Unformatted Attachment Preview
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File Number 1-5231
McDONALD’S CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
36-2361282
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
One McDonald’s Plaza
Oak Brook, Illinois
60523
(Address of principal executive offices)
(Zip code)
Registrant’s telephone number, including area code: (630) 623-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
on which registered
Title of each class
Common stock, $.01 par value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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.
(Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
(do not check if a smaller reporting company)
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
The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2017 was $124,038,758,906.
The number of shares outstanding of the registrant’s common stock as of January 31, 2018 was 794,497,880.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates information by reference from the registrant’s 2018 definitive proxy statement, which will be filed no later than 120 days
after December 31, 2017.
McDONALD’S CORPORATION
P
INDEX
IT
Page reference
Part I.
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Additional Item
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors and Cautionary Statement Regarding Forward-Looking Statements . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
3
8
8
8
9
10
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . .
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11
13
14
30
30
54
54
54
Item 10
Item 11
Item 12
Item 13
Item 14
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters. . .
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54
54
54
55
55
Item 15
Item 16
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55
57
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58
Part II.
Part III.
Part IV.
Exhibits
All trademarks used herein are the property of their respective owners.
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PART I
ITEM 1. Business
McDonald’s Corporation, the registrant, together with its subsidiaries, is referred to herein as the “Company.”
a. General
During 2017, there were no material changes to the Company's
corporate structure or in its method of conducting business. The
business is structured with segments that combine markets with
similar characteristics and opportunities for growth. Significant
reportable segments include the United States ("U.S."),
International Lead Markets and High Growth Markets. In addition,
throughout this report we present the Foundational Markets &
Corporate segment, which includes markets in over 80 countries,
as well as Corporate activities.
b. Financial information about segments
Segment data for the years ended December 31, 2017, 2016, and
2015 are included in Part II, Item 8, page 47 of this Form 10-K.
c. Narrative description of business
General
The Company operates and franchises McDonald’s restaurants,
which serve a locally-relevant menu of quality food and beverages
sold at various price points in more than 100 countries.
McDonald’s global system is comprised of both Company-owned
and franchised restaurants. McDonald’s franchised restaurants are
owned and operated under one of the following structures conventional franchise, developmental license or affiliate. The
optimal ownership structure for an individual restaurant, trading
area or market (country) is based on a variety of factors, including
the availability of individuals with the entrepreneurial experience
and financial resources, as well as the local legal and regulatory
environment in critical areas such as property ownership and
franchising. We continually review our mix of Company-owned and
franchised restaurants to help optimize overall performance, with a
goal to be approximately 95% franchised over the long term. The
business relationship between McDonald’s and its independent
franchisees is of fundamental importance to overall performance
and to the McDonald’s brand. This business relationship is
supported by an agreement that requires adherence to standards
and policies essential to protecting our brand.
The Company is primarily a franchisor, with more than 90% of
McDonald's restaurants currently owned and operated by
independent franchisees. 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. One of the strengths of this model
is that the expertise gained 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.
Directly operating McDonald’s restaurants contributes
significantly to our ability to act as a credible franchisor. Having
Company-owned 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.
Under a conventional franchise arrangement, the Company
generally owns the land and building or secures a long-term lease
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 also responsible for reinvesting capital in
their businesses over time. In addition, to accelerate
implementation of certain initiatives, the Company frequently coinvests with franchisees to fund improvements to their restaurants
or their operating systems. These investments, developed with
input from McDonald’s with the aim of improving local business
performance, increase the value of our brand through the
development of modernized, more attractive and higher revenue
generating restaurants.
The Company’s typical franchise term is 20 years. The
Company requires franchisees to meet rigorous standards and
generally does not work with passive investors. The business
relationship with franchisees is designed to ensure consistency
and high quality at all McDonald’s restaurants. Conventional
franchisees contribute to the Company’s revenue 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. This
structure enables McDonald’s to generate significant levels of
cash flow.
Under a developmental license arrangement, licensees
provide capital for the entire business, including the real estate
interest. The Company generally does not invest any capital under
a developmental license arrangement. The Company receives a
royalty based upon a percent of sales as well as initial fees upon
the opening of a new restaurant or grant of a new license. We use
the developmental license ownership structure in over 80
countries with a total of approximately 6,900 restaurants. The
largest developmental licensee operates approximately 2,200
restaurants in 19 countries in Latin America and the Caribbean.
Finally, the Company also has an equity investment in a
limited number of foreign affiliated markets, referred to as
“affiliates.” In these markets, the Company receives a royalty
based on a percent of sales and records its share of net results in
Equity in earnings of unconsolidated affiliates. In 2017, the
Company completed the sale of its businesses in China and Hong
Kong, while retaining a 20% ownership in the entity that now owns
the business. There are approximately 5,800 restaurants in foreign
affiliated markets, the largest of which are Japan and China,
where there are about 2,900 and 2,600 restaurants, respectively.
Supply Chain and Quality Assurance
The Company and its franchisees purchase food, packaging,
equipment and other goods from numerous independent
suppliers. The Company has established and enforces high quality
standards and product specifications. The Company has quality
centers around the world designed to ensure that its high
standards are consistently met. The quality assurance process not
only involves ongoing product reviews, but also on-site supplier
visits. A Food Safety Advisory Council, composed of the
Company’s technical, safety and supply chain specialists, as well
as suppliers and outside academia, provides strategic global
leadership for all aspects of food safety. In addition, the Company
works closely with suppliers to encourage innovation, assure best
practices and drive continuous improvement. Leveraging scale,
supply chain infrastructure and risk management strategies, the
Company also collaborates with suppliers toward a goal of
achieving competitive, predictable food and paper costs over the
long term.
McDonald's Corporation 2017 Annual Report 1
Independently owned and operated distribution centers,
approved by the Company, distribute products and supplies to
McDonald’s restaurants. In addition, restaurant personnel are
trained in the proper storage, handling and preparation of
products.
Products
McDonald’s restaurants offer a substantially uniform menu,
although there are geographic variations to suit local consumer
preferences and tastes. In addition, McDonald’s tests new
products on an ongoing basis.
McDonald’s menu includes hamburgers and cheeseburgers,
Big Mac, Quarter Pounder with Cheese, Filet-O-Fish, several
chicken sandwiches, Chicken McNuggets, wraps, french fries,
salads, oatmeal, shakes, McFlurry desserts, sundaes, soft serve
cones, pies, soft drinks, coffee, McCafé beverages and other
beverages. In addition, the restaurants sell a variety of other
products during limited-time promotions.
McDonald’s restaurants in the U.S. and many international
markets offer a full or limited breakfast menu. Breakfast offerings
may include Egg McMuffin, Sausage McMuffin with Egg,
McGriddles, biscuit and bagel sandwiches and hotcakes.
Quality, choice and nutrition are increasingly important to our
customers and we are continuously evolving our menu to meet our
customers' needs.
Marketing
McDonald’s global brand is well known. Marketing, promotional
and public relations activities are designed to promote McDonald’s
brand and differentiate the Company from competitors. Marketing
and promotional efforts focus on value, quality, food taste, menu
choice, nutrition, convenience and the customer experience.
Intellectual property
The Company owns or is licensed to use valuable intellectual
property including trademarks, service marks, patents, copyrights,
trade secrets and other proprietary information. The Company
considers the trademarks “McDonald’s” and “The Golden Arches
Logo” to be of material importance to its business. Depending on
the jurisdiction, trademarks and service marks generally are valid
as long as they are used and/or registered. Patents, copyrights
and licenses are of varying durations.
Seasonal operations
The Company does not consider its operations to be seasonal to
any material degree.
Working capital practices
Information about the Company’s working capital practices is
incorporated herein by reference to Management’s Discussion and
Analysis of Financial Condition and Results of Operations for the
years ended December 31, 2017, 2016, and 2015 in Part II,
Item 7, pages 14 through 29, and the consolidated statement of
cash flows for the years ended December 31, 2017, 2016, and
2015 in Part II, Item 8, page 34 of this Form 10-K.
Customers
The Company’s business is not dependent upon either a single
customer or small group of customers.
Backlog
Company-operated restaurants have no backlog orders.
Government contracts
No material portion of the business is subject to renegotiation of
profits or termination of contracts or subcontracts at government
election.
2 McDonald's Corporation 2017 Annual Report
Competition
McDonald’s restaurants compete with international, national,
regional and local retailers of food products. The Company
competes on the basis of price, convenience, service, menu
variety and product quality in a highly fragmented global
restaurant industry.
In measuring the Company’s competitive position,
management reviews data compiled by Euromonitor International,
a leading source of market data with respect to the global
restaurant industry. The Company’s primary competition, which is
referred to as the informal eating out ("IEO") segment, includes
the following restaurant categories defined by Euromonitor
International: quick-service eating establishments, casual dining
full-service restaurants, street stalls or kiosks, cafés,100% home
delivery/takeaway providers, specialist coffee shops, self-service
cafeterias and juice/smoothie bars. The IEO segment excludes
establishments that primarily serve alcohol and full-service
restaurants other than casual dining.
Based on data from Euromonitor International, the global IEO
segment was composed of approximately 9 million outlets and
generated $1.2 trillion in annual sales in 2016, the most recent
year for which data is available. McDonald’s Systemwide 2016
restaurant business accounted for 0.4% of those outlets and 7.0%
of the sales.
Management also on occasion benchmarks McDonald’s
against the entire restaurant industry, including the IEO segment
defined above and all other full-service restaurants. Based on data
from Euromonitor International, the restaurant industry was
composed of approximately 19 million outlets and generated $2.4
trillion in annual sales in 2016. McDonald’s Systemwide restaurant
business accounted for 0.2% of those outlets and 3.5% of the
sales.
Research and development
The Company performs research and development activities in the
U.S., Europe and Asia. While research and development activities
are important to the Company’s business, these expenditures are
not material. Independent suppliers also conduct research
activities that benefit the Company, its franchisees and suppliers
(collectively referred to as the "System").
Environmental matters
The Company continuously endeavors to improve its social
responsibility and environmental practices to achieve long-term
sustainability, which benefits McDonald’s and the communities it
serves.
Increased focus by certain governmental authorities on
environmental matters may lead to new governmental initiatives.
While we cannot predict the precise nature of these initiatives, we
expect that they may impact our business both directly and
indirectly. Although the impact would likely vary by world region
and/or market, we believe that adoption of new regulations may
increase costs for the Company. Also, there is a possibility that
governmental initiatives, or actual or perceived effects of changes
in weather patterns, climate, or water resources, could have a
direct impact on the operations of the System in ways which we
cannot predict at this time.
The Company monitors developments related to
environmental matters and plans to respond to governmental
initiatives in a timely and appropriate manner. At this time, the
Company has already begun to undertake its own initiatives
relating to preservation of the environment, including the
implementation of more energy efficient equipment and
management of energy use and more sustainable sourcing
practices in many of its markets.
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The Company’s number of employees worldwide, including its
corporate office employees and company-owned restaurant
employees, was approximately 235,000 as of year-end 2017.
d. Financial information about geographic areas
Financial information about geographic areas is incorporated
herein by reference to Management’s Discussion and Analysis of
Financial Condition and Results of Operations in Part II, Item 7,
pages 14 through 29 and Segment and geographic information in
Part II, Item 8, page 47 of this Form 10-K.
e. Available information
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 ("Exchange Act"). The Company
therefore files periodic reports, proxy statements and other
information with the U.S. Securities and Exchange Commission
("SEC"). Such reports may be obtained by visiting the Public
Reference Room of the SEC at 100 F Street, NE, Washington, DC
20549, or by calling the SEC at (800) SEC-0330. In addition, the
SEC maintains an Internet site (www.sec.gov) that contains
reports, proxy and information statements and other information.
Financial and other information can also be accessed on the
investor section of the Company’s website at
www.investor.mcdonalds.com. The Company makes available,
free of charge, copies of its annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after filing such material electronically or otherwise
furnishing it to the SEC. Copies of financial and other information
are also available free of charge by calling (800) 228-9623 or by
sending a request to McDonald’s Corporation Shareholder
Services, Department 720, 711 Jorie Boulevard, Oak Brook,
Illinois 60523.
Also posted on McDonald’s website are the Company’s
Corporate Governance Principles; the charters for each of the
Committees of the Board of Directors, including the Audit and
Finance Committee, Compensation Committee, Governance
Committee, Public Policy and Strategy Committee and
Sustainability and Corporate Responsibility Committee; the Code
of Conduct for the Board of Directors; and the Company’s
Standards of Business Conduct, which applies to all officers and
employees. Copies of these documents are also available free of
charge by calling (800) 228-9623 or by sending a request to
McDonald’s Corporation Shareholder Services, Department 720,
711 Jorie Boulevard, Oak Brook, Illinois 60523.
Information on the Company’s website is not incorporated into
this Form 10-K or the Company’s other securities filings and is not
a part of them.
ITEM 1A. 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 “may,” “will,” “expect,” “believe,” “anticipate” and
“plan” or similar expressions. In particular, statements regarding
our plans, strategies, prospects and expectations regarding our
business and industry, including those under "Outlook", are
forward-looking statements. They reflect our expectations, are
not guarantees of performance and speak only as of the date of
this report. Except as required by law, we do not undertake to
update them. Our expectations (or the underlying assumptions)
may change or not be realized, and you should not rely unduly
on forward-looking statements. Our business results are subject
to a variety of risks, including those that are reflected in the
following considerations and factors, as well as elsewhere in our
filings with the SEC. If any of these considerations or risks
materialize, our expectations may change and our performance
may be adversely affected.
If we do not successfully evolve and execute against our
business strategies, we may not be able to increase operating
income.
To drive future results, our business strategies must be
effective in delivering increased guest counts to drive operating
income growth. Whether these strategies are successful
depends mainly on our System’s ability to:
•
Continue to innovate and differentiate the McDonald’s
experience by preparing and serving our food in a way that
balances value and convenience to our customers with
profitability;
•
Capitalize on our global scale, iconic brand and local market
presence to enhance our ability to retain, regain and convert
key customer groups;
•
Utilize our more adaptive organizational structure to execute
against our initiatives at an accelerated pace;
•
Strengthen customer appeal and augment our digital
initiatives, including mobile ordering and delivery, along with
Experience of the Future (“EOTF”), particularly in the U.S.;
•
Identify and develop restaurant sites consistent with our
plans for net growth of Systemwide restaurants; and
•
Operate restaurants with high service levels and optimal
capacity while managing the increasing complexity of our
restaurant operations.
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.
Our investments to enhance the customer experience,
including through technology, may not generate the expected
returns.
We will continue to build upon our investments in EOTF,
which focus on restaurant modernization and technology and
digital engagement in order to transform the restaurant
experience. As we accelerate our pace of converting restaurants
to EOTF, we are placing renewed emphasis on improving our
service model and strengthening relationships with customers,
in part through digital channels and loyalty initiatives, as well as
mobile ordering and payment systems. We also continue to
build on delivery initiatives, which may not generate expected
returns. We may not fully realize the intended benefits of these
significant investments, or these initiatives may not be well
executed, and therefore our business results may suffer.
If we do not anticipate and address evolving consumer
preferences, our business could suffer.
Our continued success depends on our System’s ability to
anticipate and respond effectively to continuously shifting
consumer demographics, and trends in food sourcing, food
preparation, food offerings and consumer preferences in the
“informal eating out” IEO segment. In order to deliver a relevant
experience for our customers amidst a highly competitive,
value-driven operating environment, we must implement
initiatives to adapt at an aggressive pace. There is no assurance
McDonald's Corporation 2017 Annual Report 3
that these initiatives will be successful and, if they are not, our
financial results could be adversely impacted.
Activities relating to our refranchising and cost savings
initiatives remain ongoing and entail various risks.
Our previously announced refranchising and cost saving
initiatives remain ongoing. As we continue on those initiatives,
the existing risks we face in our business may be intensified.
Our efforts to reduce costs and capital expenditures depend, in
part, upon our refranchising efforts, which, in turn, depend upon
our selection and integration of capable third parties. Our cost
savings initiatives also depend upon a variety of factors,
including our ability to achieve efficiencies through the
consolidation of global, back-office functions. If these various
initiatives are not successful, take longer to complete than
initially projected, or are not well executed, or if our cost
reduction efforts adversely impact our effectiveness, our
business operations, financial results and results of operations
could be adversely affected.
If pricing, promotional and marketing plans are not effective,
our results may be negatively impacted.
Our results depend on the impact of pricing, promotional
and marketing plans across the System, and the ability to adjust
these plans to respond quickly and effectively to evolving
customer preferences, as well as shifting economic and
competitive conditions. Existing or future pricing strategies, and
the value proposition they represent, are expected to continue
to be important components of our business strategy; however,
they may not be successful and could negatively impact sales
and margins. Further, the promotion of menu offerings may yield
results below the desired levels.
Additionally, we operate in a complex and costly
advertising environment. Our marketing and advertising
programs may not be successful, and we may fail to attract and
retain customers. Our success depends in part on whether the
allocation of our advertising and marketing resources across
different channels allows us to reach our customers effectively.
If the advertising and marketing programs are not successful, or
are not as successful as those of our competitors, our sales,
guest counts and market share could decrease.
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. 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, our business practices and the manner in which we
source the commodities we use. Consumer acceptance of our
offerings is subject to change for a variety of reasons, and some
changes can occur rapidly. For example, nutritional, health 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 IEO segment or
perceptions of our brand generally or relative to available
alternatives. Consumer perceptions may also be affected by
third parties presenting or promoting adverse commentary or
portrayals of the quick-service category of the IEO segment, our
brand and/or our operations, our suppliers or our franchisees. If
we are unsuccessful in addressing such adverse commentary or
portrayals, 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 System-wide coordination and alignment. If we are not
4 McDonald's Corporation 2017 Annual Report
effective in addressing social responsibility matters or achieving
relevant sustainability goals, consumer trust in our brand may
suffer. In particular, business incidents or practices that erode
consumer trust or confidence, particularly if such incidents or
practices receive considerable publicity or result in litigation, can
significantly reduce brand value and have a negative impact on
our financial results.
We face intense competition in our markets, which could hurt
our business.
We compete primarily in the IEO segment, which is highly
competitive. We also face sustained, intense competition from
traditional, fast casual and other competitors, which may include
many non-traditional market participants such as convenience
stores, grocery stores and coffee shops. We expect our
environment to continue to be highly competitive, and our
results in any particular reporting period may be impacted by
new or continuing actions of our competitors, which may have a
short- or long-term impact on our results.
We compete on the basis of product choice, quality,
affordability, service and location. In particular, we believe our
ability to compete successfully in the current market
environment depends on our ability to improve existing
products, develop new products, price our products
appropriately, deliver a relevant customer experience, manage
the complexity of our restaurant operations and respond
effectively to our competitors’ actions or disruptive actions from
others which we do not foresee. Recognizing these
dependencies, we have intensified our focus in recent periods
on strategies to achieve these goals, and we will likely continue
to modify our strategies and implement new strategies in the
future. There can be no assurance these strategies will be
effective, and some strategies may be effective at improving
some metrics while adversely affecting other metrics.
Unfavorable general economic conditions could adversely
affect our business and financial results.
Our results of operations are substantially affected by
economic conditions, which can vary significantly by market and
can impact consumer disposable income levels and spending
habits. Economic conditions can also be impacted by a variety
of factors including hostilities, epidemics and actions taken by
governments to manage national and international economic
matters, whether through austerity, stimulus measures or trade
measures, and initiatives intended to control wages,
unemployment, credit availability, inflation, taxation and other
economic drivers. Continued adverse economic conditions or
adverse changes in economic conditions in our markets could
pressure our operating performance, and our business and
financial results may suffer.
Our results of operations are also affected by fluctuations
in currency exchange rates, which may adversely affect
reported earnings.
Supply chain interruptions may increase costs or reduce
revenues.
We depend on the effectiveness of our supply chain
management to assure reliable and sufficient product supply,
including on favorable terms. Although many of the products we
sell are sourced from a wide variety of suppliers in countries
around the world, certain products have limited suppliers, which
may increase our reliance on those suppliers. Supply chain
interruptions, including shortages and transportation issues, and
price increases can adversely affect us as well as our suppliers
and franchisees whose performance may have a significant
impact on our results. Such shortages or disruptions could be
caused by factors beyond the control of our suppliers,
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franchisees or us. If we experience interruptions in our System’s
supply chain, our costs could increase and it could limit the
availability of products critical to our System’s operations.
franchisees, licensees and/or affiliates that meet our rigorous
standards, and whether their performance and the resulting
ownership mix supports our brand and financial objectives.
Food safety concerns may have an adverse effect on our
business.
Challenges with respect to talent management could harm
our business.
Our ability to increase sales and profits depends on our
System’s ability to meet expectations for safe food and on our
ability to manage the potential impact on McDonald’s of foodborne illnesses and food or product safety issues that may arise
in the future. Food safety is a top priority, and we dedicate
substantial resources to ensure that our customers enjoy safe
food products, including as our menu and service model evolve.
However, food safety events, including instances of food-borne
illness, have occurred in the food industry in the past, and could
occur in the future. Instances of food tampering, food
contamination or food-borne illness, whether actual or
perceived, could adversely affect our brand and reputation as
well as our revenues and profits.
Effective succession planning is important to our longterm success. Failure to effectively identify, develop and retain
key personnel, recruit high-quality candidates and ensure
smooth management and personnel transitions could disrupt
our business and adversely affect our results.
Our franchise business model presents a number of risks.
Our success increasingly relies on the financial success
and cooperation of our franchisees, including our developmental
licensees and affiliates, yet we have limited influence over their
operations. Our restaurant margins arise from two sources: fees
from franchised restaurants (e.g., rent and royalties based on a
percentage of sales) and, to a lesser degree, sales from
Company-operated restaurants. Our franchisees manage their
businesses independently, and therefore are responsible for the
day-to-day operation of their restaurants. The revenues we
realize from franchised restaurants are largely dependent on the
ability of our franchisees to grow their sales. If our franchisees
do not experience sales growth, our revenues and margins
could be negatively affected as a result. Also, if sales trends
worsen for franchisees, their financial results may deteriorate,
which could result in, among other things, restaurant closures,
or delayed or reduced payments to us. Our refranchising efforts
will continue to increase that dependence and the potential
effect of those factors.
Our success also increasingly depends on the
willingness and ability of our independent franchisees and
affiliates to implement major initiatives, which may include
financial investment, and to remain aligned with us on operating,
promotional and capital-intensive reinvestment plans.
Franchisees’ ability to contribute to the achievement of our plans
is dependent in large part on the availability to them of funding
at reasonable interest rates and may be negatively impacted by
the financial markets in general or by the creditworthiness of our
franchisees or the Company. Our operating performance could
also be negatively affected if our franchisees experience food
safety or other operational problems or project an image
inconsistent with our brand and values, particularly if our
contractual and other rights and remedies are limited, costly to
exercise or subjected to litigation and potential delays. If
franchisees do not successfully operate restaurants in a manner
consistent with our required standards, our brand’s image and
reputation could be harmed, which in turn could hurt our
business and operating results.
Our ownership mix also affects our results and financial
condition. The decision to own restaurants or to operate under
franchise or license agreements is driven by many factors
whose interrelationship is complex and changing. Our ability to
achieve the benefits of our refranchising strategy, which involves
a significant percentage of franchised restaurants, including an
increased number of restaurants run by developmental
licensees and affiliates, depends on various factors. Those
factors include whether we have effectively selected
Our success depends in part on our System’s ability to
recruit, motivate and retain a qualified workforce to work in our
restaurants in an intensely competitive environment. Increased
costs associated with recruiting, motivating and retaining
qualified employees to work in our Company-operated
restaurants could have a negative impact on our Companyoperated margins. Similar concerns apply to our franchisees.
We are also impacted by the costs and other effects of
compliance with U.S. and international regulations affecting our
workforce, which includes our staff and employees working in
our Company-operated restaurants. These regulations are
increasingly focused on employment issues, including wage and
hour, healthcare, immigration, retirement and other employee
benefits and workplace practices. Our potential exposure to
reputational and other harm regarding our workplace practices
or conditions or those of our independent franchisees or
suppliers (or perceptions thereof) could have a negative impact
on consumer perceptions of us and our business. Additionally,
economic action, such as boycotts, protests, work stoppages or
campaigns by labor organizations, could adversely affect us
(including our ability to recruit and retain talent) or the
franchisees and suppliers that are also part of the McDonald's
System and whose performance may have a material impact on
our results.
Information technology system failures or interruptions, or
breaches of network security, may interrupt our operations.
We are increasingly reliant on technological systems,
such as point-of-sale and other in-store systems or platforms,
technologies supporting McDonald’s delivery and digital
solutions, as well as technologies that facilitate communication
and collaboration internally, with affiliated entities, customers or
independent third parties to conduct our business, including
technology-enabled systems provided to us by third parties. Any
failure of these systems could significantly impact our
operations and customer experience and perceptions.
Despite the implementation of security measures, those
technology systems and solutions could become vulnerable to
damage, disability or failures due to theft, fire, power loss,
telecommunications failure or other catastrophic events. Our
increasing reliance on third party systems also present the risks
faced by the third party’s business, including the operational,
security and credit risks of those parties. If those systems were
to fail or otherwise be unavailable, and we were unable to
recover in a timely way, we could experience an interruption in
our operations.
Furthermore, security breaches have from time to time
occurred and may in the future occur involving our systems, the
systems of the parties we communicate or collaborate with
(including franchisees), or those of third party providers. These
may include such things as unauthorized access, denial of
service, computer viruses, introduction of malware or
ransomware and other disruptive problems caused by hackers.
Our information technology systems contain personal, financial
and other information that is entrusted to us by our customers,
McDonald's Corporation 2017 Annual Report 5
our employees and other third parties, as well as financial,
proprietary and other confidential information related to our
business. An actual or alleged security breach could result in
disruptions, shutdowns, theft or unauthorized disclosure of
personal, financial, proprietary or other confidential information.
The occurrence of any of these incidents could result in
reputational damage, adverse publicity, loss of consumer
confidence, reduced sales and profits, complications in
executing our growth initiatives and criminal penalties or civil
liabilities.
The global scope of our business subjects us to risks that
could negatively affect our business.
We encounter differing cultural, regulatory and economic
environments within and among the more than 100 countries
where McDonald’s restaurants operate, and our ability to
achieve our business objectives depends on the System's
success in these environments. Meeting customer expectations
is complicated by the risks inherent in our global operating
environment, and our global success is partially dependent on
our System’s ability to leverage operating successes across
markets. Planned initiatives may not have appeal across
multiple markets with McDonald's customers and could drive
unanticipated changes in customer perceptions and guest
counts.
Disruptions in operations or price volatility in a market
can also result from governmental actions, such as price,
foreign exchange or changes in trade-related tariffs or controls,
government-mandated closure of our, our franchisees' or our
suppliers’ operations, and asset seizures. The cost and
disruption of responding to governmental investigations or
inquiries, whether or not they have merit, may impact our results
and could cause reputational or other harm. Our international
success depends in part on the effectiveness of our strategies
and brand-building initiatives to reduce our exposure to such
governmental investigations or inquiries.
Additionally, challenges and uncertainties are associated
with operating in developing markets, which may entail a
relatively higher risk of political instability, economic volatility,
crime, corruption and social and ethnic unrest. Such challenges
may be exacerbated in many cases by a lack of an independent
and experienced judiciary and uncertainties in how local law is
applied and enforced, including in areas most relevant to
commercial transactions and foreign investment. An inability to
manage effectively the risks associated with our international
operations could have a material adverse effect on our business
and financial condition.
We may also face challenges and uncertainties in
developed markets. For example, as a result of the U.K.'s
decision to leave the European Union through a negotiated exit
over a period of time, including its recent formal commencement
of exit proceedings, it is possible that there will be increased
regulatory complexities, as well as potential referenda in the
U.K. and/or other European countries, that could cause
uncertainty in European or worldwide economic conditions. In
the short term, the decision created volatility in certain foreign
currency exchange rates, and the resulting depression in those
exchange rates may continue. Any of these effects, and others
we cannot anticipate, could adversely affect our business,
results of operations, financial condition and cash flows.
Changes in tax laws and unanticipated tax liabilities could
adversely affect the taxes we pay and our profitability.
We are subject to income and other taxes in the U.S. and
foreign jurisdictions, and our operations, plans and results are
affected by tax and other initiatives around the world. In
6 McDonald's Corporation 2017 Annual Report
particular, we are affected by the impact of changes to tax laws
or policy or related authoritative interpretations, including
changes and uncertainties resulting from proposals for
comprehensive or corporate tax reforms in the U.S. or
elsewhere. On December 22, 2017, the Tax Cuts and Jobs Act
(“Tax Act”) was signed into law. While we have estimated the
effects of the Tax Act, we continue to refine those estimates with
the possibility they could change, and those changes could be
material. We are also impacted by settlements of pending or
any future adjustments proposed by taxing authorities inside
and outside of the U.S. in connection with our tax audits, all of
which will depend on their timing, nature and scope. Any
increases in income tax rates, changes in income tax laws or
unfavorable resolution of tax matters could have a material
adverse impact on our financial results.
Changes in commodity and other operating costs could
adversely affect our results of operations.
The profitability of our Company-operated restaurants
depends in part on our ability to anticipate and react to changes
in commodity costs, including food, paper, supplies, fuel, utilities
and distribution, and other operating costs, including labor. Any
volatility in certain commodity prices or fluctuation in labor costs
could adversely affect our operating results by impacting
restaurant profitability. The commodity markets for some of the
ingredients we use, such as beef and chicken, are particularly
volatile due to factors such as seasonal shifts, climate
conditions, industry demand, international commodity markets,
food safety concerns, product recalls and government
regulation, all of which are beyond our control and, in many
instances, unpredictable. We can only partially address future
price risk through hedging and other activities, and therefore
increases in commodity costs could have an adverse impact on
our profitability.
Increasing regulatory complexity may adversely affect
restaurant operations and our financial results.
Our regulatory environment worldwide exposes us to
complex compliance and similar risks that could affect our
operations and results in material ways. In many of our markets,
we are subject to increasing regulation, which has increased our
cost of doing business. We are affected by the cost, compliance
and other risks associated with the often conflicting and highly
prescriptive regulations we face, including where inconsistent
standards imposed by multiple governmental authorities can
adversely affect our business and increase our exposure to
litigation or governmental investigations or proceedings.
Our success depends in part on our ability to manage the
impact of new, potential or changing regulations that can affect
our business plans and operations. These regulations include
product packaging, marketing, the nutritional content and safety
of our food and other products, labeling and other disclosure
practices. Compliance efforts with those regulations may be
affected by ordinary variations in food preparation among our
own restaurants and the need to rely on the accuracy and
completeness of information from third-party suppliers
(particularly given varying requirements and practices for testing
and disclosure).
Additionally, we are working to manage the risks and costs
to us, our franchisees and our supply chain of the effects of
climate change, greenhouse gases, and diminishing energy and
water resources. These risks include the 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 the
increased pressure to make commitments, set targets or
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establish additional goals and take actions to meet them. These
risks could expose us to market, operational and execution
costs or risks. If we are unable to effectively manage the risks
associated with our complex regulatory environment, it could
have a material adverse effect on our business and financial
condition.
We are subject to increasing legal complexity and could be
party to litigation that could adversely affect us.
Increasing legal complexity will continue to affect our
operations and results in material ways. We could be subject to
legal proceedings that may adversely affect our business,
including class actions, administrative proceedings, government
investigations, employment and personal injury claims, landlord/
tenant disputes, disputes with current or former suppliers,
claims by current or former franchisees and intellectual property
claims (including claims that we infringed another party’s
trademarks, copyrights or patents).
Inconsistent standards imposed by governmental
authorities can adversely affect our business and increase our
exposure to regulatory proceedings or litigation.
Litigation involving our relationship with franchisees and
the legal distinction between our franchisees and us for
employment law purposes, if determined adversely, could
increase costs, negatively impact the business prospects of our
franchisees and subject us to incremental liability for their
actions. Similarly, although our commercial relationships with
our suppliers remain independent, there may be attempts to
challenge that independence, which, if determined adversely,
could also increase costs, negatively impact the business
prospects of our suppliers, and subject us to incremental liability
for their actions. We are also subject to legal and compliance
risks and associated liability, such as in the areas of privacy and
data collection, protection and management, as it relates to
information we collect and share when we provide optional
technology-related services and platforms to third parties.
Our operating results could also be affected by the
following:
•
The relative level of our defense costs, which vary from
period to period depending on the number, nature and
procedural status of pending proceedings;
•
The cost and other effects of settlements, judgments or
consent decrees, which may require us to make disclosures
or take other actions that may affect perceptions of our brand
and products;
•
Adverse results of pending or future litigation, including
litigation challenging the composition and preparation of our
products, or the appropriateness or accuracy of our
marketing or other communication practices; and
•
The scope and terms of insurance or indemnification
protections that we may have.
A judgment significantly in excess of any applicable
insurance coverage or third party indemnity could materially
adversely affect our financial condition or results of operations.
Further, adverse publicity resulting from these claims may hurt
our business.
We may not be able to adequately protect our intellectual
property or adequately ensure that we are not infringing the
intellectual property of others, which could harm the value
of the McDonald’s brand and our business.
a combination of trademarks, copyrights, service marks, trade
secrets, patents and other intellectual property rights to protect
our brand and branded products.
We have registered certain trademarks and have other
trademark registrations pending in the U.S. and certain foreign
jurisdictions. The trademarks that we currently use have not
been registered in all of the countries outside of the U.S. in
which we do business or may do business in the future and may
never be registered in all of these countries. The steps we have
taken to protect our intellectual property in the U.S. and foreign
countries may not be adequate. In addition, the steps we have
taken may not adequately ensure that we do not infringe the
intellectual property of others, and third parties may claim
infringement by us in the future. In particular, we may be
involved in intellectual property claims, including often
aggressive or opportunistic attempts to enforce patents used in
information technology systems, which might affect our
operations and results. Any claim of infringement, whether or
not it has merit, could be time-consuming, result in costly
litigation and harm our business.
We cannot ensure that franchisees and other third parties
who hold licenses to our intellectual property will not take
actions that hurt the value of our intellectual property.
Changes in accounting standards or the recognition of
impairment or other charges may adversely affect our
future operations and results.
New accounting standards or changes in financial
reporting requirements, accounting principles or practices,
including with respect to our critical accounting estimates, could
adversely affect our future results. We may also be affected by
the nature and timing of decisions about underperforming
markets or assets, including decisions that result in impairment
or other charges that reduce our earnings. In assessing the
recoverability of our long-lived assets, we consider changes in
economic conditions and make assumptions regarding
estimated future cash flows and other factors. These estimates
are highly subjective and can be significantly impacted by many
factors such as global and local business and economic
conditions, operating costs, inflation, competition, consumer and
demographic trends, and our restructuring activities. If our
estimates or underlying assumptions change in the future, we
may be required to record impairment charges. If we experience
any such changes, they could have a significant adverse effect
on our reported results for the affected periods.
A decrease in our credit ratings or an increase in our
funding costs could adversely affect our profitability.
Our credit ratings may be negatively affected by our
results of operations or changes in our debt levels. As a result,
our interest expense, the availability of acceptable
counterparties, our ability to obtain funding on favorable terms,
collateral requirements and our operating or financial flexibility
could all be negatively affected, especially if lenders impose
new operating or financial covenants.
Our operations may also be impacted by regulations
affecting capital flows, financial markets or financial institutions,
which can limit our ability to manage and deploy our liquidity or
increase our funding costs. If any of these events were to occur,
they could have a material adverse effect on our business and
financial condition.
The success of our business depends on our continued
ability to use our existing trademarks and service marks in order
to increase brand awareness and further develop our branded
products in both domestic and international markets. We rely on
McDonald's Corporation 2017 Annual Report 7
Trading volatility and price of our common stock may be
adversely affected by many factors.
Many factors affect the volatility and price of our common
stock in addition to our operating results and prospects. The
most important of these factors, some of which are outside our
control, are the following:
•
The unpredictable nature of global economic and market
conditions;
•
Governmental action or inaction in light of key indicators of
economic activity or events that can significantly influence
financial markets, particularly in the U.S., which is the
principal trading market for our common stock, and media
reports and commentary about economic or other matters,
even when the matter in question does not directly relate to
our business;
•
Trading activity in our common stock or trading activity in
derivative instruments with respect to our common stock or
debt securities, which can be affected by market
commentary (including commentary that may be unreliable
or incomplete); unauthorized disclosures about our
performance, plans or expectations about our business; our
actual performance and creditworthiness; investor
confidence, driven in part by expectations about our
performance; actions by shareholders and others seeking to
influence our business strategies; portfolio transactions in
our stock by significant shareholders; or trading activity that
results from the ordinary course rebalancing of stock indices
in which McDonald’s may be included, such as the S&P 500
Index and the Dow Jones Industrial Average;
•
The impact of our stock repurchase program or dividend
rate; and
•
The impact on our results of corporate actions and market
and third-party perceptions and assessments of such
actions, such as those we may take from time to time as we
implement our strategies in light of changing business, legal
and tax considerations and evolve our corporate structure.
Events such as severe weather conditions, natural
disasters, hostilities and social unrest, among others, can
adversely affect our results and prospects.
Severe weather conditions, natural disasters, hostilities
and social unrest, terrorist activities, health epidemics or
pandemics (or expectations about them) can adversely affect
consumer spending and confidence levels and supply
availability and costs, as well as the local operations in impacted
markets, all of which can affect our results and prospects. Our
receipt of proceeds under any insurance we maintain with
respect to some of these risks may be delayed or the proceeds
may be insufficient to cover our losses fully.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
The Company owns and leases real estate primarily in connection
with its restaurant business. The Company identifies and develops
sites that offer convenience to customers and long-term sales and
profit potential to the Company. To assess potential, the Company
analyzes traffic and walking patterns, census data and other
relevant data. The Company’s experience and access to
advanced technology aid in evaluating this information. The
Company generally owns the land and building or secures longterm leases for conventional franchised and Company-operated
restaurant sites, which ensures long-term occupancy rights and
8 McDonald's Corporation 2017 Annual Report
helps control related costs. Restaurant profitability for both the
Company and franchisees is important; therefore, ongoing efforts
are made to control average development costs through
construction and design efficiencies, standardization and by
leveraging the Company’s global sourcing network. Additional
information about the Company’s properties is included in
Management’s Discussion and Analysis of Financial Condition and
Results of Operations in Part II, Item 7, pages 14 through 29 and
in Financial statements and supplementary data in Part II, Item 8,
pages 30 through 50 of this Form 10-K.
ITEM 3. Legal Proceedings
The Company has pending a number of lawsuits that have been
filed in various jurisdictions. These lawsuits cover a broad variety
of allegations spanning the Company’s entire business. The
following is a brief description of the more significant types of
claims and lawsuits. In addition, the Company is subject to various
national and local laws and regulations that impact various
aspects of its business, as discussed below. While the Company
does not believe that any such claims, lawsuits or regulations will
have a material adverse effect on its financial condition or results
of operations, unfavorable rulings could occur. Were an
unfavorable ruling to occur, there exists the possibility of a material
adverse impact on net income for the period in which the ruling
occurs or for future periods.
Franchising
A substantial number of McDonald’s restaurants are franchised to
independent owner/operators under contractual arrangements
with the Company. In the course of the franchise relationship,
occasional disputes arise between the Company and its current or
former franchisees relating to a broad range of subjects including,
but not limited to, quality, service and cleanliness issues, menu
pricing, contentions regarding grants or terminations of franchises,
delinquent payments of rents and fees, and franchisee claims for
additional franchises or rewrites of franchises. Additionally,
occasional disputes arise between the Company and individuals
who claim they should have been granted a McDonald’s franchise
or who challenge the legal distinction between the Company and
its franchisees for employment law purposes.
Suppliers
The Company and its affiliates and subsidiaries generally do not
supply food, paper or related items to any McDonald’s restaurants.
The Company relies upon numerous independent suppliers,
including service providers, that are required to meet and maintain
the Company’s high standards and specifications. On occasion,
disputes arise between the Company and its suppliers (or former
suppliers) which include, for example, compliance with product
specifications and the Company’s business relationship with
suppliers. In addition, disputes occasionally arise on a number of
issues between the Company and individuals or entities who claim
that they should be (or should have been) granted the opportunity
to supply products or services to the Company’s restaurants.
Employees
Hundreds of thousands of people are employed by the Company
and in restaurants owned and operated by subsidiaries of the
Company. In addition, thousands of people from time to time seek
employment in such restaurants. In the ordinary course of
business, disputes arise regarding hiring, termination, promotion
and pay practices, including wage and hour disputes, alleged
discrimination and compliance with labor and employment laws.
Customers
Restaurants owned by subsidiaries of the Company regularly
serve a broad segment of the public. In so doing, disputes arise as
to products, service, incidents, advertising, nutritional and other
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disclosures, as well as other matters common to an extensive
restaurant business such as that of the Company.
Intellectual Property
The Company has registered trademarks and service marks,
patents and copyrights, some of which are of material importance
to the Company’s business. From time to time, the Company may
become involved in litigation to protect its intellectual property and
defend against the alleged use of third party intellectual property.
Government Regulations
Local and national governments have adopted laws and
regulations involving various aspects of the restaurant business
including, but not limited to, advertising, franchising, health, safety,
environment, zoning, employment and taxation. The Company
strives to comply with all applicable existing statutory and
administrative rules and cannot predict the effect on its operations
from the issuance of additional requirements in the future.
ITEM 4. Mine Safety Disclosures
Not applicable.
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McDonald's Corporation 2017 Annual Report 9
Executive Officers of the Registrant
The following are the Executive Officers of our Company (as of the
date of this filing):
Ian Borden, 49, is President - Foundational Markets, a
position he has held since July 2015. From January 2014 through
June 2015, Mr. Borden served as Vice President and Chief
Financial Officer - McDonald’s Asia/Pacific, Middle East and Africa.
Prior to that time, Mr. Borden served as Regional Vice President of
Europe’s East Division from April 2011 to December 2013 and as
Managing Director - McDonald’s Ukraine from December 2007 to
December 2013. He has served the Company for 23 years.
Stephen Easterbrook, 50, is President and Chief Executive
Officer, a position he has held since March 2015. Mr. Easterbrook
was also elected a Director of the Company effective March 2015.
From May 2014 through February 2015, Mr. Easterbrook served
as Corporate Senior Executive Vice President and Global Chief
Brand Officer. From June 2013 through April 2014, Mr.
Easterbrook served as Corporate Executive Vice President and
Global Chief Brand Officer. From September 2012 through May
2013, Mr. Easterbrook served as the Chief Executive Officer of
Wagamama Limited, a pan-Asian restaurant chain, and from
September 2011 to September 2012, he served as the Chief
Executive Officer of PizzaExpress Limited, an Italian restaurant
brand. From December 2010 to September 2011, he held the
position of President, McDonald’s Europe. Prior to that, Mr.
Easterbrook served in a number of roles with the Company. Mr.
Easterbrook has served the Company for 24 years.
Joseph Erlinger, 44, is President - High Growth Markets, a
position he has held since September 2016. Prior to that, Mr.
Erlinger served as Vice President and Chief Financial Officer High Growth Markets from March 2015 to January 2017 (serving
in dual roles from September 2016 through January 2017), as
Managing Director of McDonald’s Korea from April 2013 to
January 2016 (serving in dual roles from March 2015 through
January 2016), and US Vice President - GM for the Indianapolis
region from December 2010 to March 2013. He has served the
Company for nearly 16 years.
David Fairhurst, 49, is Corporate Executive Vice President &
Chief People Officer, a position he has held since October 2015.
Mr. Fairhurst served as Corporate Senior Vice President,
International Human Resources and Strategy from April 2015 to
September 2015. Prior to that time, he served as Europe Vice
President - Chief People Officer from January 2011 to March
2015. Mr. Fairhurst has served the Company for 12 years.
Robert Gibbs, 46, is Corporate Executive Vice President and
Global Chief Communications Officer, a position he has held since
June 2015. Mr. Gibbs joined the Company from The Incite Agency,
a strategic communications advisory firm that he co-founded in
2013. Prior to that, Mr. Gibbs held several senior advisory roles in
the White House, serving as the White House Press Secretary
beginning in 2009, then as Senior Advisor in the 2012 re-election
campaign. Mr. Gibbs has been with the Company for nearly 3
years.
Douglas Goare, 65, has served as President, International
Lead Markets since July 2015 and in October 2016, he assumed
responsibility as Chief Restaurant Officer. From October 2011
through June 2015, Mr. Goare served as President, McDonald’s
Europe. Prior to that time, Mr. Goare served as Corporate
Executive Vice President of Supply Chain and Development from
February 2011 through September 2011. In addition, Mr. Goare
assumed responsibility for Development in December 2010 and
served as Corporate Senior Vice President of Supply Chain and
Development through January 2011. Mr. Goare has served the
Company for 39 years.
10 McDonald's Corporation 2017 Annual Report
Catherine Hoovel, 46, is Corporate Vice President - Chief
Accounting Officer, a position she has held since October 2016.
Ms. Hoovel served as Controller for the McDonald's restaurants
owned and operated by McDonald's USA from April 2014 to
September 2016. Prior to that time, Ms. Hoovel served as a Senior
Director of Finance from February 2012 to April 2014 and was a
Divisional Director from August 2010 to February 2012. Ms.
Hoovel has served the Company for nearly 22 years.
Christopher Kempczinski, 49, is President, McDonald’s USA,
a position he has held since January 2017. Prior to that, Mr.
Kempczinski served as Corporate Executive Vice President Strategy, Business Development and Innovation, from October
2015 through December 2016. Mr. Kempczinski joined the
Company from Kraft Heinz, a manufacturer and marketer of food
and beverage products, where he most recently served as
Executive Vice President of Growth Initiatives and President of
Kraft International from December 2014 to September 2015. Prior
to that, Mr. Kempczinski served as President of Kraft Canada from
July 2012 through December 2014 and as Senior Vice President U.S. Grocery from December 2008 to July 2012. Mr. Kempczinski
has been with the Company for over 2 years.
Jerome Krulewitch, 53, is Corporate Executive Vice President,
General Counsel and Secretary, a position he has held since
March 2017. From May 2011 until March 2017, Mr. Krulewitch
served as Corporate Senior Vice President - Chief Counsel,
Global Operations. Prior to that, Mr. Krulewitch was Corporate
Senior Vice President - General Counsel, The Americas from
September 2010 to April 2011. Mr. Krulewitch has served the
Company for nearly 16 years.
Silvia Lagnado, 54, is Corporate Executive Vice President,
Global Chief Marketing Officer, a position she has held since
August 2015. Ms. Lagnado served as Chief Marketing Officer of
Bacardi Limited, a spirits company, from September 2010 to
October 2012. Prior to that, Ms. Lagnado served more than 20
years in positions of increased responsibility at Unilever. Ms.
Lagnado has been with the Company for over 2 years.
Kevin Ozan, 54, is Corporate Executive Vice President and
Chief Financial Officer, a position he has held since March 2015.
From February 2008 through February 2015, Mr. Ozan served as
Corporate Senior Vice President - Controller. Mr. Ozan has served
the Company for 20 years.
Jim Sappington, 59, is Corporate Executive Vice President,
Operations and Technology Systems, a position he has held since
March 2015. From January 2013 through February 2015, Mr.
Sappington served as Corporate Senior Vice President-Chief
Information Officer. Prior to that time, Mr. Sappington served as
U.S. Vice President - General Manager for the Northwest Region
from September 2010 to December 2012. Mr. Sappington has
been with the Company for 30 years.
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(1)
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
or
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nt,
MARKET INFORMATION AND DIVIDEND POLICY
The Company’s common stock trades under the symbol MCD and is listed on the New York Stock Exchange in the U.S. The following table
sets forth the common stock price ranges on the New York Stock Exchange and dividends declared per common share:
2017
Dollars per share
Quarter:
First
Second
Third
Fourth
Year
*
Low
130.19
155.46
161.72
175.78
175.78
118.18
128.65
151.77
155.80
118.18
2016
Dividend
0.94
0.94
1.95 *
—
3.83
High
Low
126.96
131.96
128.60
124.00
131.96
112.71
116.08
113.96
110.33
110.33
Dividend
0.89
0.89
1.83 *
—
3.61
Includes a $0.94 and $0.89 per share dividend declared and paid in third quarter of 2017 and 2016, respectively, and a $1.01 and $0.94 per share dividend
declared in third quarter and paid in fourth quarter of 2017 and 2016, respectively.
The number of shareholders of record and beneficial owners of the Company’s common stock as of January 31, 2018 was estimated to
be 1,781,818.
Given the Company’s returns on incremental invested capital and assets, management believes it is prudent to reinvest in the business
in markets with acceptable returns and/or opportunity for long-term growth and use excess cash flow to return cash to shareholders through
dividends and share repurchases. The Company has paid dividends on common stock for 42 consecutive years through 2017 and has
increased the dividend amount at least once every year. As in the past, future dividend amounts will be considered after reviewing
profitability expectations and financing needs, and will be declared at the discretion of the Company’s Board of Directors.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table presents information related to repurchases of common stock the Company made during the quarter ended
December 31, 2017*:
Period
October 1-31, 2017
November 1-30, 2017
December 1-31, 2017
Total
s
d
e
High
Total Number of
Shares Purchased
Average Price
Paid per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs(1)
3,803,997
254,210
800
4,059,007
162.45
167.64
173.25
162.78
3,803,997
254,210
800
4,059,007
Approximate Dollar
Value of Shares
that May Yet
Be Purchased Under
the Plans or Programs(1)
$12,304,717,273
12,262,100,551
12,261,961,951
*
Subject to applicable law, the Company may repurchase shares directly in the open market, in privately negotiated transactions, or pursuant to derivative
instruments and plans complying with Rule 10b5-1, among other types of transactions and arrangements.
(1)
On July 27, 2017, the Company's Board of Directors approved a share repurchase program, effective July 28, 2017, that authorized the purchase of up to $15
billion of the Company's outstanding common stock with no specified expiration date.
McDonald's Corporation 2017 Annual Report 11
Stock Performance Graph
IT
At least annually, we consider which companies comprise a readily identifiable investment peer group. McDonald's is included in published
restaurant indices; however, unlike most other companies included in these indices, which have no or limited international operations,
McDonald's does business in more than 100 countries and a substantial portion of our revenues and income is generated outside the U.S.
In addition, because of our size, McDonald's inclusion in those indices tends to skew the results. Therefore, we believe that such a
comparison is not meaningful.
Our market capitalization, trading volume and importance in an industry that is vital to the U.S. economy have resulted in McDonald's
inclusion in the Dow Jones Industrial Average (DJIA) since 1985. Like McDonald's, many DJIA companies generate meaningful revenues
and income outside the U.S. and some manage global brands. Thus, we believe that the use of the DJIA companies as the group for
comparison purposes is appropriate.
The following performance graph shows McDonald's cumulative total shareholder returns (i.e., price appreciation and reinvestment of
dividends) relative to the Standard & Poor's 500 Stock Index (S&P 500 Index) and to the DJIA companies for the five-year period ended
December 31, 2017. The graph assumes that the value of an investment in McDonald's common stock, the S&P 500 Index and the DJIA
companies (including McDonald's) was $100 at December 31, 2012. For the DJIA companies, returns are weighted for market capitalization
as of the beginning of each period indicated. These returns may vary from those of the Dow Jones Industrial Average Index, which is not
weighted by market capitalization, and may be composed of different companies during the period under consideration.
6
In
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T
O
N
C
C
C
C
C
T
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F
T
T
T
S
P
E
D
M
R
R
T
F
(1)
(2)
Company/Index
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
McDonald's Corporation
$100
$114
$113
$148
$157
$228
S&P 500 Index
100
132
151
153
171
208
Dow Jones Industrials
100
130
143
143
167
213
Source: S&P Capital IQ
12 McDonald's Corporation 2017 Annual Report
n
ITEM 6. Selected Financial Data
6-Year Summary
Years ended December 31,
2017
In millions, except per share and unit amounts
Consolidated Statement of Income Data
Revenues
Sales by Company-operated restaurants
Revenues from franchised restaurants
Total revenues
Operating income
Net income
Consolidated Statement of Cash Flows Data
Cash provided by operations
Cash used for (provided by) investing activities
Capital expenditures
Cash used for (provided by) financing activities
Treasury stock purchases(1)
Common stock dividends
Financial Position
Total assets
Total debt
Total shareholders’ equity (deficit)
Shares outstanding
Per Common Share Data
Earnings-diluted
Dividends declared
Market price at year end
Restaurant Information and Other Data
Restaurants at year end
Company-operated restaurants
Franchised restaurants
Total Systemwide restaurants
Franchised sales(2)
2016
2015
$
15,295
9,327
24,622
7,745
4,687
$
$
5,551 $
(562)
1,854
5,311
4,651
3,089
6,060
982
1,821
11,262
11,142
3,058
$
$
33,804 $
29,536
(3,268)
794
$
6.37
3.83
172.12
$
$
12,719
10,101
22,820
9,553
5,192
3,133
34,108
37,241
78,191
$
$
16,488
8,925
25,413
7,146
4,529
2014
2013
2012
$
18,169
9,272
27,441
7,949
4,758
$
18,875
9,231
28,106
8,764
5,586
$
18,603
8,964
27,567
8,605
5,465
6,539 $
1,420
1,814
(735)
6,182
3,230
6,730
2,305
2,583
4,618
3,175
3,216
$
7,121
2,674
2,825
4,043
1,810
3,115
$
6,966
3,167
3,049
3,850
2,605
2,897
31,024 $
25,956
(2,204)
819
37,939
24,122
7,088
907
$
34,227
14,936
12,853
963
$
36,626
14,130
16,010
990
$
35,386
13,633
15,294
1,003
5.44
3.61
121.72
4.80
3.44
118.44
$
4.82
3.28
93.70
$
5.55
3.12
97.03
$
5.36
2.87
88.21
5,669
31,230
36,899
69,707
$
$
6,444
30,081
36,525
66,226
$
6,714
29,544
36,258
69,617
$
6,738
28,691
35,429
70,251
$
6,598
27,882
34,480
69,687
(1)
Represents treasury stock purchases as reflected in Shareholders' equity.
(2)
While franchised sales are not recorded as revenues by the Company, management believes they are important in understanding the Company's financial
performance because these sales are the basis on which the Company calculates and records franchised revenues and are indicative of the financial health of the
franchisee base. Franchised restaurants represent more than 90% of McDonald's restaurants worldwide at December 31, 2017.
McDonald's Corporation 2017 Annual Report 13
ITEM 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
•
U.S. - the Company's largest segment.
•
International Lead Markets - established markets including
Australia, Canada, France, Germany, the U.K. and related
markets.
•
High Growth Markets - markets that the Company believes
have relatively higher restaurant expansion and franchising
potential including China, Italy, Korea, the Netherlands,
Poland, Russia, Spain, Switzerland and related markets.
Overview
DESCRIPTION OF THE BUSINESS
The Company franchises and operates McDonald’s restaurants.
Of the 37,241 restaurants in 120 countries at year-end 2017,
34,108 were franchised (reflects 21,366 franchised to conventional
franchisees, 6,945 licensed to developmental licensees and 5,797
licensed to foreign affiliates ("affiliates")—primarily in Japan and
China) and 3,133 were operated by the Company.
Under McDonald's conventional franchise arrangement,
franchisees provide a portion of the capital required by initially
investing in the equipment, signs, seating and décor of their
restaurant business, and by reinvesting in the business over time.
The Company generally owns the land and building or secures
long-term leases for both Company-operated and conventional
franchised restaurant sites. This maintains long-term occupancy
rights, helps control related costs and assists in alignment with
franchisees enabling restaurant performance levels that are
among the highest in the industry. In certain circumstances, the
Company participates in the reinvestment for conventional
franchised restaurants in an effort to accelerate implementation of
certain initiatives.
Under McDonald's developmental license arrangement,
licensees provide capital for the entire business, including the real
estate interest, and the Company generally has no capital
invested. In addition, the Company has an equity investment in a
number of affiliates (primarily in Japan and China) that invest in
real estate and operate or franchise restaurants within a market.
McDonald's is primarily a franchisor and believes franchising
is paramount to delivering great-tasting food, locally-relevant
customer experiences and driving profitability. Franchising enables
an individual to be his or her own employer and maintain control
over all employment-related matters, marketing and pricing
decisions, while also benefiting from the financial strength and
global experience of McDonald's. However, directly operating
restaurants is important to being a credible franchisor and
provides Company personnel with restaurant operations
experience. In Company-operated restaurants, and in
collaboration with franchisees, McDonald's further develops and
refines operating standards, marketing concepts and product and
pricing strategies, so that only those that the Company believes
are most beneficial are introduced in the restaurants. McDonald's
continually reviews its mix of Company-operated and franchised
restaurants to help optimize overall performance, with a goal to be
approximately 95% franchised over the long term.
The Company’s revenues consist of sales by Companyoperated restaurants and fees from restaurants operated by
franchisees. Revenues from conventional franchised restaurants
include rent and royalties based on a percent of sales along with
minimum rent payments, and initial fees. Revenues from
restaurants licensed to affiliates and developmental licensees
include a royalty based on a percent of sales, and generally
include initial fees. Fees vary by type of site, amount of Company
investment, if any, and local business conditions. These fees,
along with occupancy and operating rights, are stipulated in
franchise/license agreements that generally have 20-year terms.
The business is structured into the following segments that
combine markets with similar characteristics and opportunities for
growth, and reflect how management reviews and evaluates
operating performance:
14 McDonald's Corporation 2017 Annual Report
Foundational Markets & Corporate - the remaining markets
in the McDonald's system, most of which operate under a
largely franchised model. Corporate activities are also
reported within this segment.
For the year ended December 31, 2017, the U.S.,
International Lead Markets and High Growth Markets accounted
for 35%, 32% and 24% of total revenues, respectively.
In analyzing business trends, management reviews results on
a constant currency basis and considers a variety of performance
and financial measures which are considered to be non-GAAP,
including comparable sales and comparable guest count growth,
Systemwide sales growth, return on incremental invested capital
("ROIIC"), free cash flow and free cash flow conversion rate, as
described below.
•
•
•
•
•
•
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 in
constant currencies and bases most incentive compensation
plans on these results because the Company believes this
better represents its underlying business trends.
Comparable sales and comparable guest counts are key
performance indicators used within the retail industry and are
indicative of the impact of the Company’s initiatives as well
as local economic and consumer trends. Increases or
decreases in comparable sales and comparable guest
counts represent the percent change in sales and
transactions, respectively, from the same period in the prior
year for all restaurants, whether operated by the Company or
franchisees, in operation at least thirteen months, including
those temporarily closed. Some of the reasons restaurants
may be temporarily closed include reimaging or remodeling,
rebuilding, road construction and natural disasters.
Comparable sales exclude the impact of currency translation,
and, beginning in 2017, also exclude sales from Venezuela
due to its hyper-inflation. Management generally identifies
hyper-inflationary markets as those markets whose
cumulative inflation rate over a three-year period exceeds
100%. Comparable sales are driven by changes in guest
counts and average check, which is affected by changes in
pricing and product mix. Typically, pricing has a greater
impact on average check than product mix. The goal is to
achieve a relatively balanced contribution from both guest
counts and average check.
Systemwide sales include sales at all restaurants. 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.
ROIIC is a measure reviewed by management over one-year
and three-year time periods to evaluate the overall
profitability of the markets, the effectiveness of capital
deployed and the future allocation of capital. The return is
calculated by dividing the change in operating income plus
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depreciation and amortization (numerator) by the cash used
for investing activities (denominator), primarily capital
expenditures. The calculation uses a constant average
foreign exchange rate over the periods included in the
calculation.
•
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.
STRATEGIC DIRECTION AND FINANCIAL PERFORMANCE
The strength of the alignment among the Company, its franchisees
and suppliers (collectively referred to as the "System") is key to
McDonald's long-term success. By leveraging the System,
McDonald’s is able to identify, implement and scale ideas that
meet customers' changing needs and preferences. McDonald's
continually builds on its competitive advantages of System
alignment and geographic diversification to deliver consistent, yet
locally-relevant restaurant experiences to customers as an integral
part of their communities.
ever-improving convenience for customers on their terms. The
Company met aggressive deployment targets for each one of
these accelerators in 2017 and continues further implementation
in 2018 and beyond.
•
Experience of the Future. The Company continues to build
upon its investments in EOTF, focusing on restaurant
modernization and technology, in order to transform the
restaurant service experience and enhance the brand in the
eyes of the customer. The modernization efforts are designed
to drive incremental customer visits and higher average
check. McDonald’s currently has EOTF deployed in about
one-third of the restaurants globally, with half of the U.S.
restaurants expected to be deployed by the end of 2018.
•
Digital. As the Company accelerates its pace of converting
restaurants to EOTF, it is placing renewed emphasis on
improving its existing service model (i.e., eat in, take out, or
drive-thru) and strengthening its relationships with customers
through technology. By evolving the technology platform, the
Company is expanding choices for how customers order, pay
and are served through additional functionality on its global
mobile app, self-order kiosks and technology-driven models
that enable table service and curb-side pick-up. In the U.S.
alone, McDonald’s now has over 20 million registered users of
the McDonald’s application.
•
Delivery. The Company continues to further scale its delivery
platform as a way of expanding the convenience customers
receive from McDonald's. In 2017, McDonald’s added delivery
to 7,000 restaurants in 21 different countries. Including
previously offering delivery in Asia and the Middle East,
McDonald’s is now delivering meals from over 10,000
restaurants. In addition to added convenience, delivery
transactions tend to realize a higher average check and a
high customer satisfaction rating. In 2018, while the Company
expects to continue to expand the number of restaurants
offering delivery, the focus will shift to growing awareness and
demand in the areas where delivery is already offered.
CUSTOMER-CENTRIC GROWTH STRATEGY
Beginning in 2015, the Company made purposeful changes to
execute against key elements of its turnaround plan including a
renewed focus on running better restaurants, driving operational
growth, returning excitement to the brand and enhancing financial
value. The Company’s current momentum is broad-based
throughout the System and its recent performance demonstrates
that McDonald’s has completed the transition from turnaround to
growth.
In 2017, the Company shifted its focus to delivering long-term
growth through accelerated execution of its customer-centric
strategy - the Velocity Growth Plan. This plan outlines actions to
drive sustainable guest count growth, a reliable long-term
measure of the Company's strength, that is vital to growing sales
and shareholder value.
The Velocity Growth Plan is rooted in extensive customer
research and insights, along with a deep understanding of the key
drivers of the business. The Company is targeting the tremendous
opportunity at the core of its business - its food, value and
customer experience. The strategy is built on the following three
pillars, all focusing on building a better McDonald’s:
•
Retaining existing customers - focusing on areas where it
already has a strong foothold in the IEO category, including
family occasions and food-led breakfast.
•
Regaining lost customers - recommitting to areas of historic
strength, namely food taste and quality, convenience and
value.
•
Converting casual to committed customers - building stronger
relationships with customers so they visit more often, by
elevating and leveraging the McCafé coffee brand and
enhancing snack and treat offerings.
In each pillar, McDonald’s has established sustainable
platforms that enable execution of the plan with greater speed,
efficiency and impact while remaining relentlessly focused on the
fundamentals of running great restaurants. Additionally, through
three identified growth accelerators - Experience of the Future
(“EOTF”), Digital and Delivery - McDonald’s is enhancing the
overall customer experience with hospitable, friendly service and
In 2018, McDonald’s has plans to raise consumer awareness
of the enhanced convenience available with delivery and mobile
order and pay through thoughtful marketing campaigns that aim to
increase the number of customers enjoying these expanded
options to engage with the brand. The Company is optimistic that
this will contribute to the continued momentum of the business.
In addition to the customer-relevant changes in the
restaurants, the Company has enhanced financial value through
its refranchising efforts, G&A cost savings initiatives and cash
return to shareholders. In 2017, the Company achieved its target
to refranchise 4,000 restaurants, a full year ahead of the original
target date. McDonald’s is currently 92% franchised, with a longterm goal of approximately 95%. The transition to a more heavily
franchised business model is benefiting the Company’s
performance, as the rent and royalty income received from
franchisees provides a more predictable and stable revenue
stream with significantly lower operating costs and risks. This
includes a less G&A and capital intensive structure as franchisees
are responsible for supporting and reinvesting in their businesses.
Under this more heavily franchised structure, growing comparable
sales will be the strongest driver of operating income growth and
returns.
Through execution of the Velocity Growth Plan, McDonald’s is
serving more customers more often. In 2018, the Company
remains aggressively focused on executing its ambitious plan to
unlock more of its potential and drive long-term sustainable
growth.
McDonald's Corporation 2017 Annual Report 15
Our Velocity Growth Plan also includes the Company doing its
part to further embed certain social and environmental issues into
the core of our business, which we refer to as our Scale for Good.
As one of the world’s largest restaurant companies, our Scale for
Good highlights our commitment to global priorities that are
consistent with our strategic priorities and provides an opportunity
to collaborate with our franchisees and suppliers to drive
meaningful progress. We believe it is important for customers to
feel good about visiting McDonald’s restaurants and eating our
food in order to continue to drive each of the pillars within our
strategy.
While we're committed to addressing many challenges facing
society today, we're elevating a few global priorities that reflect
analysis of major social and environmental impacts of our food
and our business and the material environmental and social
issues that matter most to our customers, employees, franchisees,
suppliers and stakeholders. Our four global priorities are: beef
sustainability, packaging and recycling, commitment to families
and our investment in people. Beyond these global priorities, we
will continue to drive progress on our goals and commitments
across key social and environmental topics such as climate
change, diversity, animal health and welfare, and supporting
families and farmers.
•
AR
U.
•
Diluted earnings per share of $6.37 increased 17% (17% in
constant currencies).
•
Cash provided by operations was $5.6 billion.
•
Capital expenditures of $1.9 billion were allocated mainly to
reinvestment in existing restaurants and, to a lesser extent,
to new restaurant openings.
•
Across the System, about 900 restaurants (including those in
our developmental licensee and affiliated markets) were
opened.
•
Free cash flow was $3.7 billion (see reconciliation in Exhibit
12).
•
One-year ROIIC was 1,671.8% and three-year ROIIC was
93.1% for the period ended December 31, 2017. Excluding
the gain from the sale of businesses in China and Hong
Kong, as well as significant investing cash inflows from
strategic refranchising initiatives, one year and three year
ROIIC were 48.3% and 43.6%, respectively (see
reconciliation in Exhibit 12).
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The Company increased its quarterly cash dividend per
share by 7% to $1.01 for the fourth quarter, equivalent to an
annual dividend of $4.04 per share.
In
2017 FINANCIAL PERFORMANCE
The Company's 2017 financial performance demonstrates that the
Velocity Growth Plan is working. By focusing on the
aforementioned three pillars, and the identified growth
accelerators, the Company achieved its best comparable sales
performance in six years. In 2017, global comparable sales
increased 5.3% and global comparable guest counts increased
1.9%, with positive results achieved in all segments.
Operating margin, defined as operating income as a percent
of total revenues, increased from 31.5% in 2016 to 41.9% in
2017.
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The Company returned $7.7 billion to shareholders through
share repurchases and dividends for the year.
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Comparable sales in the U.S. increased 3.6% and
comparable guest counts increased 1.0%. The growth in
comparable sales and guest counts was supported by the
full breadth of our menu, including national beverage value
offerings, strong performance of core menu items featured
under the McPick 2 platform as well as Signature Crafted
premium sandwiches and other menu innovations.
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Comparable sales in the International Lead segment
increased 5.3% and comparable guest counts increased
2.3%, reflecting positive performance across all of the
segment, led by the U.K. and Canada.
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In the High Growth segment, comparable sales increased
5.3% and comparable guest counts increased 1.8%. This
performance reflects positive results across most of the
segment, led by China.
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Comparable sales in the Foundational Markets increased
9.0% and comparable guest counts increased 3.3%, led by
strong performance in Japan and Latin America, as well as
solid results across the remainder of the segment.
In addition to improved comparable sales and guest count
performance, the Company achieved the following financial results
in 2017:
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