | |||||||
| Total | $ | 974 | $ | (483) | $ | (118) |
McDonald's Corporation 2022 Annual Report 16
•Gains on sales of restaurant businesses
In 2022, gains on sales of restaurant businesses decreased primarily due to a lower number of restaurant sales in the U.S.
•Equity in earnings of unconsolidated affiliates
In 2022, equity in earnings of unconsolidated affiliates decreased due to lower equity in earnings from China as a result of the continued impact of COVID-19 related government restrictions, and lower equity in earnings from the International Operated Markets segment, primarily as a result of dissolving a restaurant joint partnership. Results also reflected lower equity in earnings from Japan, due to the Company's reduced ownership in McDonald's Japan when compared to 2021.
•Asset dispositions and other (income) expense, net
Asset dispositions and other (income) expense, net reflected higher asset write-offs, costs incurred to support the Company's business in Ukraine, and the comparison to a prior year gain on the strategic sale of restaurant properties. Results also reflected a gain as a result of an increase to fair value of an existing restaurant joint venture in connection with the buyout of a joint venture partner within the International Operated Markets segment.
•Impairment and other charges (gains), net
In 2022, impairment and other charges (gains), net reflected $1,281 million of pre-tax charges related to the sale of the Company's business in Russia and a pre-tax gain of $271 million related to the Company's sale of its Dynamic Yield business.
Results in 2021 reflected net pre-tax gains of $339 million, primarily related to the sale of McDonald's Japan stock. These results were partly offset by $54 million of pre-tax charges, primarily related to the sale of McD Tech Labs.
OPERATING INCOME
Operating income
| Amount | Increase/(decrease) | Increase/(decrease) excluding currency translation | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dollars in millions | 2022 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| U.S. | $ | 5,136 | $4,755 | $3,789 | 8 | % | 25 | % | 8 | % | 25 | % | |||||||
| International Operated Markets | 3,926 | 5,130 | 3,315 | (23) | 55 | (13) | 48 | ||||||||||||
| International Developmental Licensed Markets & Corporate | 309 | 471 | 220 | (34) | n/m | (5) | n/m | ||||||||||||
| Total | $9,371 | $10,356 | $7,324 | (10 | %) | 41 | % | (3 | %) | 38 | % | ||||||||
| Operating margin | 40.4 | % | 44.6 | % | 38.1 | % |
Operating income reconciliation*
| Amount | Increase/(decrease) | Increase/(decrease) excluding currency translation | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Dollars in millions | 2022 | 2021 | 2022 | 2022 | |||||||
| GAAP operating income | $ | 9,371 | $10,356 | (10 | %) | (3 | %) | ||||
| Russia sale charge | 1,281 | — | |||||||||
| Dynamic Yield sale gain | (271) | — | |||||||||
| Japan stock sale gains | — | (339) | |||||||||
| McD Tech Labs sale charge | — | 54 | |||||||||
| Non-GAAP operating income | $10,381 | $10,071 | 3 | % | 10 | % | |||||
| Non-GAAP operating margin | 44.8 | % | 43.4 | % |
*Refer to the Impairment and other charges (gains), net line within the Other Operating (Income) Expense, Net section above for details of the gains and charges in this table.
•Operating Income: Operating income decreased 10% (3% in constant currencies). Excluding the current year and prior year items in the table above, operating income increased 3% (10% in constant currencies) for 2022.
•U.S.: Operating income increased due to sales-driven growth in Franchised margins, partly offset by inflationary pressures on labor and commodities in Company-operated restaurant margins.
•International Operated Markets: Constant currency results reflected positive sales performance led by France, Germany, and the U.K. Results were partly offset by the impact of restaurant closures in Russia and Ukraine as well as inflationary pressures in Company-operated restaurant margins.
•International Developmental Licensed Markets & Corporate: Results reflected strong sales performance, primarily in Brazil and Japan, and higher Corporate general and administrative expenses.
McDonald's Corporation 2022 Annual Report 17
OPERATING INCOME BY SEGMENT*
| U.S. | ||
|---|---|---|
| International Operated Markets | ||
| International Developmental Licensed Markets & Corporate* |
*The IDL segment data in this graphic excludes Corporate activities, which is a Non-GAAP presentation.
•Operating margin: Operating margin is defined as operating income as a percent of total revenues. The contributions to operating margin differ by segment due to each segment's ownership structure, primarily due to the relative percentage of franchised versus Company-operated restaurants. Additionally, temporary restaurant closures, which vary by segment, impact the contribution of each segment to the consolidated operating margin.
NON-GAAP OPERATING MARGIN PERCENT ROLL-FORWARD*
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 | Column 6 | Column 7 |
|---|---|---|---|---|---|---|
| Non-GAAP | Increase | Decrease |
*Refer to the Operating Income section on page 17 in this Form 10-K for details regarding operating margin percent for 2022.
McDonald's Corporation 2022 Annual Report 18
INTEREST EXPENSE
Interest expense increased 2% (4% in constant currencies) and decreased 3% (4% in constant currencies) in 2022 and 2021, respectively. Results in 2022 reflected higher average interest rates.
NONOPERATING (INCOME) EXPENSE, NET
Nonoperating (income) expense, net
| In millions | 2022 | 2021 | 2020 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Interest income | $ | (44) | $ | (9) | $ | (18) | |||||
| Foreign currency and hedging activity | (134) | 37 | (3) | ||||||||
| Other expense | 517 | 14 | (14) | ||||||||
| Total | $ | 339 | $ | 42 | $ | (35) |
In 2022, Interest income increased due to higher average interest rates.
Foreign currency and hedging activity includes net gains or losses on certain hedges that reduce the exposure to variability on certain intercompany foreign currency cash flow streams.
In 2022, Other (income) expense, net included $537 million of nonoperating expense related to the settlement of a tax audit in France.
PROVISION FOR INCOME TAXES
In 2022 and 2021, the reported effective income tax rates were 21.1% and 17.3%, respectively.
Results for 2022 reflected the tax impact of $537 million of nonoperating expense related to the settlement of a tax audit in France. During the year, the Company finalized and settled certain tax examinations and remeasured other income tax reserves based on audit progression.
Results for 2021 included $364 million of income tax benefits due to a change in the U.K. statutory income tax rate. Excluding the income tax benefits and the tax impact of net gains, the effective income tax rate for the year was 21.1%.
Consolidated deferred tax assets, net of valuation allowance, was $6.1 billion in 2022 and $6.6 billion in 2021. Substantially all of the net tax assets are expected to be realized in the U.S. and other profitable markets.
RECENTLY ISSUED ACCOUNTING STANDARDS
Recently issued accounting standards are included on page 41 of this Form 10-K.
CASH FLOWS
The Company has a long history of generating significant cash from operations and has substantial credit capacity to fund operating and discretionary spending such as capital expenditures, debt repayments, dividends and share repurchases.
Cash provided by operations totaled $7.4 billion in 2022, a decrease of $1.7 billion or 19%. Free cash flow was $5.5 billion in 2022, a decrease of $1.6 billion or 23%. The Company’s free cash flow conversion rate was 89% in 2022 and 94% in 2021. Cash provided by operations decreased in 2022 compared to 2021 primarily due to the settlement of a tax audit in France, changes in working capital, and the negative impact of foreign currency rates on operating results.
Cash used for investing activities totaled $2.7 billion in 2022, an increase of $512 million compared with 2021. The increase was primarily due to higher purchases of restaurant businesses, partly offset by proceeds from the sale of Dynamic Yield in 2022 and proceeds from the sale of McDonald’s Japan stock in 2021.
Cash used for financing activities totaled $6.6 billion in 2022, an increase of $1.0 billion compared with 2021. The increase was primarily due to increased treasury stock purchases, partly offset by increased net debt issuances.
The Company’s cash and equivalents balance was $2.6 billion and $4.7 billion at year end 2022 and 2021, respectively. In addition to cash and equivalents on hand and cash provided by operations, the Company can meet short-term funding needs through its continued access to commercial paper borrowings and line of credit agreements.
McDonald's Corporation 2022 Annual Report 19
RESTAURANT DEVELOPMENT AND CAPITAL EXPENDITURES
In 2022, the Company opened 1,576 restaurants and closed 1,332 restaurants. In 2021, the Company opened 1,494 restaurants and closed 661 restaurants. The increase in closures in 2022 was primarily due to the closure of 855 restaurants as a result of the sale of the Company's business in Russia.
Systemwide restaurants at year end
| 2022 | 2021 | 2020 | |||||
|---|---|---|---|---|---|---|---|
| U.S. | 13,444 | 13,438 | 13,682 | ||||
| International Operated Markets | 10,103 | 10,785 | 10,560 | ||||
| International Developmental Licensed Markets & Corporate | 16,728 | 15,808 | 14,956 | ||||
| Total | 40,275 | 40,031 | 39,198 |
RESTAURANTS BY OWNERSHIP TYPE
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 |
|---|---|---|---|---|
| Franchised restaurants | Company-operated restaurants |
Approximately 95% of the restaurants at year-end 2022 were franchised, including 95% in the U.S., 89% in International Operated Markets and 98% in the International Developmental Licensed Markets.
Capital expenditures decreased $141 million or 7% in 2022 due to lower reinvestment in existing restaurants, primarily as a result of the sale of the Company's business in Russia and temporary restaurant closures in Ukraine.
McDonald's Corporation 2022 Annual Report 20
CAPITAL EXPENDITURES BY TYPE (In millions)
* Primarily corporate equipment and other office-related expenditures.
New restaurant investments in all years were concentrated in markets with strong returns and/or opportunities for long-term growth. Average development costs vary widely by market depending on the types of restaurants built and the real estate and construction costs within each market. These costs, which include land, buildings and equipment, are managed through the use of optimally-sized restaurants, construction and design efficiencies, as well as leveraging the Company's global sourcing network and best practices.
As of December 31, 2022 and 2021, the Company owned approximately 57% and 55%, respectively, of the land and 80% of the buildings for restaurants in its consolidated markets.
SHARE REPURCHASES AND DIVIDENDS
In 2022, the Company returned approximately $8.1 billion to shareholders through a combination of dividends paid and shares repurchased.
Shares repurchased and dividends
| In millions, except per share data | 2022 | 2021 | 2020 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Number of shares repurchased | 15.8 | 3.4 | 4.3 | |||||||
| Shares outstanding at year end | 731 | 745 | 745 | |||||||
| Dividends declared per share | $ | 5.66 | $ | 5.25 | $ | 5.04 | ||||
| Treasury stock purchases (in Shareholders' equity) | $ | 3,896 | $ | 846 | $ | 874 | ||||
| Dividends paid | 4,168 | 3,919 | 3,753 | |||||||
| Total returned to shareholders | $ | 8,064 | $ | 4,765 | $ | 4,627 |
In December 2019, the Company's Board of Directors approved a share repurchase program, effective January 1, 2020, that authorized the purchase of up to $15 billion of the Company's outstanding stock, with no specified expiration date. In 2022, approximately 15.8 million shares were repurchased for $3.9 billion, bringing total purchases under the program to approximately 23.5 million shares or $5.6 billion.
The Company has paid dividends on its common stock for 47 consecutive years and has increased the dividend amount every year. The 2022 full year dividend of $5.66 per share reflects the quarterly dividend paid for each of the first three quarters of $1.38 per share, with an increase to $1.52 per share paid in the fourth quarter. This 10% increase in the quarterly dividend equates to a $6.08 per share annual dividend and reflects the Company’s confidence in the ongoing strength and reliability of its cash flow. As in the past, future dividend amounts will be considered after reviewing profitability expectations and financing needs, and will be declared at the discretion of the Company’s Board of Directors.
McDonald's Corporation 2022 Annual Report 21
FINANCIAL POSITION AND CAPITAL RESOURCES
TOTAL ASSETS AND RETURN
Total assets decreased $3.4 billion or 6% in 2022, primarily due to a decrease in Cash and equivalents driven by lower cash from operations and increased treasury stock purchases, partly offset by increased net debt issuances. Net property and equipment decreased $0.9 billion in 2022, primarily due to the sale of the Company's business in Russia. Net property and equipment and the Lease right-of-use asset, net represented approximately 47% and approximately 25%, respectively, of total assets at year-end. Approximately 87% of total assets were in the U.S. and International Operated Markets at year-end 2022.
The Company’s after-tax ROIC from continuing operations is a metric that management believes measures capital-allocation effectiveness over time and was 22.6%, 21.5% and 14.9% as of December 31, 2022, 2021 and 2020, respectively. The increase from 2020 to 2021 was primarily due to improved operating results and recovery from the impact of COVID-19 as well as lower average debt balances compared to the prior year. Refer to the reconciliation in Exhibit 99.1 to this Form 10-K.
FINANCING AND MARKET RISK
The Company generally borrows on a long-term basis and is exposed to the impact of interest rate changes and foreign currency fluctuations. Debt obligations at December 31, 2022 totaled $35.9 billion, compared with $35.6 billion at December 31, 2021. The net increase in 2022 was due to net issuances of $1.2 billion, partly offset by the impact of changes in exchange rates on foreign currency denominated debt of $814 million.
Debt highlights(1)
| 2022 | 2021 | 2020 | ||||||
|---|---|---|---|---|---|---|---|---|
| Fixed-rate debt as a percent of total debt(2,3) | 96 | % | 95 | % | 95 | % | ||
| Weighted-average annual interest rate of total debt(3) | 3.5 | 3.2 | 3.2 | |||||
| Foreign currency-denominated debt as a percent of total debt(2) | 36 | 36 | 36 | |||||
| Total debt as a percent of total capitalization (total debt and total Shareholders' equity)(2) | 120 | 115 | 126 | |||||
| Cash provided by operations as a percent of total debt(2) | 20 | 26 | 17 |
(1)All percentages are as of December 31, except for the weighted-average annual interest rate, which is for the year. See reconciliation in Exhibit 99.1.
(2)Based on debt obligations before the effects of fair value hedging adjustments and deferred debt costs. These effects are excluded as they have no impact on the obligation at maturity. See the Debt Financing footnote on page 55 of this Form 10-K.
(3)Includes the effect of interest rate swaps used to hedge debt.
Standard & Poor's and Moody's currently rate the Company’s commercial paper A-2 and P-2, respectively, and its long-term debt BBB+ and Baa1, respectively. To access the debt capital markets, the Company relies on credit-rating agencies to assign short-term and long-term credit ratings.
Certain of the Company’s debt obligations contain cross-acceleration provisions and restrictions on Company and subsidiary mortgages and the long-term debt of certain subsidiaries. There are no provisions in the Company’s debt obligations that would accelerate repayment of debt as a result of a change in credit ratings or a material adverse change in the Company’s business. In December 2022, the Company's Board of Directors authorized $15 billion of borrowing capacity with no specified expiration date, all of which remained outstanding as of December 31, 2022. These borrowings may include (i) public or private offering of debt securities; (ii) direct borrowing from banks or other financial institutions; and (iii) other forms of indebtedness. In addition to debt securities available through a medium-term notes program registered with the SEC and a Global Medium-Term Notes program, the Company is authorized to issue up to $5 billion of commercial paper, and has $3.5 billion available under a committed line of credit agreement (see the Debt Financing footnote on page 55 of this Form 10-K). As of December 31, 2022, the Company's subsidiaries also had $267 million of borrowings outstanding, primarily under uncommitted foreign currency line of credit agreements.
The Company uses major capital markets, bank financings and derivatives to meet its financing requirements. The Company manages its debt portfolio in response to changes in interest rates and foreign currency rates by periodically retiring, redeeming and repurchasing debt, terminating swaps and using derivatives. The Company does not hold or issue derivatives for trading purposes. All swaps are over-the-counter instruments.
In managing the impact of interest rate changes and foreign currency fluctuations, the Company uses interest rate swaps and finances in the currencies in which assets are denominated. The Company uses foreign currency debt and derivatives to hedge the foreign currency risk associated with certain royalties, intercompany financings and long-term investments in foreign subsidiaries and affiliates. This reduces the impact of fluctuating foreign currencies on cash flows and shareholders’ equity. Total foreign currency-denominated debt was $13.0 billion and $12.8 billion for the years ended December 31, 2022 and 2021, respectively. In addition, where practical, the Company’s restaurants purchase goods and services in local currencies resulting in natural hedges. See the Summary of significant accounting policies footnote related to financial instruments and hedging activities on page 45 of this Form 10-K for additional information regarding the accounting impact and use of derivatives.
The Company does not have significant exposure to any individual counterparty and has master agreements that contain netting arrangements. Certain of these agreements also require each party to post collateral if credit ratings fall below, or aggregate exposures exceed, certain contractual limits. At December 31, 2022, the Company was required to post $78 million 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.
The Company’s net asset exposure is diversified among a broad basket of currencies. The Company’s largest net asset exposures (defined as foreign currency assets less foreign currency liabilities) at year end were as follows:
McDonald's Corporation 2022 Annual Report 22
Foreign currency net asset exposures
| In millions of U.S. Dollars | 2022 | 2021 | ||||
|---|---|---|---|---|---|---|
| British Pounds Sterling | $ | 1,167 | $ | 1,293 | ||
| Australian Dollars | 884 | 855 | ||||
| Canadian Dollars | 575 | 904 | ||||
| Polish Zloty | 444 | 427 | ||||
| New Zealand Dollars | 275 | 267 |
The Company prepared sensitivity analyses of its financial instruments to determine the impact of hypothetical changes in interest rates and foreign currency exchange rates on the Company’s results of operations, cash flows and the fair value of its financial instruments. The interest rate analysis assumed a one percentage point adverse change in interest rates on all financial instruments, but did not consider the effects of the reduced level of economic activity that could exist in such an environment. The foreign currency rate analysis assumed that each foreign currency rate would change by 10% in the same direction relative to the U.S. Dollar on all financial instruments; however, the analysis did not include the potential impact on revenues, local currency prices or the effect of fluctuating currencies on the Company’s anticipated foreign currency royalties and other payments received from the markets. Based on the results of these analyses of the Company’s financial instruments, neither a one percentage point adverse change in interest rates from 2022 levels nor a 10% adverse change in foreign currency rates from 2022 levels would materially affect the Company’s results of operations, cash flows or the fair value of its financial instruments.
LIQUIDITY AND USES OF CASH
The Company generates significant cash from operations and expects available cash and cash equivalents, future operating cash flows and its ability to issue debt to be sufficient to finance its foreseeable operating needs and other cash requirements.
Consistent with prior years, the Company expects existing domestic cash and equivalents, domestic cash flows from operations, the ability to issue domestic debt and repatriation of a portion of foreign earnings to continue to be sufficient to fund its domestic operating, investing and financing activities. The Company also continues to expect existing foreign cash and equivalents and foreign cash flows from operations to be sufficient to fund its foreign operating, investing and financing activities. In the future, should more capital be required to fund activities in the U.S. than is generated by domestic operations and is available through the issuance of domestic debt, the Company could elect to repatriate a greater portion of future periods' earnings from foreign jurisdictions.
The Company has significant operations outside the U.S. where it earns approximately 60% of its operating income. A significant portion of these historical earnings have been reinvested in foreign jurisdictions where the Company has made, and will continue to make, substantial investments to support the ongoing development and growth of its international operations.
Sources of Liquidity
The Company has long-term revenue and cash flow streams that relate to its franchise arrangements. Minimum rent payments under franchise arrangements are based on the Company’s underlying investment in owned sites and parallel the Company’s underlying lease obligations and escalations on properties that are leased. The Company believes that control over the real estate enables it to achieve restaurant performance levels that are among the highest in the industry. Refer to the Franchise Arrangements footnote on page 49 of this Form 10-K for additional information on future gross minimum payments due to the Company under existing conventional franchise arrangements.
Additionally, the Company is authorized to utilize up to $15 billion of borrowing capacity in various forms by the Board of Directors, all of which remained outstanding as of December 31, 2022. The Company is also authorized to issue up to $5 billion of commercial paper, and has $3.5 billion available under a committed line of credit agreement. Refer to the Financing and Market Risk section on page 22 of this Form 10-K.
Material Cash Requirements and Uses of Cash
Material cash requirements primarily consist of lease obligations (related to both Company-operated and franchised restaurants) and debt obligations. Refer to the Leasing Arrangements footnote on page 50 and the Debt Financing footnote on page 55 of this Form 10-K for more information.
The Company also records liabilities related to supplemental benefit plans maintained in the U.S. as well as liabilities for gross unrecognized tax benefits on certain tax positions. Details related to these obligations are provided in the Employee Benefit Plan footnote on page 54 and the Income Taxes footnote on page 52 of this Form 10-K.
The Company contracts with vendors and suppliers in the normal course of business. These contracts may include items related to construction projects, inventory, energy, marketing, technology and other services. Generally, these items are shorter term in nature and have no minimum payment requirements. These expenses, along with other standard operating expenses incurred, are funded from operating cash flows and reflected in other areas of this Form 10-K (e.g., franchised margins, Company-operated margins and selling, general & administrative expenses that are reflected in the Consolidated Statement of Income and capital expenditures that are reflected on the Consolidated Statement of Cash Flows).
Additionally, the Company has guaranteed certain loans totaling approximately $197 million at December 31, 2022. These guarantees are contingent commitments generally issued by the Company to support borrowing arrangements of the System. At December 31, 2022, there was no carrying value for obligations under these guarantees in the Consolidated Balance Sheet.
McDonald's Corporation 2022 Annual Report 23
OTHER MATTERS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses as well as related disclosures. On an ongoing basis, the Company evaluates its estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
The Company reviews its financial reporting and disclosure practices and accounting policies quarterly to confirm that they provide accurate and transparent information relative to the current economic and business environment. The Company believes that of its significant accounting policies, the following involve a higher degree of judgment and/or complexity:
•Property and equipment
Property and equipment are depreciated or amortized on a straight-line basis over their useful lives based on management’s estimates of the period over which the assets will generate revenue (not to exceed lease term plus options for leased property). The useful lives are estimated based on historical experience with similar assets, taking into account anticipated technological or other changes. Refer to the Property and Equipment section in the Summary of Significant Accounting Policies footnote on page 42 of this Form 10-K and the Property and Equipment footnote on page 49 of this Form 10-K for additional information.
•Leasing Arrangements
The Lease right-of-use asset and Lease liability include an assumption on renewal options that have not yet been exercised by the Company. The Company also uses an incremental borrowing rate in calculating the Lease liability that represents an estimate of the interest rate the Company would incur to borrow on a collateralized basis over the term of a lease within a particular currency environment. Refer to the Leasing section in the Summary of Significant Accounting Policies footnote on page 42 of this Form 10-K and the Leasing Arrangements footnote on page 50 of this Form 10-K for additional information.
•Long-lived assets impairment review
Long-lived assets (including goodwill) are reviewed for impairment annually. If qualitative indicators of impairment are present, such as changes in global and local business and economic conditions, operating costs, inflation, competition, and consumer and demographic trends, the Company will use these and other factors in estimating future cash flows when testing for the recoverability of its long-lived assets. Estimates of future cash flows are highly subjective judgements based on the Company’s experience and knowledge of its operations. A key assumption impacting estimated future cash flows is the estimated change in comparable sales. If the Company’s estimates or underlying assumptions change in the future, it may be required to record impairment charges. Refer to the Long-lived Assets and Goodwill sections in the Summary of Significant Accounting Policies footnote on page 43 of this Form 10-K for additional information.
•Litigation accruals
In the ordinary course of business, the Company is subject to proceedings, lawsuits and other claims primarily related to competitors, customers, employees, franchisees, government agencies, intellectual property, shareholders and suppliers. The Company is required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. Refer to the Contingencies footnote on page 51 of this Form 10-K for additional information.
•Income taxes
The Company records a valuation allowance to reduce its deferred tax assets if it is considered more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company operates within, and is subject to audit in, multiple taxing jurisdictions. The Company records accruals for the estimated outcomes of these audits, and the accruals may change in the future due to new developments in each matter.
Refer to the Income Taxes section in the Summary of Significant Accounting Policies footnote on page 44 of this Form 10-K and the Income Taxes footnote on page 52 of this Form 10-K for additional information.
EFFECTS OF CHANGING PRICES — INFLATION
Broader inflationary pressures in the economy are expected to continue to impact the restaurant industry through supply chain, labor and energy cost challenges. The Company has demonstrated an ability to manage these inflationary cost increases effectively through its rapid inventory turnover, ability to adjust menu prices, cost controls and substantial property holdings, many of which are at fixed costs.
McDonald's Corporation 2022 Annual Report 24
Other Key Information
STOCK PERFORMANCE GRAPH
At least annually, McDonald's considers which companies comprise a readily identifiable investment peer group. The Company 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 its revenues and income is generated outside the U.S. In addition, because of its size, McDonald's inclusion in those indices tends to skew the results. Therefore, the Company believes that such a comparison is not meaningful.
The Company's 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, the Company believes 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, 2022. 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, 2017. 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 DJIA Index, which is not weighted by market capitalization and may be composed of different companies during the period under consideration.
| Company/Index | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | 12/31/2022 |
|---|---|---|---|---|---|---|
| McDonald's Corporation | $100 | $106 | $121 | $134 | $171 | $172 |
| S&P 500 Index | $100 | $96 | $126 | $149 | $192 | $157 |
| Dow Jones Industrials | $100 | $97 | $121 | $133 | $161 | $150 |
Source: S&P Capital IQ
McDonald's Corporation 2022 Annual Report 25
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER 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, 2023 was estimated to be 4,300,000.
Given the Company’s returns on its capital investments and significant cash provided by operations, management believes it is prudent to reinvest in the business to drive profitable growth and use excess cash flow to return cash to shareholders over time through dividends and share repurchases. The Company has paid dividends on common stock for 47 consecutive years through 2022 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, 2022*:
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms(1) | Approximate DollarValue of Sharesthat May YetBe Purchased Underthe Plans or Programs(1) | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| October 1-31, 2022 | 1,685,076 | 241.61 | 1,685,076 | $ | 9,386,452,589 | |||||||
| November 1-30, 2022 | 6,873 | 270.40 | 6,873 | 9,384,594,115 | ||||||||
| December 1-31, 2022 | 747 | 250.52 | 747 | 9,384,406,977 | ||||||||
| Total | 1,692,696 | 241.74 | 1,692,696 |
* Subject to applicable law, the Company may repurchase shares directly in the open market, in privately negotiated transactions, or pursuant to derivative instruments and plans complying with Rule 10b5-1, among other types of transactions and arrangements.
(1)On December 31, 2019, the Company's Board of Directors approved a share repurchase program, effective January 1, 2020, that authorized the purchase of up to $15 billion of the Company's outstanding common stock.
McDonald's Corporation 2022 Annual Report 26