10-Q 1 mcd-9302016x10q.htm 10-Q Document

 
 
 
 
 
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, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from             to            
Commission File Number 1-5231
McDONALD’S CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
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

830,443,627
(Number of shares of common stock
outstanding as of September 30, 2016)
 
 
 
 
 



McDONALD’S CORPORATION
___________________________
INDEX
_______
 
 
 
Page Reference
 
 
 
 
 
 
 
 
Condensed consolidated statement of income (unaudited), quarters and nine months ended September 30, 2016 and 2015
 
 
Condensed consolidated statement of comprehensive income (unaudited), quarters and nine months ended September 30, 2016 and 2015
 
 
Condensed consolidated statement of cash flows (unaudited), quarters and nine months ended September 30, 2016 and 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1 –  Legal Proceedings
 
 
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,
2016
 
December 31,
2015
Assets
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and equivalents
 
$
2,266.7

 
 
$
7,685.5

Accounts and notes receivable
 
1,349.8

 
 
1,298.7

Inventories, at cost, not in excess of market
 
90.5

 
 
100.1

Prepaid expenses and other current assets
 
595.1

 
 
558.7

Total current assets
 
4,302.1

 
 
9,643.0

Other assets
 
 
 
 
 
Investments in and advances to affiliates
 
878.0

 
 
792.7

Goodwill
 
2,504.7

 
 
2,516.3

Miscellaneous
 
1,816.4

 
 
1,869.1

Total other assets
 
5,199.1

 
 
5,178.1

Property and equipment
 
 
 
 
 
Property and equipment, at cost
 
37,931.1

 
 
37,692.4

Accumulated depreciation and amortization
 
(14,945.4
)
 
 
(14,574.8
)
Net property and equipment
 
22,985.7

 
 
23,117.6

Total assets
 
$
32,486.9

 
 
$
37,938.7

Liabilities and shareholders’ equity
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accounts payable
 
$
852.2

 
 
$
874.7

Dividends payable
 
772.9

 
 

Income taxes
 
561.3

 
 
154.8

Other taxes
 
295.3

 
 
309.0

Accrued interest
 
263.6

 
 
233.1

Accrued payroll and other liabilities
 
1,731.4

 
 
1,378.8

Total current liabilities
 
4,476.7

 
 
2,950.4

Long-term debt
 
26,007.0

 
 
24,122.1

Other long-term liabilities
 
2,248.5

 
 
2,074.0

Deferred income taxes
 
1,378.8

 
 
1,704.3

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
 
6,712.8

 
 
6,533.4

Retained earnings
 
45,030.0

 
 
44,594.5

Accumulated other comprehensive income
 
(2,622.6
)
 
 
(2,879.8
)
Common stock in treasury, at cost; 830.2 and 753.8 million shares
 
(50,760.9
)
 
 
(41,176.8
)
Total shareholders’ equity
 
(1,624.1
)
 
 
7,087.9

Total liabilities and shareholders’ equity
 
$
32,486.9

 
 
$
37,938.7

See Notes to condensed consolidated financial statements.

3


CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarters Ended
 
 
Nine Months Ended
 
 
September 30,
 
 
September 30,
In millions, except per share data
 
2016
 
 
2015
 
 
2016
 
 
2015
Revenues
 
 
 
 
 
 
 
 
 
 
 
Sales by Company-operated restaurants
 
$
3,972.1

 
 
$
4,282.9

 
 
$
11,642.2

 
 
$
12,458.1

Revenues from franchised restaurants
 
2,452.0

 
 
2,332.2

 
 
6,950.8

 
 
6,613.6

Total revenues
 
6,424.1

 
 
6,615.1

 
 
18,593.0

 
 
19,071.7

Operating costs and expenses
 
 
 
 
 
 
 
 
 
 
 
Company-operated restaurant expenses
 
3,239.5

 
 
3,607.7

 
 
9,662.9

 
 
10,558.3

Franchised restaurants—occupancy expenses
 
437.6

 
 
416.1

 
 
1,283.6

 
 
1,230.7

Selling, general & administrative expenses
 
582.9

 
 
584.0

 
 
1,757.0

 
 
1,759.2

Other operating (income) expense, net
 
26.8

 
 
(23.0
)
 
 
114.0

 
 
258.4

Total operating costs and expenses
 
4,286.8

 
 
4,584.8

 
 
12,817.5

 
 
13,806.6

Operating income
 
2,137.3

 
 
2,030.3

 
 
5,775.5

 
 
5,265.1

Interest expense
 
221.4

 
 
160.9

 
 
663.6

 
 
457.4

Nonoperating (income) expense, net
 
11.4

 
 
(9.0
)
 
 
(19.2
)
 
 
(37.2
)
Income before provision for income taxes
 
1,904.5

 
 
1,878.4

 
 
5,131.1

 
 
4,844.9

Provision for income taxes
 
629.1

 
 
569.2

 
 
1,638.0

 
 
1,521.8

Net income
 
$
1,275.4

 
 
$
1,309.2

 
 
$
3,493.1

 
 
$
3,323.1

Earnings per common share-basic
 
$
1.52

 
 
$
1.41

 
 
$
4.04

 
 
$
3.51

Earnings per common share-diluted
 
$
1.50

 
 
$
1.40

 
 
$
4.01

 
 
$
3.49

Dividends declared per common share
 
$
0.89

 
 
$
0.85

 
 
$
2.67

 
 
$
2.55

Weighted-average shares outstanding-basic
 
841.4

 
 
930.3

 
 
864.7

 
 
947.9

Weighted-average shares outstanding-diluted
 
847.7

 
 
934.8

 
 
871.8

 
 
952.7

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
 
2016
 
 
2015
 
 
2016
 
 
2015
Net income
 
$
1,275.4

 
 
$
1,309.2

 
 
$
3,493.1

 
 
$
3,323.1

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in accumulated other comprehensive
income (AOCI), including net investment hedges
50.7

 
 
(492.6
)
 
 
255.0

 
 
(1,083.1
)
Reclassification of (gain) loss to net income

 
 

 
 
18.3

 
 
0.2

Foreign currency translation adjustments-net of tax
benefit (expense) of $30.4, $0.3, $(66.9) and $(92.6)
50.7

 
 
(492.6
)
 
 
273.3

 
 
(1,082.9
)
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in AOCI
(1.3
)
 
 
1.7

 
 
(8.4
)
 
 
13.7

Reclassification of (gain) loss to net income
1.8

 
 
(8.3
)
 
 
(10.2
)
 
 
(23.0
)
Cash flow hedges-net of tax benefit (expense) of $(0.1), $3.8
and $10.6, $5.3
0.5

 
 
(6.6
)
 
 
(18.6
)
 
 
(9.3
)
Defined benefit pension plans:
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in AOCI
(0.1
)
 
 

 
 
(0.9
)
 
 
(1.4
)
Reclassification of (gain) loss to net income
1.1

 
 
1.7

 
 
3.4

 
 
5.8

Defined benefit pension plans-net of tax benefit (expense)
of $0.1, $0.1 and $0.1, $0.7
1.0

 
 
1.7

 
 
2.5

 
 
4.4

Total other comprehensive income (loss), net of tax
52.2

 
 
(497.5
)
 
 
257.2

 
 
(1,087.8
)
Comprehensive income (loss)
 
$
1,327.6

 
 
$
811.7

 
 
$
3,750.3

 
 
$
2,235.3

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
 
2016
 
 
2015
 
 
2016
 
 
2015
Operating activities
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
1,275.4

 
 
$
1,309.2

 
 
$
3,493.1

 
 
$
3,323.1

Adjustments to reconcile to cash provided by operations
 
 
 
 
 
 
 
 
 
 
 
Charges and credits:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
370.6

 
 
387.7

 
 
1,137.6

 
 
1,166.0

Deferred income taxes
 
(216.0
)
 
 
(0.1
)
 
 
(374.7
)
 
 
15.2

Share-based compensation
 
34.3

 
 
29.0

 
 
102.1

 
 
76.7

Other
 
2.9

 
 
27.2

 
 
189.1

 
 
289.3

Changes in working capital items
 
783.9

 
 
194.4

 
 
697.5

 
 
290.1

Cash provided by operations
 
2,251.1

 
 
1,947.4

 
 
5,244.7

 
 
5,160.4

Investing activities
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
(405.3
)
 
 
(412.7
)
 
 
(1,149.6
)
 
 
(1,221.2
)
Sales and purchases of restaurant businesses and property sales
 
103.9

 
 
38.2

 
 
421.3

 
 
136.8

Other
 
(49.7
)
 
 
(44.0
)
 
 
(82.4
)
 
 
(29.8
)
Cash used for investing activities
 
(351.1
)
 
 
(418.5
)
 
 
(810.7
)
 
 
(1,114.2
)
Financing activities
 
 
 
 
 
 
 
 
 
 
 
Net short-term borrowings
 
(80.0
)
 
 
170.2

 
 
(742.9
)
 
 
131.4

Long-term financing issuances
 
0.6

 
 
1.4

 
 
3,372.7

 
 
4,229.2

Long-term financing repayments
 
(5.7
)
 
 
(6.2
)
 
 
(819.6
)
 
 
(1,052.9
)
Treasury stock purchases
 
(1,969.8
)
 
 
(2,392.3
)
 
 
(9,662.2
)
 
 
(4,554.1
)
Common stock dividends
 
(745.1
)
 
 
(789.1
)
 
 
(2,285.2
)
 
 
(2,416.4
)
Proceeds from stock option exercises
 
36.1

 
 
35.7

 
 
249.9

 
 
170.9

Excess tax benefit on share-based compensation
 

 
 
4.6

 
 

 
 
30.0

Other
 
(11.8
)
 
 
(2.9
)
 
 
(3.9
)
 
 
(22.4
)
Cash used for financing activities
 
(2,775.7
)
 
 
(2,978.6
)
 
 
(9,891.2
)
 
 
(3,484.3
)
Effect of exchange rates on cash and cash equivalents
 
14.4

 
 
(96.3
)
 
 
38.4

 
 
(187.3
)
Cash and equivalents increase (decrease)
 
(861.3
)
 
 
(1,546.0
)
 
 
(5,418.8
)
 
 
374.6

Cash and equivalents at beginning of period
 
3,128.0

 
 
3,998.5

 
 
7,685.5

 
 
2,077.9

Cash and equivalents at end of period
 
$
2,266.7

 
 
$
2,452.5

 
 
$
2,266.7

 
 
$
2,452.5

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, 2015 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, 2016 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,
2016
 
2015
Conventional franchised
21,456

 
21,009

Developmental licensed
5,742

 
5,348

Foreign affiliated
3,361

 
3,494

Total Franchised
30,559

 
29,851

Company-operated
6,056

 
6,554

Systemwide restaurants
36,615

 
36,405

The results of operations of restaurant businesses purchased and sold in transactions with franchisees were not material either individually or in the aggregate to the condensed consolidated financial statements for the periods prior to purchase and sale.

Per Common Share Information
Diluted earnings per common share is calculated using net income divided by diluted weighted-average shares. Diluted weighted-average shares include weighted-average shares outstanding plus the dilutive effect of share-based compensation, calculated using the treasury stock method, of 6.3 million shares and 4.5 million shares for the quarters 2016 and 2015, respectively, and 7.1 million shares and 4.8 million shares for the nine months 2016 and 2015, respectively. Stock options that would have been antidilutive, and therefore were not included in the calculation of diluted weighted-average shares, totaled 4.2 million shares and 9.1 million shares for the quarters 2016 and 2015, respectively, and 1.2 million shares and 9.4 million shares for the nine months 2016 and 2015, respectively.
In the second quarter 2016, the Company entered into an Accelerated Share Repurchase agreement (“ASR”) to purchase up to $2.6 billion of the Company's common stock and received an initial delivery of 16.2 million shares, which represented 80% of the total shares the Company expected to receive based on the market price at the time of initial delivery. In July 2016, the purchase period for this ASR ended, and an additional 5.1 million shares were received.
In September 2016, McDonald's Board of Directors declared a fourth quarter dividend of $0.94 per share of common stock, resulting in $772.9 million of dividends payable in December 2016.

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, 2015 Annual Report on Form 10-K.
At September 30, 2016, the fair value of the Company’s debt obligations was estimated at $28.8 billion, compared to a carrying amount of $26.0 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 condensed consolidated balance sheet:
  
Derivative Assets
 
Derivative Liabilities
In millions
September 30,
2016
 
December 31,
2015
 
September 30,
2016
 
December 31,
2015
Total derivatives designated as hedging instruments
 
$
9.7

 
 
$
60.9

 
 
$
(11.3
)
 
 
$
(38.9
)
Total derivatives not designated as hedging instruments
 
131.1

 
 
144.4

 
 
(16.6
)
 
 
(5.5
)
Total derivatives
 
$
140.8

 
 
$
205.3

 
 
$
(27.9
)
 
 
$
(44.4
)
The following table presents the pretax amounts affecting income and other comprehensive income (“OCI”) for the nine months ended September 30, 2016 and 2015, 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
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Cash Flow Hedges
 
$
(13.6
)
 
 
$
19.7

 
 
$
15.6

 
 
$
34.3

 


 

$
22.9

Net Investment Hedges
 
$
(96.5
)
 
 
$
493.5

 
 
$
(18.3
)
 
 
$
(0.2
)
 
 
 
 
 
 
Undesignated derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
$
(4.1
)

 
$
19.5

(1)
Includes amounts excluded from effectiveness testing, ineffectiveness, and undesignated gains (losses).
Fair Value Hedges
The Company enters into fair value hedges that convert a portion of its fixed-rate debt into floating-rate debt by use of interest rate swaps. At September 30, 2016, $2.2 billion of the Company's outstanding fixed-rate debt was effectively converted. For the nine months ended September 30, 2016, the Company recognized a $2.2 million gain on fair value interest rate swaps, which was exactly offset by a corresponding loss 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 18 months for certain exposures and are denominated in various currencies. As of September 30, 2016, the Company had derivatives outstanding with an equivalent notional amount of $676.5 million that hedged a portion of forecasted foreign currency denominated royalties.
Based on market conditions at September 30, 2016, the $1.4 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, 2016, $8.4 billion of the Company's third party foreign currency denominated debt, $3.3 billion of intercompany foreign currency denominated debt and $297.7 million of derivatives were designated to hedge investments in certain foreign subsidiaries and affiliates.
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, 2016 and has master agreements that contain netting arrangements. For financial reporting purposes, the Company presents gross derivative balances in the financial statements and supplementary data, including for counterparties subject to netting arrangements. Some of these agreements also require each party to post collateral if credit ratings fall below, or aggregate exposures exceed, certain contractual limits. At September 30, 2016, the Company was required to post an immaterial amount of collateral due to certain derivatives having negative positions. The Company's counterparties were not required to post collateral on any derivative position, other than on hedges of certain of the Company’s supplemental benefit plan liabilities where the counterparties were required to post collateral on their liability positions.

Segment Information
The Company franchises and operates McDonald’s restaurants in the global restaurant industry. The following reporting segments reflect how management reviews and evaluates operating performance.
U.S. - the Company's largest segment.
International Lead Markets - established markets including Australia, Canada, France, Germany, the U.K. and related markets.
High Growth Markets - markets the Company believes have relatively higher restaurant expansion and franchising potential including China, Italy, Korea, Poland, Russia, Spain, Switzerland, the Netherlands and related markets.
Foundational Markets & Corporate - the remaining markets in the McDonald's system, each of which the Company believes have the potential to operate under a largely franchised model. Corporate activities are also reported within this segment.
The following table presents the Company’s revenues and operating income by segment.
 
Quarters Ended
 
Nine Months Ended
  
September 30,
 
September 30,
In millions
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
U.S.
$
2,072.5

 
$
2,189.3

 
$
6,215.2

 
$
6,341.6

International Lead Markets
1,881.2

 
1,971.6

 
5,452.5

 
5,699.3

High Growth Markets
1,651.3

 
1,645.2

 
4,644.1

 
4,714.4

Foundational Markets & Corporate
819.1

 
809.0

 
2,281.2

 
2,316.4

Total revenues
$
6,424.1

 
$
6,615.1

 
$
18,593.0

 
$
19,071.7

Operating Income
 
 
 
 
 
 
 
U.S.
$
977.5

 
$
902.1

 
$
2,836.6

 
$
2,559.7

International Lead Markets
754.1

 
739.5

 
2,127.2

 
2,011.6

High Growth Markets
320.1

 
297.3

 
814.7

 
639.3

Foundational Markets & Corporate
85.6

 
91.4

 
(3.0
)
 
54.5

Total operating income
$
2,137.3

 
$
2,030.3

 
$
5,775.5

 
$
5,265.1


Recently Issued Accounting Standards
Employee Share-Based Payment Accounting
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The goal of this update is to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This update is effective beginning January 1, 2017 with early adoption permitted.
The Company elected to early adopt ASU 2016-09 in the second quarter 2016, which required reflection of any adjustments as of January 1, 2016. The primary impact of adoption was the recognition of excess tax benefits as a reduction to the provision for income taxes for all periods reported in fiscal year 2016.
Additional amendments to ASU 2016-09 related to income taxes and minimum statutory withholding tax requirements had no impact to retained earnings, where the cumulative effect of these changes are required to be recorded. The Company also elected to continue estimating forfeitures when determining the amount of compensation costs to be recognized in each period.
The presentation requirements for cash flows related to excess tax benefits were applied prospectively; as such, prior years have not been restated. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presented in the consolidated statement of cash flows, since such cash flows have historically been presented in financing activities.
Lease Accounting
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company anticipates ASU 2016-02 to have a material impact on the consolidated balance sheet. The impact on the Company’s consolidated statement of income is currently being evaluated. The impact of ASU 2016-02 is non-cash in nature, as such, it will not affect the Company’s cash position.

8


Revenue Recognition
In May 2014, the FASB issued guidance codified in ASC 606, “Revenue Recognition - Revenue from Contracts with Customers,” which amends the guidance in former ASC 605, “Revenue Recognition.” In July 2015, the FASB made a decision to defer by one year the effective date of its new standard to January 1, 2018, although early adoption is permitted as of January 1, 2017. The Company is currently evaluating the impact 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 36,615 restaurants in 120 countries at September 30, 2016, 30,559 were licensed to franchisees (comprised of 21,456 franchised to conventional franchisees, 5,742 licensed to developmental licensees and 3,361 licensed to foreign affiliates (“affiliates”) – primarily in Japan) and 6,056 were operated by the Company.
Under McDonald's conventional franchise arrangement, franchisees provide a portion of the capital required by initially investing in the equipment, signs, seating and décor of their restaurant business, and by reinvesting in the business over time. The Company owns the land and building or secures long-term leases for both Company-operated and conventional franchised restaurant sites. This maintains long-term occupancy rights, helps control related costs and assists in alignment with franchisees enabling restaurant performance levels that are among the highest in the industry. In certain circumstances, the Company participates in the reinvestment for conventional franchised restaurants in an effort to accelerate implementation of certain initiatives.
Under McDonald's developmental license arrangement, licensees provide capital for the entire business, including the real estate interest, and the Company has no capital invested. In addition, the Company has an equity investment in a limited number of affiliates that invest in real estate and operate or franchise restaurants within a market.
McDonald's is primarily a franchisor and believes franchising is paramount to delivering great-tasting food, locally-relevant customer experiences and driving profitability. Franchising enables an individual to own a restaurant business and maintain control over staffing, purchasing, marketing and pricing decisions, while also benefiting from the financial strength and global experience of McDonald's. However, directly operating restaurants is important to being a credible franchisor and provides Company personnel with restaurant operations experience. In Company-operated restaurants, and in collaboration with franchisees, McDonald's further develops and refines operating standards, marketing concepts and product and pricing strategies, so that only those that the Company believes are most beneficial are introduced in the restaurants. McDonald's continually reviews its mix of Company-operated and franchised restaurants to help optimize overall performance, with a goal to be 95% franchised over the long term.
The Company’s revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales along with minimum rent payments, and initial fees. Revenues from restaurants licensed to affiliates and developmental licensees include a royalty based on a percent of sales, and generally include initial fees. Fees vary by type of site, amount of Company investment, if any, and local business conditions. These fees, along with occupancy and operating rights, are stipulated in franchise/license agreements that generally have 20-year terms.
The business is structured with segments that combine markets with similar characteristics and opportunities for growth. Significant reportable segments include the United States ("U.S."), International Lead Markets and High Growth Markets. In addition, throughout this report we present the Foundational Markets & Corporate segment which includes markets in over 80 countries, as well as Corporate activities. For the nine months ended September 30, 2016, the U.S., the International Lead Markets and the High Growth Markets accounted for 33%, 29% and 25% of total revenues, respectively.
Strategic Direction
The strength of the alignment among the Company, its franchisees and suppliers (collectively referred to as the “System”) has been key to McDonald's long-term success. By leveraging the System, McDonald’s is able to identify, implement and scale ideas that meet customers' changing needs and preferences. In addition, the Company’s business model enables the System to build on its competitive advantages of geographic diversification and System alignment that have been created over time to consistently deliver locally-relevant restaurant experiences to customers and be an integral part of the communities it serves.
McDonald’s aspires to be viewed by its customers as a modern and progressive burger company delivering a contemporary customer experience and continues to execute on the three priorities of the turnaround plan - driving operating growth, building brand excitement and enhancing financial value. The turnaround plan is grounded on running great restaurants and providing customers with what matters most to them - hot and fresh food, fast and friendly service, and a contemporary restaurant experience at the value and convenience of McDonald’s.
Management is encouraged by the progress the Company has made to execute the turnaround plan, as evidenced by stronger business results and improved customer perceptions of McDonald's over the past eighteen months. The Company is now beginning to transition from revitalization to strengthening its business to drive long-term sustainable growth. As the Company pursues its refranchising and restructuring targets, it will unlock financial value and direct its resources towards innovations and investments that will strengthen the Company's ability to deliver a better McDonald's experience over time. The Company is putting the customer at the center of everything it does and remains focused on serving more customers and growing global comparable sales while being mindful of the near-term challenges in several markets.

10


Financial Performance
The Company continues to make meaningful progress towards improving efficiencies and reducing costs, and most importantly driving top-line growth, despite a challenging environment in several key markets. For the third quarter and nine months, global comparable sales increased 3.5% and 4.2%, respectively, driven by stronger operating performance across all segments, with third quarter marking the Company’s fifth consecutive quarter of positive comparable sales growth across all segments.
Amidst continued industry softness, comparable sales in the U.S. increased 1.3% for the quarter and 2.7% for the nine months, supported by All Day Breakfast, everyday value under the McPick 2 platform and the introduction of Chicken McNuggets with no artificial preservatives. McDonald’s U.S. begins the fourth quarter with an expanded All Day Breakfast menu and continued emphasis on food quality and the customer experience.
Comparable sales for the International Lead Markets increased 3.3% for the quarter and 3.6% for the nine months, reflecting strong sales in the U.K. and positive results in Australia, Canada and Germany, as strong execution of core menu, compelling value and convenience strategies continued to resonate with consumers.
In the High Growth Markets, comparable sales increased 1.5% for the quarter and 2.2% for the nine months, reflecting positive performance in nearly all markets for both periods. The quarter was partially offset by negative comparable sales in China due in part to temporary protests related to events surrounding the South China Sea and comparison against very strong prior year results.
Consolidated operating income for the quarter and nine months benefited from stronger operating performance and higher gains on sales of restaurant businesses, partly offset by pre-tax restructuring and non-cash impairment charges of $128 million in the quarter and $357 million for the nine months related to the Company’s global G&A and refranchising initiatives. The nine months of 2015 included pre-tax strategic charges primarily related to store closing costs, restructuring and other asset write-offs totaling $240 million.
Third Quarter and Nine Months 2016 Highlights:
Global comparable sales increased 3.5% for the quarter and 4.2% for the nine months, reflecting positive comparable sales in all segments
Due to the impact of refranchising, consolidated revenues decreased 3% (1% in constant currencies) for the quarter and decreased 3% (flat in constant currencies) for the nine months
Consolidated operating income increased 5% (7% in constant currencies) for the quarter and increased 10% (12% in constant currencies) for the nine months, which included restructuring and non-cash impairment charges of $128 million in the quarter and $357 million for the nine months related to the Company’s global G&A and refranchising initiatives. The nine months of 2015 included strategic charges primarily related to store closing costs, restructuring and other asset write-offs totaling $240 million
Diluted earnings per share of $1.50 for the quarter increased 7% (9% in constant currencies) and $4.01 for the nine months increased 15% (17% in constant currencies), which included strategic charges totaling $0.12 per share for the quarter and $.30 per share for the nine months. Excluding the impact of the current and prior year charges, diluted earnings per share increased 16% (17% in constant currencies) for the quarter and 17% (19% in constant currencies) for the nine months
Returned $3.4 billion to shareholders through share repurchases and dividends for the quarter. This brings the cumulative return to shareholders to $27.8 billion against the targeted return of about $30 billion for the three-year period ending 2016. In addition, the Company announced a 6% increase in its dividend beginning in the fourth quarter

Outlook
While the Company does not provide specific guidance on earnings per share, the following global and certain segment-specific information is provided to assist in forecasting the Company’s future results.
Changes in Systemwide sales are driven by comparable sales and net restaurant unit expansion. The Company expects net restaurant additions to add approximately 1 percentage point to 2016 Systemwide sales growth (in constant currencies).
The Company does not generally provide specific guidance on changes in comparable sales. However, as a perspective, assuming no change in cost structure, a 1 percentage point change in comparable sales for either the U.S. or the International Lead Markets 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 2016, costs for the total basket of goods are expected to decrease about 4.5-5.0% in the U.S. and remain relatively flat in the International Lead Markets.
The Company expects full-year 2016 selling, general and administrative expenses to be relatively flat in constant currencies. Some volatility may be experienced between quarters. 

11


Based on current interest and foreign currency exchange rates, the Company expects interest expense for the full-year 2016 to increase about 40-45% compared with 2015 due to higher average debt balances in connection with the Company's previously-announced plans to optimize its capital structure.
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 up to 25 cents.
The Company expects the effective income tax rate for the full-year 2016 to be in the 31-33% range. Some volatility may be experienced between the quarters resulting in a quarterly tax rate outside of the annual range.
The Company expects capital expenditures for 2016 to be approximately $2.0 billion, less than half of which are expected to be used to open new restaurants. The Company expects to open about 900 restaurants, including about 400 restaurants in affiliated and developmental-licensee markets where the Company does not fund any capital expenditures. The Company expects net additions of about 400 restaurants. The remaining capital is expected to be used to reinvest in existing locations.
The Company continues to optimize its capital structure and expects to return about $30 billion to shareholders for the three-year period ending 2016. The cumulative return through the September 30, 2016 was approximately $28 billion.

Long-term
The Company expects to refranchise about 4,000 restaurants through 2018 with a long-term goal to become 95% franchised. The majority of the refranchising is expected to take place in the High Growth and Foundational markets.
The Company expects to realize net annual G&A savings of about $500 million from our G&A base of $2.6 billion at the beginning of 2015, the vast majority of which is expected to be realized by the end of 2017. These savings will be realized through our refranchising efforts, streamlining across corporate, segment and market organizations, primarily in non-customer facing functions, and realizing greater efficiencies in the Company's Global Business Services platform. This target excludes the impact of foreign currency changes. We expect to realize a cumulative total of at least $150 million in savings by the end of 2016, with about half of these savings already achieved in 2015.
In connection with executing against our refranchising and G&A targets, we may incur additional strategic charges.
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.

12


CONSOLIDATED OPERATING RESULTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter Ended
 
Nine Months Ended
Dollars in millions, except per share data
September 30, 2016
 
September 30, 2016
 
Amount
 
 
Increase/
(Decrease)

 
Amount
 
 
Increase/
(Decrease)

Revenues
 
 
 
 
 
 
 
 
 
Sales by Company-operated restaurants
 
$
3,972.1

 
(7
)%
 
 
$
11,642.2

 
(7
)%
Revenues from franchised restaurants
 
2,452.0

 
5

 
 
6,950.8

 
5

Total revenues
 
6,424.1

 
(3
)
 
 
18,593.0

 
(3
)
Operating costs and expenses
 
 
 
 
 
 
 
 
 
Company-operated restaurant expenses
 
3,239.5

 
(10
)
 
 
9,662.9

 
(8
)
Franchised restaurants—occupancy expenses
 
437.6

 
5

 
 
1,283.6

 
4

Selling, general & administrative expenses
 
582.9

 
0

 
 
1,757.0

 
0

Other operating (income) expense, net
 
26.8

 
n/m

 
 
114.0

 
(56
)
Total operating costs and expenses
 
4,286.8

 
(6
)
 
 
12,817.5

 
(7
)
Operating income
 
2,137.3

 
5

 
 
5,775.5

 
10

Interest expense
 
221.4

 
38

 
 
663.6

 
45

Nonoperating (income) expense, net
 
11.4

 
n/m

 
 
(19.2
)
 
48

Income before provision for income taxes
 
1,904.5

 
1

 
 
5,131.1

 
6

Provision for income taxes
 
629.1

 
11

 
 
1,638.0

 
8

Net income
 
$
1,275.4

 
(3
)%
 
 
$
3,493.1

 
5
 %
Earnings per common share-basic
 
$
1.52

 
8
 %
 
 
$
4.04

 
15
 %
Earnings per common share-diluted
 
$
1.50

 
7
 %
 
 
$
4.01

 
15
 %
n/m Not meaningful

13


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 the Company believes this better represents 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
Benefit/ (Cost)
 
Quarters Ended September 30,
 
2016

 
 
2015

 
 
2016

Revenues
 
$
6,424.1

 
 
$
6,615.1

 
 
$
(113.6
)
Company-operated margins
 
732.6

 
 
675.2

 
 
(18.5
)
Franchised margins
 
2,014.4

 
 
1,916.1

 
 
(14.3
)
Selling, general & administrative expenses
 
582.9

 
 
584.0

 
 
4.1

Operating income
 
2,137.3

 
 
2,030.3

 
 
(26.8
)
Net income
 
1,275.4

 
 
1,309.2

 
 
(19.0
)
Earnings per share-diluted
 
$
1.50

 
 
$
1.40

 
 
$
(0.03
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency
Translation
Benefit/ (Cost)
 
Nine Months Ended September 30,
 
2016

 
 
2015

 
 
2016

Revenues
 
$
18,593.0

 
 
$
19,071.7

 
 
$
(552.2
)
Company-operated margins
 
1,979.3

 
 
1,899.8

 
 
(70.9
)
Franchised margins
 
5,667.2

 
 
5,382.9

 
 
(87.0
)
Selling, general & administrative expenses
 
1,757.0

 
 
1,759.2

 
 
21.5

Operating income
 
5,775.5

 
 
5,265.1

 
 
(136.8
)
Net income
 
3,493.1

 
 
3,323.1

 
 
(73.8
)
Earnings per share-diluted
 
$
4.01

 
 
$
3.49

 
 
$
(0.08
)
The impact of foreign currency translation on consolidated operating results for the quarter primarily reflected the weaker British Pound. The nine months reflected the strengthening of the U.S. Dollar against the British Pound and most other currencies.

Net Income and Diluted Earnings per Common Share
For the quarter, net income decreased 3% (1% in constant currencies) to $1,275.4 million, and diluted earnings per share increased 7% (up 9% in constant currencies) to $1.50. Foreign currency translation had a negative impact of $0.03 on diluted earnings per share.
For the nine months, net income increased 5% (7% in constant currencies) to $3,493.1 million, and diluted earnings per share increased 15% (17% in constant currencies) to $4.01. Foreign currency translation had a negative impact of $0.08 on diluted earnings per share.
Results for the quarter and nine months benefited from stronger operating performance and higher gains on sales of restaurant businesses, partly offset by pre-tax restructuring and non-cash impairment charges of $128 million in the quarter and $357 million for the nine months related to the Company’s global G&A and refranchising initiatives. The nine months of 2015 included pre-tax strategic charges primarily related to store closing costs, restructuring and other asset write-offs totaling $240 million.
Excluding the impact of the current and prior year charges, diluted earnings per share increased 16% (17% in constant currencies) for the quarter and 17% (19% in constant currencies) for the nine months. This supplemental information is provided to help investors understand the impact of the current and prior year charges on the Company’s results.
Diluted earnings per share for both periods benefited from a decrease in diluted weighted-average shares outstanding due to share repurchases. During the quarter, the Company repurchased 23.3 million shares of stock for $2.7 billion, bringing total purchases for the nine months to 80.4 million shares or $9.8 billion. In addition, the Company paid a quarterly dividend of $0.89 per share, or $745.1 million, bringing the total dividends paid for the nine months to $2.3 billion.

14


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.
The Company is accelerating the pace of refranchising to optimize its restaurant ownership mix, generate more stable and predictable revenue and cash flow streams, and operate with a less resource-intensive structure. The shift to a greater percentage of franchised restaurants negatively impacts consolidated revenues as Company-operated sales are replaced by franchised sales, where the Company receives rent and/or royalty revenue based on a percentage of sales.
REVENUES
 
 
 
 
 
 
 
 
Dollars in millions
 
 
 
 
 
 
 
 
Quarters Ended September 30,
 
2016

 
2015

 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

Company-operated sales
 
 
 
 
 
 
 
 
U.S.
 
$
910.3

 
$
1,062.2

 
(14
)%
 
(14
)%
International Lead Markets
 
1,098.8

 
1,233.0

 
(11
)
 
(6
)
High Growth Markets
 
1,441.5

 
1,450.9

 
(1
)
 
2

Foundational Markets & Corporate
 
521.5

 
536.8

 
(3
)
 
(2
)
Total
 
$
3,972.1

 
$
4,282.9

 
(7
)%
 
(5
)%
Franchised revenues
 
 
 
 
 
 
 
 
U.S.
 
$
1,162.2

 
$
1,127.1

 
3
 %
 
3
 %
International Lead Markets
 
782.4

 
738.6

 
6

 
8

High Growth Markets
 
209.8

 
194.3

 
8

 
9

Foundational Markets & Corporate
 
297.6

 
272.2

 
9

 
10

Total
 
$
2,452.0

 
$
2,332.2

 
5
 %
 
6
 %
Total revenues
 
 
 
 
 
 
 
 
U.S.
 
$
2,072.5

 
$
2,189.3

 
(5
)%
 
(5
)%
International Lead Markets
 
1,881.2

 
1,971.6

 
(5
)
 
(1
)
High Growth Markets
 
1,651.3

 
1,645.2

 
0

 
2

Foundational Markets & Corporate
 
819.1

 
809.0

 
1

 
2

Total
 
$
6,424.1

 
$
6,615.1

 
(3
)%
 
(1
)%
 
 
 
 
 
 
 
 
 

15


Nine Months Ended September 30,
 
2016

 
2015

 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

Company-operated sales
 
 
 
 
 
 

 
 
U.S.
 
$
2,852.0

 
$
3,126.6

 
(9
)%
 
(9
)%
International Lead Markets
 
3,250.7

 
3,605.9

 
(10
)
 
(6
)
High Growth Markets
 
4,063.5

 
4,170.5

 
(3
)
 
3

Foundational Markets & Corporate
 
1,476.0

 
1,555.1

 
(5
)
 
(1
)
Total
 
$
11,642.2

 
$
12,458.1

 
(7
)%
 
(3
)%
Franchised revenues
 
 
 
 
 
 
 
 
U.S.
 
$
3,363.2

 
$
3,215.0

 
5
 %
 
5
 %
International Lead Markets
 
2,201.8

 
2,093.4

 
5

 
8

High Growth Markets
 
580.6

 
543.9

 
7

 
8

Foundational Markets & Corporate
 
805.2

 
761.3

 
6

 
10

Total
 
$
6,950.8

 
$
6,613.6

 
5
 %
 
7
 %
Total revenues
 
 
 
 
 
 
 
 
U.S.
 
$
6,215.2

 
$
6,341.6

 
(2
)%
 
(2
)%
International Lead Markets
 
5,452.5

 
5,699.3

 
(4
)
 
0

High Growth Markets
 
4,644.1

 
4,714.4

 
(1
)
 
4

Foundational Markets & Corporate
 
2,281.2

 
2,316.4

 
(2
)
 
2

Total
 
$
18,593.0

 
$
19,071.7

 
(3
)%
 
0
 %
Revenues: Revenues decreased 3% (1% in constant currencies) for the quarter and decreased 3% (flat in constant currencies) for the nine months.
U.S.: Revenues decreased for the quarter and nine months due to the impact of refranchising, partly offset by positive comparable sales.
International Lead Markets: Revenues decreased for both periods partly due to negative foreign currency translation. In constant currencies, revenues decreased for the quarter and were flat for the nine months due to the impact of refranchising, partly offset by strong sales in the U.K. and positive results in Australia, Canada and Germany.
High Growth Markets: Revenues were flat for the quarter and decreased for the nine months partly due to negative foreign currency translation. In constant currencies, revenues increased for both periods due to positive comparable sales in most markets and continued expansion in Russia. For the quarter, revenues were partly offset by negative comparable sales in China due in part to temporary protests related to events surrounding the South China Sea and comparison against very strong prior year results.

Comparable Sales and Guest Counts

The following table presents the percent change in comparable sales for the quarters and nine months ended September 30, 2016 and 2015:
COMPARABLE SALES
 
 
 
 
 
 
Increase/ (Decrease)
 
Quarters Ended
 
Nine Months Ended
  
September 30,
 
September 30,*
 
2016

 
2015

 
2016

 
2015

U.S.
1.3
%
 
0.9
%
 
2.7
%
 
(1.2
)%
International Lead Markets
3.3

 
4.6

 
3.6

 
3.2

High Growth Markets
1.5

 
8.9

 
2.2

 
1.4

Foundational Markets & Corporate
10.1

 
6.1

 
9.6

 
(0.9
)
Total
3.5
%
 
4.0
%
 
4.2
%
 
0.4
 %
*
On a consolidated basis, comparable guest counts (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) decreased 0.1% and 3.1% for the nine months ended 2016 and 2015, respectively.

16


Systemwide Sales and Franchised Sales
The following table presents the percent change in Systemwide sales for the quarter and nine months ended September 30, 2016:
SYSTEMWIDE SALES
 
 
 
 
Quarter Ended
 
Nine Months Ended
  
September 30, 2016
 
September 30, 2016
 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

 
Inc/ (Dec)

Inc/ (Dec)
Excluding
Currency
Translation

U.S.
1
%
 
1
%
 
3
%
3
%
International Lead Markets
2

 
5

 
2

5

High Growth Markets
3

 
5

 
2

6

Foundational Markets & Corporate
13

 
12

 
7

11

Total
4
%
 
4
%
 
3
%
5
%
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,
 
2016

 
2015

 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

U.S.
 
$
8,391.0

 
$
8,139.9

 
3
%
 
3
%
International Lead Markets
 
4,534.1

 
4,290.5

 
6

 
8

High Growth Markets
 
1,305.4

 
1,216.6

 
7

 
9

Foundational Markets & Corporate
 
4,126.0

 
3,592.7

 
15

 
14

Total*
 
$
18,356.5

 
$
17,239.7

 
6
%
 
7
%
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2016

 
2015

 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

U.S.
 
$
24,356.4

 
$
23,389.7

 
4
%
 
4
%
International Lead Markets
 
12,760.8

 
12,158.6

 
5

 
8

High Growth Markets
 
3,636.0

 
3,407.9

 
7

 
9

Foundational Markets & Corporate
 
11,117.8

 
10,247.3

 
8

 
13

Total*
 
$
51,871.0

 
$
49,203.5

 
5
%
 
7
%
*
Sales from developmental licensed restaurants and foreign affiliated markets where the Company earns a royalty based on a percent of sales totaled $3,705.6 million and $3,177.4 million for the quarters 2016 and 2015, respectively, and $9,990.0 million and $9,110.1 million for the nine months 2016 and 2015, respectively. Results reflected improved performance in Japan, partly due to the stronger Yen, and improved performance across most markets. These results were partly offset by 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.

17


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

 
Inc/ (Dec)
Excluding
Currency
Translation

Quarters Ended September 30,
2016

 
2015

 
2016

 
2015

 
 
Franchised
 
 
 
 
 
 
 
 
 
 
 
U.S.
82.7
%
 
83.1
%
 
$
961.4

 
$
937.0

 
3
 %
 
3
 %
International Lead Markets
81.2

 
80.8

 
635.4

 
596.7

 
6

 
8

High Growth Markets
71.6

 
72.3

 
150.1

 
140.4

 
7

 
8

Foundational Markets & Corporate
89.8

 
88.8

 
267.5

 
242.0

 
11

 
11

Total
82.1
%
 
82.2
%
 
$
2,014.4

 
$
1,916.1

 
5
 %
 
6
 %
Company-operated
 
 
 
 
 
 
 
 
 
 
 
U.S.
16.9
%
 
12.4
%
 
$
153.9

 
$
132.2

 
16
 %
 
16
 %
International Lead Markets
21.6

 
20.8

 
237.9

 
256.8

 
(7
)
 
(3
)
High Growth Markets
17.0

 
14.3

 
245.2

 
207.5

 
18

 
21

Foundational Markets & Corporate
18.4

 
14.7

 
95.6

 
78.7

 
22

 
23

Total
18.4
%
 
15.8
%
 
$
732.6

 
$
675.2

 
9
 %
 
11
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Percent
 
Amount
 
Inc/ (Dec)

 
Inc/ (Dec)
Excluding
Currency
Translation

Nine Months Ended September 30,
2016

 
2015

 
2016

 
2015

 
 
Franchised
 
 
 
 
 
 
 
 
 
 
 
U.S.
82.7
%
 
82.5
%
 
$
2,779.7

 
$
2,652.1

 
5
 %
 
5
 %
International Lead Markets
80.2

 
79.9

 
1,765.8

 
1,673.0

 
6

 
9

High Growth Markets
69.9

 
71.0

 
406.0

 
385.9

 
5

 
7

Foundational Markets & Corporate
88.9

 
88.3

 
715.7

 
671.9

 
7

 
11

Total
81.5
%
 
81.4
%
 
$
5,667.2

 
$
5,382.9

 
5
 %
 
7
 %
Company-operated
 
 
 
 
 
 
 
 
 
 
 
U.S.
15.9
%
 
14.7
%
 
$
454.4

 
$
460.5

 
(1
)%
 
(1
)%
International Lead Markets
20.7

 
20.0

 
673.2

 
719.9

 
(6
)
 
(2
)
High Growth Markets
15.3

 
12.6

 
623.4

 
526.6

 
18

 
25

Foundational Markets & Corporate
15.5

 
12.4

 
228.3

 
192.8

 
18

 
22

Total
17.0
%
 
15.2
%
 
$
1,979.3

 
$
1,899.8

 
4
 %
 
8
 %
Franchised: Franchised margin dollars increased $98.3 million or 5% (6% in constant currencies) for the quarter and increased $284.3 million or 5% (7% in constant currencies) for the nine months. Both periods benefited from expansion and refranchising, as well as positive comparable sales performance.
U.S.: The franchised margin percent declined in the quarter and increased for the nine months. Positive comparable sales contributed to both periods, but for the quarter was more than offset by higher occupancy costs.
International Lead Markets: The increase in the franchised margin percent for the quarter and nine months reflected the benefit from positive comparable sales performance, partly offset by refranchising.
High Growth Markets: The decrease in the franchised margin percent for the quarter and nine months was primarily due to refranchising and higher occupancy costs.
In general, refranchising may have a dilutive effect on the franchised margin percent, but results in higher franchised margin dollars.
Company-operated: Company-operated margin dollars increased $57.4 million or 9% (11% in constant currencies) for the quarter and increased $79.5 million or 4% (8% in constant currencies) for the nine months.
U.S.: The Company-operated margin percent increased for the quarter and nine months. Both periods reflected positive comparable sales and lower commodity costs. The incremental investment in wages and benefits for eligible Company-operated restaurant employees impacted results for the nine months.
International Lead Markets: The Company-operated margin percent increased for the quarter and nine months primarily due to positive comparable sales, partly offset by higher labor and occupancy costs.

18


High Growth Markets: The Company-operated margin percent increased for the quarter and nine months due to improved restaurant profitability in China, which benefited from recent VAT reform. Higher labor costs across the segment pressured margins for both periods.

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,
 
2016

 
2015

 
2016

 
2015

Food & paper
31.8
%
 
33.7
%
 
32.1
%
 
33.8
%
Payroll & employee benefits
26.1

 
26.5

 
27.0

 
26.5

Occupancy & other operating expenses
23.7

 
24.0

 
23.9

 
24.5

Total expenses
81.6
%
 
84.2
%
 
83.0
%
 
84.8
%
Company-operated margins
18.4
%
 
15.8
%
 
17.0
%
 
15.2
%
Selling, General & Administrative Expenses
Selling, general and administrative expenses were flat for the quarter and nine months benefiting from negative foreign currency translation. In constant currencies, selling, general and administrative expenses increased 1% for the quarter and nine months. These results were due to higher incentive-based compensation costs reflecting improved Company performance, partly offset by lower employee-related costs resulting from the Company's recent restructuring initiatives. The nine months also included costs associated with the 2016 Worldwide Owner/Operator Convention.
For the nine months, selling, general and administrative expenses as a percent of revenues increased to 9.4% for 2016 compared with 9.2% for 2015, and as a percent of Systemwide sales decreased to 2.8% for 2016 compared with 2.9% for 2015.
Other Operating (Income) Expense, Net
OTHER OPERATING (INCOME) EXPENSE, NET
 
 
 
 
Dollars in millions
 
Quarters Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016

 
2015

 
2016

 
2015

Gains on sales of restaurant businesses
$
(70.1
)
 
$
(20.2
)
 
$
(219.6
)