10-Q 1 mcd-9302014x10q.htm 10-Q MCD-9.30.2014-10Q
 
 
 
 
 
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 September 30, 2014
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.)
 
 
One McDonald’s Plaza
Oak Brook, Illinois
 
60523
(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
 
Accelerated filer ¨
 
 
Non-accelerated filer ¨  (do not check if a smaller reporting  company)
 
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No  x

973,203,623
(Number of shares of common stock
outstanding as of September 30, 2014)
 
 
 
 
 

 



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.

2


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEET
 
 
 
 
 
 
 
(unaudited)
 
 
 
In millions, except per share data
September 30,
2014
 
December 31,
2013
Assets
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and equivalents
 
$
2,825.8

 
 
$
2,798.7

Short-term investments
 
407.5

 
 
160.0

Accounts and notes receivable
 
1,226.7

 
 
1,319.8

Inventories, at cost, not in excess of market
 
105.0

 
 
123.7

Prepaid expenses and other current assets
 
645.4

 
 
647.9

Total current assets
 
5,210.4

 
 
5,050.1

Other assets
 
 
 
 
 
Investments in and advances to affiliates
 
1,106.4

 
 
1,209.1

Goodwill
 
2,811.2

 
 
2,872.7

Miscellaneous
 
1,907.5

 
 
1,747.1

Total other assets
 
5,825.1

 
 
5,828.9

Property and equipment
 
 
 
 
 
Property and equipment, at cost
 
39,804.6

 
 
40,355.6

Accumulated depreciation and amortization
 
(14,819.3
)
 
 
(14,608.3
)
Net property and equipment
 
24,985.3

 
 
25,747.3

Total assets
 
$
36,020.8

 
 
$
36,626.3

Liabilities and shareholders’ equity
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accounts payable
 
$
847.3

 
 
$
1,086.0

Dividends payable
 
815.5

 
 

Income taxes
 
115.3

 
 
215.5

Other taxes
 
379.7

 
 
383.1

Accrued interest
 
195.7

 
 
221.6

Accrued payroll and other liabilities
 
1,212.8

 
 
1,263.8

Current maturities of long-term debt
 
613.3

 
 

Total current liabilities
 
4,179.6

 
 
3,170.0

Long-term debt
 
14,516.9

 
 
14,129.8

Other long-term liabilities
 
2,175.2

 
 
1,669.1

Deferred income taxes
 
1,523.2

 
 
1,647.7

Shareholders’ equity
 
 
 
 
 
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
 
6,187.7

 
 
5,994.1

Retained earnings
 
42,201.8

 
 
41,751.2

Accumulated other comprehensive income
 
(596.3
)
 
 
427.6

Common stock in treasury, at cost; 687.4 and 670.2 million shares
 
(34,183.9
)
 
 
(32,179.8
)
Total shareholders’ equity
 
13,625.9

 
 
16,009.7

Total liabilities and shareholders’ equity
 
$
36,020.8

 
 
$
36,626.3

See Notes to condensed consolidated financial statements.

3


CONDENSED CONSOLIDATED STATEMENT OF NET INCOME (UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarters Ended
 
 
Nine Months Ended
 
 
September 30,
 
 
September 30,
In millions, except per share data
 
2014
 
 
2013
 
 
2014
 
 
2013
Revenues
 
 
 
 
 
 
 
 
 
 
 
Sales by Company-operated restaurants
 
$
4,596.2

 
 
$
4,923.1

 
 
$
13,872.6

 
 
$
14,129.9

Revenues from franchised restaurants
 
2,390.9

 
 
2,400.3

 
 
6,996.5

 
 
6,882.6

Total revenues
 
6,987.1

 
 
7,323.4

 
 
20,869.1

 
 
21,012.5

Operating costs and expenses
 
 
 
 
 
 
 
 
 
 
 
Company-operated restaurant expenses
 
3,874.7

 
 
4,004.4

 
 
11,611.6

 
 
11,649.9

Franchised restaurants—occupancy expenses
 
431.2

 
 
408.4

 
 
1,275.9

 
 
1,202.7

Selling, general & administrative expenses
 
575.8

 
 
554.3

 
 
1,825.4

 
 
1,757.8

Other operating (income) expense, net
 
32.9

 
 
(60.4
)
 
 
(41.3
)
 
 
(161.8
)
Total operating costs and expenses
 
4,914.6

 
 
4,906.7

 
 
14,671.6

 
 
14,448.6

Operating income
 
2,072.5

 
 
2,416.7

 
 
6,197.5

 
 
6,563.9

Interest expense
 
149.3

 
 
130.5

 
 
422.7

 
 
388.4

Nonoperating (income) expense, net
 
2.1

 
 
13.6

 
 
(1.1
)
 
 
26.2

Income before provision for income taxes
 
1,921.1

 
 
2,272.6

 
 
5,775.9

 
 
6,149.3

Provision for income taxes
 
852.7

 
 
750.4

 
 
2,115.6

 
 
1,960.4

Net income
 
$
1,068.4

 
 
$
1,522.2

 
 
$
3,660.3

 
 
$
4,188.9

Earnings per common share-basic
 
$
1.09

 
 
$
1.53

 
 
$
3.72

 
 
$
4.19

Earnings per common share-diluted
 
$
1.09

 
 
$
1.52

 
 
$
3.69

 
 
$
4.16

Dividends declared per common share
 
$
1.66

 
 
$
1.58

 
 
$
3.28

 
 
$
3.12

Weighted average shares outstanding-basic
 
978.7

 
 
997.3

 
 
985.2

 
 
1,000.5

Weighted average shares outstanding-diluted
 
983.8

 
 
1,004.2

 
 
991.1

 
 
1,008.2

See Notes to condensed consolidated financial statements.

4


CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarters Ended
 
 
Nine Months Ended
 
 
September 30,
 
 
September 30,
In millions
 
2014
 
 
2013
 
 
2014
 
 
2013
Net income
 
$
1,068.4

 
 
$
1,522.2

 
 
$
3,660.3

 
 
$
4,188.9

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in accumulated other comprehensive
income (AOCI), including net investment hedges
(1,168.9
)
 
 
496.4

 
 
(1,077.7
)
 
 
(253.1
)
Reclassification of (gain) loss to net income

 
 

 
 
15.2

 
 

Foreign currency translation adjustments-net of tax
benefit (expense) of $(110.4), $57.6, $(93.2) and $5.7
(1,168.9
)
 
 
496.4

 
 
(1,062.5
)
 
 
(253.1
)
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in AOCI
19.5

 
 
(17.6
)
 
 
33.0

 
 
(47.9
)
Reclassification of (gain) loss to net income
(0.1
)
 
 
8.4

 
 
(6.2
)
 
 
20.7

Cash flow hedges-net of tax benefit (expense) of $(11.8), $3.5,
$(14.6) and $6.3
19.4

 
 
(9.2
)
 
 
26.8

 
 
(27.2
)
Defined benefit pension plans:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in AOCI

 
 
0.0

 
 
6.5

 
 
0.1

Reclassification of (gain) loss to net income
1.3

 
 
0.2

 
 
5.3

 
 
0.4

Defined benefit pension plans-net of tax benefit (expense)
of $0.0, $0.0, $(4.4) and $0.0
1.3

 
 
0.2

 
 
11.8

 
 
0.5

Total other comprehensive income (loss), net of tax
(1,148.2
)
 
 
487.4

 
 
(1,023.9
)
 
 
(279.8
)
Comprehensive income (loss)
 
$
(79.8
)
 
 
$
2,009.6

 
 
$
2,636.4

 
 
$
3,909.1

See Notes to condensed consolidated financial statements.

5


CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarters Ended
 
 
Nine Months Ended
 
 
September 30,
 
 
September 30,
In millions
 
2014
 
 
2013
 
 
2014
 
 
2013
Operating activities
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
1,068.4

 
 
$
1,522.2

 
 
$
3,660.3

 
 
$
4,188.9

Adjustments to reconcile to cash provided by operations
 
 
 
 
 
 
 
 
 
 
 
Charges and credits:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
413.4

 
 
394.5

 
 
1,237.0

 
 
1,176.5

Deferred income taxes
 
(104.0
)
 
 
18.7

 
 
(142.8
)
 
 
13.4

Share-based compensation
 
23.3

 
 
22.7

 
 
75.1

 
 
68.9

Other
 
290.0

 
 
(8.0
)
 
 
353.7

 
 
78.5

Changes in working capital items
 
141.8

 
 
100.4

 
 
43.9

 
 
(279.0
)
Cash provided by operations
 
1,832.9

 
 
2,050.5

 
 
5,227.2

 
 
5,247.2

Investing activities
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
(658.9
)
 
 
(687.1
)
 
 
(1,817.3
)
 
 
(1,920.7
)
Sales and purchases of restaurant businesses and property sales
 
71.9

 
 
77.1

 
 
229.8

 
 
126.7

Other
 
(195.6
)
 
 
24.4

 
 
(418.4
)
 
 
127.8

Cash used for investing activities
 
(782.6
)
 
 
(585.6
)
 
 
(2,005.9
)
 
 
(1,666.2
)
Financing activities
 
 
 
 
 
 
 
 
 
 
 
Short-term borrowings and long-term financing issuances and repayments
 
147.6

 
 
(67.8
)
 
 
1,379.3

 
 
(91.1
)
Treasury stock purchases
 
(944.4
)
 
 
(501.1
)
 
 
(2,087.4
)
 
 
(1,273.1
)
Common stock dividends
 
(793.0
)
 
 
(767.5
)
 
 
(2,395.3
)
 
 
(2,310.8
)
Proceeds from stock option exercises
 
39.6

 
 
25.2

 
 
201.3

 
 
203.6

Excess tax benefit on share-based compensation
 
11.0

 
 
8.9

 
 
67.5

 
 
82.1

Other
 
(3.2
)
 
 
0.7

 
 
(11.9
)
 
 
(6.2
)
Cash used for financing activities
 
(1,542.4
)
 
 
(1,301.6
)
 
 
(2,846.5
)
 
 
(3,395.5
)
Effect of exchange rates on cash and cash equivalents
 
(352.7
)
 
 
102.6

 
 
(347.7
)
 
 
22.7

Cash and equivalents increase (decrease)
 
(844.8
)
 
 
265.9

 
 
27.1

 
 
208.2

Cash and equivalents at beginning of period
 
3,670.6

 
 
2,278.4

 
 
2,798.7

 
 
2,336.1

Cash and equivalents at end of period
 
$
2,825.8

 
 
$
2,544.3

 
 
$
2,825.8

 
 
$
2,544.3

See Notes to condensed consolidated financial statements.


6


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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, 2013 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 and nine months ended September 30, 2014 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 September 30,
2014
 
2013
Conventional franchised
20,573

 
20,117

Developmental licensed
5,059

 
4,566

Foreign affiliated
3,540

 
3,598

Total Franchised
29,172

 
28,281

Company-operated
6,692

 
6,642

Systemwide restaurants
35,864

 
34,923

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 5.1 million shares and 6.9 million shares for the quarters 2014 and 2013, respectively, and 5.9 million shares and 7.7 million shares for the nine months 2014 and 2013, respectively. Stock options that would have been antidilutive and therefore were not included in the calculation of diluted weighted-average shares totaled 9.2 million shares and 7.7 million shares for the quarters 2014 and 2013, respectively, and 5.3 million shares and 4.7 million shares for the nine months 2014 and 2013, respectively.
In September 2014, McDonald's Board of Directors declared a fourth quarter dividend of $0.85 per share of common stock, resulting in $815.5 million of dividends payable in December 2014.

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, 2013 Annual Report on Form 10-K.

Certain Financial Assets and Liabilities Measured at Fair Value
The following table presents financial assets and liabilities measured at fair value on a recurring basis:
In millions
Level 1
 
Level 2
 
Carrying
Value
September 30, 2014
 
 
 
 
 
 
 
 
Derivative assets
 
$
127.8

 
 
$
93.3

 
 
$
221.1

Derivative liabilities
 
 
 
 
$
(54.2
)
 
 
$
(54.2
)

Certain Financial Assets and Liabilities not Measured at Fair Value
At September 30, 2014, the fair value of the Company’s debt obligations was estimated at $16.5 billion, compared to a carrying amount of $15.1 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.

7


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 Consolidated balance sheet:
  
Derivative Assets
 
Derivative Liabilities
In millions
September 30,
2014
 
December 31,
2013
 
September 30,
2014
 
December 31,
2013
Total derivatives designated as hedging instruments
 
$
83.1

 
 
$
55.6

 
 
$
(48.2
)
 
 
$
(155.5
)
Total derivatives not designated as hedging instruments
 
138.0

 
 
144.2

 
 
(6.0
)
 
 
(23.8
)
Total derivatives
 
$
221.1

 
 
$
199.8

 
 
$
(54.2
)
 
 
$
(179.3
)

The following table presents the pretax amounts affecting income and other comprehensive income ("OCI") for the nine months ended September 30, 2014 and 2013, respectively:
 
Gain (Loss)
Recognized in
Accumulated OCI
 
Gain (Loss) Reclassified
into Income from
Accumulated OCI
 
Gain (Loss) Recognized in
Income on Derivative(1)
 
 
 
 
 
 
In millions
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Cash Flow Hedges
 
$
50.4

 
 
$
(62.3
)
 
 
$
9.0

 
 
$
(28.8
)
 

$
0.7

 

$
(7.7
)
Net Investment Hedges
 
$
698.4

 
 
$
(229.8
)
 
 
$
(15.2
)
 
 
$

 
 
 
 
 
 
Undesignated derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
$
14.8


 
$
(31.7
)
(1)
Includes amounts excluded from effectiveness testing, ineffectiveness, and undesignated gains (losses).

Fair Value Hedges
The Company enters into fair value hedges which convert a portion of its fixed-rate debt into floating-rate debt by use of interest rate swaps. At September 30, 2014, $2.6 billion of the Company's outstanding fixed-rate debt was effectively converted. For the nine months ended September 30, 2014, the Company recognized a $11.8 million loss on fair value interest rate swaps, which was exactly offset by a corresponding gain in the fair value of the hedged debt instruments.
 
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 and foreign currency options to hedge a portion of anticipated exposures. The hedges cover the next 19 months for certain exposures and are denominated in various currencies. As of September 30, 2014, the Company had derivatives outstanding with an equivalent notional amount of $525.8 million that hedged a portion of forecasted foreign currency denominated royalties.
The Company uses cross-currency swaps to hedge the risk of cash flows associated with certain foreign currency denominated debt, including forecasted interest payments, and has elected cash flow hedge accounting. The hedges cover periods up to 30 months and have an equivalent notional amount of $150.0 million.
Based on market conditions at September 30, 2014, the $24.5 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 OCI and offset translation adjustments on the underlying net assets of foreign subsidiaries and affiliates, which also are recorded in OCI. As of September 30, 2014, $4.8 billion of the Company's third party foreign currency denominated debt, $4.0 billion of intercompany foreign currency denominated debt and $0.9 billion of derivatives were designated to hedge investments in certain foreign subsidiaries and affiliates.

8


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 September 30, 2014 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.

Segment Information
The Company franchises and operates McDonald’s restaurants in the global restaurant industry. The following table presents the Company’s revenues and operating income by geographic segment. The APMEA segment represents operations in Asia/Pacific, Middle East and Africa. Other Countries & Corporate represents operations in Canada and Latin America, as well as Corporate activities.
 
Quarters Ended
 
Nine Months Ended
  
September 30,
 
September 30,
In millions
2014
 
2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
U.S.
$
2,202.1

 
$
2,289.0

 
$
6,505.2

 
$
6,659.9

Europe
2,884.1

 
2,955.3

 
8,509.6

 
8,378.8

APMEA
1,530.5

 
1,683.1

 
4,813.6

 
4,866.3

Other Countries & Corporate
370.4

 
396.0

 
1,040.7

 
1,107.5

Total revenues
$
6,987.1

 
$
7,323.4

 
$
20,869.1

 
$
21,012.5

Operating Income
 
 
 
 
 
 
 
U.S.
$
914.4

 
$
1,021.7

 
$
2,715.7

 
$
2,834.3

Europe
926.2

 
944.4

 
2,532.3

 
2,503.3

APMEA
177.9

 
391.8

 
871.3

 
1,128.4

Other Countries & Corporate
54.0

 
58.8

 
78.2

 
97.9

Total operating income
$
2,072.5

 
$
2,416.7

 
$
6,197.5

 
$
6,563.9


Income Taxes
The effective income tax rate for the quarter and nine months ended September 30, 2014 was 44.4% and 36.6%, respectively. These effective income tax rates reflected an increase in tax reserves for 2003-2008 and the associated interest expense resulting from an unfavorable lower tax court ruling in a foreign tax jurisdiction, as well as the impact of changes in tax reserves and the associated interest expense related to audit progression in other foreign tax jurisdictions. In reconciling the effective income tax rate to the statutory US federal income tax rate for the nine months ended September 30, 2014, the net tax cost associated with these adjustments impacted the effective income tax rate by 4.5%.
As a result of these adjustments, the December 31, 2013 balance of unrecognized tax benefits has increased by $450 million for tax positions taken in prior years. After considering the deferred tax accounting impact, approximately $170 million of this increase would favorably affect the effective tax rate if resolved in the Company’s favor.
It is reasonably possible that the total amount of the unrecognized tax benefits could decrease within the next 12 months by $640 million due to the possible completion of the 2009 and 2010 IRS audit, various foreign and US state tax audits and the expiration of the statute of limitations in multiple tax jurisdictions. Additionally, it is reasonably possible that, as a result of audit progression within the next 12 months, there may be new information that causes the Company to reassess the total amount of unrecognized tax benefits recorded. While the Company cannot estimate the impact that new information may have on our unrecognized tax benefit balance, we believe that the liabilities recorded are appropriate and adequate as determined under Accounting Standards Codification (ASC) 740, "Income Taxes."

Recently Issued Accounting Standard
In May 2014, the Financial Accounting Standards Board issued guidance codified in ASC 606, "Revenue Recognition - Revenue from Contracts with Customers," which amends the guidance in former ASC 605, "Revenue Recognition," and becomes effective beginning January 1, 2017. The Company is currently evaluating the impact of the provisions of ASC 606.

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.

9


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 35,864 restaurants in 119 countries at September 30, 2014, 29,172 were licensed to franchisees (including 20,573 franchised to conventional franchisees, 5,059 licensed to developmental licensees and 3,540 licensed to foreign affiliates ("affiliates") – primarily Japan) and 6,692 were operated by the Company. Under our conventional franchise arrangement, franchisees provide a portion of the capital required by initially investing in the equipment, signs, seating and décor of their restaurant business, and by reinvesting in the business over time. The Company owns the land and building or secures long-term leases for both Company-operated and conventional franchised restaurant sites. This maintains long-term occupancy rights, helps control related costs and assists in alignment with franchisees. In certain circumstances, the Company participates in reinvestment for conventional franchised restaurants. Under our developmental license arrangement, licensees provide capital for the entire business, including the real estate interest, and the Company has no capital invested. In addition, the Company has an equity investment in a limited number of affiliates that invest in real estate and operate or franchise restaurants within a market.
We view ourselves primarily as a franchisor and believe franchising is important to both delivering great, locally-relevant customer experiences and driving profitability. However, directly operating restaurants is paramount to being a credible franchisor and is essential to providing Company personnel with restaurant operations experience. In our Company-operated restaurants, and in collaboration with franchisees, we further develop and refine operating standards, marketing concepts and product and pricing strategies, so that only those that we believe are most beneficial are introduced in the restaurants. We continually review, and as appropriate adjust, our mix of Company-operated and franchised (conventional franchised, developmental licensed and foreign affiliated) restaurants to help optimize overall performance. The Company expects to refranchise at least 1,500 restaurants by the end of 2016, primarily in Asia/Pacific, Middle East and Africa ("APMEA") and Europe.
The Company’s revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales along with minimum rent payments, and initial fees. Revenues from restaurants licensed to affiliates and developmental licensees include a royalty based on a percent of sales, and generally include initial fees. Fees vary by type of site, amount of Company investment, if any, and local business conditions. These fees, along with occupancy and operating rights, are stipulated in franchise/license agreements that generally have 20‑year terms.
The business is managed as distinct geographic segments. Significant reportable segments include the United States ("U.S."), Europe, and APMEA. In addition, throughout this report we present “Other Countries & Corporate” that includes operations in Canada and Latin America, as well as Corporate activities. For the nine months ended September 30, 2014, the U.S., Europe and APMEA segments accounted for 31%, 41% and 23% of total revenues, respectively.
Strategic Direction and Financial Performance
The strength of the alignment among the Company, its franchisees and suppliers (collectively referred to as the "System") has been key to McDonald's success. By leveraging our System, we are able to identify, implement and scale ideas that meet customers' changing needs and preferences. In addition, our business model enables McDonald's to consistently deliver locally-relevant restaurant experiences to customers and be an integral part of the communities we serve.
McDonald's customer-focused Plan to Win ("Plan") provides a common framework that aligns our global business and allows for local adaptation through an emphasis on the Plan's five pillars - People, Products, Place, Price and Promotion. In 2014, we evolved our Plan framework, refocusing our planning and actions on what matters most to our customers. The following four strategic global growth priorities support our Plan: serving our customers' favorite food and drinks; offering a memorable customer experience; providing unparalleled convenience; and becoming an even more trusted brand. We believe that our strategic growth priorities align with our customers' evolving needs, and - combined with our competitive advantages of convenience, menu variety, geographic diversification and System alignment - will drive long-term sustainable growth and shareholder value.
We began 2014 mindful of the challenges we faced in driving sales and profitability. Internal factors and external headwinds - namely the impact of the previously-disclosed supplier issue in certain markets in APMEA, sustained competitive activity and rising costs in the U.S., and ongoing consumer-confidence issues and instability in Europe - have proven more formidable than expected and will continue into the fourth quarter. Within our evolved Plan to Win framework, the Company is focused on the following three specific areas designed to increase its relevance with customers and drive guest traffic:
McDonald's Experience of the Future - a comprehensive restaurant experience that enhances the menu and customer engagement elements that are hallmarks of the McDonald's brand, and leverages our investments in reimaging, service and technology to improve the look, feel and convenience of the McDonald's experience in ways that are in-tune with today's consumer,

10


Digital Strategy - a global strategy supporting the McDonald's Experience of the Future designed to simplify the customer journey across ordering, payment and mobile offers, beginning with the implementation of exciting and relevant new options, such as Apple Pay in the U.S., and
Resourcing for Growth - a diligent review of the organization's structure and use of resources in order to redirect G&A spending toward those initiatives, such as the McDonald's Experience of the Future and the Digital Strategy, that will support the Company's long-term growth.
We will continue to prioritize our near-term efforts on improving performance in key opportunity markets that are significant contributors to consolidated results, including the U.S., Germany, Australia and Japan. At the same time, we are continuing to optimize our capital and restaurant ownership structures, while maintaining our existing long-term financial strength and philosophy.
Global comparable sales decreased 3.3% for the quarter and decreased 1.0% for the nine months, reflecting negative guest traffic in all major segments and the impact of the supplier issue. On a consolidated basis, comparable guest counts decreased 3.7% for the nine months. Comparable sales are driven by changes in guest counts and average check, which is affected by changes in pricing and product mix. Typically, pricing has a greater impact on average check than product mix. The goal is to achieve a balanced contribution from both guest counts and average check.
U.S. comparable sales decreased 3.3% for the quarter and decreased 2.2% for the nine months, reflecting negative comparable guest counts amid ongoing broad-based challenges, including sustained competitive activity. Looking ahead, the U.S. is moving quickly to implement new initiatives designed to deliver:
A flatter, more nimble organization that ensures key business decisions are made closer to the customer, by people with local market expertise,
A revamped marketing approach that links national messaging around our food quality, brand transparency and people initiatives - complemented by local ad campaigns that are responsive to individual market preferences, and
A simplified menu that showcases the Company's core products and features locally-relevant menu options - available in new, customizable ways.
In addition, the U.S. has continued to invest in new and existing restaurants, although the pace of our reimaging program has been slower compared to last year.
In Europe, comparable sales decreased 1.4% for the quarter and decreased 0.4% for the nine months, reflecting positive performance in the U.K. offset by ongoing weakness in Germany. In addition, sales performance for the quarter was negatively impacted by consumer confidence and other issues, such as temporary restaurant closures, related to the operating environment in Russia and Ukraine. Looking ahead, McDonald's Europe will work to build guest traffic by pursuing targeted opportunities that leverage everyday value, classic core favorites, blended-ice beverages and key daypart initiatives. In addition, we remain committed to our ongoing restaurant reimaging, technology initiatives, and targeted new restaurant openings.
In APMEA, comparable sales decreased 9.9% for the quarter and decreased 2.7% for the nine months, due primarily to the impact of the supplier issue in China, Japan and certain other markets, which collectively represent about 10% of global systemwide sales. APMEA is diligently working to restore consumer trust and confidence in McDonald’s brand and strengthen its financial results to continue driving the long-term potential of this segment. With sales trends showing signs of improvement, we expect that it will take at least 6-9 more months for our business to return to a normalized level. We will continue to pursue customer-focused initiatives to deliver menu variety, increased convenience and branded affordability. In addition, we remain committed to ongoing restaurant reimaging and restaurant expansion, although the pace of new openings has slowed in China in response to local market dynamics.
Third Quarter and Nine Months 2014 Operating Results Included:
Global comparable sales decreased 3.3% for the quarter and decreased 1.0% for the nine months, reflecting negative guest traffic in all major segments and the impact of the supplier issue
Consolidated revenues decreased 5% (4% in constant currencies) for the quarter and decreased 1% (0% in constant currencies) for the nine months, reflecting negative comparable sales, partly due to the impact of the supplier issue
Consolidated operating income decreased 14% (14% in constant currencies) for the quarter and decreased 6% (5% in constant currencies) for the nine months, approximately half due to the impact of the supplier issue, and the remainder largely due to soft operating performance in the U.S. and certain markets in Europe
Effective tax rate of 44.4% for the quarter and 36.6% for the nine months, reflecting an increase in tax reserves related to certain foreign tax matters
Diluted earnings per share was $1.09 for the quarter and $3.69 for the nine months, down 28% (28% in constant currencies) and 11% (10% in constant currencies), respectively. Foreign currency translation had a negative impact of $0.01 and $0.04 on

11


diluted earnings per share for the quarter and nine months, respectively. The following items, which total $0.42 per share, negatively impacted diluted earnings per share by 28% (28% in constant currencies) for the quarter and 10% (10% in constant currencies) for the nine months:
$0.26 per share due to an increase in tax reserves related to certain foreign tax matters
$0.15 per share due to the estimated impact of the supplier issue resulting from lost sales and profitability
$0.01 per share due to the estimated impact of temporary store closures in Russia and Ukraine
Excluding the impact of these items, earnings per share for the quarter would have been relatively flat compared to last year.  This supplemental information is provided to help investors understand the impact of recent events on the Company's results.
Returned $4.6 billion year-to-date September to shareholders through dividends and share repurchases, in connection with our $18-$20 billion, 3-year cash return target
The quarterly cash dividend increased 5% to $0.85 per share - the equivalent of $3.40 per share annually - effective for the fourth quarter 2014
Outlook
The Company currently expects pressures on operating performance to persist given difficulty predicting the pace of recovery from the supplier issue, sustained competitive activity and rising costs in the U.S., and ongoing consumer-confidence issues and instability in Europe. For the fourth quarter, we estimate the impact from the supplier issue on diluted earnings per share to be between $0.07-$0.10 per share.
While the Company does not provide specific guidance on earnings per share, the following information is provided to assist in forecasting the Company's future results.
Changes in Systemwide sales are driven by comparable sales and net restaurant unit expansion. The Company expects net restaurant additions to add approximately 2.5 percentage points to 2014 Systemwide sales growth (in constant currencies), most of which will be due to the 949 net restaurants (1,098 net traditional openings less 149 net satellite closings) added in 2013.
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 Europe would change annual diluted earnings per share by about 4 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 2014, the total basket of goods cost is expected to increase 2.5%-3.0% in the U.S. and 0.0%-1.0% in Europe.
The Company expects full-year 2014 selling, general and administrative expenses to increase approximately 4%-5% in constant currencies. The increase is primarily due to expenses associated with our 2014 Worldwide Owner/Operator Convention and sponsorship of the Winter Olympics, and costs related to long-term growth initiatives.
Based on current interest and foreign currency exchange rates, the Company expects interest expense for the full-year 2014 to increase approximately 9-10% compared with 2013.
A significant part of the Company's operating income is generated outside the U.S., and about 40% of its total debt is denominated in foreign currencies. Accordingly, earnings are affected by changes in foreign currency exchange rates, particularly the Euro, British Pound, Australian Dollar and Canadian Dollar. Collectively, these currencies represent approximately 65% of the Company's operating income outside the U.S. If all four of these currencies moved by 10% in the same direction, the Company's annual diluted earnings per share would change by about 25 cents.
The Company expects the effective income tax rate for the full-year 2014 to be 35% to 37%.
The Company expects capital expenditures for 2014 to be approximately $2.7 billion. Over half of this amount will be used to open new restaurants. The Company expects to open approximately 1,400 restaurants including about 500 restaurants in affiliated and developmental licensee markets, such as Japan and Latin America, where the Company does not fund any capital expenditures. The Company expects net additions of between 900-1,000 restaurants. The remaining capital will be used to reinvest in existing locations, in part through reimaging. About 1,000 restaurants worldwide are expected to be reimaged, including locations in affiliated and developmental licensee markets that require no capital investment from the Company.
The Company has returned $4.6 billion year-to-date September to shareholders through dividends and share repurchases, in connection with our 3-year cash return target of $18-$20 billion for 2014 to 2016. This target is based on several ongoing factors, including the significant free cash flow generated from our operations, as well as the use of cash proceeds from debt additions and refranchising of at least 1,500 restaurants.

12


The Following Definitions Apply to these Terms as Used Throughout this Form 10-Q:
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 and bases incentive compensation plans on these results because they believe this better represents the Company’s underlying 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.
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. Comparable sales are driven by changes in guest counts and average check, which is affected by changes in pricing and product mix. Typically, pricing has a greater impact on average check than product mix. 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. The number of weekdays and weekend days, referred to as the calendar shift/trading day adjustment, can impact comparable sales and guest counts. In addition, the timing of holidays can also impact comparable sales and guest counts.

13


CONSOLIDATED OPERATING RESULTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter Ended
 
Nine Months Ended
Dollars in millions, except per share data
September 30, 2014
 
September 30, 2014
 
Amount
 
 
Increase/
(Decrease)

 
Amount
 
 
Increase/
(Decrease)

Revenues
 
 
 
 
 
 
 
 
 
Sales by Company-operated restaurants
 
$
4,596.2

 
(7
)%
 
 
$
13,872.6

 
(2
)%
Revenues from franchised restaurants
 
2,390.9

 
0

 
 
6,996.5

 
2

Total revenues
 
6,987.1

 
(5
)
 
 
20,869.1

 
(1
)
Operating costs and expenses
 
 
 
 
 
 
 
 
 
Company-operated restaurant expenses
 
3,874.7

 
(3
)
 
 
11,611.6

 
0

Franchised restaurants—occupancy expenses
 
431.2

 
6

 
 
1,275.9

 
6

Selling, general & administrative expenses
 
575.8

 
4

 
 
1,825.4

 
4

Other operating (income) expense, net
 
32.9

 
n/m

 
 
(41.3
)
 
75

Total operating costs and expenses
 
4,914.6

 
0

 
 
14,671.6

 
2

Operating income
 
2,072.5

 
(14
)
 
 
6,197.5

 
(6
)
Interest expense
 
149.3

 
14

 
 
422.7

 
9

Nonoperating (income) expense, net
 
2.1

 
(84
)
 
 
(1.1
)
 
n/m

Income before provision for income taxes
 
1,921.1

 
(15
)
 
 
5,775.9

 
(6
)
Provision for income taxes
 
852.7

 
14

 
 
2,115.6

 
8

Net income
 
$
1,068.4

 
(30
)%
 
 
$
3,660.3

 
(13
)%
Earnings per common share-basic
 
$
1.09

 
(29
)%
 
 
$
3.72

 
(11
)%
Earnings per common share-diluted
 
$
1.09

 
(28
)%
 
 
$
3.69

 
(11
)%
n/m Not meaningful

14


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. Management reviews and analyzes business results excluding the effect of foreign currency translation and bases incentive compensation plans on these results, because they believe this better represents the Company's underlying business trends. 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
(Cost)
 
Quarters Ended September 30,
 
2014

 
 
2013

 
 
2014

Revenues
 
$
6,987.1

 
 
$
7,323.4

 
 
$
(49.8
)
Company-operated margins
 
721.5

 
 
918.7

 
 
(2.5
)
Franchised margins
 
1,959.7

 
 
1,991.9

 
 
(12.5
)
Selling, general & administrative expenses
 
575.8

 
 
554.3

 
 
0.0

Operating income
 
2,072.5

 
 
2,416.7

 
 
(12.3
)
Net income
 
1,068.4

 
 
1,522.2

 
 
(10.1
)
Earnings per share-diluted
 
$
1.09

 
 
$
1.52

 
 
$
(0.01
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency
Translation
(Cost)
 
Nine Months Ended September 30,
 
2014

 
 
2013

 
 
2014

Revenues
 
$
20,869.1

 
 
$
21,012.5

 
 
$
(125.4
)
Company-operated margins
 
2,261.0

 
 
2,480.0

 
 
(11.3
)
Franchised margins
 
5,720.6

 
 
5,679.9

 
 
(26.5
)
Selling, general & administrative expenses
 
1,825.4

 
 
1,757.8

 
 
(2.0
)
Operating income
 
6,197.5

 
 
6,563.9

 
 
(38.8
)
Net income
 
3,660.3

 
 
4,188.9

 
 
(35.9
)
Earnings per share-diluted
 
$
3.69

 
 
$
4.16

 
 
$
(0.04
)
The impact of foreign currency translation on consolidated operating results for the nine months reflected the weaker Australian Dollar and Russian Ruble, and the stronger Euro and British Pound.
Net Income and Diluted Earnings per Common Share
For the quarter, net income decreased 30% (29% in constant currencies) to $1,068.4 million, and diluted earnings per share decreased 28% (28% in constant currencies) to $1.09. Foreign currency translation had a negative impact of $0.01 on diluted earnings per share.
For the nine months, net income decreased 13% (12% in constant currencies) to $3,660.3 million, and diluted earnings per share decreased 11% (10% in constant currencies) to $3.69. Foreign currency translation had a negative impact of $0.04 on diluted earnings per share.
The following items, which total $0.42 per share, negatively impacted diluted earnings per share by 28% (28% in constant currencies) for the quarter and 10% (10% in constant currencies) for the nine months:
$0.26 per share due to an increase in tax reserves for 2003-2008 resulting from an unfavorable lower tax court ruling in a foreign tax jurisdiction, as well as an increase in tax reserves related to audit progression in other foreign tax jurisdictions.
$0.15 per share due to the estimated impact of the previously-disclosed supplier issue in China. In mid-July, food quality issues were discovered at a supplier to McDonald's and other food companies in China. As a consequence, results in China, Japan and certain other markets were negatively impacted due to lost sales and profitability, including expenses associated with our recovery efforts.
$0.01 per share due to the estimated impact of temporary store closures in Russia and Ukraine.

15


Excluding the impact of these items, earnings per share for the quarter would have been relatively flat compared to last year.  This supplemental information is provided to help investors understand the impact of recent events on the Company's results.
During the quarter, the Company paid a quarterly dividend of $0.81 per share or $793.0 million, bringing the total dividends paid for the nine months to $2.4 billion. In addition, the Company repurchased 9.6 million shares of its stock for $918.7 million, bringing total purchases for the nine months to 22.2 million shares or $2.2 billion.
Revenues
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 franchised restaurants that are licensed to affiliates and developmental licensees include a royalty based on a percent of sales and generally include initial fees.
REVENUES
 
 
 
 
 
 
 
 
Dollars in millions
 
 
 
 
 
 
 
 
Quarters Ended September 30,
 
2014

 
2013

 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

Company-operated sales
 
 
 
 
 
 
 
 
U.S.
 
$
1,097.3

 
$
1,161.9

 
(6
)%
 
(6
)%
Europe
 
2,023.6

 
2,123.7

 
(5
)
 
(3
)
APMEA
 
1,278.0

 
1,420.9

 
(10
)
 
(11
)
Other Countries & Corporate
 
197.3

 
216.6

 
(9
)
 
(5
)
Total
 
$
4,596.2

 
$
4,923.1

 
(7
)%
 
(6
)%
Franchised revenues
 
 
 
 
 
 
 
 
U.S.
 
$
1,104.8

 
$
1,127.1

 
(2
)%
 
(2
)%
Europe
 
860.5

 
831.6

 
3

 
3

APMEA
 
252.5

 
262.2

 
(4
)
 
(4
)
Other Countries & Corporate
 
173.1

 
179.4

 
(3
)
 
8

Total
 
$
2,390.9

 
$
2,400.3

 
0
 %
 
0
 %
Total revenues
 
 
 
 
 
 
 
 
U.S.
 
$
2,202.1

 
$
2,289.0

 
(4
)%
 
(4
)%
Europe
 
2,884.1

 
2,955.3

 
(2
)
 
(1
)
APMEA
 
1,530.5

 
1,683.1

 
(9
)
 
(10
)
Other Countries & Corporate
 
370.4

 
396.0

 
(6
)
 
1

Total
 
$
6,987.1

 
$
7,323.4

 
(5
)%
 
(4
)%


16


 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2014

 
2013

 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

Company-operated sales
 
 
 
 
 
 

 
 
U.S.
 
$
3,271.6

 
$
3,397.6

 
(4
)%
 
(4
)%
Europe
 
6,023.6

 
6,044.1

 
0

 
0

APMEA
 
4,022.0

 
4,086.1

 
(2
)
 
(1
)
Other Countries & Corporate
 
555.4

 
602.1

 
(8
)
 
(2
)
Total
 
$
13,872.6

 
$
14,129.9

 
(2
)%
 
(1
)%
Franchised revenues
 
 
 
 
 
 
 
 
U.S.
 
$
3,233.6

 
$
3,262.3

 
(1
)%
 
(1
)%
Europe
 
2,486.0

 
2,334.7

 
6

 
3

APMEA
 
791.6

 
780.2

 
1

 
6

Other Countries & Corporate
 
485.3

 
505.4

 
(4
)
 
8

Total
 
$
6,996.5

 
$
6,882.6

 
2
 %
 
2
 %
Total revenues
 
 
 
 
 
 
 
 
U.S.
 
$
6,505.2

 
$
6,659.9

 
(2
)%
 
(2
)%
Europe
 
8,509.6

 
8,378.8

 
2

 
1

APMEA
 
4,813.6

 
4,866.3

 
(1
)
 
0

Other Countries & Corporate
 
1,040.7

 
1,107.5

 
(6
)
 
3

Total
 
$
20,869.1

 
$
21,012.5

 
(1
)%
 
0
 %
Consolidated revenues decreased 5% (4% in constant currencies) for the quarter and decreased 1% (0% in constant currencies) for the nine months, reflecting negative comparable sales, which had a more significant impact for the quarter.
In the U.S., revenues decreased for the quarter and nine months due to negative comparable sales, reflecting negative comparable guest counts amid ongoing broad-based challenges, including sustained competitive activity.
In Europe, the constant currency results for the quarter and nine months reflected a benefit from expansion, primarily in Russia, and positive comparable sales in the U.K. Both periods were impacted by negative comparable sales and refranchising in Germany and negative comparable sales in Russia.
In APMEA, the constant currency decrease for the quarter and flat results for the nine months were driven by negative comparable sales in China, Japan and certain other markets, largely impacted by the supplier issue. Results for both periods benefited from expansion, partly offset by refranchising in Australia.
The following table presents the percent change in comparable sales for the quarters and nine months ended September 30, 2014 and 2013:
COMPARABLE SALES
 
 
 
 
 
 
Increase/ (Decrease)
 
Quarters Ended
 
Nine Months Ended
  
September 30,
 
September 30,*
 
2014

 
2013

 
2014

 
2013

U.S.
(3.3
)%
 
0.7
 %
 
(2.2
)%
 
0.2
 %
Europe
(1.4
)
 
0.2

 
(0.4
)
 
(0.3
)
APMEA
(9.9
)
 
(1.4
)
 
(2.7
)
 
(1.7
)
Other Countries & Corporate
4.3

 
8.6

 
5.3

 
7.0

Total
(3.3
)%
 
0.9
 %
 
(1.0
)%
 
0.3
 %
*
On a consolidated basis, comparable guest counts decreased 3.7% and 1.4% for the nine months 2014 and 2013, respectively.

17


The following table presents the percent change in Systemwide sales for the quarter and nine months ended September 30, 2014:
SYSTEMWIDE SALES
 
 
 
 
Quarter Ended
 
Nine Months Ended
  
September 30, 2014
 
September 30, 2014
 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

 
Inc/ (Dec)

Inc/ (Dec)
Excluding
Currency
Translation

U.S.
(2
)%
 
(2
)%
 
(1
)%
(1
)%
Europe
1

 
1

 
4

2

APMEA
(7
)
 
(6
)
 
(2
)
2

Other Countries & Corporate
(7
)
 
8

 
(6
)
9

Total
(3
)%
 
(1
)%
 
0
 %
1
 %
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 health of the franchisee base. The following table presents Franchised sales and the related increases/(decreases):
FRANCHISED SALES
 
 
 
 
 
 
 
 
Dollars in millions
 
 
 
 
 
 
 
 
Quarters Ended September 30,
 
2014

 
2013

 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

U.S.
 
$
7,975.1

 
$
8,129.9

 
(2
)%
 
(2
)%
Europe
 
4,860.9

 
4,677.4

 
4

 
3

APMEA
 
3,065.4

 
3,238.0

 
(5
)
 
(4
)
Other Countries & Corporate
 
2,024.6

 
2,183.7

 
(7
)
 
9

Total*
 
$
17,926.0

 
$
18,229.0

 
(2
)%
 
0
 %
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2014

 
2013

 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

U.S.
 
$
23,371.5

 
$
23,590.0

 
(1
)%
 
(1
)%
Europe
 
13,993.1

 
13,126.8

 
7

 
3

APMEA
 
9,345.5

 
9,574.6

 
(2
)
 
3

Other Countries & Corporate
 
5,866.4

 
6,253.5

 
(6
)
 
10

Total*
 
$
52,576.5

 
$
52,544.9

 
0
 %
 
2
 %
*
Sales from developmental licensed restaurants and foreign affiliated markets where the Company earns a royalty based on a percent of sales totaled $3,492.4 million and $3,862.8 million for the quarters 2014 and 2013, respectively, and $10,610.8 million and $11,235.7 million for the nine months 2014 and 2013, respectively. Results were negatively impacted by the supplier issue and the weaker Yen in Japan, and many weaker currencies in Latin America. The remaining balance of franchised sales is derived from conventional franchised restaurants where the Company earns rent and royalties based primarily on a percent of sales.

18


Restaurant Margins
FRANCHISED AND COMPANY-OPERATED RESTAURANT MARGINS
Dollars in millions
 
Percent    
 
Amount    
 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

Quarters Ended September 30,
2014

 
2013

 
2014

 
2013

 
 
Franchised
 
 
 
 
 
 
 
 
 
 
 
U.S.
83.4
%
 
84.0
%
 
$
921.3

 
$
946.3

 
(3
)%
 
(3
)%
Europe
78.6

 
79.3

 
676.6

 
659.1

 
3

 
2

APMEA
84.3

 
88.1

 
212.9

 
230.8

 
(8
)
 
(8
)
Other Countries & Corporate
86.0

 
86.8

 
148.9

 
155.7

 
(4
)
 
8

Total
82.0
%
 
83.0
%
 
$
1,959.7

 
$
1,991.9

 
(2
)%
 
(1
)%
Company-operated
 
 
 
 
 
 
 
 
 
 
 
U.S.
16.7
%
 
18.4
%
 
$
182.9

 
$
214.3

 
(15
)%
 
(15
)%
Europe
19.5

 
21.1

 
394.6

 
448.4

 
(12
)
 
(11
)
APMEA
8.8

 
15.3

 
111.9

 
217.7

 
(49
)
 
(50
)
Other Countries & Corporate
16.3

 
17.7

 
32.1

 
38.3

 
(16
)
 
(12
)
Total
15.7
%
 
18.7
%
 
$
721.5

 
$
918.7

 
(21
)%
 
(21
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Percent
 
Amount
 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

Nine Months Ended September 30,
2014

 
2013

 
2014

 
2013

 
 
Franchised
 
 
 
 
 
 
 
 
 
 
 
U.S.
83.2
%
 
83.7
%
 
$
2,691.8

 
$
2,730.2

 
(1
)%
 
(1
)%
Europe
77.9

 
78.4

 
1,936.0

 
1,829.4

 
6

 
2

APMEA
85.6

 
87.8

 
677.6

 
685.0

 
(1
)
 
4

Other Countries & Corporate
85.6

 
86.1

 
415.2

 
435.3

 
(5
)
 
8

Total
81.8
%
 
82.5
%
 
$
5,720.6

 
$
5,679.9

 
1
 %
 
1
 %
Company-operated
 
 
 
 
 
 
 
 
 
 
 
U.S.
17.5
%
 
18.2
%
 
$
570.9

 
$
619.0

 
(8
)%
 
(8
)%
Europe
18.4

 
19.2

 
1,108.3

 
1,159.7

 
(4
)
 
(5
)
APMEA
12.3

 
14.7

 
493.1

 
602.6

 
(18
)
 
(17
)
Other Countries & Corporate
16.0

 
16.4

 
88.7

 
98.7

 
(10
)
 
(4
)
Total
16.3
%
 
17.6
%
 
$
2,261.0

 
$
2,480.0

 
(9
)%
 
(8
)%
Franchised margin dollars decreased $32.2 million or 2% (1% in constant currencies) for the quarter and increased $40.7 million or 1% (1% in constant currencies) for the nine months. These results reflected a benefit from expansion and refranchising, offset by negative comparable sales performance, which had a more significant impact for the quarter.
In the U.S., the franchised margin percent decreased for the quarter and nine months primarily due to negative comparable sales and higher occupancy costs.
In Europe, the franchised margin percent decreased for the quarter and nine months primarily due to the impact of refranchising and negative comparable sales in Germany and certain other markets.
In APMEA, the franchised margin percent decreased for the quarter and nine months primarily due to the negative impact in China and Japan from the supplier issue, and higher occupancy costs. The margin percent decrease also reflected a higher proportion of conventionally-franchised restaurants relative to developmentally-licensed and affiliate restaurants. While this has a dilutive effect on the franchised margin percent, it results in higher franchised margin dollars.

19


Company-operated margin dollars decreased $197.2 million or 21% (21% in constant currencies) for the quarter and decreased $219.0 million or 9% (8% in constant currencies) for the nine months.
In the U.S., the Company-operated margin percent decreased for the quarter and nine months as the positive impact of a higher average check was more than offset by negative comparable guest counts, higher commodity costs and higher labor.
In Europe, the Company-operated margin percent decreased for the quarter and nine months, reflecting weaker results in Russia and Ukraine, as a challenging operating environment negatively impacted comparable sales performance and drove higher imported commodity costs due to weaker currencies.
In APMEA, the Company-operated margin percent for the quarter and nine months decreased primarily due to negative comparable sales in China and certain other markets, largely impacted by the supplier issue.
The following table presents Company-operated restaurant margin components as a percent of sales:
CONSOLIDATED COMPANY-OPERATED RESTAURANT EXPENSES AND MARGINS AS A PERCENT OF SALES
 
Quarters Ended
 
Nine Months Ended
  
September 30,
 
September 30,
 
2014

 
2013

 
2014

 
2013

Food & paper
33.6
%
 
33.7
%
 
33.6
%
 
33.7
%
Payroll & employee benefits
26.3

 
24.7

 
26.1

 
25.6

Occupancy & other operating expenses
24.4

 
22.9

 
24.0

 
23.1

Total expenses
84.3
%
 
81.3
%
 
83.7
%
 
82.4
%
Company-operated margins
15.7
%
 
18.7
%
 
16.3
%
 
17.6
%
Selling, General & Administrative Expenses
Selling, general and administrative expenses increased $21.5 million or 4% (4% in constant currencies) for the quarter and increased $67.6 million or 4% (4% in constant currencies) for the nine months primarily due to higher employee and other costs, partly offset by a reduction in incentive-based compensation. The nine months also included costs rela