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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
10-K
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
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
mcd-20201231_g1.jpg
McDONALD’S CORPORATION
(Exact name of registrant as specified in its charter)
Delaware36-2361282
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
110 North Carpenter Street,Chicago,Illinois60607
(Address of principal executive offices)
(Zip code)

Registrant’s telephone number, including area code: (630) 623-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valueMCDNew York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes   No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes   No
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   No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer           Accelerated filer   Non-accelerated filer  
Smaller reporting company   Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No
The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2020 was $137,233,144,378.
The number of shares outstanding of the registrant’s common stock as of January 31, 2021 was 745,572,145.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates information by reference from the registrant’s 2021 definitive proxy statement, which will be filed no later than 120 days after December 31, 2020.



McDONALD’S CORPORATION
TABLE OF CONTENTS

ORGANIZATION OF OUR ANNUAL REPORT ON FORM 10-K
The order and presentation of content in our Annual Report on Form 10-K ("Form 10-K") differs from the traditional U.S. Securities and Exchange Commission ("SEC") Form 10-K format. We believe that our format improves readability and better presents how we organize and manage our business. See "Form 10-K Cross-Reference Index" for a cross-reference index to the traditional SEC Form 10-K format.
Page reference
Forward-Looking Statements
About McDonald's
    Business Summary
Management's Discussion and Analysis of Financial Condition and Results of Operations
    Management's View of the Business
    Financial Performance and Strategic Direction
    Outlook
    Consolidated Operating Results
    Cash Flows
    Financial Position and Capital Resources
    Other Matters
Other Key Information
    Selected Financial Data
    Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
    Risk Factors
    Legal Proceedings
    Properties
    Information About our Executive Officers
    Availability of Company Information
Financial Statements and Supplementary Data
Controls and Procedures
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Form 10-K Cross-Reference Index
All trademarks used herein are the property of their respective owners.



FORWARD-LOOKING STATEMENTS
The information in this report includes forward-looking statements about future events and circumstances and their effects upon revenues, expenses and business opportunities. Generally speaking, any statement in this report not based upon historical fact is a forward-looking statement. Forward-looking statements can also be identified by the use of forward-looking words, such as "could," "should," "continue," "estimate," "forecast," "intend," "look," “may,” “will,” “expect,” “believe,” “anticipate,” “plan,” "remain" and "confident" or similar expressions. In particular, statements regarding our plans, strategies, prospects and expectations regarding our business and industry, including those under "2020 Financial Performance", "Strategic Direction", "Outlook", or "Risk Factors" are forward-looking statements. They reflect our expectations, are not guarantees of performance and speak only as of the date of this report. Except as required by law, we do not undertake to update such forward-looking statements. Our business results are subject to a variety of risks, including those considerations or risks that are reflected in the "Risk Factors" section, as well as elsewhere in our filings with the SEC. If any of these considerations or risks materialize, our expectations (or underlying assumptions) may change or not be realized and our performance may be adversely affected. Therefore, you should not rely unduly on any forward-looking statements.
ABOUT McDONALD'S

McDonald’s Corporation, the registrant, together with its subsidiaries, is referred to herein as the "Company." The Company, its franchisees and suppliers, are referred to herein as the "System."
BUSINESS SUMMARY
General
For the year ended December 31, 2020, there were no material changes to the Company's corporate structure or in its method of conducting business. The Company’s reporting segments are aligned with its strategic priorities and reflect how management reviews and evaluates operating performance. Significant reportable segments include the United States ("U.S.") and International Operated Markets ("IOM"). In addition, throughout this report we present the International Developmental Licensed Markets & Corporate segment ("IDL"), which includes markets in over 80 countries, as well as Corporate activities. Effective January 1, 2019, McDonald's changed its global operating structure. Refer to the Segment and Geographic Information section included on page 50 of this Form 10-K for additional information.
Description of business
General
The Company franchises and operates McDonald’s restaurants, which serve a locally-relevant menu of quality food and beverages in 119 countries. Of the 39,198 restaurants at year-end 2020, 36,521 were franchised, which is 93% of McDonald's restaurants.
McDonald’s franchised restaurants are owned and operated under one of the following structures - conventional franchise, developmental license or affiliate. The optimal ownership structure for an individual restaurant, trading area or market (country) is based on a variety of factors, including the availability of individuals with the entrepreneurial experience and financial resources, as well as the local legal and regulatory environment in critical areas such as property ownership and franchising. The business relationship between McDonald’s and its independent franchisees is supported by adhering to standards and policies and is of fundamental importance to overall performance and to protecting the McDonald’s brand.
The Company is primarily a franchisor and believes franchising is paramount to delivering great-tasting food, locally relevant customer experiences and driving profitability. Franchising enables an individual to be their own employer and maintain control over all employment related matters, marketing and pricing decisions, while also benefiting from the strength of McDonald’s global brand, operating system and financial resources.
Directly operating McDonald’s restaurants contributes significantly to our ability to act as a credible franchisor. One of the strengths of the franchising model is that the expertise from operating Company-owned restaurants allows McDonald’s to improve the operations and success of all restaurants while innovations from franchisees can be tested and, when viable, efficiently implemented across relevant restaurants. Having Company-owned and operated restaurants provides Company personnel with a venue for restaurant operations training experience. In addition, in our Company-owned and operated restaurants, and in collaboration with franchisees, we are able to further develop and refine operating standards, marketing concepts and product and pricing strategies that will ultimately benefit McDonald’s restaurants.
The Company’s revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. Fees vary by type of site, amount of Company investment, if any, and local business conditions. These fees, along with occupancy and operating rights, are stipulated in franchise/license agreements that generally have 20-year terms. The Company’s Other revenues are comprised of technology fees paid by franchisees, revenues from brand licensing arrangements, and third party revenues for the Dynamic Yield business.
Conventional Franchise
Under a conventional franchise arrangement, the Company generally owns or secures a long-term lease on the land and building for the restaurant location and the franchisee pays for equipment, signs, seating and décor. The Company believes that ownership of real estate, combined with the co-investment by franchisees, enables us to achieve restaurant performance levels that are among the highest in the industry.

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Franchisees are also responsible for reinvesting capital in their businesses over time. In addition, to accelerate implementation of certain initiatives, the Company may co-invest with franchisees to fund improvements to their restaurants or their operating systems. These investments, developed in collaboration with franchisees, are designed to cater to consumer preferences, improve local business performance, and increase the value of our brand through the development of modernized, more attractive and higher revenue generating restaurants.
The Company requires franchisees to meet rigorous standards and generally does not work with passive investors. The business relationship with franchisees is designed to facilitate consistency and high quality at all McDonald’s restaurants. Conventional franchisees contribute to the Company’s revenue, primarily through the payment of rent and royalties based upon a percent of sales, with specified minimum rent payments, along with initial fees paid upon the opening of a new restaurant or grant of a new franchise. The Company's heavily franchised business model is designed to generate stable and predictable revenue, which is largely a function of franchisee sales, and resulting cash flow streams. As most revenues are based on a percent of sales, the Company expects that consumer sentiment and government regulations as a result of COVID-19 may continue to have a negative impact on revenue in the near term.
Developmental License or Affiliate
Under a developmental license or affiliate arrangement, licensees are responsible for operating and managing the business, providing capital (including the real estate interest) and developing and opening new restaurants. The Company generally does not invest any capital under a developmental license or affiliate arrangement, and it receives a royalty based on a percent of sales, and generally receives initial fees upon the opening of a new restaurant or grant of a new license.
While developmental license and affiliate arrangements are largely the same, affiliate arrangements are used in a limited number of foreign markets (primarily China and Japan) within the International Developmental Licensed Markets segment and a limited number of individual restaurants within the International Operated Markets segment, where the Company also has an equity investment and records its share of net results in Equity in earnings of unconsolidated affiliates.
As both royalty revenues and the Company's share of net results in equity investments are based on sales results, the Company may continue to experience a negative impact to revenues and Equity in earnings of unconsolidated affiliates as a result of COVID-19 in the near term.
Supply chain, food safety, and quality
The Company and its franchisees purchase food, packaging, equipment, and other goods from numerous independent suppliers. The Company has established and enforces high food safety and quality standards. The Company has quality centers around the world designed to promote consistency of its high standards. The quality management systems and processes not only involve ongoing product reviews, but also on-site and virtual supplier visits. A Food Safety Advisory Council, composed of the Company’s internal food safety experts, as well as suppliers and outside academia, provides strategic global leadership for all aspects of food safety. We have ongoing programs to educate employees about food safety practices, and our suppliers and restaurant operators participate in food safety trainings where we share best practices on food safety and quality. In addition, the Company works closely with suppliers to encourage innovation and drive continuous improvement. Leveraging scale, supply chain infrastructure and risk management strategies, the Company also collaborates with suppliers toward a goal of achieving competitive, predictable food and paper costs over the long term.
Independently owned and operated distribution centers, approved by the Company, distribute products and supplies to McDonald’s restaurants. In addition, restaurant personnel are trained in the proper storage, handling and preparation of food for customers.
As a result of the COVID-19 pandemic, the Company implemented a framework called Safety+ for enhanced hygiene and safety standards to help re-enforce customer and crew safety. Additionally, the Company worked closely with suppliers on contingency planning for continuous supply so that we were able to continue to operate safe restaurants, and we had no breaks in supply for food, packaging, toys or equipment globally throughout 2020 due to COVID-19.
Products
McDonald’s restaurants offer a substantially uniform menu, although there are geographic variations to suit local consumer preferences and tastes.
McDonald’s menu includes hamburgers and cheeseburgers, Big Mac, Quarter Pounder with Cheese, Filet-O-Fish, several chicken sandwiches, Chicken McNuggets, wraps, McDonald's Fries, salads, oatmeal, shakes, McFlurry desserts, sundaes, soft serve cones, bakery items, soft drinks, coffee, McCafé beverages and other beverages.
McDonald’s restaurants in the U.S. and many international markets offer a full or limited breakfast menu. Breakfast offerings may include Egg McMuffin, Sausage McMuffin with Egg, McGriddles, biscuit and bagel sandwiches, oatmeal, breakfast burritos and hotcakes.
In addition to these menu items, the restaurants sell a variety of other products during limited-time promotions.
Taste, quality, choice, value and nutrition are important to our customers, and we are continuously evolving our menu to meet our customers' needs, including testing new products on an ongoing basis.
Marketing
McDonald’s global brand is well known. Marketing, promotional and public relations activities are designed with customers in mind and are focused on promoting the McDonald’s brand and differentiating the Company from its competitors. Marketing and promotional efforts focus on value, quality, food taste, menu choice, nutrition, convenience and the customer experience.
Intellectual property
The Company owns or is licensed to use valuable intellectual property including trademarks, service marks, patents, copyrights, trade secrets and other proprietary information. The Company considers the "McDonald's" trademark and the Golden Arches Logo to be of material importance to its business. Depending on the jurisdiction, trademarks and service marks generally are valid as long as they are used and/or registered. Patents, copyrights and licenses are of varying durations.
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Competition
McDonald’s restaurants compete with international, national, regional and local retailers of traditional, fast casual and other food service competitors. The Company competes in the quick-service restaurant industry on the basis of price, convenience, service, experience, menu variety and product quality in a highly fragmented global restaurant industry.
In measuring the Company’s competitive position, management reviews data compiled by Euromonitor International, a leading source of market data with respect to the global restaurant industry. The Company measures itself using the informal eating out ("IEO") segment information, which is inclusive of the Company’s primary competition of quick-service restaurants. The IEO segment includes the following restaurant categories defined by Euromonitor International: limited-service restaurants (which combines quick-service eating establishments and 100% home delivery/takeaway providers), street stalls or kiosks, cafés, specialist coffee shops, self-service cafeterias and juice/smoothie bars. The IEO segment excludes establishments that primarily serve alcohol and full-service restaurants other than providers with limited table service.
Based on data from Euromonitor International, the global IEO segment was composed of approximately 9 million outlets and generated $1.2 trillion in annual sales in 2019, the most recent year for which data is available. McDonald’s Systemwide 2019 restaurant business accounted for 0.4% of those outlets and 8.4% of the sales.
Management also on occasion benchmarks McDonald’s against the entire restaurant industry, including the IEO segment defined above and all full-service restaurants. Based on data from Euromonitor International, the restaurant industry was composed of approximately 20 million outlets and generated $2.6 trillion in annual sales in 2019. McDonald’s Systemwide restaurant business accounted for 0.2% of those outlets and 3.8% of the sales.
Environmental matters
The Company prioritizes progress across a range of environmental matters, and endeavors to improve our long-term sustainability and resiliency, which benefits McDonald’s and the communities it serves. The Company monitors environment-related governmental initiatives and consumer preferences, and while we cannot predict the precise nature of how these may evolve, the Company plans to respond in a timely and appropriate manner. Although any impact would likely vary by geographic region and/or market, we believe that the adoption of new regulations may increase costs or operational complexity for the Company.
To guide our management of environmental matters, the Company has developed goals and performance indicators that are updated periodically on the Company’s website, informed by relevant frameworks including the Sustainability Accounting Standards Board. These include goals and initiatives to reduce System greenhouse gas emissions, eliminate deforestation from our global supply chain, responsibly source ingredients and packaging, and increase the availability of recycling in restaurants to reduce waste, which the Company recognizes are increasingly important to customers. The Company also discloses the impacts of environmental risks and opportunities in its annual CDP Climate Change, CDP Forests and CDP Water reports. In recent years, we have made significant progress on our global commitments where we can make a difference at scale and drive industry-wide change.
Actual or perceived effects of changes in climate, weather patterns, water resources, forests or other natural resources, or packaging waste could have a direct or indirect impact on the operations of the System in ways which we cannot fully predict at this time. The Company will continue to assess potential risks and opportunities to analyze possible material impacts to the System as we believe taking action on environmental matters will drive business value in the long-term by ensuring we are managing operational costs in our energy supply, improving the security of supply of our raw materials and reducing our exposure to increasing environmental risks, regulation and taxes.
Government regulations
The Company has global operations and is therefore subject to the laws of the United States and multiple foreign jurisdictions in which the Company operates and the rules and regulations of various governing bodies, which may differ among jurisdictions. Throughout 2020, there were various instances around the world of COVID-19 related government restrictions on operating hours, dine-in capacity and in some cases, mandated full restaurant closures. These government restrictions negatively impacted the Company's revenues. The Company does not believe that compliance with other current government regulations will have a material effect on the Company's capital expenditures, earnings or competitive position.

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Human capital management
Purpose, Mission, & Values
Through our size and scale, the Company is embracing and prioritizing our role and commitment to the communities in which we operate through our:
Purpose to feed and foster communities,
Mission to create delicious feel-good moments for everyone, and
Core values that define who we are and how we run our business.
At McDonald's, we are guided by our five core values:
1.Serve – We put our customers and people first;
2.Inclusion – We open our doors to everyone;
3.Integrity – We do the right thing;
4.Community – We are good neighbors; and
5.Family – We get better together.
The Company believes that it is our people, all around the world, who set us apart and bring these values to life on a daily basis.
In addition, the Company’s people strategies aim to create an environment grounded in diversity, equity and inclusion; continually evaluate and evolve compensation and benefits programs, while offering quality training and learning opportunities; and uphold a high standard of health and safety for employees and customers alike.
We encourage you to read more information within McDonald’s “Purpose & Impact” section on the Company’s website that includes additional information regarding our human capital management and other initiatives and is updated periodically as our strategies evolve. Our website is not deemed incorporated by reference into this Annual Report on Form 10-K, but does provide background for reference.
Our People
The Company’s employees include those in our corporate and other offices as well as Company-owned and operated restaurant employees, totaling approximately 200,000 worldwide as of year-end 2020, of which over 75% are based outside of the U.S. In addition to Company employees, the over two million individuals who work in our independent Franchisee restaurants globally are critical to the Company’s success, enabling us to drive long-term value creation and further our purpose and mission. People are at the cornerstone of our business and an essential part of the McDonald's System – our owner-operators, our suppliers, and the Company.
Diversity, Equity and Inclusion (“DEI”)
At McDonald’s, our aspiration is that no matter where you are in the world, when you interact with McDonald’s, inclusivity and equity are evident. We believe that a diverse workforce is critical to McDonald’s success, and we are committed to making this a continued priority for our Company. Our Board of Directors reflects this commitment as half of the 12 members are women or racially diverse, including the Chairman of the Board. With this leadership, the Company recently launched a new global DEI strategy designed to drive accountability across the System to better represent the diverse communities in which McDonald’s operates, to accelerate cultures of inclusion and belonging, and to further dismantle barriers to economic opportunity.
The Company’s enhanced DEI strategy builds on existing initiatives from across the business, including:
the ongoing initiative to improve the representation of women at all levels of the Company,
long-standing work designed to encourage franchisees and suppliers to create greater diversity in their own operations,
upholding human rights and cultivating a respectful workplace that is ethical, truthful and dependable, and
our commitment to equitable pay among Company employees with comparable job responsibilities, experience, performance and contributions.
While McDonald’s is proud of our more than 65-year history as an employer, we expect our global DEI strategy to represent a step change in how we view equitable opportunity across our System and we are committed to accelerating the representation, inclusion and opportunity for historically underrepresented groups throughout our business. Aligned with our purpose, mission and values, this strategy will shape our future as a leading employer.
Beginning in 2021, the Company is incorporating quantitative human capital management related metrics to annual incentive compensation for its executives. In addition to the Company’s financial performance, executives will be measured on their ability to champion our core values, improve diversity representation within leadership roles for both women and historically underrepresented groups, and create a strong culture of inclusion within the Company.

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Workplace Health and Safety
McDonald’s has always focused on protecting the health and safety of our people and our customers. Throughout 2020, in response to the global COVID-19 pandemic, we have made informed decisions with the guidance from health ministries in most of the countries in which we operate, as well as the World Health Organization. As safety, hygiene and customers’ trust and confidence in our restaurants is critical in this environment, the Company has established even greater discipline in restaurant operations to meet those needs. McDonald’s engaged Mayo Clinic, a global leader in serious and complex healthcare, to provide ongoing counsel and expertise on emerging science in infection prevention and control, and to identify best practices to mitigate the spread of COVID-19. Over the last year, elevated standards informed by this engagement have been executed in the majority of McDonald’s over 39,000 restaurants, including more than 50 process changes in U.S. restaurants. Encompassed in a framework called Safety+, this effort builds on the Company’s history of safety-first leadership in McDonald’s restaurants, and supplements the work of global markets to help keep customers and crew safe.
Respectful Workplace Environment
Fostering safe, inclusive, and respectful workplaces, wherever we do business, has been integral to the Company for its more than 65 year history. We understand the importance of providing a positive experience in our offices and in the restaurants where everyone is valued. In 2018, we introduced McDonald's Human Rights Policy, which outlines our commitment to respect our people and their rights. Our commitment to respect human rights is also set out in our Standards of Business Conduct which apply to Company employees, and in our Supplier Code of Conduct, which contains our human rights requirements for our global suppliers. Company staff are trained regularly on the Standards and are required to annually certify their understanding of and commitment to upholding them.
Additionally, we recognize that developing respectful workplaces, where everyone’s rights are recognized, is an ongoing process that requires continuous effort and improvement. That’s why we worked with third party experts to strengthen our U.S. discrimination, harassment and anti-retaliation policy and provide enhanced interactive training for corporate staff and U.S. Company-owned restaurant employees. We have shared this policy and training with our franchisees and encourage them to utilize these tools and resources. We also recognize how important it is to provide channels for employees to report human rights concerns. Company employees can raise concerns in many ways, including through an anonymous global channel, the Business Integrity Line – staffed by a live operator from an independent company – 24 hours a day, 365 days a year. This is complemented by additional reporting channels in many markets. We expect our employees and franchisees to uphold human rights and cultivate respectful workplaces which builds trust, protects the integrity of our brand and fuels our success.
Compensation, Benefits, and Talent Development
The compensation and benefits provided to U.S. and internationally-based Company employees, including both corporate staff and Company-owned restaurant employees, is established based upon competitive considerations in the relevant labor market. The amount and type of compensation varies by level of employee as well as their location, and may include some combination of the following (in addition to base pay): cash bonuses, stock-based awards, retirement savings programs, and health and welfare benefits. In addition, Company employees may receive paid time off, family care resources, tuition assistance and flexible work schedules. In 2020, the Company placed a significant emphasis on wellbeing globally, deploying a multitude of new benefits focused on the physical, financial and mental health of our employees. For example, in the U.S., these enhancements included the introduction of new Emotional Wellbeing and Employee Assistance programs.
McDonald’s has a long-standing commitment to provide training, education benefits and career paths, which empower people and the communities we serve. McDonald’s is committed to providing opportunities for people to enhance their skills and fulfill their potential through talent development programs, apprenticeship opportunities, language and technical skill training, and by supporting continuing education. We believe this helps to facilitate talent attraction, career development and retention. Further, McDonald’s Hamburger University has eight campuses around the world to provide training for Company employees as well as franchisees and eligible employees from their organizations. These are just a few examples of how education plays an important role in our business and our communities.
Communities
The Company embraces our role and commitment to the communities we serve. Throughout the past year, McDonald’s rallied together with our suppliers, franchisees and partners, not just to keep restaurants open and running safely, but also to support our communities and first responders as seen through our donations of food and masks. Through the Company’s Youth Opportunity program, we aim to reduce barriers to employment for many at risk young people, through pre-employment job readiness training, employment opportunities, and workplace development programs. We are also proud of the network of over 260 local Chapters of Ronald McDonald House Charities (“RMHC”) spanning over 60 countries and regions that creates, finds and supports programs that directly improve the health and well-being of children and their families. In support of RMHC, in 2020, the Company announced our five-year commitment to RMHC totaling $100 million. The Company will continue to look for ways to utilize our size and scale to create an even bigger impact in the communities we serve in the future.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MANAGEMENT'S VIEW OF THE BUSINESS
In analyzing business trends, management reviews results on a constant currency basis and considers a variety of performance and financial measures which are considered to be non-GAAP, including comparable sales and comparable guest count growth, Systemwide sales growth, after-tax return on invested capital from continuing operations, free cash flow and free cash flow conversion rate, as described below. Management believes these measures are important in understanding the financial performance of the Company.
Constant currency results exclude the effects of foreign currency translation and are calculated by translating current year results at prior year average exchange rates. Management reviews and analyzes business results excluding the effect of foreign currency translation, impairment and other strategic charges and gains, as well as income tax provision adjustments related to the Tax Cuts and Jobs Act of 2017 (“Tax Act”), and bases incentive compensation plans on these results, because the Company believes this better represents underlying business trends.
Comparable sales are compared to the same period in the prior year and represent sales 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 (including restaurants temporarily closed due to COVID-19 in 2020). Comparable sales exclude the impact of currency translation and the sales of any market considered hyper-inflationary (generally identified as those markets whose cumulative inflation rate over a three-year period exceeds 100%), which management believes more accurately reflects the underlying business trends. Comparable sales are driven by changes in guest counts and average check, which is affected by changes in pricing and product mix.
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.
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. The Company's revenues consist solely of sales by Company-operated restaurants and fees from franchised restaurants operated by conventional franchisees, developmental licensees and affiliates. Changes in Systemwide sales are primarily driven by comparable sales and net restaurant unit expansion.
The Company’s after-tax return on invested capital ("ROIC") from continuing operations is a metric that management believes measures our capital-allocation effectiveness over time. Other companies may calculate ROIC differently, limiting the usefulness of the measure for comparisons with other companies. Refer to the reconciliation in Exhibit 12 for further information on the Company's calculation of ROIC.
Free cash flow, defined as cash provided by operations less capital expenditures, and free cash flow conversion rate, defined as free cash flow divided by net income, are measures reviewed by management in order to evaluate the Company’s ability to convert net profits into cash resources, after reinvesting in the core business, that can be used to pursue opportunities to enhance shareholder value. Refer to the reconciliations in Exhibit 12 for further information on the Company's calculations of free cash flow and free cash flow conversion rate.
2020 FINANCIAL PERFORMANCE
In 2020, global comparable sales decreased 7.7% primarily as a result of COVID-19. Comparable guest counts were negative across all segments for the year.
Comparable sales in the U.S. increased 0.4% benefiting from strong average check growth and positive comparable sales primarily at the dinner daypart. The Company's strategic marketing investments and promotional activity, along with growth in delivery, had a positive impact on comparable sales in the second half of 2020.
Comparable sales in the International Operated segment decreased 15.0% reflecting negative comparable sales in most markets as a result of COVID-19. The comparable sales decline was primarily driven by France, the U.K., Germany, Italy and Spain, partly offset by positive results in Australia.
Comparable sales in the International Developmental Licensed segment decreased 10.5% reflecting negative comparable sales primarily in Latin America and Asia, partly offset by strong comparable sales in Japan.
In addition to the comparable sales results, the Company had the following financial results in 2020:
Consolidated revenues decreased 10% (10% in constant currencies).
Systemwide sales decreased 7% (7% in constant currencies).
Consolidated operating income decreased 19% (20% in constant currencies) and included $268 million of net strategic gains. Excluding these gains, operating income decreased 23% (23% in constant currencies), when also excluding $74 million of net strategic charges from the prior year. Refer to the Operating Income section on page 17 for additional details.
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Operating margin, defined as operating income as a percent of total revenues, decreased from 42.5% in 2019 to 38.1% in 2020. Excluding the items referenced in the previous bullet point, operating margin decreased from 42.8% in 2019 to 36.7% in 2020.
Diluted earnings per share of $6.31 decreased 20% (20% in constant currencies). Refer to the Net Income and Diluted Earnings Per Share section on page 12 for additional details.
Cash provided by operations was $6.27 billion.
Capital expenditures of $1.64 billion were allocated mainly to reinvestment in existing restaurants and, to a lesser extent, to new restaurant openings.
Free cash flow was $4.62 billion, a 19% decrease from the prior year.
Across the System, nearly 1,000 restaurants (including those in our developmental licensee and affiliated markets) were opened.
The Company increased its quarterly cash dividend per share by 3% to $1.29 for the fourth quarter, equivalent to an annual dividend of $5.16 per share.
STRATEGIC DIRECTION
In 2020, the Company announced a new growth strategy, Accelerating the Arches (the “Strategy”). The Strategy encompasses all aspects of McDonald’s business as the leading global omni-channel restaurant brand, and includes a refreshed purpose, updated values, and new growth pillars that build on the Company’s competitive advantages.
Purpose, Mission, & Values
The Company is embracing and prioritizing its role and commitments to the communities in which it operates through our:
Purpose to feed and foster communities,
Mission to create delicious feel-good moments for everyone, and
Core values that define who we are and how we run our business.
Growth Pillars
The new growth pillars, rooted in the Company’s identity, MCD, build on historic strengths and articulate areas of further opportunity. Under the Strategy, the Company will:
Maximize our Marketing by investing in new, culturally relevant approaches to effectively communicate the story of our brand, food and purpose. This will focus on enhanced digital capabilities that provide a more personal connection with customers. The Company is also committed to a marketing strategy that highlights value at every tier of the menu, as affordability remains a cornerstone of the McDonald’s brand.
Commit to the Core by tapping into customer demand for the familiar and focusing on serving delicious burgers, chicken and coffee. The Company will prioritize chicken and beef offerings as we expect they represent the largest growth opportunities. The Company expects there is significant opportunity to expand its chicken offerings by leveraging line extensions of customer favorites. In addition, the Company plans to introduce a new Crispy Chicken Sandwich in the U.S. at the end of February. The Company will also implement a series of operational and formulation changes designed to improve upon the great taste of our burgers. We also see a significant opportunity with coffee, and markets will leverage the McCafe brand, experience, value and quality to drive long-term growth.
Double Down on the 3D's: Digital, Delivery and Drive Thru by leveraging competitive strengths and building a powerful digital experience growth engine that provides a fast, easy experience for our customers. To unlock further growth, the Company will accelerate technology innovation so that when customers interact with McDonald’s, they can enjoy a fast, easy experience that meets their needs.
Digital: The Company’s new digital experience growth engine, “MyMcDonald’s” will transform its digital offerings across drive thru, takeaway, delivery, curbside pick-up and dine-in. Through the digital tools across this platform, customers will receive tailored offers, be able to participate in a new loyalty program and order and receive McDonald's food through the channel of their choice. The Company expects to have elements of “MyMcDonald’s” across its top six markets by the end of 2021, featuring loyalty programs in several of those markets, including a U.S. loyalty launch later in 2021. Across these top six markets, digital sales exceeded $10 billion or nearly 20% of Systemwide sales in 2020.
Delivery: Over the past three years, the Company has expanded the number of McDonald’s restaurants offering delivery to nearly 30,000 restaurants, and delivery sales have grown significantly. The Company will build on this progress and enhance the delivery experience for customers by adding the ability to order on the McDonald’s app, which is already available in several markets around the world, and optimizing operations with a focus on speed and accuracy.
Drive Thru: The Company has drive thru locations in over 25,000 restaurants globally, including nearly 95% of the over 13,000 locations in the U.S. During the COVID-19 pandemic, this channel has heightened importance and we expect that it will become even more critical to meet customers’ demand for flexibility and choice. The Company will build on its drive thru advantage as the vast majority of new restaurant openings in the U.S. and International Operated Markets will include a drive thru. The Company will test new concepts and technology to enhance the customer experience, including automated order taking; a new drive thru express pick-up lane for customers with a digital order; and a restaurant concept that offers drive thru, delivery and takeaway only to provide a faster, more convenient experience.
The Company’s Strategy is underpinned by a relentless focus on running great restaurants, including improving speed of service to address customer needs. The Company believes this Strategy will build on our inherent strengths by harnessing our competitive advantages and investing in innovations that will enhance the customer experience and deliver long-term growth.
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OUTLOOK
2021 Outlook
Based on current conditions, the following information is provided to assist in forecasting the Company's future results for 2021.
The Company expects 2021 Systemwide sales growth, in constant currencies, in the low double digits, and expects net restaurant unit expansion to contribute about 1% to 2021 Systemwide sales growth.
The Company expects operating margin percent to be in the low-to-mid 40% range.
The Company expects full year 2021 selling, general and administrative expenses of approximately 2.3% of Systemwide sales, reflecting a decrease of about 2% to 4% in constant currencies.
Based on current interest and foreign currency exchange rates, the Company expects interest expense for the full year 2021 to decrease about 1% to 3% due primarily to lower average debt balances as the Company expects to pay down current debt levels to return to pre-COVID-19 leverage ratios.
The Company expects the effective income tax rate for the full year 2021 to be in the 21% to 23% range. Some volatility may result in a quarterly tax rate outside of the annual range.
The Company expects 2021 capital expenditures to be approximately $2.3 billion, about half of which will be directed towards new unit expansion across the U.S. and International Operated Markets.
In 2021, about $1.1 billion will be dedicated to our U.S. business, about $500 million of which will be allocated to approximately 1,200 restaurant modernization projects. Globally, the Company expects to open over 1,300 restaurants. We will open nearly 500 restaurants in the U.S. and International Operated Markets segments, and our developmental licensee and affiliates will contribute capital towards over 800 restaurant openings in their respective markets. Additionally, the U.S. expects to close roughly 325 restaurants in 2021; a majority of which are lower sales volume McDonald's in Walmart locations. The Company expects about 650 net restaurant additions in 2021.
The Company expects to achieve a free cash flow conversion rate greater than 90%.

2022 Outlook
The Company has provided a 2022 outlook that is detailed in its Form 10-Q for the quarter ended September 30, 2020.



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CONSOLIDATED OPERATING RESULTS
The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included on pages 38 through 59 of this Form 10-K. This section generally discusses 2020 and 2019 items and the year-to-year comparisons between the year ended December 31, 2020 compared to the year ended December 31, 2019. Discussions of 2018 items and the year-to-year comparisons between the year ended December 31, 2019 compared to the year ended December 31, 2018 are not included in this Form 10-K and can be found in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 26, 2020.

Operating results
202020192018
Dollars and shares in millions, except per share dataAmountIncrease/ (decrease)AmountIncrease/ (decrease)Amount
Revenues
Sales by Company-operated restaurants$8,139 (14 %)$9,421 (6 %)$10,013 
Revenues from franchised restaurants10,726 (8)11,656 11,012 
Other revenues343 19 288 24 233 
Total revenues19,208 (10)21,365 21,258 
Operating costs and expenses
Company-operated restaurant expenses6,981 (10)7,761 (6)8,266 
Franchised restaurants-occupancy expenses2,208 0 2,201 12 1,973 
Other restaurant expenses267 19 224 20 186 
Selling, general & administrative expenses
Depreciation and amortization301 14 262 22 215 
Other2,245 14 1,967 (1)1,985 
Other operating (income) expense, net(118)2 (120)37 (190)
Total operating costs and expenses11,884 (3)12,295 (1)12,435 
Operating income7,324 (19)9,070 8,823 
Interest expense1,218 9 1,122 14 981 
Nonoperating (income) expense, net(35)50 (70)n/m26 
Income before provision for income taxes6,141 (23)8,018 7,816 
Provision for income taxes1,410 (29)1,993 1,892 
Net income$4,731 (21 %)$6,025 %$5,924 
Earnings per common share—diluted$6.31 (20 %)$7.88 %$7.54 
Weighted-average common shares outstanding—
diluted
750.1 (2 %)764.9 (3 %)785.6 
n/m Not meaningful

IMPACT OF FOREIGN CURRENCY TRANSLATION ON REPORTED RESULTS
While changes in foreign currency exchange rates affect reported results, McDonald’s mitigates exposures, where practical, by purchasing goods and services in local currencies, financing in local currencies and hedging certain foreign-denominated cash flows.

Impact of foreign currency translation on reported results
 
  
Reported amountCurrency translation benefit/(cost)
In millions, except per share data202020192018202020192018
Revenues$19,208 $21,365 $21,258 $(75)$(610)$124 
Company-operated margins1,158 1,660 1,747 (1)(51)
Franchised margins8,519 9,455 9,039 32 (256)57 
Selling, general & administrative expenses2,546 2,229 2,200 (2)29 (13)
Operating income7,324 9,070 8,823 35 (280)56 
Net income4,731 6,025 5,924 26 (165)33 
Earnings per common share—diluted6.31 7.88 7.54 0.04 (0.21)0.04 
 
In 2020, results primarily reflected the strengthening of the Euro and British Pound, partly offset by the weakening of the Brazilian Real. In 2019, results reflected the weakening of the Euro and most other major currencies.
McDonald's Corporation 2020 Annual Report 11


NET INCOME AND DILUTED EARNINGS PER COMMON SHARE
In 2020, net income decreased 21% (22% in constant currencies) to $4.7 billion and diluted earnings per common share decreased 20% (20% in constant currencies) to $6.31. Foreign currency translation had a positive impact of $0.04 on diluted earnings per share.
Results in 2020 reflected sales declines in the International Operated Markets and International Developmental Licensed Markets segments as a result of COVID-19.
Results in 2020 also included the following:
Higher Selling, General and Administrative Expenses reflecting:
$100 million for the Company's five year commitment to Ronald McDonald House Charities;
one-time investments in renewed brand communications as part of the “Serving Here” campaign launch that was announced with the new growth strategy, Accelerating the Arches; and
partly offset by lower incentive-based compensation expense.
Over $200 million of incremental franchisee support for the year for marketing to accelerate recovery and drive growth across the U.S. and International Operated Markets, a majority of which was recorded in Selling, General and Administrative Expenses.
About $100 million was recorded in the U.S. and the remaining support was recorded in the International Operated Markets segment.
Higher restaurant closing costs of $68 million in both the International Operated Markets and in the U.S. The U.S. costs were primarily related to planned closings of McDonald’s in Walmart locations.
Lower gains on sales of restaurant businesses.
An increase of reserves for bad debts of $58 million related to rent and royalty deferrals.
Outlined below is additional information for the full year 2020, 2019, and 2018:
Diluted Earnings Per Common Share Reconciliation
 AmountIncrease/(decrease)Increase/(decrease)
excluding currency
translation
2020201920182020201920202019
GAAP earnings per share-diluted$6.31 $7.88 $7.54 (20 %)%(20 %)%
Strategic (gains) charges(0.26)0.07 0.26 
Income tax (benefit) cost, net (0.11)0.10 
Non-GAAP earnings per share-diluted$6.05 $7.84 $7.90 (23)%(1)%(23)%%
2020 results included:
net pre-tax strategic gains of $268 million, or $0.26 per share, primarily related to the sale of McDonald's Japan stock, which reduced the Company's ownership by about 6%.
2019 results included:
$84 million, or $0.11 per share, of income tax benefit due to regulations issued in the fourth quarter 2019 related to the Tax Act.
net pre-tax strategic charges of $74 million, or $0.07 per share, primarily related to impairment associated with the purchase of our joint venture partner's interest in the India Delhi market, partly offset by gains on the sales of property at the former Corporate headquarters.
2018 results included:
net tax cost of $75 million, or $0.10 per share, associated with the final 2018 adjustments to the provisional amounts recorded in December 2017 under the Tax Act.
$234 million, or $0.26 per share, of pre-tax strategic impairment and restructuring charges.
Excluding the above 2020 and 2019 items, 2020 net income decreased 24% (25% in constant currencies), and diluted earnings per share decreased 23% (23% in constant currencies).
Diluted earnings per share for 2020 and 2019 benefited from a decrease in diluted weighted average shares outstanding. In early March 2020, the Company suspended its share repurchase program. The Company repurchased 4.3 million shares of its stock for $874 million in 2020 and 25.0 million shares of its stock for $5 billion in 2019.
RESTAURANT UPDATE
The Company has continued to follow the guidance of expert health authorities to ensure the appropriate precautionary steps are taken to protect the health and safety of our people and our customers.
As a result of COVID-19, throughout 2020, there have been numerous instances of government restrictions on restaurant operating hours, limited dine-in capacity in most countries and, in some cases, mandated dining room closures particularly in the International Operated Markets. These restrictions, which have carried into 2021, are impacting most of the Company's key markets outside of the U.S., particularly those with fewer drive thru restaurant locations. The Company expects some restrictions in various markets so long as the COVID-19 pandemic continues.


McDonald's Corporation 2020 Annual Report 12


REVENUES
The Company's revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees, developmental licensees and affiliates. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales with minimum rent payments, and initial fees. Revenues from restaurants licensed to developmental licensees and affiliates include a royalty based on a percent of sales, and generally include initial fees. The Company’s Other revenues are comprised of fees paid by franchisees to recover a portion of costs incurred by the Company for various technology platforms, revenues from brand licensing arrangements to market and sell consumer packaged goods using the McDonald’s brand, and third party revenues for the Dynamic Yield business.
Franchised restaurants represented 93% of McDonald's restaurants worldwide at December 31, 2020. The Company's heavily franchised business model is designed to generate stable and predictable revenue, which is largely a function of franchisee sales and resulting cash flow streams. As most revenues are based on a percent of sales, the Company expects that government regulations as a result of COVID-19 resurgences will continue to have a negative impact on revenue in the near term.
Revenues
 AmountIncrease/(decrease)Increase/(decrease)
excluding currency
translation
Dollars in millions2020201920182020201920202019
Company-operated sales:
U.S.$2,395 $2,490 $2,665 (4 %)(7 %)(4 %)(7 %)
International Operated Markets5,114 6,334 6,668 (19)(5)(18)(1)
International Developmental Licensed Markets & Corporate 630 597 680 6 (12)7 (7)
Total$8,139 $9,421 $10,013 (14 %)(6 %)(12 %)(3 %)
Franchised revenues:
U.S.$5,261 $5,353 $5,001 (2 %)%(2 %)%
International Operated Markets4,348 5,064 4,839 (14)(15)10 
International Developmental Licensed Markets & Corporate 1,117 1,239 1,172 (10)(8)10 
Total$10,726 $11,656 $11,012 (8 %)%(8 %)%
Total Company-operated sales and Franchised revenues:
U.S.$7,656 $7,843 $7,666 (2 %)%(2 %)%
International Operated Markets9,462 11,398 11,507 (17)(1)(17)
International Developmental Licensed Markets & Corporate1,747 1,836 1,852 (5)(1)(3)
Total$18,865 $21,077 $21,025 (10 %)%(10 %)%
Total Other revenues$343 $288 $233 19 %24 %19 %25 %
Total Revenues$19,208 $21,365 $21,258 (10 %)%(10 %)%
In 2020, total Company-operated sales and franchised revenues decreased 10% (10% in constant currencies), primarily reflecting sales declines in the International Operated Markets segment as a result of COVID-19. Results also reflected positive sales performance in the U.S., which was more than offset by support provided for marketing, through incentives to franchisees, to accelerate recovery and drive growth, including the free Thank You Meals served across the country to first responders and health care workers.
Revenue declines were more significant in the International Operated Markets segment, driven by the temporary restaurant closures and limited operations. While performance was mixed, the ability of each market to drive sales and revenue growth is also impacted by the number of drive thru restaurant locations. The revenue declines were driven by the U.K., France, Germany, Italy and Spain.
TOTAL REVENUES BY SEGMENT
mcd-20201231_g2.jpgmcd-20201231_g3.jpgmcd-20201231_g4.jpg
U.S.
International Operated Markets
International Developmental Licensed Markets & Corporate
McDonald's Corporation 2020 Annual Report 13


The following tables present comparable sales and Systemwide sales increases/(decreases):
Comparable sales increases/(decreases)
 202020192018
U.S.0.4 %5.0 %2.5 %
International Operated Markets(15.0)6.1 6.1 
International Developmental Licensed Markets & Corporate(10.5)7.2 5.6 
Total(7.7 %)5.9 %4.5 %
    

Systemwide sales increases/(decreases)*
 Increase/(decrease)
excluding currency
translation
2020201920202019
U.S.0 %%0 %%
International Operated Markets(13)(14)
International Developmental Licensed Markets & Corporate (10)(8)10 
Total(7 %)%(7 %)%
    * Unlike comparable sales, the Company has not excluded hyper-inflationary market results from Systemwide sales as these sales are the basis on which the Company calculates and records revenues.

Franchised sales are not recorded as revenues by the Company, but are the basis on which the Company calculates and records franchised revenues and are indicative of the financial health of the franchisee base. The following table presents franchised sales and the related increases/(decreases):
Franchised sales
AmountIncrease/(decrease)Increase/(decrease)
excluding currency
translation
Dollars in millions2020201920182020201920202019
U.S.$38,123 $37,923 $35,860 1 %%1 %%
International Operated Markets25,446 28,853 27,557 (12)(13)10 
International Developmental Licensed Markets & Corporate 21,609 23,981 22,717 (10)(8)10 
Total$85,178 $90,757 $86,134 (6 %)%(6 %)%
Ownership type
Conventional franchised$63,297 $66,415 $63,251 (5)%(5)%%
Developmental licensed11,781 14,392 13,519 (18)(14)13 
Foreign affiliated10,100 9,950 9,364 2 0 
Total$85,178 $90,757 $86,134 (6 %)%(6 %)%


McDonald's Corporation 2020 Annual Report 14


RESTAURANT MARGINS
Restaurant margins
 AmountIncrease/(decrease)Increase/(decrease) excluding currency translation
Dollars in millions2020201920182020201920202019
Franchised:
U.S.$4,097 $4,227 $4,070 (3 %)%(3 %)%
International Operated Markets3,329 4,018 3,829 (17)(19)10 
International Developmental Licensed Markets & Corporate 1,093 1,210 1,140 (10)(8)11 
Total$8,519 $9,455 $9,039 (10 %)%(10 %)%
Company-operated:
U.S.$405 $388 $397 4 %(2 %)4 %(2 %)
International Operated Markets748 1,266 1,327 (41)(5)(41)(1)
International Developmental Licensed Markets & Corporaten/mn/mn/mn/mn/mn/mn/m
Total$1,158 $1,660 $1,747 (30 %)(5 %)(30 %)(2 %)
Total restaurant margins:
U.S.$4,502 $4,615 $4,467 (2 %)%(2 %)%
International Operated Markets4,077 5,284 5,156 (23)(24)
International Developmental Licensed Markets & Corporaten/mn/mn/mn/mn/mn/mn/m
Total$9,677 $11,115 $10,786 (13 %)%(13 %)%
n/m Not meaningful
In 2020, total restaurant margins decreased 13% (13% in constant currencies), which reflected sales declines in the International Operated Markets segment as a result of COVID-19, partly offset by positive sales performance in the U.S.
Franchised margins represented over 85% of restaurant margin dollars.
Franchised margins in the U.S. reflected higher depreciation costs related to investments in Experience of the Future ("EOTF"), as well as support provided for marketing to accelerate recovery and drive growth, including the free Thank You Meals served across the country to first responders and health care workers.
Company-operated margins in the U.S. and International Operated Markets segments reflected incremental COVID-19 expenses incurred for employee related costs, personal protective equipment, and signage and other restaurant costs.
Due to the nature of our operating model, franchised margin expenses (primarily comprised of lease expense and depreciation expense) are mainly fixed, whereas Company-operated restaurant expenses have more variable cost components. Total restaurant margins included $1,452 million of depreciation and amortization expenses in 2020.

RESTAURANT MARGINS BY TYPE (In millions)
mcd-20201231_g5.jpg

McDonald's Corporation 2020 Annual Report 15


SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general & administrative expenses
 AmountIncrease/(decrease)Increase/(decrease)
excluding currency
translation
Dollars in millions2020201920182020201920202019
U.S.$625 $587 $591 7 %(1 %)7 %(1 %)
International Operated Markets
700 629 641 11 (2)11 
International Developmental Licensed Markets & Corporate(1)
1,221 1,013 968 20 20 
Total Selling, General & Administrative Expenses$2,546 $2,229 $2,200 14 %%14 %%
Less: Incentive-Based Compensation(2)
158 289 284 (45 %)%(45 %)%
Total Excluding Incentive-Based Compensation$2,388 $1,940 $1,916 23 %%23 %%
(1)Included in International Developmental Licensed Markets & Corporate are home office support costs in areas such as facilities, finance, human resources, investments in strategic technology initiatives, legal, marketing, restaurant operations, supply chain and training.
(2)Includes all cash incentives and share-based compensation expense.
In 2020, consolidated selling, general and administrative expenses increased 14% (14% in constant currencies). The results reflected about $175 million of incremental marketing contributions by the Company to the System's advertising cooperative arrangements across the U.S. and International Operated Markets to accelerate recovery and drive growth; the Company's five year commitment totaling $100 million to RMHC; one-time investments in renewed brand communications as part of the “Serving Here” campaign launch that was announced with the new growth strategy, Accelerating the Arches; and higher investments in strategic technology initiatives. These results were partly offset by lower incentive-based compensation expense and travel costs.
Selling, general and administrative expenses as a percent of Systemwide sales was 2.7% in 2020, 2.2% in 2019 and 2.3% in 2018. Management believes that analyzing selling, general and administrative expenses as a percent of Systemwide sales is meaningful because these costs are incurred to support the overall McDonald's business.

OTHER OPERATING (INCOME) EXPENSE, NET
Other operating (income) expense, net
In millions202020192018
Gains on sales of restaurant businesses
$(23)$(127)$(304)
Equity in earnings of unconsolidated affiliates
(117)(154)(152)
Asset dispositions and other (income) expense, net
290 87 34 
Impairment and other charges (gains), net
(268)74 232 
Total
$(118)$(120)$(190)
Gains on sales of restaurant businesses
In 2020, gains on sales of restaurant businesses decreased primarily due to fewer restaurant sales primarily in the U.K. and the U.S.
Equity in earnings of unconsolidated affiliates
In 2020, equity in earnings of unconsolidated affiliates declined primarily due to sales declines as a result of COVID-19 in both the International Operated Markets and International Developmental Licensed Markets.
Asset dispositions and other (income) expense, net
Asset dispositions and other expense, net reflected $68 million of restaurant closing costs in both the International Operated Markets and in the U.S. The U.S. costs were primarily related to planned closings of McDonald's in Walmart locations.
Results also reflected an increase of reserves for bad debts of $58 million, related to rent and royalty deferrals; $31 million of payments to distribution centers for obsolete inventory to support franchisee liquidity; and litigation settlements.
Impairment and other charges (gains), net
In 2020, impairment and other charges (gains), net reflected $274 million of pre-tax strategic gains related to the sale of McDonald's Japan stock, which reduced the Company's ownership by about 6% for the year. Results also reflected the write-off of impaired software that was no longer being used of $26 million, partly offset by $13 million of income primarily comprised of a reversal of a reserve associated with the Company's sale of its business in the India Delhi market in January 2020.
The results in 2019 reflected $99 million of impairment associated with the purchase of our joint venture partner's interest in the India Delhi market, partly offset by $20 million of gains on the sales of property at the former Corporate headquarters.
The results in 2018 reflected $140 million of impairment charges and $85 million of strategic restructuring charges in the U.S.


McDonald's Corporation 2020 Annual Report 16


OPERATING INCOME
Operating income
 AmountIncrease/(decrease)Increase/(decrease) excluding currency translation
Dollars in millions2020201920182020201920202019
U.S.$3,789 $4,069 $4,016 (7 %)%(7 %)%
International Operated Markets3,315 4,789 4,643 (31)(32)
International Developmental Licensed Markets & Corporate 2202121644 29 12 59 
Total$7,324 $9,070 $8,823 (19 %)%(20 %)%
Operating margin38.1 %42.5 %41.5 %
Non-GAAP operating margin36.7 %42.8 %42.6 %
Operating Income: Operating income decreased 19% (20% in constant currencies). Results for 2020 included $268 million of net strategic gains primarily related to the sale of McDonald's Japan stock, and results for 2019 included $74 million of net strategic charges. Excluding these current year and prior year items, operating income decreased 23% (23% in constant currencies) for 2020.
U.S.: The operating income decrease reflected positive sales performance, which was more than offset by about $100 million of support for marketing to accelerate recovery and drive growth; EOTF depreciation; a comparison to a prior year gain on the sale of real estate; lower gains on sales of restaurant businesses; and higher restaurant closing costs, primarily related to planned closings of McDonald's in Walmart locations.
International Operated Markets: The operating income decrease reflected sales declines as a result of COVID-19; over $100 million of support for marketing to accelerate recovery and drive growth; incremental COVID-19 Company-operated expenses primarily for employee related costs; lower gains on sales of restaurant businesses primarily in the U.K.; higher restaurant closing costs; lower equity in earnings from unconsolidated affiliates; and $23 million of payments to distribution centers for obsolete inventory.
International Developmental Licensed Markets & Corporate: Excluding the current year and prior year strategic gains and charges described above, the results primarily reflected higher G&A due to the Company's five year commitment totaling $100 million to RMHC as well as one-time investments in renewed brand communications.

OPERATING INCOME BY SEGMENT*
mcd-20201231_g6.jpgmcd-20201231_g7.jpgmcd-20201231_g8.jpg
U.S.
International Operated Markets
International Developmental Licensed Markets & Corporate*
*The IDL segment excludes Corporate activities, which is a Non-GAAP metric.



McDonald's Corporation 2020 Annual Report 17


Operating margin: Operating margin is defined as operating income as a percent of total revenues. The contributions to operating margin differ by segment due to each segment's ownership structure, primarily due to the relative percentage of franchised versus Company-operated restaurants. Additionally, the number of temporary restaurant closures, which varies by segment, as a result of COVID-19, also impacts the contribution of each segment to the consolidated operating margin.
The decrease in operating margin percent for 2020 was driven by a decline in sales, higher other operating expenses and higher G&A. While the sales-driven franchised margin decline had a dilutive effect on operating margin percent, franchised margin dollars represented over 85% of overall margin dollars and were a key component of operating income.

OPERATING MARGIN PERCENT ROLL-FORWARD*
mcd-20201231_g9.jpg
Operating marginIncreaseDecrease
*The operating margin roll-forward excludes the strategic gains and charges previously described.

INTEREST EXPENSE
Interest expense increased 9% (8% in constant currencies) and 14% (16% in constant currencies) in 2020 and 2019, respectively. Results in 2020 reflected higher average debt balances, partly offset by a decrease in the amount of Euro denominated deposits incurring interest expense as a result of the Company's cash management strategies.

NONOPERATING (INCOME) EXPENSE, NET
Nonoperating (income) expense, net
In millions202020192018
Interest income$(18)$(37)$(4)
Foreign currency and hedging activity(3)(48)
Other expense(14)15 25 
Total$(35)$(70)$26 
Foreign currency and hedging activity includes net gains or losses on certain hedges that reduce the exposure to variability on certain intercompany foreign currency cash flow streams.


McDonald's Corporation 2020 Annual Report 18


PROVISION FOR INCOME TAXES
In 2020, 2019 and 2018 the reported effective income tax rates were 23.0%, 24.9% and 24.2%, respectively.
Results for 2020 included $50 million of income tax benefits due to new U.S. tax regulations and $48 million of income tax benefits related to the impact of a tax rate change in the U.K.
The effective income tax rate for 2019 reflected $84 million of income tax benefit due to regulations issued in the fourth quarter 2019 related to the Tax Act. Excluding the income tax benefit, the effective income tax rate was 25.9% for the year 2019.
The effective income tax rate for 2018 reflected the final 2018 adjustments to the provisional amounts recorded in 2017 under the Tax Act of $75 million net tax cost. Excluding the impact of the Tax Act and impairment charges, the effective income tax rate was 22.9% for the year 2018.
Consolidated net deferred tax liabilities included tax assets, net of valuation allowance, of $6.5 billion in 2020 and $5.3 billion in 2019. Substantially all of the net tax assets are expected to be realized in the U.S. and other profitable markets.

RECENTLY ISSUED ACCOUNTING STANDARDS
Recently issued accounting standards are included on page 43 of this Form 10-K.

CASH FLOWS
The Company has a long history of generating significant cash from operations and has substantial credit capacity to fund operating and discretionary spending such as capital expenditures, debt repayments, dividends and share repurchases. As our operations have been impacted due to COVID-19, we have taken actions to preserve financial flexibility, primarily during the peak of the pandemic.
Cash provided by operations totaled $6.3 billion in 2020, a decrease of $1.9 billion or 23%. Free cash flow was $4.6 billion in 2020, a decrease of $1.1 billion or 19%. The Company’s free cash flow conversion rate was 98% in 2020 and 95% in 2019. Cash provided by operations decreased in 2020 compared to 2019 primarily due to a reduction in operating earnings due to COVID-19. In 2019, cash provided by operations totaled $8.1 billion, an increase of $1.1 billion or 17% compared with 2018, primarily due to a decrease in accounts receivable and lower income tax payments.
During 2020, the Company deferred collection of rent and royalties earned from franchisees. In total, the Company deferred collection of approximately $1 billion, and has collected over 80% of these total deferrals as of December 31, 2020. The remaining deferrals are expected to be collected in the first half of 2021.
Cash used for investing activities totaled $1.5 billion in 2020, a decrease of $1.5 billion compared with 2019. The decrease was primarily due to lower capital expenditures, fewer strategic acquisitions, and proceeds received from the sale of McDonald’s Japan stock in 2020. Cash used for investing activities totaled $3.1 billion in 2019, an increase of $616 million compared with 2018. The increase was primarily due to the Company’s strategic acquisitions of a real estate entity, Dynamic Yield and Apprente, partly offset by lower capital expenditures.
Cash used for financing activities totaled $2.2 billion in 2020, a decrease of $2.7 billion compared with 2019. The decrease was primarily due to $4.1 billion of lower treasury stock purchases in 2020 as the Company suspended its share repurchase program in early March 2020. In addition, the Company had $2.2 billion in net debt issuances in 2020, as compared to $3.2 billion in net debt issuances in 2019. The decrease in net debt issuances was primarily due to the timing of short-term commercial paper issuances and repayments. Cash used for financing activities totaled $5.0 billion in 2019, a decrease of $955 million compared with 2018, primarily due to net debt activity.
The Company’s cash and equivalents balance was $3.4 billion and $899 million at year end 2020 and 2019, respectively. In addition to cash and equivalents on hand and cash provided by operations, the Company can meet short-term funding needs through its continued access to commercial paper borrowings and line of credit agreements.
McDonald's Corporation 2020 Annual Report 19


RESTAURANT DEVELOPMENT AND CAPITAL EXPENDITURES
In 2020, the Company opened 977 restaurants and closed 643 restaurants. In 2019, the Company opened 1,231 restaurants and closed 391 restaurants. The decrease in openings during the year compared to 2019 was due to COVID-19. The closures in 2020 include approximately 200 closures in the U.S.; over half of which are lower sales volume McDonald's in Walmart locations.
Systemwide restaurants at year end
202020192018
U.S.13,682 13,846 13,914 
International Operated Markets10,560 10,465 10,263 
International Developmental Licensed Markets & Corporate14,956 14,384 13,678 
Total39,198 38,695 37,855 
RESTAURANTS BY OWNERSHIP TYPE
mcd-20201231_g10.jpgmcd-20201231_g11.jpgmcd-20201231_g12.jpg
Franchised restaurantsCompany-operated restaurants

Approximately 93% of the restaurants at year-end 2020 were franchised, including 95% in the U.S., 84% in International Operated Markets and 98% in the International Developmental Licensed Markets.
Capital expenditures decreased $753 million or 31% in 2020 primarily due to lower reinvestment in existing restaurants as a result of COVID-19. Capital expenditures decreased $348 million or 13% in 2019 primarily due to lower reinvestment in existing restaurants, partly offset by an increase in new restaurant openings that required the Company's capital.


McDonald's Corporation 2020 Annual Report 20


CAPITAL EXPENDITURES BY TYPE (In millions)
mcd-20201231_g13.jpg
* Primarily corporate equipment and other office-related expenditures.

New restaurant investments in all years were concentrated in markets with strong returns and/or opportunities for long-term growth. Average development costs vary widely by market depending on the types of restaurants built and the real estate and construction costs within each market. These costs, which include land, buildings and equipment, are managed through the use of optimally-sized restaurants, construction and design efficiencies, as well as leveraging the Company's global sourcing network and best practices. Although the Company is not responsible for all costs for every restaurant opened, total development costs for new traditional McDonald’s restaurants in the U.S. averaged approximately $4.4 million in 2020.
As of December 31, 2020 and December 31, 2019, the Company owned approximately 55% of the land and 80% of the buildings for restaurants in its consolidated markets.

SHARE REPURCHASES AND DIVIDENDS
In 2020, the Company returned approximately $4.6 billion to shareholders, primarily through dividends paid.
Shares repurchased and dividends  
In millions, except per share data202020192018
Number of shares repurchased4.3 25.0 32.2 
Shares outstanding at year end745 746 767 
Dividends declared per share$5.04 $4.73 $4.19 
Treasury stock purchases (in Shareholders' equity)
$874 $4,980 $5,247 
Dividends paid3,753 3,582 3,256 
Total returned to shareholders$4,627 $8,562 $8,503 
In December 2019, the Company's Board of Directors authorized the purchase of up to $15 billion of the Company's outstanding stock, with no specified expiration date. In 2020, approximately 4.3 million shares were repurchased for $874.1 million under the program. In early March 2020, the Company voluntarily suspended share repurchases from the open market.
The Company has paid dividends on its common stock for 45 consecutive years and has increased the dividend amount every year. The 2020 full year dividend of $5.04 per share reflects the quarterly dividend paid for each of the first three quarters of $1.25 per share, with an increase to $1.29 per share paid in the fourth quarter. This 3% increase in the quarterly dividend equates to a $5.16 per share annual dividend and reflects the Company’s confidence in the ongoing strength and reliability of its cash flow. As in the past, future dividend amounts will be considered after reviewing profitability expectations and financing needs, and will be declared at the discretion of the Company’s Board of Directors.

McDonald's Corporation 2020 Annual Report 21


FINANCIAL POSITION AND CAPITAL RESOURCES
TOTAL ASSETS AND RETURN
Total assets increased $5.1 billion or 11% in 2020, primarily due to an increase in Cash and equivalents driven by lower capital expenditures and fewer treasury stock purchases compared to the prior year, as well as proceeds received from the sale of McDonald's Japan stock. Net property and equipment increased $0.8 billion in 2020, primarily due to fixed asset additions and the impact of foreign exchange rates, partly offset by depreciation. Net property and equipment and the Lease right-of-use asset, net represented approximately 50% and approximately 25%, respectively, of total assets at year-end. Approximately 86% of total assets were in the U.S. and International Operated Markets at year-end 2020.
The Company’s after-tax ROIC from continuing operations is a metric that management believes measures our capital-allocation effectiveness over time and was 14.9%, 19.2% and 20.0% as of December 31, 2020, 2019 and 2018, respectively. The decrease from 2019 to 2020 was primarily due to the decrease in operating performance as a result of COVID-19 and higher average debt balances compared to the prior year. Refer to the reconciliation in Exhibit 12.

FINANCING AND MARKET RISK
The Company generally borrows on a long-term basis and is exposed to the impact of interest rate changes and foreign currency fluctuations. Debt obligations at December 31, 2020 totaled $37.4 billion, compared with $34.2 billion at December 31, 2019. The net increase in 2020 was primarily due to net long-term issuances of $3.1 billion, which were used to bolster our cash position in anticipation of the adverse macroeconomic and business conditions associated with COVID-19.
Debt highlights(1)
202020192018
Fixed-rate debt as a percent of total debt(2,3)
95 %92 %91 %
Weighted-average annual interest rate of total debt(3)
3.2 3.2 3.2 
Foreign currency-denominated debt as a percent of total debt(2)
36 38 38 
Total debt as a percent of total capitalization (total debt and total Shareholders' equity)(2)
126 131 125 
Cash provided by operations as a percent of total debt(2)
17 24 22 
(1)All percentages are as of December 31, except for the weighted-average annual interest rate, which is for the year. See reconciliation in Exhibit 12.
(2)Based on debt obligations before the effects of fair value hedging adjustments and deferred debt costs. These effects are excluded as they have no impact on the obligation at maturity. See Debt Financing note to the consolidated financial statements.
(3)Includes the effect of interest rate swaps used to hedge debt.

In connection with the increased funding activity during the first quarter of 2020, both Standard & Poor’s (S&P) and Moody’s affirmed our ratings, although S&P put McDonald's on negative outlook. S&P and Moody's currently rate the Company’s commercial paper A-2 and P-2, respectively; and its long-term debt BBB+ and Baa1, respectively. To access the debt capital markets, the Company relies on credit-rating agencies to assign short-term and long-term credit ratings.
Certain of the Company’s debt obligations contain cross-acceleration provisions and restrictions on Company and subsidiary mortgages and the long-term debt of certain subsidiaries. There are no provisions in the Company’s debt obligations that would accelerate repayment of debt as a result of a change in credit ratings or a material adverse change in the Company’s business. In December 2019, the Company's Board of Directors authorized $15 billion of borrowing capacity with no specified expiration date, of which $9.5 billion remains outstanding as of December 31, 2020. These borrowings may include (i) public or private offering of debt securities; (ii) direct borrowing from banks or other financial institutions; and (iii) other forms of indebtedness. In April 2020, the Company’s Board of Directors provided additional authorization to issue commercial paper and draw on lines of credit agreements up to $8 billion in addition to the $15 billion authorized as referenced above. In addition to debt securities available through a medium-term notes program registered with the SEC and a Global Medium-Term Notes program, the Company has $4.5 billion available under committed line of credit agreements (see Debt Financing note to the consolidated financial statements). As of December 31, 2020, the Company's subsidiaries also had $274 million of borrowings outstanding, primarily under uncommitted foreign currency line of credit agreements.
The Company uses major capital markets, bank financings and derivatives to meet its financing requirements. The Company manages its debt portfolio in response to changes in interest rates and foreign currency rates by periodically retiring, redeeming and repurchasing debt, terminating swaps and using derivatives. The Company does not hold or issue derivatives for trading purposes. All swaps are over-the-counter instruments.
In managing the impact of interest rate changes and foreign currency fluctuations, the Company uses interest rate swaps and finances in the currencies in which assets are denominated. The Company uses foreign currency debt and derivatives to hedge the foreign currency risk associated with certain royalties, intercompany financings and long-term investments in foreign subsidiaries and affiliates. This reduces the impact of fluctuating foreign currencies on cash flows and shareholders’ equity. Total foreign currency-denominated debt was $13.7 billion and $12.9 billion for the years ended December 31, 2020 and 2019, respectively. In addition, where practical, the Company’s restaurants purchase goods and services in local currencies resulting in natural hedges. See the Summary of significant accounting policies note to the consolidated financial statements related to financial instruments and hedging activities for additional information regarding the accounting impact and use of derivatives.



McDonald's Corporation 2020 Annual Report 22


The Company does not have significant exposure to any individual counterparty and has master agreements that contain netting arrangements. Certain of these agreements also require each party to post collateral if credit ratings fall below, or aggregate exposures exceed, certain contractual limits. At December 31, 2020, the Company was required to post an immaterial amount of collateral due to the negative fair value of certain derivative positions. The Company's counterparties were not required to post collateral on any derivative position, other than on hedges of certain of the Company’s supplemental benefit plan liabilities where the counterparties were required to post collateral on their liability positions.
The Company’s net asset exposure is diversified among a broad basket of currencies. The Company’s largest net asset exposures (defined as foreign currency assets less foreign currency liabilities) at year end were as follows:
Foreign currency net asset exposures
In millions of U.S. Dollars20202019
British Pounds Sterling$1,374 $811 
Australian Dollars913 560 
Canadian Dollars878 699 
Russian Ruble533 577 
Polish Zloty393 396 

The Company prepared sensitivity analyses of its financial instruments to determine the impact of hypothetical changes in interest rates and foreign currency exchange rates on the Company’s results of operations, cash flows and the fair value of its financial instruments. The interest rate analysis assumed a one percentage point adverse change in interest rates on all financial instruments, but did not consider the effects of the reduced level of economic activity that could exist in such an environment. The foreign currency rate analysis assumed that each foreign currency rate would change by 10% in the same direction relative to the U.S. Dollar on all financial instruments; however, the analysis did not include the potential impact on revenues, local currency prices or the effect of fluctuating currencies on the Company’s anticipated foreign currency royalties and other payments received from the markets. Based on the results of these analyses of the Company’s financial instruments, neither a one percentage point adverse change in interest rates from 2020 levels nor a 10% adverse change in foreign currency rates from 2020 levels would materially affect the Company’s results of operations, cash flows or the fair value of its financial instruments.
LIQUIDITY
The Company has significant operations outside the U.S. where we earn approximately 65% of our operating income. A significant portion of these historical earnings have been reinvested in foreign jurisdictions where the Company has made, and will continue to make, substantial investments to support the ongoing development and growth of our international operations.
During the first quarter of 2020, the Company secured $6.5 billion of new financing, including $5.5 billion of debt issuances at various maturities and a new $1.0 billion line of credit that was drawn upon immediately. In the third quarter of 2020, the Company repaid the total $1.0 billion on its line of credit. The $1.0 billion line of credit agreement remains in place and the amount remains available to be borrowed. The Company also has $3.5 billion available under a committed line of credit, which has not been drawn upon, as well as continuing authority to issue commercial paper in the U.S. and global markets. In 2021, the Company intends to reduce current debt levels to return to pre-COVID-19 leverage ratios.
Consistent with prior years, we expect existing domestic cash and equivalents, domestic cash flows from operations, the ability to issue domestic debt, and repatriation of a portion of foreign earnings to continue to be sufficient to fund our domestic operating, investing, and financing activities. We also continue to expect existing foreign cash and equivalents and foreign cash flows from operations to be sufficient to fund our foreign operating, investing and financing activities.
In the future, should we require more capital to fund activities in the U.S. than is generated by our domestic operations and is available through the issuance of domestic debt, we could elect to repatriate a greater portion of future periods' earnings from foreign jurisdictions.

McDonald's Corporation 2020 Annual Report 23


CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Company has long-term contractual obligations primarily in the form of lease obligations (related to both Company-operated and franchised restaurants) and debt obligations. In addition, the Company has long-term revenue and cash flow streams that relate to its franchise arrangements. Minimum rent payments under franchise arrangements are based on the Company’s underlying investment in owned sites and parallel the Company’s underlying lease obligations and escalations on properties that are leased. The Company believes that control over the real estate enables it to achieve restaurant performance levels that are amongst the highest in the industry. Cash provided by operations (including cash provided by these franchise arrangements) along with the Company’s borrowing capacity and other sources of cash will be used to satisfy the obligations. The following table summarizes the Company’s contractual obligations and their aggregate maturities as well as future minimum rent payments due to the Company under existing franchise arrangements as of December 31, 2020. 
 Contractual cash outflowsContractual cash inflows
In millions
Leases (1)
Debt obligations (2)
Minimum rent under
franchise arrangements
2021$1,216 $2,244 $3,073 
20221,150 2,332 2,954 
20231,068 2,644 2,835 
2024989 3,301 2,743 
2025899 3,159 2,642 
Thereafter7,358 23,881 20,175 
Total$12,680 $37,561 $34,422 
(1)For sites that have lease escalations tied to an index, future minimum payments reflect the current index adjustments through December 31, 2020. In addition, future minimum payments exclude option periods that have not yet been exercised.
(2)The maturities include reclassifications of short-term obligations to long-term obligations of $269 million, as they are supported by a long-term line of credit agreement expiring in December 2024. Debt obligations do not include the impact of non-cash fair value hedging adjustments, deferred debt costs and accrued interest.
In the U.S., the Company maintains certain supplemental benefit plans that allow participants to (i) make tax-deferred contributions and (ii) receive Company-provided allocations that cannot be made under the qualified benefit plans because of Internal Revenue Service ("IRS") limitations. At December 31, 2020, total liabilities for the supplemental plans were $431 million.
At December 31, 2020, total liabilities for gross unrecognized tax benefits were $1.5 billion.
On a recurring basis, the Company contracts with vendors and suppliers in the normal course of business. These contracts may
include items related to construction projects, inventory, energy, marketing, technology and other services. Generally, these items are shorter term in nature and have no minimum payment requirements. They are funded from operating cash flows and reflected in other areas of the Form 10-K (e.g., franchised margins, Company-operated margins and selling, general and administrative expenses that are reflected in the Consolidated Statement of Income and capital expenditures that are reflected on the Consolidated Statement of Cash Flows).
The Company has guaranteed certain loans totaling approximately $95 million at December 31, 2020. These guarantees are contingent commitments generally issued by the Company to support borrowing arrangements of the System. At December 31, 2020, there was no carrying value for obligations under these guarantees in the Consolidated Balance Sheet.
OTHER MATTERS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses as well as related disclosures. On an ongoing basis, the Company evaluates its estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
The Company reviews its financial reporting and disclosure practices and accounting policies quarterly to confirm that they provide accurate and transparent information relative to the current economic and business environment. The Company believes that of its significant accounting policies, the following involve a higher degree of judgment and/or complexity:
Property and equipment
Property and equipment are depreciated or amortized on a straight-line basis over their useful lives based on management’s estimates of the period over which the assets will generate revenue (not to exceed lease term plus options for leased property). The useful lives are estimated based on historical experience with similar assets, taking into account anticipated technological or other changes. Refer to the Property and Equipment section in the Summary of Significant Accounting Policies footnote on page 44 and the Property and Equipment footnote on page 51 for additional information.
Leasing Arrangements
The Lease right-of-use asset and Lease liability include an assumption on renewal options that have not yet been exercised by the Company. The Company also uses an incremental borrowing rate in calculating the Lease liability that represents an estimate of the interest rate the Company would incur to borrow on a collateralized basis over the term of a lease within a particular currency environment. Refer to the Leasing section in the Summary of Significant Accounting Policies footnote on page 44 and the Leasing Arrangements footnote on page 52 for additional information.

McDonald's Corporation 2020 Annual Report 24


Long-lived assets impairment review
Long-lived assets (including goodwill) are reviewed for impairment annually. If qualitative indicators of impairment are present, such as changes in global and local business and economic conditions, operating costs, inflation, competition, and consumer and demographic trends, the Company will use these and other factors in estimating future cash flows when testing for the recoverability of its long-lived assets. Estimates of future cash flows are highly subjective judgements based on the Company’s experience and knowledge of its operations. A key assumption impacting estimated future cash flows is the estimated change in comparable sales. If the Company’s estimates or underlying assumptions change in the future, the Company may be required to record impairment charges. Refer to the Long-lived Assets and Goodwill sections in the Summary of Significant Accounting Policies footnote on page 45 for additional information.
Litigation accruals
In the ordinary course of business, the Company is subject to proceedings, lawsuits and other claims primarily related to competitors, customers, employees, franchisees, government agencies, intellectual property, shareholders and suppliers. The Company is required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. Refer to the Contingencies footnote on page 53 for additional information.
Income taxes
The Company records a valuation allowance to reduce its deferred tax assets if it is considered more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. The Company records accruals for the estimated outcomes of these audits, and the accruals may change in the future due to new developments in each matter.
Refer to the Income Taxes sections in the Summary of Significant Accounting Policies footnote on page 46 and the Income Taxes footnote on page 53 for additional information.

EFFECTS OF CHANGING PRICES—INFLATION
The Company has demonstrated an ability to manage inflationary cost increases effectively. This ability is because of rapid inventory turnover, the ability to adjust menu prices, cost controls and substantial property holdings, many of which are at fixed costs and partly financed by debt made less expensive by inflation.



McDonald's Corporation 2020 Annual Report 25


Other Key Information

SELECTED FINANCIAL DATA
5-Year SummaryYears ended December 31,
In millions, except per share and unit amounts20202019201820172016
Consolidated Statement of Income Data
Revenues
   Sales by Company-operated restaurants$8,139 $9,421 $10,013 $12,719 $15,295 
   Revenues from franchised restaurants10,726 11,656 11,012 10,101 9,327 
   Other revenues(1)
343 288 233 140 151 
Total revenues19,208 21,365 21,258 22,960 24,773 
Operating income7,324 9,070 8,823 9,553 7,745 
Net income4,731 6,025 5,924 5,192 4,687 
Consolidated Statement of Cash Flows Data
Cash provided by operations$6,265 $8,122 $6,967 $5,551 $6,060 
Cash used for (provided by) investing activities1,546 3,071 2,455 (562)982 
Capital expenditures1,641 2,394 2,742 1,854 1,821 
Cash used for financing activities2,249 4,995 5,950 5,311 11,262 
Treasury stock purchases(2)
874 4,980 5,247 4,651 11,142 
Common stock dividends3,753 3,582 3,256 3,089 3,058 
Financial Position
Total assets(3)
$52,627 $47,511 $32,811 $33,804 $31,024 
Total debt37,440 34,177 31,075 29,536 25,956 
Total shareholders’ equity (deficit)(7,825)(8,210)(6,258)(3,268)(2,204)
Shares outstanding 745 746 767 794 819 
Per Common Share Data
Earnings-diluted$6.31 $7.88 $7.54 $6.37 $5.44 
Dividends declared5.04 4.73 4.19 3.83 3.61 
Market price at year end214.58 197.61 177.57 172.12 121.72 
Restaurant Information and Other Data
Restaurants at year end
   Company-operated restaurants2,677 2,636 2,770 3,133 5,669 
   Franchised restaurants36,521 36,059 35,085 34,108 31,230 
Total Systemwide restaurants39,198 38,695 37,855 37,241 36,899 
Franchised sales(4)
$85,178 $90,757 $86,134 $78,191 $69,707 
(1)Refer to the Basis of Presentation section included in the Summary of Significant Accounting Policies footnote of this Form 10-K for additional information related to a change in presentation that was effective January 1, 2020, which was applied retrospectively to all periods presented.
(2)Represents treasury stock purchases as reflected in Shareholders' equity. Treasury stock purchases decreased from 2019 to 2020 as the Company suspended its share repurchase program in March 2020.
(3)Total assets increased from 2018 to 2019 primarily due to the Company's Lease right-of-use asset recorded as a result of the adoption of Accounting Standard Codification ("ASC") Topic 842, "Leases" ("ASC 842").
(4)While franchised sales are not recorded as revenues by the Company, management believes they are important in understanding the Company's financial performance because these sales are the basis on which the Company calculates and records franchised revenues and are indicative of the financial health of the franchisee base. Franchised restaurants represent 93% of McDonald's restaurants worldwide at December 31, 2020.
McDonald's Corporation 2020 Annual Report 26


STOCK PERFORMANCE GRAPH
At least annually, we consider which companies comprise a readily identifiable investment peer group. McDonald's is included in published restaurant indices; however, unlike most other companies included in these indices, which have no or limited international operations, McDonald's does business in more than 100 countries and a substantial portion of our revenues and income is generated outside the U.S. In addition, because of our size, McDonald's inclusion in those indices tends to skew the results. Therefore, we believe that such a comparison is not meaningful.
Our market capitalization, trading volume and importance in an industry that is vital to the U.S. economy have resulted in McDonald's inclusion in the Dow Jones Industrial Average (DJIA) since 1985. Like McDonald's, many DJIA companies generate meaningful revenues and income outside the U.S. and some manage global brands. Thus, we believe that the use of the DJIA companies as the group for comparison purposes is appropriate.
The following performance graph shows McDonald's cumulative total shareholder returns (i.e., price appreciation and reinvestment of dividends) relative to the Standard & Poor's 500 Stock Index (S&P 500 Index) and to the DJIA companies for the five-year period ended December 31, 2020. The graph assumes that the value of an investment in McDonald's common stock, the S&P 500 Index and the DJIA companies (including McDonald's) was $100 at December 31, 2015. For the DJIA companies, returns are weighted for market capitalization as of the beginning of each period indicated. These returns may vary from those of the Dow Jones Industrial Average Index, which is not weighted by market capitalization, and may be composed of different companies during the period under consideration.
mcd-20201231_g14.jpg
Company/Index12/31/201512/31/201612/31/201712/31/201812/31/201912/31/2020
McDonald's Corporation$100$106$154$163$186$207
S&P 500 Index$100$112$136$130$171$203
Dow Jones Industrials$100$116$149$144$181$198
Source: S&P Capital IQ
McDonald's Corporation 2020 Annual Report 27


MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION AND DIVIDEND POLICY
The Company’s common stock trades under the symbol MCD and is listed on the New York Stock Exchange in the U.S.
The number of shareholders of record and beneficial owners of the Company’s common stock as of January 31, 2021 was estimated to be 2,900,000.
Given the Company’s returns on its capital investments and significant cash provided by operations, management believes it is prudent to reinvest in the business to drive profitable growth and use excess cash flow to return cash to shareholders through dividends and share repurchases. The Company has paid dividends on common stock for 45 consecutive years through 2020 and has increased the dividend amount at least once every year. As in the past, future dividend amounts will be considered after reviewing profitability expectations and financing needs, and will be declared at the discretion of the Company’s Board of Directors.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table presents information related to repurchases of common stock the Company made during the quarter ended December 31, 2020*:
Period
Total Number of
Shares Purchased(1)
Average Price
Paid per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs(1)
Approximate Dollar
Value of Shares
that May Yet
Be Purchased Under
the Plans or Programs(1)
October 1-31, 20207,104 223.77 7,104 $14,126,457,801 
November 1-30, 20202,342 216.52 2,342 14,125,950,721 
December 1-31, 2020356 212.08 356 14,125,875,221 
   Total9,802 221.61 9,802 
*    Subject to applicable law, the Company may repurchase shares directly in the open market, in privately negotiated transactions, or pursuant to derivative instruments and plans complying with Rule 10b5-1, among other types of transactions and arrangements.
(1)On December 31, 2019, the Company's Board of Directors approved a share repurchase program, effective January 1, 2020, that authorized the purchase of up to $15 billion of the Company's outstanding common stock. In early March 2020, the Company voluntarily suspended share repurchases from the open market. Therefore, the table above reflects only shares withheld for taxes under the Company's equity compensation program.
McDonald's Corporation 2020 Annual Report 28


RISK FACTORS
GLOBAL PANDEMIC
The COVID-19 pandemic has adversely affected and is expected to continue to adversely affect our financial results, condition and outlook.
Health epidemics or pandemics can adversely affect consumer spending and confidence levels and supply availability and costs, as well as the local operations in impacted markets, all of which can affect our financial results, condition and outlook. Importantly, the global pandemic resulting from COVID-19 has disrupted global health, economic and market conditions, consumer behavior and McDonald’s global restaurant operations beginning in early 2020. Local and national governmental mandates or recommendations and public perceptions of the risks associated with the COVID-19 pandemic have caused, and we expect will continue to cause, consumer behavior to change and worsening or volatile economic conditions, each of which could continue to adversely affect our business. In addition, our global operations have been disrupted to varying degrees and may continue to be disrupted given the unpredictability of the virus, its resurgences and government responses thereto as well as potentially permanent changes to the industry we operate in. While we cannot predict the duration or scope of the COVID-19 pandemic, the resurgence of infections in one or more markets, or the impact of vaccines across the globe, the COVID-19 pandemic has negatively impacted our business and is expected to continue to impact our financial results, condition and outlook in a way that may be material.
The COVID-19 pandemic may also heighten other risks disclosed in these Risk Factors, such as, but not limited to, those related to consumer behavior, consumer perceptions of our brand, supply chain interruptions, commodity costs and labor availability and cost.
STRATEGY AND BRAND
If we do not successfully evolve and execute against our business strategies, including the new Accelerating the Arches strategy, we may not be able to drive business growth.
To drive Systemwide sales, operating income and free cash flow growth, our business strategies must be effective in maintaining and strengthening customer appeal and capturing additional market share. Whether these strategies are successful depends mainly on our System’s ability to:
Capitalize on our global scale, iconic brand and local market presence to build upon our historic strengths and competitive advantages, such as our marketing, core menu items and digital, delivery and drive thru;
Continue to innovate and differentiate the McDonald's experience, including by preparing and serving our food in a way that balances value and convenience to our customers with profitability;
Accelerate digital innovation for a fast and easy customer experience;
Continue to run great restaurants by driving efficiencies and expanding capacities while continuing to prioritize health and safety;
Identify and develop restaurant sites consistent with our plans for net growth of Systemwide restaurants;
Accelerate our existing strategies, including through growth opportunities and potential acquisitions, investments and partnerships; and
Evolve and adjust our business strategies in response to, among other things, changing consumer behavior, operational restrictions and impacts to our results of operations and liquidity, including as a result of the COVID-19 pandemic.
If we are delayed or unsuccessful in executing our strategies, or if our strategies do not yield the desired results, our business, financial condition and results of operations may suffer.
Failure to preserve the value and relevance of our brand could have an adverse impact on our financial results.
To be successful in the future, we believe we must preserve, enhance and leverage the value of our brand, including our corporate purpose, mission and values. Brand value is based in part on consumer perceptions. Those perceptions are affected by a variety of factors, including the nutritional content and preparation of our food, the ingredients we use, the manner in which we source commodities and our general business practices. Consumer acceptance of our offerings is subject to change for a variety of reasons, and some changes can occur rapidly. For example, nutritional, health, environmental and other scientific studies and conclusions, which constantly evolve and may have contradictory implications, drive popular opinion, litigation and regulation (including initiatives intended to drive consumer behavior) in ways that affect the “informal eating out” (“IEO”) segment or perceptions of our brand, generally or relative to available alternatives. Consumer perceptions may also be affected by adverse commentary from third parties, including through social media or conventional media outlets, regarding the quick-service category of the IEO segment, our brand, our culture, our operations, our suppliers, or our franchisees. If we are unsuccessful in addressing adverse commentary or perceptions, whether or not accurate, our brand and our financial results may suffer.
Additionally, the ongoing relevance of our brand may depend on the success of our sustainability initiatives, which require Systemwide coordination and alignment. We are working to manage any risks and costs to us, our franchisees and our supply chain of any effects of climate change, greenhouse gases, and diminishing energy and water resources. These risks include any increased public focus, including by governmental and nongovernmental organizations, on these and other environmental sustainability matters, such as packaging and waste, animal health and welfare, deforestation and land use. These risks also include any increased pressure to make commitments, set targets or establish additional goals and take actions to meet them. These risks could expose us to market, operational and execution costs or risks.
McDonald's Corporation 2020 Annual Report 29


If we are not effective in addressing social and environmental responsibility matters or achieving relevant sustainability goals, consumer trust in our brand may suffer. In particular, business incidents or practices, whether actual or perceived, that erode consumer trust or confidence, particularly if such incidents or practices receive considerable publicity or result in litigation, can significantly reduce brand value and have a negative impact on our financial results.
If we do not anticipate and address evolving consumer preferences and effectively execute our pricing, promotional and marketing plans, our business could suffer.
Our continued success depends on our System’s ability to build upon our historic strengths and competitive advantages. In order to do so, we need to anticipate and respond effectively to continuously shifting consumer demographics and trends in food sourcing, food preparation, food offerings and consumer preferences and behaviors in the IEO segment. If we are not able to predict, or quickly and effectively respond to, these changes, or our competitors predict or respond more effectively, our financial results could be adversely impacted.
Our ability to build upon our strengths and advantages also depends on the impact of pricing, promotional and marketing plans across the System, and the ability to adjust these plans to respond quickly and effectively to evolving customer preferences, as well as shifting economic and competitive conditions. Existing or future pricing strategies, marketing plans, and the value proposition they represent, are expected to continue to be important components of our business strategy; however, they may not be successful, or may not be as successful as the efforts of our competitors, and could negatively impact sales, guest counts and market share.
Additionally, we operate in a complex and costly advertising environment. Our marketing and advertising programs may not be successful in reaching our customers in the way we intend. Our success depends in part on whether the allocation of our advertising and marketing resources across different channels, including digital marketing, allows us to reach our customers effectively and efficiently, and in ways that are meaningful to them. If the advertising and marketing programs are not successful, or are not as successful as those of our competitors, our sales, guest counts and market share could decrease.
Our investments to enhance the customer experience, including through technology, may not generate the expected returns.
Our long-term business objectives depend on the successful Systemwide execution of our strategies. We continue to build upon our investments in technology and modernization, digital engagement and delivery, in order to transform the customer experience. As part of these investments, we are placing renewed emphasis on improving our service model and strengthening relationships with customers, in part through digital channels and loyalty initiatives, mobile ordering and payment systems, and enhancing our drive thru technologies, which may not generate expected returns. We also continue to offer and refine our delivery initiatives, including through growing awareness and trial. Utilizing a third-party delivery service may not have the same level of profitability as a non-delivery transaction, and may introduce additional food quality and customer satisfaction risks. If these customer experience initiatives are not well executed, or if we do not fully realize the intended benefits of these significant investments, our business results may suffer.
We face intense competition in our markets, which could hurt our business.
We compete primarily in the IEO segment, which is highly competitive. We also face sustained, intense competition from traditional, fast casual and other competitors, which may include many non-traditional market participants such as convenience stores, grocery stores and coffee shops as well as online retailers. We expect our environment to continue to be highly competitive, and our results in any particular reporting period may be impacted by a contracting IEO segment or by new or continuing actions, product offerings or consolidation of our competitors and third party partners, which may have a short- or long-term impact on our results.
We compete on the basis of product choice, quality, affordability, service and location. In particular, we believe our ability to compete successfully in the current market environment depends on our ability to improve existing products, successfully develop and introduce new products, price our products appropriately, deliver a relevant customer experience, manage the complexity of our restaurant operations, manage our investments in technology and modernization, and respond effectively to our competitors’ actions or offerings or to unforeseen disruptive actions. There can be no assurance these strategies will be effective, and some strategies may be effective at improving some metrics while adversely affecting other metrics, which could have the overall effect of harming our business.
We may not be able to adequately protect our intellectual property or adequately ensure that we are not infringing the intellectual property of others, which could harm the value of the McDonald’s brand and our business.
The success of our business depends on our continued ability to use our existing trademarks and service marks in order to increase brand awareness and further develop our branded products in both domestic and international markets. We rely on a combination of trademarks, copyrights, service marks, trade secrets, patents and other intellectual property rights to protect our brand and branded products.
We have registered certain trademarks and have other trademark registrations pending in the U.S. and certain foreign jurisdictions. The trademarks that we currently use have not been registered in all of the countries outside of the U.S. in which we do business or may do business in the future and may never be registered in all of these countries. It may be costly and time consuming to protect our intellectual property, and the steps we have taken to protect our intellectual property in the U.S. and foreign countries may not be adequate. In addition, the steps we have taken may not adequately ensure that we do not infringe the intellectual property of others, and third parties may claim infringement by us in the future. In particular, we may be involved in intellectual property claims, including often aggressive or opportunistic attempts to enforce patents used in information technology systems, which might affect our operations and results. Any claim of infringement, whether or not it has merit, could be time-consuming, result in costly litigation and harm our business.
We cannot ensure that franchisees and other third parties who hold licenses to our intellectual property will not take actions that hurt the value of our intellectual property.
McDonald's Corporation 2020 Annual Report 30


OPERATIONS
The global scope of our business subjects us to risks that could negatively affect our business.
We encounter differing cultural, regulatory, geopolitical and economic environments within and among the more than 100 countries where McDonald’s restaurants operate, and our ability to achieve our business objectives depends on the System's success in these environments. Meeting customer expectations is complicated by the risks inherent in our global operating environment, and our global success is partially dependent on our System’s ability to leverage operating successes across markets and brand perceptions. Planned initiatives may not have appeal across multiple markets with McDonald's customers and could drive unanticipated changes in customer perceptions and guest counts.
Disruptions in operations or price volatility in a market can also result from governmental actions, such as price, foreign exchange or changes in trade-related tariffs or controls, sanctions and counter sanctions, government-mandated closure of our, our franchisees’ or our suppliers’ operations, and asset seizures. Trade policies, tariffs and other regulations affecting trade between the U.S. and other countries could adversely affect our business and operations. These and other government actions may impact our results and could cause reputational or other harm. Our international success depends in part on the effectiveness of our strategies and brand-building initiatives to reduce our exposure to such governmental actions.
Additionally, challenges and uncertainties are associated with operating in developing markets, which may entail a relatively higher risk of political instability, economic volatility, crime, corruption and social and ethnic unrest. Such challenges may be exacerbated in many cases by a lack of an independent and experienced judiciary and uncertainties in how local law is applied and enforced, including in areas most relevant to commercial transactions and foreign investment. An inability to manage effectively the risks associated with our international operations could have a material adverse effect on our business and financial condition.
We may also face challenges and uncertainties in developed markets. For example, as a result of the U.K.’s exit from the European Union, it is possible that there will be increased regulatory complexities and uncertainty in European or worldwide economic conditions. The decision created volatility in certain foreign currency exchange rates that may or may not continue, and may result in increased supply chain costs for items that are imported from other countries. Any of these effects, and others we cannot anticipate, could adversely affect our business, results of operations, financial condition and cash flows.
Supply chain interruptions may increase costs or reduce revenues.
We depend on the effectiveness of our supply chain management to assure reliable and sufficient supply of quality products on favorable terms. Although many of the products we sell are sourced from a wide variety of suppliers in countries around the world, certain products have limited suppliers, which may increase our reliance on those suppliers. Supply chain interruptions, including as a result of shortages and transportation issues or unexpected increases in demand, and price increases can adversely affect us as well as our suppliers and franchisees, whose performance may have a significant impact on our results. Such shortages or disruptions could be caused by factors beyond the control of our suppliers, franchisees or us. If we experience interruptions in our System’s supply chain, or if contingency planning is not effective, our costs could increase and it could limit the availability of products critical to our System’s operations.
Our franchise business model presents a number of risks.
The Company's success as a heavily franchised business relies to a large degree on the financial success and cooperation of our franchisees, including our developmental licensees and affiliates. Our restaurant margins arise from two sources: fees from franchised restaurants (e.g., rent and royalties based on a percentage of sales) and, to a lesser degree, sales from Company-operated restaurants. Our franchisees and developmental licensees manage their businesses independently, and therefore are responsible for the day-to-day operation of their restaurants. The revenues we realize from franchised restaurants are largely dependent on the ability of our franchisees to grow their sales. Business risks affecting our operations also affect our franchisees. In particular, our franchisees have also been significantly impacted by the COVID-19 pandemic, and the Company granted the deferral of cash collection for certain rent and royalties earned from franchisees in substantially all markets. If franchisee sales trends worsen, or do not improve at a sufficiently rapid rate, our financial results will continue to be negatively affected, which may be material.
Our success also relies on the willingness and ability of our independent franchisees and affiliates to implement major initiatives, which may include financial investment, and to remain aligned with us on operating, value/promotional and capital-intensive reinvestment plans. The ability of franchisees to contribute to the achievement of our plans is dependent in large part on the availability to them of funding at reasonable interest rates and may be negatively impacted by the financial markets in general, by the creditworthiness of our franchisees or the Company or by banks’ lending practices. If our franchisees are unwilling or unable to invest in major initiatives or are unable to obtain financing at commercially reasonable rates, or at all, our future growth and results of operations could be adversely affected.
Our operating performance could also be negatively affected if our franchisees experience food safety or other operational problems or project an image inconsistent with our brand and values, particularly if our contractual and other rights and remedies are limited, costly to exercise or subjected to litigation and potential delays. If franchisees do not successfully operate restaurants in a manner consistent with our required standards, our brand’s image and reputation could be harmed, which in turn could hurt our business and operating results.
Our ownership mix also affects our results and financial condition. The decision to own restaurants or to operate under franchise or license agreements is driven by many factors whose interrelationship is complex. The benefits of our more heavily franchised structure depend on various factors including whether we have effectively selected franchisees, licensees and/or affiliates that meet our rigorous standards, whether we are able to successfully integrate them into our structure and whether their performance and the resulting ownership mix supports our brand and financial objectives.
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Challenges with respect to labor, including availability and cost, could impact our business and results of operations.
Our success depends in part on our System’s ability to proactively recruit, motivate and retain qualified individuals to work in McDonald's restaurants and to maintain appropriately-staffed restaurants in an intensely competitive environment. Increased costs associated with recruiting, motivating and retaining qualified employees to work in our Company-operated restaurants, as well as costs to promote awareness of the opportunities of working at McDonald's restaurants, could have a negative impact on our Company-operated margins. Similar concerns apply to our franchisees.
We are also impacted by the costs and other effects of compliance with U.S. and international regulations affecting our workforce, which includes our staff and employees working in our Company-operated restaurants. These regulations are increasingly focused on employment issues, including wage and hour, healthcare, immigration, retirement and other employee benefits and workplace practices. Claims of non-compliance with these regulations could result in liability and expense to us. Our potential exposure to reputational and other harm regarding our workplace practices or conditions or those of our independent franchisees or suppliers, including those giving rise to claims of harassment or discrimination (or perceptions thereof) or workplace safety could have a negative impact on consumer perceptions of us and our business. Additionally, economic action, such as boycotts, protests, work stoppages or campaigns by labor organizations, could adversely affect us (including our ability to recruit and retain talent) or the franchisees and suppliers that are also part of the McDonald's System and whose performance may have a material impact on our results.
Effective succession planning is important to our continued success.
Effective succession planning is important to our long-term success. Failure to effectively identify, develop and retain key personnel, recruit high-quality candidates and ensure smooth management and personnel transitions could disrupt our business and adversely affect our results.
Food safety concerns may have an adverse effect on our business.
Our ability to increase sales and profits depends on our System’s ability to meet expectations for safe food and on our ability to manage the potential impact on McDonald’s of food-borne illnesses and food or product safety issues that may arise in the future, including in the supply chain, restaurants or delivery. Food safety is a top priority, and we dedicate substantial resources to ensure that our customers enjoy safe food products, including as our menu and service model evolve. However, food safety events, including instances of food-borne illness, occur within the food industry and our System from time to time and could occur in the future. Instances of food tampering, food contamination or food-borne illness, whether actual or perceived, could adversely affect our brand and reputation as well as our revenues and profits.
If we do not effectively manage our real estate portfolio, our operating results may be negatively impacted.
We have significant real estate operations, primarily in connection with our restaurant business. We generally own or secure a long-term lease on the land and building for conventional franchised and Company-operated restaurant sites. We seek to identify and develop restaurant locations that offer convenience to customers and long-term sales and profit potential. As we generally secure long-term real estate interests for our restaurants, we have limited flexibility to quickly alter our real estate portfolio. The competitive business landscape continues to evolve in light of changing business trends, consumer preferences, trade area demographics, consumer use of digital and delivery, local competitive positions and other economic factors. If our restaurants are not located in desirable locations, or if we do not evolve in response to these factors, it could adversely affect Systemwide sales and profitability.
Our real estate values and the costs associated with our real estate operations are also impacted by a variety of other factors, including governmental regulations; insurance; zoning, tax and eminent domain laws; interest rate levels and the cost of financing. A significant change in real estate values, or an increase in costs as a result of any of these factors, could adversely affect our operating results.
Information technology system failures or interruptions, or breaches of network security, may impact our operations or cause reputational harm.
We are increasingly reliant upon technology systems, such as point-of-sale, technologies supporting McDonald’s digital and delivery solutions, and technologies that facilitate communication and collaboration with affiliated entities, customers, employees, franchisees, suppliers, service providers or other independent third parties to conduct our business, whether developed and maintained by us or provided by third parties. Any failure or interruption of these systems could significantly impact our franchisees’ operations, or our customers’ experience and perceptions. Additionally, we provide certain technology systems to businesses that are unaffiliated with the McDonald’s System and a failure, interruption or breach of these systems may cause harm to those unaffiliated parties, which may result in liability to the Company or reputational harm.
Despite the implementation of security measures, those technology systems could become vulnerable to damage, disability or failures due to theft, fire, power loss, telecommunications failure or other catastrophic events. Certain technology systems may also become vulnerable, unreliable or inefficient in cases where technology vendors limit or terminate product support and maintenance. Our increasing reliance on third party systems also present the risks faced by the third party’s business, including the operational, security and credit risks of those parties. If those systems were to fail or otherwise be unavailable, or if business continuity or disaster recovery plans were not effective, and we were unable to recover in a timely manner, we could experience an interruption in our or our franchisees’ operations.
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Furthermore, security incidents or breaches have from time to time occurred and may in the future occur involving our systems, the systems of the parties we communicate or collaborate with (including franchisees), or those of third party providers. These may include such things as unauthorized access, phishing attacks, account takeovers, denial of service, computer viruses, introduction of malware or ransomware and other disruptive problems caused by hackers. Our technology systems contain personal, financial and other information that is entrusted to us by our customers, our employees, our franchisees, our business customers and other third parties, as well as financial, proprietary and other confidential information related to our business. An actual or alleged security breach could result in disruptions, shutdowns, theft or unauthorized disclosure of personal, financial, proprietary or other confidential information. The occurrence of any of these incidents could result in reputational damage, adverse publicity, loss of consumer confidence, reduced sales and profits, complications in executing our growth initiatives and regulatory and legal risk, including criminal penalties or civil liabilities.
LEGAL AND REGULATORY
Increasing regulatory and legal complexity may adversely affect our business and financial results.
Our regulatory and legal environment worldwide exposes us to complex compliance, litigation and similar risks that could affect our operations and results in material ways. Many of our markets are subject to increasing, conflicting and highly prescriptive regulations involving, among other matters, restaurant operations, product packaging, marketing, the nutritional and allergen content and safety of our food and other products, labeling and other disclosure practices. Compliance efforts with those regulations may be affected by ordinary variations in food preparation among our own restaurants and the need to rely on the accuracy and completeness of information from third-party suppliers. Our success depends in part on our ability to manage the impact of regulations that can affect our business plans and operations, and have increased our costs of doing business and exposure to litigation, governmental investigations or other proceedings.
We are also subject to legal proceedings that may adversely affect our business, including class actions, administrative proceedings, government investigations and proceedings, shareholder proceedings, employment and personal injury claims, landlord/ tenant disputes, supplier related disputes, and claims by current or former franchisees. Regardless of whether claims against us are valid or whether we are found to be liable, claims may be expensive to defend and may divert management's attention away from operations.
Litigation and regulatory action concerning our relationship with franchisees and the legal distinction between our franchisees and us for employment law purposes, if determined adversely, could increase costs, negatively impact our business operations and the business prospects of our franchisees and subject us to incremental liability for their actions. Similarly, although our commercial relationships with our suppliers remain independent, there may be attempts to challenge that independence, which, if determined adversely, could also increase costs, negatively impact the business prospects of our suppliers, and subject us to incremental liability for their actions.
Our results could also be affected by the following:
The relative level of our defense costs, which vary from period to period depending on the number, nature and procedural status of pending proceedings;
The cost and other effects of settlements, judgments or consent decrees, which may require us to make disclosures or take other actions that may affect perceptions of our brand and products; and
Adverse results of pending or future litigation, including litigation challenging the composition and preparation of our products, or the appropriateness or accuracy of our marketing or other communication practices.
A judgment significantly in excess of any applicable insurance coverage or third party indemnity could materially adversely affect our financial condition or results of operations. Further, adverse publicity resulting from claims may hurt our business. If we are unable to effectively manage the risks associated with our complex regulatory and legal environment, it could have a material adverse effect on our business and financial condition.
Changes in tax laws and unanticipated tax liabilities could adversely affect the taxes we pay and our profitability.
We are subject to income and other taxes in the U.S. and foreign jurisdictions, and our operations, plans and results are affected by tax and other initiatives around the world. In particular, we are affected by the impact of changes to tax laws or policy or related authoritative interpretations. We are also impacted by settlements of pending or any future adjustments proposed by taxing and governmental authorities inside and outside of the U.S. in connection with our tax audits, all of which will depend on their timing, nature and scope. Any significant increases in income tax rates, changes in income tax laws or unfavorable resolution of tax matters could have a material adverse impact on our financial results.
Changes in accounting standards or the recognition of impairment or other charges may adversely affect our future operations and results.
New accounting standards or changes in financial reporting requirements, accounting principles or practices, including with respect to our critical accounting estimates, could adversely affect our future results. We may also be affected by the nature and timing of decisions about underperforming markets or assets, including decisions that result in impairment or other charges that reduce our earnings. In assessing the recoverability of our long-lived assets, we consider changes in economic conditions and make assumptions regarding estimated future cash flows and other factors. These estimates are highly subjective and can be significantly impacted by many factors such as global and local business and economic conditions, operating costs, inflation, competition, consumer and demographic trends, and our restructuring activities. If our estimates or underlying assumptions change in the future, we may be required to record impairment charges. If we experience any such changes, they could have a significant adverse effect on our reported results for the affected periods.
McDonald's Corporation 2020 Annual Report 33


If we fail to comply with privacy and data collection laws, we could be subject to legal proceedings and penalties, which could negatively affect our financial results or brand perceptions.
We are subject to legal and compliance risks and associated liability related to privacy and data collection, protection and management, as it relates to information associated with our technology-related services and platforms made available to business partners, customers, employees, franchisees or other third parties. For example, the General Data Protection Regulation (“GDPR”) requires entities processing the personal data of individuals in the European Union to meet certain requirements regarding the handling of that data. We are also subject to U.S. federal and state and foreign laws and regulations in this area such as the California Consumer Privacy Act (“CCPA”). These regulations have been subject to frequent change, and there may be markets or jurisdictions that propose or enact new or emerging data privacy requirements in the future. Failure to comply with GDPR, CCPA or other privacy and data collection laws could result in legal proceedings and substantial penalties, and materially adversely impact our financial results or brand perceptions.
MACROECONOMIC AND MARKET CONDITIONS
Unfavorable general economic conditions could adversely affect our business and financial results.
Our results of operations are substantially affected by economic conditions, which can vary significantly by market and can impact consumer disposable income levels and spending habits. Economic conditions can also be impacted by a variety of factors including hostilities, epidemics, pandemics and actions taken by governments to manage national and international economic matters, whether through austerity, stimulus measures or trade measures, and initiatives intended to control wages, unemployment, credit availability, inflation, taxation and other economic drivers. Sustained adverse economic conditions or periodic adverse changes in economic conditions in our markets could pressure our operating performance and our business continuity disruption planning, and our business and financial results may suffer.
Our results of operations are also affected by fluctuations in currency exchange rates and unfavorable currency fluctuations could adversely affect reported earnings.
Changes in commodity and other operating costs could adversely affect our results of operations.
The profitability of our Company-operated restaurants depends in part on our ability to anticipate and react to changes in commodity costs, including food, paper, supplies, fuel, utilities and distribution, and other operating costs, including labor. Any volatility in certain commodity prices or fluctuation in labor costs could adversely affect our operating results by impacting restaurant profitability. The commodity markets for some of the ingredients we use, such as beef and chicken, are particularly volatile due to factors such as seasonal shifts, climate conditions, industry demand, international commodity markets, food safety concerns, product recalls and government regulation, all of which are beyond our control and, in many instances, unpredictable. We can only partially address future price risk through hedging and other activities, and therefore increases in commodity costs could have an adverse impact on our profitability.
A decrease in our credit ratings or an increase in our funding costs could adversely affect our profitability.
Our credit ratings may be negatively affected by our results of operations or changes in our debt levels. As a result, our interest expense, the availability of acceptable counterparties, our ability to obtain funding on favorable terms, collateral requirements and our operating or financial flexibility could all be negatively affected, especially if lenders impose new operating or financial covenants.
Our operations may also be impacted by regulations affecting capital flows, financial markets or financial institutions, which can limit our ability to manage and deploy our liquidity or increase our funding costs. If any of these events were to occur, they could have a material adverse effect on our business and financial condition.
Trading volatility and the price of our common stock may be adversely affected by many factors.
Many factors affect the volatility and price of our common stock in addition to our operating results and prospects. The most important of these factors, some of which are outside our control, are the following:
The unpredictable nature of global economic and market conditions;
Governmental action or inaction in light of key indicators of economic activity or events that can significantly influence financial markets, particularly in the U.S., which is the principal trading market for our common stock, and media reports and commentary about economic, trade or other matters, even when the matter in question does not directly relate to our business;
Trading activity in our common stock or trading activity in derivative instruments with respect to our common stock or debt securities, which can be affected by market commentary (including commentary that may be unreliable or incomplete); unauthorized disclosures about our performance, plans or expectations about our business; our actual performance and creditworthiness; investor confidence, driven in part by expectations about our performance; actions by shareholders and others seeking to influence our business strategies; portfolio transactions in our stock by significant shareholders; or trading activity that results from the ordinary course rebalancing of stock indices in which McDonald’s may be included, such as the S&P 500 Index and the Dow Jones Industrial Average;
The impact of our stock repurchase program or dividend rate; and
The impact on our results of corporate actions and market and third-party perceptions and assessments of such actions, such as those we may take from time to time as we implement our strategies, including through acquisitions, in light of changing business, legal and tax considerations and evolve our corporate structure.
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Events such as severe weather conditions, natural disasters, hostilities and social unrest, among others, can adversely affect our results and prospects.
Severe weather conditions, natural disasters, hostilities and social unrest, climate change or terrorist activities (or expectations about them) can adversely affect consumer spending and confidence levels and supply availability and costs, as well as the local operations in impacted markets, all of which can affect our results and prospects. Our receipt of proceeds under any insurance we maintain with respect to some of these risks may be delayed or the proceeds may be insufficient to cover our losses fully.

LEGAL PROCEEDINGS
The Company has pending a number of lawsuits that have been filed in various jurisdictions. These lawsuits cover a broad variety of allegations spanning the Company’s entire business. The following is a brief description of the more significant types of claims and lawsuits. In addition, the Company is subject to various national and local laws and regulations that impact various aspects of its business, as discussed below. While the Company does not believe that any such claims, lawsuits or regulations will have a material adverse effect on its financial condition or results of operations, unfavorable rulings could occur. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on net income for the period in which the ruling occurs or for future periods.
Franchising
A substantial number of McDonald’s restaurants are franchised to independent owner/operators and developmental licensees under contractual arrangements with the Company. In the course of the franchise relationship, occasional disputes arise between the Company and its current or former franchisees relating to a broad range of subjects including, but not limited to, quality, service and cleanliness issues, menu pricing, contentions regarding grants or terminations of franchises, alleged discrimination, delinquent payments of rents and fees, and franchisee claims for additional franchises or renewals of franchises. Additionally, occasional disputes arise between the Company and individuals who claim they should have been granted a McDonald’s franchise or who challenge the legal distinction between the Company and its franchisees for employment law purposes.
Suppliers
The Company and its affiliates and subsidiaries generally do not supply food, paper or related items to any McDonald’s restaurants. The Company relies upon numerous independent suppliers, including service providers, that are required to meet and maintain the Company’s high standards and specifications. On occasion, disputes arise between the Company and its suppliers (or former suppliers) which include, for example, compliance with product specifications and the Company’s business relationship with suppliers. In addition, disputes occasionally arise on a number of issues between the Company and individuals or entities who claim that they should be (or should have been) granted the opportunity to supply products or services to the Company’s restaurants.
Employees
Hundreds of thousands of people are employed by the Company and in restaurants owned and operated by subsidiaries of the Company. In addition, thousands of people from time to time seek employment in such restaurants. In the ordinary course of business, disputes arise regarding hiring, termination, promotion and pay practices, including wage and hour disputes, alleged discrimination and compliance with labor and employment laws.
Customers
Restaurants owned by subsidiaries of the Company regularly serve a broad segment of the public as do independent owner/operators and developmental licensees of McDonald's restaurants. In so doing, disputes arise as to products, service, incidents, pricing, advertising, nutritional and other disclosures, as well as other matters common to an extensive restaurant business such as that of the Company.
Intellectual Property
The Company has registered trademarks and service marks, patents and copyrights, some of which are of material importance to the Company’s business. From time to time, the Company may become involved in litigation to protect its intellectual property and defend against the alleged use of third party intellectual property. 
Government Regulations
Local and national governments have adopted laws and regulations involving various aspects of the restaurant business including, but not limited to, advertising, franchising, health, safety, environment, competition, zoning, employment and taxation. The Company is occasionally involved in litigation or other proceedings regarding these matters. The Company strives to comply with all applicable existing statutory and administrative rules and cannot predict the effect on its operations from these matters or the issuance of additional requirements in the future.

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PROPERTIES
The Company owns and leases real estate primarily in connection with its restaurant business. The Company identifies and develops sites that offer convenience to customers and long-term sales and profit potential to the System. To assess potential, the Company analyzes traffic and walking patterns, census data and other relevant data. The Company’s experience and access to advanced technology aid in evaluating this information. The Company generally owns or secures a long-term lease on the land and building for conventional franchised and Company-operated restaurant sites, which facilitates long-term occupancy rights and helps control related costs. Restaurant profitability for both the Company and franchisees is important; therefore, ongoing efforts are made to control average development costs through construction and design efficiencies, standardization and by leveraging the Company’s global sourcing network.
In addition, the Company primarily leases real estate in connection with its corporate headquarters, field and other offices.
Additional information about the Company’s properties is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 8 through 25 and in Financial Statements and Supplementary Data on pages 38 through 59 of this Form 10-K.

INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The following are the Executive Officers of our Company (as of the date of this filing):
Ian Borden, 52, is President, International, a position he has held since January 2020. Prior to that, Mr. Borden served as President - International Developmental Licensed Markets, from January 2019 through December 2019. Prior to that, Mr. Borden served as President - Foundational Markets, from July 2015 through December 2018. Mr. Borden has served the Company for 26 years.
Heidi Capozzi, 51, is Corporate Executive Vice President - Chief People Officer, a position she has held since April 2020. Prior to joining the Company, Ms. Capozzi served as Senior Vice President of Human Resources for The Boeing Company from 2016 to April 2020.
Francesca A. DeBiase, 55, is Corporate Executive Vice President - Global Chief Supply Chain Officer, a position she has held since October 2020. Prior to that, Ms. DeBiase served as Corporate Executive Vice President - Worldwide Supply Chain and Sustainability, from April 2018 through October 2020 and Corporate Senior Vice President - Worldwide Supply Chain and Sustainability, from March 2015 through March 2018. Ms. DeBiase has served the Company for 29 years.
Joseph Erlinger, 47, is President, McDonald's USA, a position he has held since November 2019. Prior to that, Mr. Erlinger served as President - International Operated Markets, from January 2019 through October 2019 and President - High Growth Markets, from September 2016 through December 2018. From March 2015 to January 2017, Mr. Erlinger served as Vice President and Chief Financial Officer - High Growth Markets (serving in dual roles from September 2016 through January 2017). Mr. Erlinger has served the Company for nearly 19 years.
Katherine Beirne Fallon, 45, is Corporate Executive Vice President - Chief Global Impact Officer, a position she has held since October 2020. Prior to joining the Company, Ms. Fallon served as Executive Vice President, Global Corporate Affairs for Hilton.
Daniel Henry, 50, is Corporate Executive Vice President - Chief Information Officer, a position he has held since May 2018. From October 2017 through April 2018, Mr. Henry served as Corporate Vice President - Chief Information Officer. Prior to that, Mr. Henry served as Vice President of Customer Technology and Enterprise Architecture at American Airlines from April 2012 to October 2017. Mr. Henry has served the Company for 3 years.
Catherine Hoovel, 49, is Corporate Vice President - Chief Accounting Officer, a position she has held since October 2016. Ms. Hoovel served as Controller for the McDonald's restaurants owned and operated by McDonald's USA from April 2014 to September 2016. Ms. Hoovel has served the Company for nearly 25 years.
Christopher Kempczinski, 52, is President and Chief Executive Officer, a position he has held since November 2019. Prior to that, Mr. Kempczinski served as President, McDonald’s USA from December 2016 through October 2019 and Corporate Executive Vice President - Strategy, Business Development and Innovation, from October 2015 through December 2016. Mr. Kempczinski joined the Company from Kraft Heinz, where he most recently served as Executive Vice President of Growth Initiatives and President of Kraft International from December 2014 to September 2015. Mr. Kempczinski has served the Company for 5 years.
Kevin Ozan, 57, is Corporate Executive Vice President and Chief Financial Officer, a position he has held since March 2015. From February 2008 through February 2015, Mr. Ozan served as Corporate Senior Vice President - Controller. Mr. Ozan has served the Company for 23 years.

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AVAILABILITY OF COMPANY INFORMATION
The Company is subject to the informational requirements of the Securities Exchange Act of 1934 ("Exchange Act"). The Company therefore files periodic reports, proxy statements and other information with the SEC. Such reports may be obtained by visiting the SEC's website at www.sec.gov.
Financial and other information can also be accessed on the investor section of the Company’s website at www.investor.mcdonalds.com. The Company uses this website as a primary channel for disclosing key information to its investors, some of which may contain material and previously non-public information. The Company makes available, free of charge, copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. Copies of financial and other information are also available free of charge by calling (800) 228-9623.
Also posted on McDonald’s website are the Company’s Corporate Governance Principles; the charters for each of the Committees of the Board of Directors, including the Audit and Finance Committee, Compensation Committee, Governance Committee, Public Policy and Strategy Committee and Sustainability and Corporate Responsibility Committee; the Code of Conduct for the Board of Directors; and the Company’s Standards of Business Conduct, which applies to all officers and employees. Copies of these documents are also available free of charge by calling (800) 228-9623.
Information on the Company’s website is not incorporated into this Form 10-K or the Company’s other securities filings unless expressly noted.

Financial Statements and Supplementary Data
Index to consolidated financial statementsPage reference
Consolidated statement of income for each of the three years in the period ended December 31, 2020
Consolidated statement of comprehensive income for each of the three years in the period ended December 31, 2020
Consolidated balance sheet at December 31, 2020 and 2019
Consolidated statement of cash flows for each of the three years in the period ended December 31, 2020
Consolidated statement of shareholders’ equity for each of the three years in the period ended December 31, 2020
Notes to consolidated financial statements
Management’s assessment of internal control over financial reporting
Report of independent registered public accounting firm
Report of independent registered public accounting firm on internal control over financial reporting

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Consolidated Statement of Income 
In millions, except per share data
Years ended December 31, 2020
20192018
REVENUES
Sales by Company-operated restaurants$8,139.2 $9,420.8 $10,012.7 
Revenues from franchised restaurants10,726.1 11,655.7 11,012.5 
Other revenues342.5 287.9 232.7 
Total revenues19,207.8 21,364.4 21,257.9 
OPERATING COSTS AND EXPENSES
Company-operated restaurant expenses
Food & paper2,564.2 2,980.3 3,153.8 
Payroll & employee benefits2,416.4 2,704.4 2,937.9 
Occupancy & other operating expenses2,000.6 2,075.9 2,174.2 
Franchised restaurants-occupancy expenses2,207.5 2,200.6 1,973.3 
Other restaurant expenses267.0 223.8 186.1 
Selling, general & administrative expenses
Depreciation and amortization300.6 262.5 214.8 
Other2,245.0 1,966.9 1,985.4 
Other operating (income) expense, net(117.5)(119.8)(190.2)
Total operating costs and expenses11,883.8 12,294.6 12,435.3 
Operating income7,324.0 9,069.8 8,822.6 
Interest expense-net of capitalized interest of $6.0, $7.4 and $5.61,218.1 1,121.9 981.2 
Nonoperating (income) expense, net(34.8)(70.2)25.3 
Income before provision for income taxes6,140.7 8,018.1 7,816.1 
Provision for income taxes1,410.2 1,992.7 1,891.8 
Net income$4,730.5 $6,025.4 $