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	June 30, 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 class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	MCD	New 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  ☒

746,798,875

(Number of shares of common stock

outstanding as of 6/30/2021)

McDONALD’S CORPORATION

___________________________

INDEX

_______

	Page Reference
Part I. Financial Information
Item 1 – Financial Statements
Condensed Consolidated Balance Sheet, June 30, 2021 (unaudited) and December 31, 2020	3
Condensed Consolidated Statement of Income (unaudited), quarters and six months ended June 30, 2021 and 2020	4
Condensed Consolidated Statement of Comprehensive Income (unaudited), quarters and six months ended June 30, 2021 and 2020	5
Condensed Consolidated Statement of Cash Flows (unaudited), quarters and six months ended June 30, 2021 and 2020	6
Condensed Consolidated Statement of Shareholders' Equity (unaudited), quarters and six months ended June 30, 2021 and 2020	7
Notes to Condensed Consolidated Financial Statements (unaudited)	9
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3 – Quantitative and Qualitative Disclosures About Market Risk	38
Item 4 – Controls and Procedures	38
Part II. Other Information
Item 1 – Legal Proceedings	39
Item 1A – Risk Factors	39
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 6 – Exhibits	40
Signature	43

All trademarks used herein are the property of their respective owners and are used with permission.

2

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEET
	(unaudited)
In millions, except per share data	June 30, 2021		December 31, 2020
Assets
Current assets
Cash and equivalents	$	3,049.4	$	3,449.1
Accounts and notes receivable	1,808.3		2,110.3
Inventories, at cost, not in excess of market	47.8		51.1
Prepaid expenses and other current assets	795.7		632.7
Total current assets	5,701.2		6,243.2
Other assets
Investments in and advances to affiliates	1,196.8		1,297.2
Goodwill	2,778.1		2,773.1
Miscellaneous	3,889.5		3,527.4
Total other assets	7,864.4		7,597.7
Lease right-of-use asset, net	13,707.3		13,827.7
Property and equipment
Property and equipment, at cost	41,535.5		41,476.5
Accumulated depreciation and amortization	(16,915.3)		(16,518.3)
Net property and equipment	24,620.2		24,958.2
Total assets	$	51,893.1	$	52,626.8
Liabilities and shareholders’ equity
Current liabilities
Accounts payable	730.9		741.3
Lease liability	720.4		701.5
Income taxes	281.4		741.1
Other taxes	241.2		227.0
Accrued interest	323.8		388.4
Accrued payroll and other liabilities	1,137.1		1,138.3
Current maturities of long-term debt	500.0		2,243.6
Total current liabilities	3,934.8		6,181.2
Long-term debt	34,922.6		35,196.8
Long-term lease liability	13,119.0		13,321.3
Long-term income taxes	1,865.2		1,970.7
Deferred revenues - initial franchise fees	714.9		702.0
Other long-term liabilities	1,077.2		1,054.1
Deferred income taxes	2,067.4		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 shares	16.6		16.6
Additional paid-in capital	8,046.0		7,903.6
Retained earnings	55,739.0		53,908.1
Accumulated other comprehensive income (loss)	(2,571.2)		(2,586.8)
Common stock in treasury, at cost; 913.8 and 915.2 million shares	(67,038.4)		(67,066.4)
Total shareholders’ equity (deficit)	(5,808.0)		(7,824.9)
Total liabilities and shareholders’ equity (deficit)	$	51,893.1	$	52,626.8

See Notes to condensed consolidated financial statements.

3

CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
	Quarters Ended				Six Months Ended
	June 30,				June 30,
In millions, except per share data	2021		2020		2021		2020
Revenues
Sales by Company-operated restaurants	$	2,488.7	$	1,593.7	$	4,650.2	$	3,619.5
Revenues from franchised restaurants	3,306.2		2,088.0		6,183.6		4,696.0
Other revenues	93.0		79.8		178.7		160.4
Total revenues	5,887.9		3,761.5		11,012.5		8,475.9
Operating costs and expenses
Company-operated restaurant expenses	2,021.0		1,448.4		3,838.6		3,201.2
Franchised restaurants-occupancy expenses	579.1		524.5		1,150.6		1,078.7
Other restaurant expenses	68.3		63.3		135.5		128.8
Selling, general & administrative expenses
Depreciation and amortization	83.1		71.0		159.1		144.5
Other	572.4		576.0		1,062.8		1,092.3
Other operating (income) expense, net	(127.1)		117.2		(306.5)		175.7
Total operating costs and expenses	3,196.8		2,800.4		6,040.1		5,821.2
Operating income	2,691.1		961.1		4,972.4		2,654.7
Interest expense	296.5		319.1		596.5		599.1
Nonoperating (income) expense, net	18.6		(6.7)		47.2		(38.0)
Income before provision for income taxes	2,376.0		648.7		4,328.7		2,093.6
Provision for income taxes	156.7		164.9		572.2		502.9
Net income	$	2,219.3	$	483.8	$	3,756.5	$	1,590.7
Earnings per common share-basic	$	2.97	$	0.65	$	5.03	$	2.14
Earnings per common share-diluted	$	2.95	$	0.65	$	5.00	$	2.12
Dividends declared per common share	$	1.29	$	1.25	$	2.58	$	2.50
Weighted-average shares outstanding-basic	746.6		743.8		746.2		744.3
Weighted-average shares outstanding-diluted	752.1		748.6		751.6		749.6

See Notes to condensed consolidated financial statements.

4

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
	Quarters Ended				Six Months Ended
	June 30,				June 30,
In millions	2021		2020		2021		2020
Net income	$	2,219.3	$	483.8	$	3,756.5	$	1,590.7
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments:
Gain (loss) recognized in accumulated other comprehensive income ("AOCI"), including net investment hedges	47.8		207.1		(39.9)		(259.1)
Reclassification of (gain) loss to net income	9.7		—		20.4		—
Foreign currency translation adjustments-net of tax benefit (expense) of $22.7, $66.1, ($67.6) and ($49.2)	57.5		207.1		(19.5)		(259.1)
Cash flow hedges:
Gain (loss) recognized in AOCI	(1.2)		(17.6)		21.9		(57.2)
Reclassification of (gain) loss to net income	13.4		(1.7)		28.4		(10.8)
Cash flow hedges-net of tax benefit (expense) of ($3.7), $5.8, ($14.9) and $20.5	12.2		(19.3)		50.3		(68.0)
Defined benefit pension plans:
Gain (loss) recognized in AOCI	0.1		(0.6)		0.8		(2.5)
Reclassification of (gain) loss to net income	(5.1)		2.9		(16.0)		6.0
Defined benefit pension plans-net of tax benefit (expense) of $0.1, $0.1, $0.1 and $0.5	(5.0)		2.3		(15.2)		3.5
Total other comprehensive income (loss), net of tax	64.7		190.1		15.6		(323.6)
Comprehensive income (loss)	$	2,284.0	$	673.9	$	3,772.1	$	1,267.1

See Notes to condensed consolidated financial statements.

5

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
	Quarters Ended				Six Months Ended
	June 30,				June 30,
In millions	2021		2020		2021		2020
Operating activities
Net income	$	2,219.3	$	483.8	$	3,756.5	$	1,590.7
Adjustments to reconcile to cash provided by operations
Charges and credits:
Depreciation and amortization	463.4		425.7		917.3		847.0
Deferred income taxes	(368.9)		(42.1)		(370.4)		234.3
Share-based compensation	36.5		30.8		63.8		56.7
Other	(71.2)		119.2		(201.2)		31.3
Changes in working capital items	(545.9)		(1,230.5)		(308.8)		(1,427.1)
Cash provided by (used for) operations	1,733.2		(213.1)		3,857.2		1,332.9
Investing activities
Capital expenditures	(482.6)		(305.0)		(851.3)		(787.5)
Purchases of restaurant businesses	(49.4)		(23.7)		(88.1)		(43.3)
Sales of restaurant businesses	52.2		1.8		81.8		27.5
Sales of property	23.8		1.8		56.6		17.6
Other	42.5		(71.5)		142.9		(129.3)
Cash used for investing activities	(413.5)		(396.6)		(658.1)		(915.0)
Financing activities
Net short-term borrowings	1.4		(4.1)		7.9		107.7
Long-term financing issuances	—		0.8		—		5,540.2
Long-term financing repayments	(401.2)		(699.9)		(1,739.0)		(962.6)
Treasury stock purchases	(3.0)		(2.3)		(24.5)		(904.9)
Common stock dividends	(963.3)		(929.7)		(1,925.6)		(1,860.4)
Proceeds from stock option exercises	72.9		57.7		132.0		157.0
Other	(13.1)		(0.4)		(21.0)		(121.9)
Cash provided by (used for) financing activities	(1,306.3)		(1,577.9)		(3,570.2)		1,955.1
Effect of exchange rates on cash and cash equivalents	16.3		63.5		(28.6)		(15.8)
Cash and equivalents increase (decrease)	29.7		(2,124.1)		(399.7)		2,357.2
Cash and equivalents at beginning of period	3,019.7		5,379.8		3,449.1		898.5
Cash and equivalents at end of period	$	3,049.4	$	3,255.7	$	3,049.4	$	3,255.7

See Notes to condensed consolidated financial statements.

6

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
For the six months ended June 30, 2020
	Common stock issued										Accumulated other comprehensive income (loss)								Common stock in treasury			Total shareholders’ equity (deficit)
					Additional paid-in capital			Retained earnings		Pensions			Cash flow hedges			Foreign currency translation
In millions, except per share data	Shares	Amount																	Shares	Amount
Balance at December 31, 2019	1,660.6		$	16.6		$	7,653.9	$	52,930.5		$	(243.7)		$	12.0		$	(2,251.0)	(914.3)	$	(66,328.6)		$	(8,210.3)
Net income								1,590.7															1,590.7
Other comprehensive income (loss),     net of tax											3.5			(68.0)			(259.1)						(323.6)
Comprehensive income																							1,267.1
Common stock cash dividends     ($2.50 per share)								(1,860.4)															(1,860.4)
Treasury stock purchases																			(4.3)	(871.2)			(871.2)
Share-based compensation						56.7																	56.7
Stock option exercises and other						69.4													2.1	85.6			155.0
Balance at June 30, 2020	1,660.6		$	16.6		$	7,780.0	$	52,660.8		$	(240.2)		$	(56.0)		$	(2,510.1)	(916.5)	$	(67,114.2)		$	(9,463.1)

For the six months ended June 30, 2021
	Common stock issued										Accumulated other comprehensive income (loss)								Common stock in treasury			Total shareholders’ equity (deficit)
					Additional paid-in capital			Retained earnings		Pensions			Cash flow hedges			Foreign currency translation
In millions, except per share data	Shares	Amount																	Shares	Amount
Balance at December 31, 2020	1,660.6		$	16.6		$	7,903.6	$	53,908.1		$	(287.6)		$	(111.3)		$	(2,187.9)	(915.2)	$	(67,066.4)		$	(7,824.9)
Net income								3,756.5															3,756.5
Other comprehensive income (loss),     net of tax											(15.2)			50.3			(19.5)						15.6
Comprehensive income																							3,772.1
Common stock cash dividends     ($2.58 per share)								(1,925.6)															(1,925.6)
Treasury stock purchases																			(0.1)	(24.5)			(24.5)
Share-based compensation						63.8																	63.8
Stock option exercises and other						78.6													1.5	52.5			131.1
Balance at June 30, 2021	1,660.6		$	16.6		$	8,046.0	$	55,739.0		$	(302.8)		$	(61.0)		$	(2,207.4)	(913.8)	$	(67,038.4)		$	(5,808.0)

See Notes to condensed consolidated financial statements.

7

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
For the quarter ended June 30, 2020
	Common stock issued										Accumulated other comprehensive income (loss)								Common stock in treasury			Total shareholders’ equity (deficit)
					Additional paid-in capital			Retained earnings		Pensions			Cash flow hedges			Foreign currency translation
In millions, except per share data	Shares	Amount																	Shares	Amount
Balance at March 31, 2020	1,660.6		$	16.6		$	7,713.5	$	53,106.7		$	(242.5)		$	(36.7)		$	(2,717.2)	(917.1)	$	(67,133.8)		$	(9,293.4)
Net income								483.8															483.8
Other comprehensive income (loss),     net of tax											2.3			(19.3)			207.1						190.1
Comprehensive income																							673.9
Common stock cash dividends     ($1.25 per share)								(929.7)															(929.7)
Treasury stock purchases																			(0.1)	(2.3)			(2.3)
Share-based compensation						30.8																	30.8
Stock option exercises and other						35.7													0.7	21.9			57.6
Balance at June 30, 2020	1,660.6		$	16.6		$	7,780.0	$	52,660.8		$	(240.2)		$	(56.0)		$	(2,510.1)	(916.5)	$	(67,114.2)		$	(9,463.1)

For the quarter ended June 30, 2021
	Common stock issued										Accumulated other comprehensive income (loss)								Common stock in treasury			Total shareholders’ equity (deficit)
					Additional paid-in capital			Retained earnings		Pensions			Cash flow hedges			Foreign currency translation
In millions, except per share data	Shares	Amount																	Shares	Amount
Balance at March 31, 2021	1,660.6		$	16.6		$	7,959.1	$	54,483.0		$	(297.8)		$	(73.2)		$	(2,264.9)	(914.5)	$	(67,058.3)		$	(7,235.5)
Net income								2,219.3															2,219.3
Other comprehensive income (loss),     net of tax											(5.0)			12.2			57.5						64.7
Comprehensive income																							2,284.0
Common stock cash dividends     ($1.29 per share)								(963.3)															(963.3)
Treasury stock purchases																			—	(3.0)			(3.0)
Share-based compensation						36.5																	36.5
Stock option exercises and other						50.4													0.7	22.9			73.3
Balance at June 30, 2021	1,660.6		$	16.6		$	8,046.0	$	55,739.0		$	(302.8)		$	(61.0)		$	(2,207.4)	(913.8)	$	(67,038.4)		$	(5,808.0)

See Notes to condensed consolidated financial statements.

8

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 and six months ended June 30, 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 June 30,	2021	2020
Conventional franchised	21,519	21,822
Developmental licensed	7,753	7,685
Foreign affiliated	7,445	6,864
Total Franchised	36,717	36,371
Company-operated	2,679	2,649
Total Systemwide restaurants	39,396	39,020

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 5.5 million shares and 4.8 million shares for the quarters 2021 and 2020, respectively, and 5.4 million shares and 5.3 million shares for the six months 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 3.0 million shares and 2.8 million shares for the quarters 2021 and 2020, respectively, and 3.0 million shares and 2.8 million shares for the six months 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 No. 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 adoption of ASU 2020-04 will not have a material impact on the Company's condensed consolidated financial statements.

9

Income Taxes

The effective income tax rate was 6.6% and 25.4% for the quarters ended 2021 and 2020, respectively, and 13.2% and 24.0% for the six months ended 2021 and 2020, respectively. The tax rate for the quarter and six months ended 2021 included a benefit of $364 million related to the remeasurement of deferred taxes as a result of a change in the U.K. statutory income tax rate.

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 June 30, 2021, the fair value of the Company’s debt obligations was estimated at $40.3 billion, compared to a carrying amount of $35.4 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.

10

Financial Instruments and Hedging Activities

The Company is exposed to global market risks, including the effect of changes in interest rates and foreign currency fluctuations. The Company uses foreign currency denominated debt and derivative instruments to mitigate the impact of these changes. The Company does not hold or issue derivatives for trading purposes.

The following table presents the fair values of derivative instruments included on the Condensed Consolidated Balance Sheet:

	Derivative Assets					Derivative Liabilities
In millions	Balance Sheet Classification	June 30, 2021		December 31, 2020		Balance Sheet Classification	June 30, 2021		December 31, 2020
Derivatives designated as hedging instruments
Foreign currency	Prepaid expenses and other current assets	$	14.8			Accrued payroll and other liabilities	$	(24.4)	$	(64.5)
Interest rate	Prepaid expenses and other current assets	4.0				Accrued payroll and other liabilities
Foreign currency	Miscellaneous other assets	24.7		$	5.6	Other long-term liabilities	(0.3)		(15.0)
Interest rate	Miscellaneous other assets	21.7		35.8		Other long-term liabilities
Total derivatives designated as hedging instruments		$	65.2	$	41.4		$	(24.7)	$	(79.5)
Derivatives not designated as hedging instruments
Equity	Prepaid expenses and other current assets	$	202.1	$	185.6	Accrued payroll and other liabilities	$	—	$	(8.6)
Foreign currency	Prepaid expenses and other current assets					Accrued payroll and other liabilities	(4.9)		(9.4)
Equity	Miscellaneous other assets
Total derivatives not designated as hedging instruments		$	202.1	$	185.6		$	(4.9)	$	(18.0)
Total derivatives		$	267.3	$	227.0		$	(29.6)	$	(97.5)

    The following table presents the pre-tax amounts from derivative instruments affecting income and AOCI for the six months ended June 30, 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 millions		2021		2020		2021		2020		2021		2020
Foreign currency	Nonoperating income/expense	$	28.4	$	16.4	$	(33.7)	$	16.4
Interest rate	Interest expense			(90.8)		(3.1)		(2.3)
Cash flow hedges		$	28.4	$	(74.4)	$	(36.8)	$	14.1
Foreign currency denominated debt	Nonoperating income/expense	$	274.0	$	91.3	$	32.4
Foreign currency derivatives	Nonoperating income/expense	26.5		15.0
Foreign currency derivatives(1)	Interest expense									$	7.3	$	7.3
Net investment hedges		$	300.5	$	106.3	$	32.4			$	7.3	$	7.3
Foreign currency	Nonoperating income/expense									$	4.5	$	(10.9)
Equity	Selling, general & administrative expenses									43.7		(23.6)
Equity	Other operating income/expense, net									(16.3)
Undesignated derivatives										$	31.9	$	(34.5)
(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 June 30, 2021, the carrying amount of fixed-rate debt that was effectively converted was $1.5 billion, which included an increase of $25.7 million of cumulative hedging adjustments. For the six months ended June 30, 2021, the Company recognized a $10.1 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 June 30, 2021, the Company had derivatives outstanding with an equivalent notional amount of $1.4 billion that hedged a portion of forecasted foreign currency denominated cash flows.

Based on market conditions at June 30, 2021, the $61.0 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 June 30, 2021, $11.6 billion of the Company's third-party foreign currency denominated debt and $1.0 billion of the Company's 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 June 30, 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 June 30, 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				Six Months Ended
	June 30,				June 30,
In millions	2021		2020		2021		2020
Rents	$	2,125.7	$	1,314.9	$	3,951.8	$	2,983.1
Royalties	1,167.8		762.0		2,206.5		1,690.8
Initial fees	12.7		11.1		25.3		22.1
Revenues from franchised restaurants	$	3,306.2	$	2,088.0	$	6,183.6	$	4,696.0

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 June 30, 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 June 30, 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 June 30, 2021.

The following table presents the Company’s revenues and operating income by segment:

	Quarters Ended				Six Months Ended
	June 30,				June 30,
In millions	2021		2020		2021		2020
Revenues
U.S.	$	2,278.8	$	1,758.6	$	4,354.3	$	3,629.6
International Operated Markets	3,078.7		1,612.5		5,634.9		4,016.8
International Developmental Licensed Markets & Corporate	530.4		390.4		1,023.3		829.5
Total revenues	$	5,887.9	$	3,761.5	$	11,012.5	$	8,475.9
Operating Income
U.S.	$	1,267.5	$	735.2	$	2,393.0	$	1,627.6
International Operated Markets	1,272.0		234.8		2,225.8		1,113.9
International Developmental Licensed Markets & Corporate *	151.6		(8.9)		353.6		(86.8)
Total operating income	$	2,691.1	$	961.1	$	4,972.4	$	2,654.7

*    Results included $98 million and $233 million for the quarter and six months, respectively, of net strategic gains primarily related to the sale of McDonald's Japan stock, which reduced the Company's total ownership by 3% for the quarter and 6% for the six months. As of June 30, 2021, the Company owned approximately 38% 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 39,396 restaurants at June 30, 2021, 36,717 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, including our newly defined Global Brand Standards, 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.

COVID-19 resurgences throughout the quarter and six months have resulted in instances of government restrictions on restaurant operating hours, limited dine-in capacity and, in some cases, dining room closures. The Company has continued to follow the guidance of expert health authorities to apply the appropriate precautionary measures to protect the health and safety of our people and our customers and expects some operating restrictions in various markets so long as the COVID-19 pandemic continues.

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.

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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 as well as 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.

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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

Our values underpin our success and are at the very heart of our Strategy. 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.

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, such as our Famous Orders platform, to effectively communicate the story of our brand, food and purpose. This focuses on enhancing 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 is prioritizing 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 is also implementing 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 are leveraging 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 is continuing to accelerate technology innovation so that, however customers choose to interact with McDonald’s, they can enjoy a fast, easy experience that meets their needs. In the first half of 2021, Systemwide sales from digital channels (which are comprised of the mobile app, delivery and kiosk) were nearly $8 billion across our top six markets, a 70% increase versus the first half of last year.

◦Digital: The Company’s digital experience growth engine, “MyMcDonald’s” is transforming its digital offerings across drive thru, takeaway, delivery, curbside pick-up and dine-in. Through the digital tools across this platform, customers receive tailored offers, can participate in a loyalty program and order and receive McDonald's food through the channel of their choice. The Company already has successful loyalty programs in many markets around the world. In July, the Company launched its loyalty program “MyMcDonald’s Rewards” in the U.S. and expects to launch in Germany and Canada before the end of 2021, followed by the U.K. and Australia in 2022.

◦Delivery: Over the past three years, the Company has expanded the number of McDonald’s restaurants offering delivery to nearly 32,000 or 80% of its restaurants, and delivery sales have grown significantly. The Company is building on this progress and enhancing 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 is building 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 to improve speed of service and enhance the customer experience. 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. To put even more emphasis on the customer experience, the Company announced in July 2021 the creation of a collaborative team that combines digital, marketing and operations with a focus on the end-to-end customer experience. The Company believes this enables us to deliver the seamless, omnichannel experience that our customers want and will transform the way they connect with and experience our brand.

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Second Quarter and Six Months 2021 Financial Performance

Global comparable sales increased 40.5% for the quarter and 22.6% for the six months.

•U.S. comparable sales increased 25.9% for the quarter and 19.7% for the six months. Comparable sales results for both periods benefited from strong average check growth driven by larger order sizes and menu price increases. Strong national menu and marketing offerings, as well as growth in delivery and digital platforms, also contributed to the comparable sales growth.

•International Operated Markets segment comparable sales increased 75.1% for the quarter and 30.7% for the six months. Results for the quarter and six months reflected strong positive comparable sales in the U.K. and France due to significantly fewer restaurant closures and the continued easing of COVID-19 restrictions.

•International Developmental Licensed Markets segment comparable sales increased 32.3% for the quarter and 18.0% for the six months. Both periods reflected strong comparable sales in Japan and China, while the quarter also benefited from strong comparable sales in Brazil.

In addition to the comparable sales results, the Company had the following financial results for the quarter and six months 2021:

•Consolidated revenues increased 57% (49% in constant currencies) for the quarter and 30% (25% in constant currencies) for the six months.

•Systemwide sales increased 48% (42% in constant currencies) for the quarter and 29% (24% in constant currencies) for the six months.

•Consolidated operating income increased $1,730 million for the quarter and $2,318 million for the six months. Results included $98 million and $233 million of net strategic gains for the quarter and six months, respectively, primarily related to the sale of McDonald's Japan stock.

•Diluted earnings per share was $2.95 for the quarter and $5.00 for the six months. Refer to the Net Income and Diluted Earnings per Share section on page 21 for additional details.

Management reviews and analyzes business results excluding the effect of foreign currency translation, impairment and other strategic charges and gains, as well as material regulatory and other income tax impacts, and bases incentive compensation plans on these results because the Company believes this better represents underlying business trends.

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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, impairment and other strategic charges and gains, as well as material regulatory and other income tax impacts, and bases incentive compensation plans on these results because the Company believes this better represents underlying business trends.

•Comparable sales 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