Q1false202112/31MCDONALDS 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission File Number 1-5231
McDONALD’S CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-2361282
(State or Other Jurisdiction of
Incorporation or Organization)
 (I.R.S. Employer
Identification No.)
110 North Carpenter Street 60607
Chicago,Illinois
(Address of Principal Executive Offices) (Zip Code)
(630) 623-3000
(Registrant’s Telephone Number, Including Area Code)
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
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 and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes    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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No  
746,174,284
(Number of shares of common stock
outstanding as of 3/31/2021)



Table of Contents
McDONALD’S CORPORATION
___________________________
INDEX
_______
 
 
 Page Reference
Item 1A – Risk Factors
Item 6 – Exhibits
All trademarks used herein are the property of their respective owners and are used with permission.
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
In millions, except per share dataMarch 31,
2021
December 31,
2020
Assets
Current assets
Cash and equivalents$3,019.7 $3,449.1 
Accounts and notes receivable1,733.7 2,110.3 
Inventories, at cost, not in excess of market45.3 51.1 
Prepaid expenses and other current assets669.2 632.7 
Total current assets5,467.9 6,243.2 
Other assets
Investments in and advances to affiliates1,211.1 1,297.2 
Goodwill2,745.8 2,773.1 
Miscellaneous3,499.1 3,527.4 
Total other assets7,456.0 7,597.7 
Lease right-of-use asset, net13,629.4 13,827.7 
Property and equipment
Property and equipment, at cost41,082.2 41,476.5 
Accumulated depreciation and amortization(16,532.4)(16,518.3)
Net property and equipment24,549.8 24,958.2 
Total assets$51,103.1 $52,626.8 
Liabilities and shareholders’ equity
Current liabilities
Accounts payable670.0 741.3 
Lease liability 718.4 701.5 
Income taxes718.3 741.1 
Other taxes192.0 227.0 
Accrued interest333.2 388.4 
Accrued payroll and other liabilities1,047.9 1,138.3 
Current maturities of long-term debt900.0 2,243.6 
Total current liabilities4,579.8 6,181.2 
Long-term debt34,823.2 35,196.8 
Long-term lease liability13,111.0 13,321.3 
Long-term income taxes1,963.4 1,970.7 
Deferred revenues - initial franchise fees702.5 702.0 
Other long-term liabilities1,056.8 1,054.1 
Deferred income taxes2,101.9 2,025.6 
Shareholders’ equity (deficit)
Preferred stock, no par value; authorized – 165.0 million shares; issued – none  
Common stock, $.01 par value; authorized – 3.5 billion shares; issued – 1,660.6 million shares16.6 16.6 
Additional paid-in capital7,959.1 7,903.6 
Retained earnings54,483.0 53,908.1 
Accumulated other comprehensive income (loss)(2,635.9)(2,586.8)
Common stock in treasury, at cost; 914.5 and 915.2 million shares(67,058.3)(67,066.4)
Total shareholders’ equity (deficit)(7,235.5)(7,824.9)
Total liabilities and shareholders’ equity (deficit)$51,103.1 $52,626.8 
See Notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Quarters Ended
 March 31,
In millions, except per share data20212020
Revenues
Sales by Company-operated restaurants$2,161.5 $2,025.8 
Revenues from franchised restaurants2,877.4 2,608.0 
Other revenues85.7 80.6 
Total revenues5,124.6 4,714.4 
Operating costs and expenses
Company-operated restaurant expenses1,817.6 1,752.8 
Franchised restaurants-occupancy expenses571.5 554.2 
Other restaurant expenses67.2 65.5 
Selling, general & administrative expenses
Depreciation and amortization76.0 73.5 
Other490.4 516.3 
Other operating (income) expense, net(179.4)58.5 
Total operating costs and expenses2,843.3 3,020.8 
Operating income2,281.3 1,693.6 
Interest expense300.0 280.0 
Nonoperating (income) expense, net28.6 (31.3)
Income before provision for income taxes1,952.7 1,444.9 
Provision for income taxes415.5 338.0 
Net income$1,537.2 $1,106.9 
Earnings per common share-basic$2.06 $1.49 
Earnings per common share-diluted$2.05 $1.47 
Dividends declared per common share$1.29 $1.25 
Weighted-average shares outstanding-basic745.8 744.8 
Weighted-average shares outstanding-diluted751.0 750.7 
See Notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Quarters Ended
March 31,
In millions20212020
Net income$1,537.2 $1,106.9 
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments:
Gain (loss) recognized in accumulated other comprehensive
income ("AOCI"), including net investment hedges
(87.7)(466.2)
Reclassification of (gain) loss to net income10.7  
Foreign currency translation adjustments-net of tax
benefit (expense) of ($90.3) and ($115.3)
(77.0)(466.2)
Cash flow hedges:
Gain (loss) recognized in AOCI23.1 (39.6)
Reclassification of (gain) loss to net income15.0 (9.1)
Cash flow hedges-net of tax benefit (expense) of ($11.2) and $14.738.1 (48.7)
Defined benefit pension plans:
Gain (loss) recognized in AOCI0.7 (1.9)
Reclassification of (gain) loss to net income(10.9)3.1 
Defined benefit pension plans-net of tax benefit (expense)
of $0.0 and $0.4
(10.2)1.2 
Total other comprehensive income (loss), net of tax(49.1)(513.7)
Comprehensive income (loss)$1,488.1 $593.2 
See Notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Quarters Ended
 March 31,
In millions20212020
Operating activities
Net income$1,537.2 $1,106.9 
Adjustments to reconcile to cash provided by operations
Charges and credits:
Depreciation and amortization453.9 421.3 
Deferred income taxes(1.5)276.4 
Share-based compensation27.3 25.9 
Other(130.0)(87.9)
Changes in working capital items237.1 (196.6)
Cash provided by operations2,124.0 1,546.0 
Investing activities
Capital expenditures(368.7)(482.5)
Purchases of restaurant businesses(38.7)(19.6)
Sales of restaurant businesses29.6 25.7 
Sales of property32.8 15.8 
Other100.4 (57.8)
Cash used for investing activities(244.6)(518.4)
Financing activities
Net short-term borrowings6.5 111.8 
Long-term financing issuances 5,539.4 
Long-term financing repayments(1,337.8)(262.7)
Treasury stock purchases(21.5)(902.6)
Common stock dividends(962.3)(930.7)
Proceeds from stock option exercises59.1 99.3 
Other(7.9)(121.5)
Cash provided by (used for) financing activities(2,263.9)3,533.0 
Effect of exchange rates on cash and cash equivalents(44.9)(79.3)
Cash and equivalents increase (decrease)(429.4)4,481.3 
Cash and equivalents at beginning of period3,449.1 898.5 
Cash and equivalents at end of period$3,019.7 $5,379.8 
See Notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
For the quarter ended March 31, 2020
 Common stock
issued
 Accumulated other
comprehensive income (loss)
Common stock in
treasury
Total
shareholders’
equity (deficit)
Additional
paid-in
capital
Retained
earnings
PensionsCash flow
hedges
Foreign
currency
translation
In millions, except per share dataSharesAmountSharesAmount
Balance at December 31, 20191,660.6 $16.6 $7,653.9 $52,930.5 $(243.7)$12.0 $(2,251.0)(914.3)$(66,328.6)$(8,210.3)
Net income1,106.9 1,106.9 
Other comprehensive income (loss),
    net of tax
1.2 (48.7)(466.2)(513.7)
Comprehensive income593.2 
Common stock cash dividends
    ($1.25 per share)
(930.7)(930.7)
Treasury stock purchases(4.2)(868.9)(868.9)
Share-based compensation25.9 25.9 
Stock option exercises and other33.7 1.4 63.7 97.4 
Balance at March 31, 20201,660.6 $16.6 $7,713.5 $53,106.7 $(242.5)$(36.7)$(2,717.2)(917.1)$(67,133.8)$(9,293.4)

For the quarter ended March 31, 2021
 Common stock
issued
 Accumulated other
comprehensive income (loss)
Common stock in
treasury
Total
shareholders’
equity (deficit)
Additional
paid-in
capital
Retained
earnings
PensionsCash flow
hedges
Foreign
currency
translation
In millions, except per share dataSharesAmountSharesAmount
Balance at December 31, 20201,660.6 $16.6 $7,903.6 $53,908.1 $(287.6)$(111.3)$(2,187.9)(915.2)$(67,066.4)$(7,824.9)
Net income1,537.2 1,537.2 
Other comprehensive income (loss),
    net of tax
(10.2)38.1 (77.0)(49.1)
Comprehensive income1,488.1 
Common stock cash dividends
    ($1.29 per share)
(962.3)(962.3)
Treasury stock purchases(0.1)(21.5)(21.5)
Share-based compensation27.3 27.3 
Stock option exercises and other28.2 0.8 29.6 57.8 
Balance at March 31, 20211,660.6 $16.6 $7,959.1 $54,483.0 $(297.8)$(73.2)$(2,264.9)(914.5)$(67,058.3)$(7,235.5)

See Notes to condensed consolidated financial statements.






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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

McDonald’s Corporation, the registrant, together with its subsidiaries, is referred to herein as the "Company." The Company, its franchisees and suppliers, are referred to herein as the "System."
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements contained in the Company’s December 31, 2020 Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. The results for the quarter ended March 31, 2021, do not necessarily indicate the results that may be expected for the full year.

Restaurant Information
The following table presents restaurant information by ownership type:
Restaurants at March 31,20212020
Conventional franchised21,496 21,838 
Developmental licensed7,705 7,678 
Foreign affiliated7,283 6,831 
Total Franchised36,484 36,347 
Company-operated2,676 2,637 
Total Systemwide restaurants39,160 38,984 
The results of operations of restaurant businesses purchased and sold in transactions with franchisees were not material either individually or in the aggregate to the Condensed Consolidated Financial Statements for the periods prior to purchase and sale.

Per Common Share Information
Diluted earnings per common share is calculated using net income divided by diluted weighted-average shares. Diluted weighted-average shares include weighted-average shares outstanding plus the dilutive effect of share-based compensation, calculated using the treasury stock method, of 5.2 million shares and 5.9 million shares for the quarters 2021 and 2020, respectively. Share-based compensation awards that would have been antidilutive, and therefore were not included in the calculation of diluted weighted-average shares, totaled 3.6 million shares and 2.0 million shares for the quarters 2021 and 2020, respectively.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Income Taxes

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which simplifies the accounting for income taxes. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including applicable interim periods. The Company adopted the new standard effective January 1, 2021. The adoption of the standard did not have a material impact on the Company's condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" (“ASU 2020-04”). The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently evaluating the impact the adoption of ASU 2020-04 will have on its consolidated financial statements.


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Updates to Significant Accounting Policies

Long-lived assets and Goodwill

Long-lived assets and Goodwill are typically reviewed for impairment annually in the fourth quarter and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable or if an indicator of impairment exists. The Company has continued to monitor the global economic uncertainty as a result of COVID-19 to assess the outlook for restaurant operations and the impact that any disruption may have on the Company's business and overall financial performance.
As a result of the Company's analysis, and in consideration of the totality of events and circumstances, including the potential impact of COVID-19 related disruptions on the Company’s operating results, there were no indicators of impairment during the first quarter of 2021.


Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value. Fair value disclosures are reflected in a three-level hierarchy, maximizing the use of observable inputs and minimizing the use of unobservable inputs. The Company did not have any significant changes to the valuation techniques used to measure fair value as described in the Company's December 31, 2020 Annual Report on Form 10-K.
At March 31, 2021, the fair value of the Company’s debt obligations was estimated at $39.8 billion, compared to a carrying amount of $35.7 billion. The fair value was based upon quoted market prices, Level 2 within the valuation hierarchy. The carrying amounts of cash and equivalents and notes receivable approximate fair value.
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Financial Instruments and Hedging Activities
The Company is exposed to global market risks, including the effect of changes in interest rates and foreign currency fluctuations. The Company uses foreign currency denominated debt and derivative instruments to mitigate the impact of these changes. The Company does not hold or issue derivatives for trading purposes.
The following table presents the fair values of derivative instruments included on the Condensed Consolidated Balance Sheet:
  Derivative AssetsDerivative Liabilities
In millionsBalance Sheet ClassificationMarch 31, 2021December 31, 2020Balance Sheet ClassificationMarch 31, 2021December 31, 2020
Derivatives designated as hedging instruments
Foreign currencyPrepaid expenses and other current assets$11.7 Accrued payroll and other liabilities$(32.9)$(64.5)
Interest ratePrepaid expenses and other current assets5.7 Accrued payroll and other liabilities
Foreign currencyMiscellaneous other assets23.0 $5.6 Other long-term liabilities(1.2)(15.0)
Interest rateMiscellaneous other assets
21.2 35.8 Other long-term liabilities
Total derivatives designated as hedging instruments$61.6 $41.4  $(34.1)$(79.5)
Derivatives not designated as hedging instruments
EquityPrepaid expenses and other current assets

$194.4 $185.6 Accrued payroll and other liabilities$(4.1)$(8.6)
Foreign currencyPrepaid expenses and other current assets

Accrued payroll and other liabilities(7.1)(9.4)
EquityMiscellaneous other assets  
Total derivatives not designated as hedging instruments$194.4 $185.6  $(11.2)$(18.0)
Total derivatives$256.0 $227.0  $(45.3)$(97.5)
    The following table presents the pre-tax amounts from derivative instruments affecting income and AOCI for the three months ended March 31, 2021 and 2020, respectively:
Location of Gain or Loss
Recognized in Income on
Derivative
Gain (Loss)
Recognized in AOCI
Gain (Loss)
Reclassified into Income from AOCI
Gain (Loss) Recognized in
Income on Derivative
In millions202120202021202020212020
Foreign currencyNonoperating income/expense$29.9 $39.3 $(17.8)$12.6 
Interest rateInterest expense(90.8)(1.6)(0.7)
Cash flow hedges$29.9 $(51.5)$(19.4)$11.9 
Foreign currency denominated debtNonoperating income/expense$379.7 $350.4 $16.2 
Foreign currency derivativesNonoperating income/expense26.6 11.9 
Foreign currency derivatives(1)
Interest expense$3.7 $3.7 
Net investment hedges$406.3 $362.3 $16.2 $3.7 $3.7 
Foreign currencyNonoperating income/expense$2.3 $7.5 
EquitySelling, general & administrative expenses20.4 (66.3)
EquityOther operating income/expense, net
(4.7)
Undesignated derivatives$18.0 $(58.8)
(1)The amount of gain (loss) recognized in income related to components excluded from effectiveness testing.


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Fair Value Hedges
The Company enters into fair value hedges to reduce the exposure to changes in fair values of certain liabilities. The Company enters into fair value hedges that convert a portion of its fixed rate debt into floating rate debt by use of interest rate swaps. At March 31, 2021, the carrying amount of fixed-rate debt that was effectively converted was $1.0 billion, which included an increase of $26.9 million of cumulative hedging adjustments. For the three months ended March 31, 2021, the Company recognized an $8.9 million loss on the fair value of interest rate swaps, and a corresponding gain on the fair value of the related hedged debt instrument to interest expense.
Cash Flow Hedges
The Company enters into cash flow hedges to reduce the exposure to variability in certain expected future cash flows. To protect against the reduction in value of forecasted foreign currency cash flows (such as royalties denominated in foreign currencies), the Company uses foreign currency forwards to hedge a portion of anticipated exposures. The hedges cover the next 18 months for certain exposures and are denominated in various currencies.
As of March 31, 2021, the Company had derivatives outstanding with an equivalent notional amount of $1.2 billion that hedged a portion of forecasted foreign currency denominated cash flows.
Based on market conditions at March 31, 2021, the $73.2 million in cumulative cash flow hedging losses, after tax, is not expected to have a significant effect on earnings over the next 12 months.
Net Investment Hedges
The Company primarily uses foreign currency denominated debt (third party and intercompany) to hedge its investments in certain foreign subsidiaries and affiliates. Realized and unrealized translation adjustments from these hedges are included in shareholders' equity in the foreign currency translation component of Other comprehensive income ("OCI") and offset translation adjustments on the underlying net assets of foreign subsidiaries and affiliates, which also are recorded in OCI. As of March 31, 2021, $11.6 billion of the Company's third party foreign currency denominated debt and $877.8 million of intercompany foreign currency denominated debt was designated to hedge investments in certain foreign subsidiaries and affiliates.
Undesignated Derivatives
The Company enters into certain derivatives that are not designated for hedge accounting, therefore the changes in the fair value of these derivatives are recognized immediately in earnings together with the gain or loss from the hedged balance sheet position. As an example, the Company enters into equity derivative contracts, including total return swaps, to hedge market-driven changes in certain of its supplemental benefit plan liabilities. Changes in the fair value of these derivatives are recorded in Selling, general & administrative expenses together with the changes in the supplemental benefit plan liabilities. The Company may also use certain derivatives to mitigate the share price risk related to its sale of stock in McDonald’s Japan.  The changes in the fair value of the undesignated derivatives used for the most recent sale transaction were recognized immediately in earnings in Other Operating (income) expense, net. In addition, the Company uses foreign currency forwards to mitigate the change in fair value of certain foreign currency denominated assets and liabilities. The changes in the fair value of these derivatives are recognized in Nonoperating (income) expense, net, along with the currency gain or loss from the hedged balance sheet position.
Credit Risk
The Company is exposed to credit-related losses in the event of non-performance by its derivative counterparties. The Company did not have significant exposure to any individual counterparty at March 31, 2021 and has master agreements that contain netting arrangements. For financial reporting purposes, the Company presents gross derivative balances in the financial statements and supplementary data, including for counterparties subject to netting arrangements. Some of these agreements also require each party to post collateral if credit ratings fall below, or aggregate exposures exceed, certain contractual limits. At March 31, 2021, the Company was required to post an immaterial amount of collateral due to the negative fair value of certain derivative positions. The Company's counterparties were not required to post collateral on any derivative position, other than on certain hedges of the Company’s supplemental benefit plan liabilities where the counterparties were required to post collateral on their liability positions.
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Franchise Arrangements
Revenues from franchised restaurants consisted of:
Quarters Ended
March 31,
In millions20212020
Rents$1,826.1 $1,668.2 
Royalties1,038.7 928.8 
Initial fees12.6 11.0 
Revenues from franchised restaurants$2,877.4 $2,608.0 

Segment Information
The Company operates under an organizational structure with the following global business segments reflecting how management reviews and evaluates operating performance:
U.S. - the Company's largest market. The segment is 95% franchised as of March 31, 2021.
International Operated Markets - comprised of markets or countries in which the Company operates and franchises restaurants, including Australia, Canada, France, Germany, Italy, the Netherlands, Russia, Spain and the U.K. The segment is 84% franchised as of March 31, 2021.
International Developmental Licensed Markets & Corporate - comprised of primarily developmental licensee and affiliate markets in the McDonald’s system. Corporate activities are also reported in this segment. The segment is 98% franchised as of March 31, 2021.
The following table presents the Company’s revenues and operating income by segment:
Quarters Ended
  
March 31,
In millions20212020
Revenues
U.S.$2,075.5 $1,871.0 
International Operated Markets2,556.2 2,404.3 
International Developmental Licensed Markets & Corporate492.9 439.1 
Total revenues$5,124.6 $4,714.4 
Operating Income
U.S.$1,125.5 $892.4 
International Operated Markets953.8 879.1 
International Developmental Licensed Markets & Corporate *202.0 (77.9)
Total operating income$2,281.3 $1,693.6 
*    Results for the quarter 2021 included $128.6 million of strategic gains related to the sale of McDonald's Japan stock, which reduced the Company's ownership by an additional 3%. As of March 31, 2021, the Company owned approximately 41% of McDonald's Japan. The proceeds were recorded within the other investing activities section of the Condensed Consolidated Statement of Cash Flows.

Subsequent Events
The Company evaluated subsequent events through the date the financial statements were issued and filed with the Securities and Exchange Commission. There were no subsequent events that required recognition or disclosure.
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Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company franchises and operates McDonald’s restaurants, which serve a locally-relevant menu of quality food and beverages in 119 countries. Of the 39,160 restaurants at March 31, 2021, 36,484 were franchised, which is 93% of McDonald's restaurants.
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. In addition, throughout this report we present the International Developmental Licensed Markets & Corporate segment, which includes markets in over 80 countries, as well as Corporate activities.
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 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.
Franchisees are 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.
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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.

Strategic Direction
In 2020, the Company announced the Accelerating the Arches (the “Strategy”) growth 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 growth pillars that build on the Company’s competitive advantages.
Purpose, Mission, & Values
The Company embraces and prioritizes 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.
Our values underpin our success and are at the very heart of our Strategy. In addition to the Company’s financial performance, beginning in 2021, the Company incorporated quantitative metrics into the Company's annual incentive compensation plan. For 2021, 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. In addition, in April, the Company defined a set of Global Brand Standards designed to reinforce a culture of safety and inclusion. All McDonald’s restaurants across the globe, including Company-owned and franchised locations, will be required to uphold these standards.
Growth Pillars
The 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 recognizes there is significant opportunity to expand its chicken offerings by leveraging line extensions of customer favorites, such as the new Crispy Chicken Sandwich that launched in the U.S. at the end of February 2021. 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 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 program launch later in 2021. Across these top six markets, digital sales exceeded $10 billion or nearly 20% of Systemwide sales in 2020.


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Delivery: Over the past three years, the Company has expanded the number of McDonald’s restaurants offering delivery to over 30,000 or 75% of its 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. This channel will remain of 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’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 builds on our inherent strengths by harnessing our competitive advantages and investing in innovations that will enhance the customer experience and deliver long-term growth.

First Quarter 2021 Financial Performance
Global comparable sales increased 7.5% for the quarter with all segments reflecting positive results as we began to lap the significant impact of COVID-19 on our global results beginning in March 2020. Guest counts remained negative for all segments.
U.S. comparable sales increased 13.6%. Comparable sales results benefited from average check growth with double digit positive comparable sales across all dayparts. The Company's strong national menu and marketing offerings, as well as growth in delivery and digital platforms, contributed to the comparable sales growth.
International Operated Markets segment comparable sales increased 0.6%. Results reflected strong positive comparable sales in the U.K., Australia and Canada, partly offset by significantly negative comparable sales in France and Germany. Comparable sales in many markets continued to be impacted by varying levels of government imposed COVID-19 restrictions on restaurant operations.
International Developmental Licensed Markets segment comparable sales increased 6.4%. Monthly comparable sales results improved sequentially throughout the quarter. The strong quarterly comparable sales were primarily driven by China and Japan.
In addition to the comparable sales results, the Company had the following financial results in the quarter:
Consolidated revenues increased 9% (5% in constant currencies)
Systemwide sales increased 12% (8% in constant currencies)
Consolidated operating income increased 35% (30% in constant currencies) and included $135 million of strategic gains primarily related to the sale of McDonald's Japan stock. Excluding these gains, operating income increased 27% (22% in constant currencies).
Diluted earnings per share increased 39% (35% in constant currencies) to $2.05. Excluding $0.13 per share of strategic gains, diluted earnings per share was $1.92 for the quarter, an increase of 31% (27% in constant currencies).

Management reviews and analyzes business results excluding the effect of foreign currency translation, as well as impairment and other strategic charges and gains, and bases incentive compensation plans on these results, because the Company believes this better represents underlying business trends.
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The Following Definitions Apply to these Terms as Used Throughout this Form 10-Q:
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, as well as impairment and other strategic charges and gains, 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). 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 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.
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.

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CONSOLIDATED OPERATING RESULTS
Quarter Ended
Dollars in millions, except per share dataMarch 31, 2021
 AmountIncrease/
(Decrease)
Revenues
Sales by Company-operated restaurants$2,161.5 %
Revenues from franchised restaurants2,877.4 10 
Other revenues85.7 
Total revenues5,124.6 
Operating costs and expenses
Company-operated restaurant expenses1,817.6 
Franchised restaurants-occupancy expenses571.5 
Other restaurant expenses67.2 
Selling, general & administrative expenses
Depreciation and amortization76.0 
Other490.4 (5)
Other operating (income) expense, net(179.4)n/m
Total operating costs and expenses2,843.3 (6)
Operating income2,281.3 35 
Interest expense300.0 
Nonoperating (income) expense, net28.6 n/m
Income before provision for income taxes1,952.7 35 
Provision for income taxes415.5 23 
Net income$1,537.2 39 %
Earnings per common share-basic$2.06 38 %
Earnings per common share-diluted$2.05 39 %
n/m Not meaningful
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Impact of Foreign Currency Translation
While changes in foreign currency exchange rates affect reported results, McDonald's mitigates exposures, where practical, by purchasing goods and services in local currencies, financing in local currencies and hedging certain foreign-denominated cash flows. Results excluding the effect of foreign currency translation (referred to as constant currency) are calculated by translating current year results at prior year average exchange rates.
IMPACT OF FOREIGN CURRENCY TRANSLATION   
Dollars in millions, except per share data   
Currency
Translation
Benefit/ (Cost)
Quarters Ended March 31,202120202021
Revenues$5,124.6 $4,714.4 $154.8 
Company-operated margins343.9 273.0 11.8 
Franchised margins2,305.9 2,053.8 80.9 
Selling, general & administrative expenses566.4 589.8 (11.3)
Operating income2,281.3 1,693.6 82.1 
Net income1,537.2 1,106.9 44.1 
Earnings per share-diluted$2.05 $1.47 $0.06 
The impact of foreign currency translation on consolidated operating results for the quarter primarily reflected the strengthening of the Euro and Australian Dollar.
Net Income and Diluted Earnings per Share
For the quarter, net income increased 39% (35% in constant currencies) to $1,537.2 million, and diluted earnings per share increased 39% (35% in constant currencies) to $2.05. Foreign currency translation had a positive impact of $0.06 on diluted earnings per share.
Results for the quarter reflected stronger operating performance in the U.S. due to higher sales-driven restaurant margins.
Results for the quarter included $135 million of pre-tax strategic gains, or $0.13 per share, primarily related to the sale of McDonald’s Japan stock, which reduced the Company's ownership by an additional 3%.

EARNINGS PER SHARE-DILUTED RECONCILIATION
Quarters Ended March 31,
20212020Inc/ (Dec)Inc/ (Dec)
Excluding
Currency
Translation
GAAP earnings per share-diluted$2.05 $1.47 39 %35 %
Strategic gains(0.13)— 
Non-GAAP earnings per share-diluted$1.92 $1.47 31 %27 %
Excluding the strategic gains, for the quarter net income increased 30% (26% in constant currencies) and diluted earnings per share increased 31% (27% in constant currencies).
Diluted weighted average shares outstanding were relatively flat with the prior year. In early March 2020, the Company suspended its share repurchase program. The share repurchase activity in the current quarter relates to shares withheld for taxes under the Company's equity compensation program. For the quarter, these shares withheld for tax purposes totaled 0.1 million shares of stock for $21.5 million.
In the first quarter, the Company paid a quarterly dividend of $1.29 per share, or $962.3 million.

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 resurgences, throughout the quarter there have been numerous instances of government restrictions on restaurant operating hours, limited dine-in capacity and, in some cases, mandated dining room closures particularly in the International Operated Markets. These restrictions are impacting most of the Company's markets across Europe, particularly those with fewer drive thru restaurant locations. The Company expects some restrictions in various markets so long as the COVID-19 pandemic continues.
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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 March 31, 2021. 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 restrictions as a result of COVID-19 may continue to have a negative impact on revenue in the near term.
The Company granted the deferral of cash collection for certain rent and royalties earned from franchisees in substantially all markets in the first quarter of 2020. While the Company deferred cash collection, revenue continued to be recognized as sales were incurred. The extent of the deferrals in 2020 differed in length by market and nearly 95% of the deferrals were collected by March 31, 2021.
REVENUES    
Dollars in millions    
Quarters Ended March 31,20212020Inc/ (Dec)Inc/ (Dec)
Excluding
Currency
Translation
Company-operated sales    
U.S.$618.3 $579.2 %%
International Operated Markets1,379.7 1,305.3 
International Developmental Licensed Markets & Corporate163.5 141.3 16 
Total$2,161.5 $2,025.8 %%
Franchised revenues   
U.S.$1,420.5 $1,250.7 14 %14 %
International Operated Markets1,144.4 1,074.0 (3)
International Developmental Licensed Markets & Corporate312.5 283.3 10 
Total$2,877.4 $2,608.0 10 %%
Total Company-operated sales and Franchised revenues   
U.S.$2,038.8 $1,829.9 11 %11 %
International Operated Markets2,524.1 2,379.3 
International Developmental Licensed Markets & Corporate476.0 424.6 12 
Total$5,038.9 $4,633.8 %%
Total Other revenues$85.7 $80.6 %%
Total Revenues$5,124.6 $4,714.4 %%
Total Company-operated sales and franchised revenues increased 9% (5% in constant currencies) for the quarter. The increase reflected strong sales performance in the U.S. and the International Developmental Licensed Markets segment driven by China.
Revenues in the International Operated Markets segment were flat with the prior year in constant currencies. Performance was mixed, with revenue growth impacted by varying levels of government imposed COVID-19 restrictions on restaurant operations. Results reflected an increase in revenues in the U.K. and Australia, partly offset by decreases in France and Germany. In addition, revenues were positively impacted by results in Russia, reflecting both strong comparable sales and unit expansion.

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Comparable Sales
The following table presents the percent change in comparable sales for the quarters ended March 31, 2021 and 2020:
Increase/(Decrease)
Quarters Ended March 31,
20212020
U.S.13.6 %0.1 %
International Operated Markets0.6 (6.9)
International Developmental Licensed Markets & Corporate6.4 (4.3)
Total 7.5 %(3.4)%

Systemwide Sales and Franchised Sales
The following table presents the percent change in Systemwide sales for the quarter ended March 31, 2021:
SYSTEMWIDE SALES*
Quarter Ended March 31, 2021
Inc/ (Dec)Inc/ (Dec)
Excluding
Currency
Translation
U.S.13 %13 %
International Operated Markets10 
International Developmental Licensed Markets & Corporate11 
Total12 %%
*    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
Dollars in millions
Quarters Ended March 31,20212020Inc/ (Dec)Inc/ (Dec)
Excluding
Currency
Translation
U.S.$10,089.8 $8,873.7 14 %14 %
International Operated Markets6,880.6 6,192.7 11 
International Developmental Licensed Markets & Corporate6,048.0 5,447.0 11 
Total$23,018.4 $20,513.4 12 %%
Ownership type
Conventional franchised$16,907.6 $14,986.4 13 %%
Developmental licensed3,280.2 3,228.0 
Foreign affiliated2,830.6 2,299.0 23 18 
Total$23,018.4 $20,513.4 12 %%

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Restaurant Margins
RESTAURANT MARGINS
Dollars in millions
AmountInc/ (Dec)Inc/ (Dec)
Excluding
Currency
Translation
Quarters Ended March 31,20212020
Franchised  
U.S.$1,131.1 $961.3 18 %18 %
International Operated Markets868.6 815.3 (3)
International Developmental Licensed Markets & Corporate306.2 277.2 10 
Total$2,305.9 $2,053.8 12 %%
Company-operated   
U.S.$125.1 $80.5 56 %56 %
International Operated Markets218.0 197.7 10 
International Developmental Licensed Markets & Corporaten/mn/mn/mn/m
Total$343.9 $273.0 26 %22 %
Total restaurant margins
U.S.$1,256.2 $1,041.8 21 %21 %
International Operated Markets1,086.6 1,013.0 (1)
International Developmental Licensed Markets & Corporaten/mn/mn/mn/m
Total$2,649.8 $2,326.8 14 %10 %
n/m Not meaningful
Total restaurant margins increased $323.0 million or 14% (10% in constant currencies) for the quarter. The increase reflected strong sales performance in the U.S., partly offset by sales declines primarily in France and Germany in the International Operated Markets segment as a result of government imposed COVID-19 restrictions.
The increase in U.S. franchised margins was partly offset by higher depreciation costs related to investments in restaurant modernization.
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 $376.6 million of depreciation and amortization expense for the quarter.
Franchised margins represented over 85% of restaurant margin dollars for the quarter.

Selling, General & Administrative Expenses
Selling, general and administrative expenses decreased $23.4 million or 4% (6% in constant currencies) for the quarter. The decrease reflected the benefit from comparisons to prior year costs related to the cancellation of the 2020 Worldwide Owner/Operator Convention and contractual obligations as a result of a reduction in scope of certain investments in restaurant technology and research & development.
Selling, general and administrative expenses as a percent of Systemwide sales was 2.2% and 2.6% for the quarters ended 2021 and 2020, respectively.








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Other Operating (Income) Expense, Net
OTHER OPERATING (INCOME) EXPENSE, NET
Dollars in millions
Quarters Ended
March 31,
20212020
Gains on sales of restaurant businesses$(17.6)$(2.5)
Equity in earnings of unconsolidated affiliates(35.1)(14.7)
Asset dispositions and other (income) expense, net8.5 74.4 
Impairment and other charges, net(135.2)1.3 
Total$(179.4)$58.5 
Gains on sales of restaurant businesses increased for the quarter primarily due to a higher number of restaurant sales, mostly in the U.S.
Equity in earnings of unconsolidated affiliates increased for the quarter primarily due to improved performance in China.
Asset dispositions and other expense, net decreased for the quarter primarily due to higher reserves for bad debts in the prior year related to rent and royalty deferrals.
Impairment and other charges, net for the quarter reflected $128.6 million of strategic gains related to the sale of McDonald’s Japan stock, which reduced the Company's ownership by an additional 3%. As of March 31, 2021, the Company owned approximately 41% of McDonald's Japan.
Results for the first quarter 2020 reflected the write-off of impaired software that was no longer being used of $14.4 million, mostly offset by $13.0 million of income associated with the Company's sale of its business in the India Delhi market.


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Operating Income
OPERATING INCOME
Dollars in millions
Quarters Ended March 31,20212020Inc/ (Dec)Inc/ (Dec)
Excluding
Currency
Translation
U.S.$1,125.5 $892.4 26 %26 %
International Operated Markets953.8 879.1 (1)
International Developmental Licensed Markets & Corporate202.0 (77.9)n/mn/m
Total$2,281.3 $1,693.6 35 %30 %
Operating margin44.5 %35.9 %
Non-GAAP operating Margin41.9 %n/a
n/m Not meaningful
n/a Not applicable
Operating Income: Operating income increased $587.7 million or 35% (30% in constant currencies) for the quarter. Results included $135 million of strategic gains primarily related to the sale of McDonald's Japan stock. Excluding the strategic gains, operating income increased 27% (22% in constant currencies).
U.S.: The operating income increase for the quarter was driven by strong sales performance.
International Operated Markets: The operating income decrease in constant currencies was primarily due to sales declines in France and Germany, partly offset by increases in Australia, the U.K. and Canada.
International Developmental Licensed Markets & Corporate: Excluding the strategic gains, results for the quarter reflected strong sales performance and the benefit from comparisons to prior year G&A costs and reserves for bad debts.
Operating Margin: Operating margin is defined as operating income as a percent of total revenues. The contributions to operating margin differ by segment due to each segment's ownership structure, primarily due to the relative percentage of franchised versus Company-operated restaurants. Additionally, temporary restaurant closures, which vary by segment, also impact the contribution of each segment to the consolidated operating margin.
Excluding the strategic gains, the increase in operating margin percent for the quarter was driven by stronger sales performance, higher other operating income and lower G&A costs.

Interest Expense
Interest expense increased 7% (5% in constant currencies) for the quarter, primarily due to higher average interest rates and the impact of foreign currency translation.

Nonoperating (Income) Expense, Net
NONOPERATING (INCOME) EXPENSE, NET
Dollars in millions
Quarters Ended
March 31,
20212020
Interest income$(1.8)$(5.4)
Foreign currency and hedging activity20.3 (17.8)
Other expense, net10.1 (8.1)
Total$28.6 $(31.3)


Income Taxes
The effective income tax rate was 21.3% and 23.4% for the quarters ended 2021 and 2020, respectively.


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Cash Flows
The Company has a long history of generating significant cash from operations and has substantial credit capacity to fund operating and discretionary spending such as capital expenditures, debt repayments, dividends and share repurchases.
Cash provided by operations totaled $2.1 billion and exceeded capital expenditures by $1.8 billion for the first quarter 2021. Cash provided by operations increased $578.0 million compared with the first quarter 2020, primarily due to changes in working capital and improved operating results, partly offset by higher income tax payments.
The Company granted the deferral of cash collections for certain rent and royalties earned from franchisees in substantially all markets in the first quarter of 2020. While the Company deferred cash collections, revenue continued to be recognized as sales were incurred. The extent of the deferrals in 2020 differed in length by market and nearly 95% of the deferrals were collected by March 31, 2021.
Cash used for investing activities totaled $244.6 million for the first quarter 2021, a decrease of $273.8 million compared with the first quarter 2020. The decrease was primarily due to lower capital expenditures and current year proceeds received from the sale of McDonald's Japan stock.
Cash used for financing activities totaled $2.3 billion for the first quarter 2021, which included $1.3 billion in debt repayments. Cash provided by financing activities totaled $3.5 billion for the first quarter 2020 due to long-term debt issuances of $5.5 billion, which were used to bolster our cash position in anticipation of the adverse macroeconomic and business conditions associated with COVID-19.
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Outlook for 2021
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 mid-teens, 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 2.4% of Systemwide sales. This is revised from our previously provided guidance due to higher incentive-based compensation expense.
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 over 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%.

Recent Accounting Pronouncements
Recent accounting pronouncements are discussed in Part I, Item 1, page 8 of this Form 10-Q.
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Risk Factors and Cautionary Statement Regarding 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,” “confident” and “commit” or similar expressions. In particular, statements regarding our plans, strategies, prospects and expectations regarding our business and industry are forward-looking statements. They reflect our expectations, are not guarantees of performance and speak only as of the date the statement is made. 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 that are reflected in the following considerations and risks, as well as elsewhere in our filings with the SEC. The considerations and risks that follow are organized within relevant headings but may be relevant to other headings as well. If any of these considerations or risks materialize, our expectations (or the underlying assumptions) may change and our performance may be adversely affected. You should not rely unduly on forward-looking statements.
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 since 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 in which we operate. While we cannot predict the duration or scope of the COVID-19 pandemic, the resurgence of infections or the emergence of new variants 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 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 general business practices across the System, including the people practices at McDonald's restaurants. 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
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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 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, which could expose us to market, operational and execution costs or risks.