MCDONALDS CORP, 10-K filed on 2/22/2019
Annual Report
v3.10.0.1
Document and Entity Information - USD ($)
12 Months Ended
Dec. 31, 2018
Jan. 31, 2019
Jun. 30, 2018
Document Documentand Entity Information [Abstract]      
Document Type 10-K    
Amendment Flag false    
Document Period End Date Dec. 31, 2018    
Document Fiscal Year Focus 2018    
Document Fiscal Period Focus FY    
Trading Symbol MCD    
Entity Registrant Name MCDONALDS CORP    
Entity Central Index Key 0000063908    
Current Fiscal Year End Date --12-31    
Entity Well-known Seasoned Issuer Yes    
Entity Current Reporting Status Yes    
Entity Voluntary Filers No    
Entity Filer Category Large Accelerated Filer    
Entity Public Float     $ 121,530,450,454
Entity Common Stock, Shares Outstanding   765,317,332  
v3.10.0.1
Consolidated Statement of Income - USD ($)
shares in Millions, $ in Millions
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
REVENUES      
Sales by Company-operated restaurants $ 10,012.7 $ 12,718.9 $ 15,295.0
Revenues from franchised restaurants 11,012.5 10,101.5 9,326.9
Total revenues 21,025.2 22,820.4 24,621.9
OPERATING COSTS AND EXPENSES      
Food & paper 3,153.8 4,033.5 4,896.9
Payroll & employee benefits 2,937.9 3,528.5 4,134.2
Occupancy & other operating expenses 2,174.2 2,847.6 3,667.7
Franchised restaurants-occupancy expenses 1,973.3 1,790.0 1,718.4
Selling, general & administrative expenses 2,200.2 2,231.3 2,384.5
Other operating (income) expense, net (236.8) (1,163.2) 75.7
Total operating costs and expenses 12,202.6 13,267.7 16,877.4
Operating income 8,822.6 9,552.7 7,744.5
Interest expense-net of capitalized interest of $5.6, $5.3 and $7.1 981.2 921.3 884.8
Nonoperating (income) expense, net 25.3 57.9 (6.3)
Income before provision for income taxes 7,816.1 8,573.5 6,866.0
Provision for income taxes 1,891.8 3,381.2 2,179.5
Net income $ 5,924.3 $ 5,192.3 $ 4,686.5
Earnings per common share–basic $ 7.61 $ 6.43 $ 5.49
Earnings per common share–diluted 7.54 6.37 5.44
Dividends declared per common share $ 4.19 $ 3.83 $ 3.61
Weighted-average shares outstanding–basic 778.2 807.4 854.4
Weighted-average shares outstanding–diluted 785.6 815.5 861.2
v3.10.0.1
Consolidated Statement of Income (Parenthetical) - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Interest expense, capitalized interest $ 5.6 $ 5.3 $ 7.1
v3.10.0.1
Consolidated Statement of Comprehensive Income - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Net income $ 5,924.3 $ 5,192.3 $ 4,686.5
Foreign currency translation adjustments:      
Gain (loss) recognized in accumulated other comprehensive income (AOCI), including net investment hedges (453.6) 827.7 (272.8)
Reclassification of (gain) loss to net income 0.0 109.3 94.0
Foreign currency translation adjustments-net of tax benefit (expense) of $(90.7), $453.1, and $(264.4) (453.6) 937.0 (178.8)
Cash flow hedges:      
Gain (loss) recognized in AOCI 46.5 (48.4) 18.5
Reclassification of (gain) loss to net income 2.4 9.0 (15.6)
Cash flow hedges-net of tax benefit (expense) of $(14.5), $22.4, and $(1.6) 48.9 (39.4) 2.9
Defined benefit pension plans:      
Gain (loss) recognized in AOCI (27.0) 16.3 (47.1)
Reclassification of (gain) loss to net income 0.6 0.6 9.9
Defined benefit pension plans-net of tax benefit (expense) of $4.3, $(3.9), and $(10.0) (26.4) 16.9 (37.2)
Total other comprehensive income (loss), net of tax (431.1) 914.5 (213.1)
Comprehensive income $ 5,493.2 $ 6,106.8 $ 4,473.4
v3.10.0.1
Consolidated Balance Sheet - USD ($)
$ in Millions
Dec. 31, 2018
Dec. 31, 2017
Current assets    
Cash and equivalents $ 866.0 $ 2,463.8
Accounts and notes receivable 2,441.5 1,976.2
Inventories, at cost, not in excess of market 51.1 58.8
Prepaid expenses and other current assets 694.6 828.4
Total current assets 4,053.2 5,327.2
Other assets    
Investments in and advances to affiliates 1,202.8 1,085.7
Goodwill 2,331.5 2,379.7
Miscellaneous 2,381.0 2,562.8
Total other assets 5,915.3 6,028.2
Property and equipment    
Property and equipment, at cost 37,193.6 36,626.4
Accumulated depreciation and amortization (14,350.9) (14,178.1)
Net property and equipment 22,842.7 22,448.3
Total assets 32,811.2 33,803.7
Current liabilities    
Accounts payable 1,207.9 924.8
Income taxes 228.3 265.8
Other taxes 253.7 275.4
Accrued interest 297.0 278.4
Accrued payroll and other liabilities 986.6 1,146.2
Total current liabilities 2,973.5 2,890.6
Long-term debt 31,075.3 29,536.4
Long-term income taxes 2,081.2 2,370.9
Deferred revenues - initial franchise fees 627.8 0.0
Other long-term liabilities 1,096.3 1,154.4
Deferred income taxes 1,215.5 1,119.4
Shareholders' equity (deficit)    
Preferred stock, no par value; authorized – 165.0 million shares; issued – none 0.0 0.0
Common stock, $.01 par value; authorized – 3.5 billion shares; issued – 1,660.6 million shares 16.6 16.6
Additional paid-in capital 7,376.0 7,072.4
Retained earnings 50,487.0 48,325.8
Accumulated other comprehensive income (2,609.5) (2,178.4)
Common stock in treasury, at cost; 893.5 and 866.5 million shares (61,528.5) (56,504.4)
Total shareholders' equity (deficit) (6,258.4) (3,268.0)
Total liabilities and shareholders' equity (deficit) $ 32,811.2 $ 33,803.7
v3.10.0.1
Consolidated Balance Sheet (Parenthetical) - $ / shares
Dec. 31, 2018
Dec. 31, 2017
Preferred stock, par value $ 0 $ 0
Preferred stock, authorized 165,000,000 165,000,000
Preferred stock, issued 0 0
Common stock, par value $ 0.01 $ 0.01
Common stock, authorized 3,500,000,000 3,500,000,000
Common stock, issued 1,660,600,000 1,660,600,000
Common stock in treasury, shares 893,500,000 866,500,000
v3.10.0.1
Consolidated Statement of Cash Flows
$ in Millions
12 Months Ended
Dec. 31, 2018
USD ($)
Dec. 31, 2017
USD ($)
Dec. 31, 2016
USD ($)
Operating activities      
Net income $ 5,924.3 $ 5,192.3 $ 4,686.5
Charges and credits:      
Depreciation and amortization 1,482.0 1,363.4 1,516.5
Deferred income taxes 102.6 (36.4) (538.6)
Share-based compensation 125.1 117.5 131.3
Net gain on sale of restaurant businesses (308.8) (1,155.8) (310.7)
Other 114.2 1,050.7 407.6
Changes in working capital items:      
Accounts receivable (479.4) (340.7) (159.0)
Inventories, prepaid expenses and other current assets (1.9) (37.3) 28.1
Accounts payable 129.4 (59.7) 89.8
Income taxes (33.4) (396.4) 169.7
Other accrued liabilities (87.4) (146.4) 38.4
Cash provided by operations 6,966.7 5,551.2 6,059.6
Investing activities      
Capital expenditures (2,741.7) (1,853.7) (1,821.1)
Purchases of restaurant businesses (101.7) (77.0) (109.5)
Sales of restaurant businesses 530.8 974.8 975.6
Proceeds from sale of businesses in China and Hong Kong 0.0 1,597.0 0.0
Sales of property 160.4 166.8 82.9
Other (302.9) (245.9) (109.5)
Cash provided by (used for) investing activities (2,455.1) 562.0 (981.6)
Financing activities      
Net short-term borrowings 95.9 (1,050.3) (286.2)
Long-term financing issuances 3,794.5 4,727.5 3,779.5
Long-term financing repayments (1,759.6) (1,649.4) (822.9)
Treasury stock purchases (5,207.7) (4,685.7) (11,171.0)
Common stock dividends (3,255.9) (3,089.2) (3,058.2)
Proceeds from stock option exercises 403.2 456.8 299.4
Other (20.0) (20.5) (3.0)
Cash used for financing activities (5,949.6) (5,310.8) (11,262.4)
Effect of exchange rates on cash and equivalents (159.8) 264.0 (103.7)
Cash and equivalents increase (decrease) (1,597.8) 1,066.4 (6,288.1)
Change in cash balances of businesses held for sale 0.0 174.0 (174.0)
Cash and equivalents at beginning of year 2,463.8 1,223.4 7,685.5
Cash and equivalents at end of year 866.0 2,463.8 1,223.4
Supplemental cash flow disclosures      
Interest paid 959.6 885.2 873.5
Income taxes paid $ 1,734.4 $ 2,786.3 $ 2,387.5
v3.10.0.1
Consolidated Statement of Shareholders Equity - USD ($)
shares in Millions, $ in Millions
Total
Common stock issued
Additional paid-in capital
Retained earnings
Pensions
Cash flow hedges
Foreign currency translation
Common stock in treasury
Beginning Balance (in shares) at Dec. 31, 2015   1,660.6           (753.8)
Beginning Balance at Dec. 31, 2015 $ 7,087.9 $ 16.6 $ 6,533.4 $ 44,594.5 $ (169.9) $ 20.0 $ (2,729.9) $ (41,176.8)
Net income 4,686.5     4,686.5        
Other comprehensive income (loss), net of tax (213.1)       (37.2) 2.9 (178.8)  
Comprehensive income 4,473.4              
Common stock cash dividends (3,058.2)     (3,058.2)        
Treasury stock purchases (in shares)               (92.3)
Treasury stock purchases (11,141.5)             $ (11,141.5)
Share-based compensation 131.3   131.3          
Stock option exercises and other (including tax benefits of $0.6m in 2016, $0.0m in 2017, $0.0m in 2018) (in shares)               4.8
Stock option exercises and other (including tax benefits of $0.6m in 2016, $0.0m in 2017, $0.0m in 2018) 302.8   93.2 (0.1)       $ 209.7
Ending Balance (in shares) at Dec. 31, 2016   1,660.6           (841.3)
Ending Balance at Dec. 31, 2016 (2,204.3) $ 16.6 6,757.9 46,222.7 (207.1) 22.9 (2,908.7) $ (52,108.6)
Net income 5,192.3     5,192.3        
Other comprehensive income (loss), net of tax 914.5       16.9 (39.4) 937.0  
Comprehensive income 6,106.8              
Common stock cash dividends (3,089.2)     (3,089.2)        
Treasury stock purchases (in shares)               (31.4)
Treasury stock purchases (4,650.5)             $ (4,650.5)
Share-based compensation 117.5   117.5          
Stock option exercises and other (including tax benefits of $0.6m in 2016, $0.0m in 2017, $0.0m in 2018) (in shares)               6.2
Stock option exercises and other (including tax benefits of $0.6m in 2016, $0.0m in 2017, $0.0m in 2018) 451.7   197.0         $ 254.7
Ending Balance (in shares) at Dec. 31, 2017   1,660.6           (866.5)
Ending Balance at Dec. 31, 2017 (3,268.0) $ 16.6 7,072.4 48,325.8 (190.2) (16.5) (1,971.7) $ (56,504.4)
Net income 5,924.3     5,924.3        
Other comprehensive income (loss), net of tax (431.1)       (26.4) 48.9 (453.6)  
Comprehensive income 5,493.2              
Adoption of ASC 606 (450.2)     (450.2)        
Adoption of ASU 2016-16 (57.0)     (57.0)        
Common stock cash dividends (3,255.9)     (3,255.9)        
Treasury stock purchases (in shares)               (32.2)
Treasury stock purchases (5,247.5)             $ (5,247.5)
Share-based compensation 125.1   125.1          
Stock option exercises and other (including tax benefits of $0.6m in 2016, $0.0m in 2017, $0.0m in 2018) (in shares)               5.2
Stock option exercises and other (including tax benefits of $0.6m in 2016, $0.0m in 2017, $0.0m in 2018) 401.9   178.5         $ 223.4
Ending Balance (in shares) at Dec. 31, 2018   1,660.6           (893.5)
Ending Balance at Dec. 31, 2018 $ (6,258.4) $ 16.6 $ 7,376.0 $ 50,487.0 $ (216.6) $ 32.4 $ (2,425.3) $ (61,528.5)
v3.10.0.1
Consolidated Statement of Shareholders Equity (Parenthetical) - USD ($)
$ in Millions
3 Months Ended 12 Months Ended
Sep. 30, 2018
[1]
Jun. 30, 2018
Mar. 31, 2018
Sep. 30, 2017
[1]
Jun. 30, 2017
Mar. 31, 2017
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Document Fiscal Year Focus             2018    
Common stock cash dividends (in dollars per share) $ 2.17 $ 1.01 $ 1.01 $ 1.95 $ 0.94 $ 0.94 $ 4.19 $ 3.83 $ 3.61
Stock option exercises and other, tax benefits             $ 0.0 $ 0.0 $ (0.6)
[1] Includes a $1.01 and $0.94 per share dividend declared and paid in third quarter of 2018 and 2017, respectively, and a $1.16 and $1.01 per share dividend declared in the third quarter and paid in fourth quarter of 2018 and 2017, respectively.
v3.10.0.1
Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2018
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies Summary of Significant Accounting PoliciesNATURE OF BUSINESS
The Company franchises and operates McDonald’s restaurants in the global restaurant industry. All restaurants are operated either by the Company or by franchisees, including conventional franchisees under franchised arrangements, and developmental licensees and foreign affiliates under license agreements.
The following table presents restaurant information by ownership type:
Restaurants at December 31,
2018

 
2017

 
2016

Conventional franchised
21,685

 
21,366

 
21,559

Developmental licensed
7,225

 
6,945

 
6,300

Foreign affiliated
6,175

 
5,797

 
3,371

Franchised
35,085

 
34,108

 
31,230

Company-operated
2,770

 
3,133

 
5,669

Systemwide restaurants
37,855

 
37,241

 
36,899


The results of operations of restaurant businesses purchased and sold in transactions with franchisees were not material either individually or in the aggregate to the consolidated financial statements for periods prior to purchase and sale.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its subsidiaries. Investments in affiliates owned 50% or less (primarily McDonald’s China and Japan) are accounted for by the equity method.
On an ongoing basis, the Company evaluates its business relationships such as those with franchisees, joint venture partners, developmental licensees, suppliers and advertising cooperatives to identify potential variable interest entities. Generally, these businesses qualify for a scope exception under the variable interest entity consolidation guidance. The Company has concluded that consolidation of any such entity is not appropriate for the periods presented.
ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
Income Taxes
In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("AOCI")." The guidance permits entities to reclassify the stranded tax effects resulting from the Tax Act from AOCI to retained earnings. ASU 2018-02 will be effective for fiscal years beginning after December 15, 2018, including interim periods within those annual reporting periods. ASU 2018-02 may be applied in the period of adoption or retrospectively to each period in which the effect of the change related to the Tax Act was recognized. The Company has adopted the provisions of ASU 2018-02 as of January 1, 2019, and plans to not make an election to reclassify the income tax effects of the Tax Act from AOCI to retained earnings.
Lease Accounting
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Most prominent among the amendments is the recognition of assets and liabilities by lessees for those leases classified as operating leases under current U.S. GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
As discussed further in the “Franchise Arrangements” and “Leasing Arrangements” footnotes, the Company is engaged in a significant amount of leasing activity, both from a lessee and a lessor perspective. As required by the standard, the Company has adopted the provisions of the new standard effective January 1, 2019, using the required modified retrospective approach.
The Company has elected the package of practical expedients, which allows the Company to retain the classification of existing leases; therefore, there will be minimal initial impact on the Consolidated Statement of Income. Moving forward, as the Company enters into new leases or as leases are modified, the expectation is that many of the Company's ground leases may be reclassified from operating classification to financing classification, which will change the timing and classification of a portion of lease expense between operating income and interest expense. It is not possible to quantify the impact at this time, due to the unknown timing of new leases and lease modifications, however the Company does not expect the impact to be material to any given year.
ASU 2016-02 will have a material impact on the Consolidated Balance Sheet due to the significance of the Company’s operating lease portfolio. The Company estimates adoption of the new standard will result in a Right of Use Asset and Lease Liability in the range of approximately $10.5 billion to $12.5 billion. At transition, the Right of Use Asset and Lease Liability reflect a present value of the Company's current minimum lease payments over a lease term, which may include options that are reasonably assured of being exercised, discounted using a collateralized incremental borrowing rate. The impact of ASU 2016-02 is non-cash in nature, therefore, it will not affect the Company’s cash flows. The Company has also made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet. It will continue to recognize those lease payments in the Consolidated Statement of Income on a straight-line basis over the lease term.
REVENUE RECOGNITION
The Company’s revenues consist of sales by Company-operated restaurants and fees from franchised restaurants operated by conventional franchisees, developmental licensees and foreign affiliates. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales with minimum rent payments, and initial fees. Revenues from restaurants licensed to foreign affiliates and developmental licensees include a royalty based on a percent of sales, and may include initial fees.
ASC 606 provides that revenues are to be recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration expected to be received for those goods or services. This standard does not impact the Company's recognition of revenue from Company-operated restaurants as those sales are recognized on a cash basis at the time of the underlying sale and are presented net of sales tax and other sales-related taxes. The standard also does not change the recognition of royalties from restaurants operated by franchisees or licensed to affiliates and developmental licensees, which are based on a percent of sales and recognized at the time the underlying sales occur. Rental income from restaurants operated by conventional franchisees is also not impacted by this standard as those revenues are subject to the guidance in ASC 840, "Leases." The standard does change the timing in which the Company recognizes initial fees from franchisees for new restaurant openings and new franchise terms. The Company's accounting policy through December 31, 2017, was to recognize initial franchise fees when received, upon a new restaurant opening and at the start of a new franchise term. Beginning in January 2018, initial franchise fees have been recognized as the Company satisfies the performance obligation over the franchise term, which is generally 20 years. Refer to the Franchise Arrangements footnote on page 44 for additional information.
The Company adopted ASC 606 as of January 1, 2018, using the modified retrospective method. This method allows the standard to be applied retrospectively through a cumulative catch up adjustment recognized upon adoption. As such, comparative information in the Company’s financial statements has not been restated and continues to be reported under the accounting standards in effect for those periods. The cumulative adjustment recorded upon adoption of ASC 606 consisted of deferred revenue of approximately $600 million within long-term liabilities and approximately $150 million of associated adjustments to the deferred tax balances which are recorded in Deferred income taxes and Miscellaneous other assets on the Consolidated Balance Sheet.

The following table presents revenue disaggregated by revenue source (in millions):

Years ended December 31,
 
2018

 
2017

 
2016

Company-operated sales:
 
 
 
 
 
 
U.S.
 
$
2,664.6

 
$
3,260.4

 
$
3,742.6

International Lead Markets
 
3,961.6

 
4,080.0

 
4,278.5

High Growth Markets
 
2,847.8

 
4,591.5

 
5,377.9

Foundational Markets & Corporate
 
538.7

 
787.0

 
1,896.0

Total
 
$
10,012.7

 
$
12,718.9

 
$
15,295.0

Franchised revenues:
 
 
 
 
 
 
U.S.
 
$
5,001.2

 
$
4,746.0

 
$
4,510.1

International Lead Markets
 
3,638.5

 
3,260.3

 
2,944.9

High Growth Markets
 
1,140.9

 
941.7

 
782.8

Foundational Markets & Corporate
 
1,231.9

 
1,153.5

 
1,089.1

Total *
 
$
11,012.5

 
$
10,101.5

 
$
9,326.9

Total revenues:
 
 
 
 
 
 
U.S.
 
$
7,665.8

 
$
8,006.4

 
$
8,252.7

International Lead Markets
 
7,600.1

 
7,340.3

 
7,223.4

High Growth Markets
 
3,988.7

 
5,533.2

 
6,160.7

Foundational Markets & Corporate
 
1,770.6

 
1,940.5

 
2,985.1

Total
 
$
21,025.2

 
$
22,820.4

 
$
24,621.9

*
Revenues for 2018 reflected a negative impact of approximately $42 million as a result of the change in timing of recognizing revenue associated with initial fees.

FOREIGN CURRENCY TRANSLATION
Generally, the functional currency of operations outside the U.S. is the respective local currency.
ADVERTISING COSTS
Advertising costs included in operating expenses of Company-operated restaurants primarily consist of contributions to advertising cooperatives and were (in millions): 2018$388.8; 2017$532.9; 2016$645.8. Production costs for radio and television advertising are expensed when the commercials are initially aired. These production costs, primarily in the U.S., as well as other marketing-related expenses included in Selling, general & administrative expenses were (in millions): 2018$88.0; 2017$100.2; 2016$88.8. Costs related to the Olympics sponsorship are included in the expenses for 2018 and 2016. In addition, significant advertising costs are incurred by franchisees through contributions to advertising cooperatives in individual markets. The costs incurred by these advertising cooperatives are approved and managed jointly by vote of both Company-operated restaurants and franchisees.

SHARE-BASED COMPENSATION
Share-based compensation includes the portion vesting of all share-based awards granted based on the grant date fair value.
Share-based compensation expense and the effect on diluted earnings per common share were as follows:
In millions, except per share data
2018

 
2017

 
2016

Share-based compensation expense
$
125.1

 
$
117.5

 
$
131.3

After tax
$
108.1

 
$
82.0

 
$
89.6

Earnings per common share-diluted
$
0.14

 
$
0.10

 
$
0.11


Compensation expense related to share-based awards is generally amortized on a straight-line basis over the vesting period in Selling, general & administrative expenses. As of December 31, 2018, there was $114.3 million of total unrecognized compensation cost related to nonvested share-based compensation that is expected to be recognized over a weighted-average period of 2.1 years.
The fair value of each stock option granted is estimated on the date of grant using a closed-form pricing model. The following table presents the weighted-average assumptions used in the option pricing model for the 2018, 2017 and 2016 stock option grants. The expected life of the options represents the period of time the options are expected to be outstanding and is based on historical trends. Expected stock price volatility is generally based on the historical volatility of the Company’s stock for a period approximating the expected life. The expected dividend yield is based on the Company’s most recent annual dividend rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant with a term equal to the expected life.

Weighted-average assumptions
 
2018

2017

2016

Expected dividend yield
2.6
%
3.1
%
3.0
%
Expected stock price volatility
18.7
%
18.4
%
19.2
%
Risk-free interest rate
2.7
%
2.2
%
1.2
%
Expected life of options (in years)
5.8

5.9

5.9

Fair value per option granted
$
23.80

$
16.10

$
13.65



The fair value of each RSU granted is equal to the market price of the Company’s stock at date of grant, and prior to 2018 included a reduction for the present value of expected dividends over the vesting period. For performance-based RSUs granted beginning in 2016, the Company includes a relative TSR modifier to determine the number of shares earned at the end of the performance period. The fair value of performance-based RSUs that include the TSR modifier is determined using a Monte Carlo valuation model.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, with depreciation and amortization provided using the straight-line method over the following estimated useful lives: buildings–up to 40 years; leasehold improvements–the lesser of useful lives of assets or lease terms, which generally include certain option periods; and equipment–3 to 12 years.
LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment annually in the fourth quarter and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of annually reviewing McDonald’s restaurant assets for potential impairment, assets are initially grouped together in the U.S. at a field office level, and internationally, at a market level. The Company manages its restaurants as a group or portfolio with significant common costs and promotional activities; as such, an individual restaurant’s cash flows are not generally independent of the cash flows of others in a market. If an indicator of impairment exists for any grouping of assets, an estimate of undiscounted future cash flows produced by each individual restaurant within the asset grouping is compared to its carrying value. If an individual restaurant is determined to be impaired, the loss is measured by the excess of the carrying amount of the restaurant over its fair value as determined by an estimate of discounted future cash flows.
Losses on assets held for disposal are recognized when management and the Board of Directors, as required, have approved and committed to a plan to dispose of the assets, the assets are available for disposal and the disposal is probable of occurring within 12 months, and the net sales proceeds are expected to be less than its net book value, among other factors. Generally, such losses are related to restaurants that have closed and ceased operations as well as other assets that meet the criteria to be considered “available for sale."
GOODWILL
Goodwill represents the excess of cost over the net tangible assets and identifiable intangible assets of acquired restaurant businesses. The Company's goodwill primarily results from purchases of McDonald's restaurants from franchisees and ownership increases in subsidiaries or affiliates, and it is generally assigned to the reporting unit (defined as each individual market) expected to benefit from the synergies of the combination. If a Company-operated restaurant is sold within 24 months of acquisition, the goodwill associated with the acquisition is written off in its entirety. If a restaurant is sold beyond 24 months from the acquisition, the amount of goodwill written off is based on the relative fair value of the business sold compared to the reporting unit.




The following table presents the 2018 activity in goodwill by segment:
In millions
U.S.

International
Lead Markets
 
High Growth
Markets
 
Foundational Markets
& Corporate
 
Consolidated
 
Balance at December 31, 2017
$
1,274.0

 
$
750.5

 
$
316.7

 
$
38.5

 
$
2,379.7

Net restaurant purchases (sales)
2.5

 
20.2

 
(1.3
)
 
(0.3
)
 
21.1

Impairment losses

 

 

 
(1.1
)
 
(1.1
)
Currency translation
 
 
(52.4
)
 
(14.1
)
 
(1.7
)
 
(68.2
)
Balance at December 31, 2018
$
1,276.5

 
$
718.3

 
$
301.3

 
$
35.4

 
$
2,331.5


The Company conducts goodwill impairment testing in the fourth quarter of each year or whenever an indicator of impairment exists. If an indicator of impairment exists (e.g., estimated earnings multiple value of a reporting unit is less than its carrying value), the goodwill impairment test compares the fair value of a reporting unit, generally based on discounted future cash flows, with its carrying amount including goodwill. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is measured as the difference between the implied fair value of the reporting unit's goodwill and the carrying amount of goodwill. Historically, goodwill impairment has not significantly impacted the consolidated financial statements. Accumulated goodwill impairment losses on the Consolidated Balance Sheet at December 31, 2018 and 2017 were $15.6 million and $14.5 million, respectively.

FAIR VALUE MEASUREMENTS
The Company measures certain financial assets and liabilities at fair value on a recurring basis, and certain non-financial assets and liabilities on a nonrecurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. Fair value disclosures are reflected in a three-level hierarchy, maximizing the use of observable inputs and minimizing the use of unobservable inputs.
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market.
Level 2 – inputs to the valuation methodology include quoted prices for a similar asset or liability in an active market or model-derived valuations in which all significant inputs are observable for substantially the full term of the asset or liability.
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability.
Certain of the Company’s derivatives are valued using various pricing models or discounted cash flow analyses that incorporate observable market parameters, such as interest rate yield curves, option volatilities and currency rates, classified as Level 2 within the valuation hierarchy. Derivative valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by the counterparty or the Company. 
Certain Financial Assets and Liabilities Measured at Fair Value
The following tables present financial assets and liabilities measured at fair value on a recurring basis by the valuation hierarchy as defined in the fair value guidance:
December 31, 2018
 
 
 
 
 
 
In millions
Level 1*

 
Level 2

 
Carrying
Value
 
Derivative assets
$
167.1

 
$
39.2

 
 
$
206.3

Derivative liabilities
 
 
$
(16.6
)
 
 
$
(16.6
)
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
In millions
Level 1*

 
Level 2

 
Carrying
Value
 
Derivative assets
$
167.3

 
$
0.6

 
 
$
167.9

Derivative liabilities
 
 
$
(45.4
)
 
 
$
(45.4
)
*
Level 1 is comprised of derivatives that hedge market driven changes in liabilities associated with the Company’s supplemental benefit plans.
Non-Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment). For the year ended December 31, 2018, the Company recorded fair value adjustments to its long-lived assets, primarily to property and equipment, based on Level 3 inputs which includes the use of a discounted cash flow valuation approach.
Certain Financial Assets and Liabilities not Measured at Fair Value
At December 31, 2018, the fair value of the Company’s debt obligations was estimated at $31.7 billion, compared to a carrying amount of $31.1 billion. The fair value was based on quoted market prices, Level 2 within the valuation hierarchy. The carrying amount for both cash equivalents and notes receivable approximate fair value.

FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
In 2018, the Company adopted ASU 2017-12, "Derivatives and Hedging (Topic 815)", utilizing the modified retrospective transition method. The adoption of this standard did not have a material impact on the consolidated financial statements.
The Company is exposed to global market risks, including the effect of changes in interest rates and foreign currency fluctuations. The Company uses foreign currency denominated debt and derivative instruments to mitigate the impact of these changes. The Company does not hold or issue derivatives for trading purposes.
The Company documents its risk management objective and strategy for undertaking hedging transactions, as well as all relationships between hedging instruments and hedged items. The Company’s derivatives that are designated for hedge accounting consist mainly of interest rate swaps, foreign currency forwards, and cross-currency swaps, and are classified as either fair value, cash flow or net investment hedges. Further details are explained in the "Fair Value," "Cash Flow" and "Net Investment" hedge sections.
The Company also enters into certain derivatives that are not designated for hedge accounting. The Company has entered into equity derivative contracts, including total return swaps, to hedge market-driven changes in certain of its supplemental benefit plan liabilities. In addition, the Company uses foreign currency forwards to mitigate the change in fair value of certain foreign currency denominated assets and liabilities. Further details are explained in the “Undesignated Derivatives” section.
All derivatives (including those not designated for hedge accounting) are recognized on the Consolidated Balance Sheet at fair value and classified based on the instruments’ maturity dates. Changes in the fair value measurements of the derivative instruments are reflected as adjustments to AOCI and/or current earnings.
The following table presents the fair values of derivative instruments included on the Consolidated Balance Sheet as of December 31, 2018 and 2017:
  
Derivative Assets
 
Derivative Liabilities
In millions
Balance Sheet Classification
 
2018

 
2017

 
Balance Sheet Classification
 
2018

 
2017

Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
Foreign currency
Prepaid expenses and other current assets
 
$
30.9

 
$
0.5

 
Accrued payroll and other liabilities
 
$
(0.7
)
 
$
(31.0
)
Interest rate
Prepaid expenses and other current assets
 
 
 
 
 
Accrued payroll and other liabilities
 
(0.1
)
 
(0.3
)
Foreign currency
Miscellaneous other assets
 
3.8

 
0.1

 
Other long-term liabilities
 
(1.3
)
 
(1.4
)
Interest rate
Miscellaneous other assets

 

 

 
Other long-term liabilities
 
(11.8
)
 
(5.9
)
Total derivatives designated as hedging instruments
 
$
34.7

 
$
0.6

 
 
 
$
(13.9
)
 
$
(38.6
)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
Equity
Prepaid expenses and other current assets


 
$
167.1

 
$

 
Accrued payroll and other liabilities
 
$
(2.7
)
 
$
(1.3
)
Foreign currency
Prepaid expenses and other current assets


 
4.5

 

 
Accrued payroll and other liabilities
 

 
(5.5
)
Equity
Miscellaneous other assets
 

 
167.3

 
 
 
 
 
 
Total derivatives not designated as hedging instruments
 
$
171.6

 
$
167.3

 
 
 
(2.7
)
 
$
(6.8
)
Total derivatives
 
$
206.3

 
$
167.9

 
 
 
$
(16.6
)
 
$
(45.4
)

The following table presents the pre-tax amounts from derivative instruments affecting income and AOCI for the year ended December 31, 2018 and 2017, respectively:
 
Location of Gain or Loss
Recognized in Income on
Derivative
 
Gain (Loss)
Recognized in
Accumulated OCI
 
Gain (Loss) Reclassified
into Income from
Accumulated OCI
 
Gain (Loss) Recognized in
Income on Derivative
 
 
 
 
 
 
 
 
In millions
 
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Foreign currency
Nonoperating income/expense
 
$
60.0

 
$
(76.0
)
 
$
(2.2
)
 
$
(13.7
)
 
 
 
 
Interest rate
Interest expense
 

 

 
(1.2
)
 
(0.5
)
 
 
 
 
Cash flow hedges
 
$
60.0

 
$
(76.0
)
 
$
(3.4
)
 
$
(14.2
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency denominated debt
Nonoperating income/expense
 
$
682.9

 
$
(1,599.7
)
 
$

 
$

 
 
 
 
Foreign currency derivatives
Nonoperating income/expense
 
1.3

 
(8.9
)
 

 
8.6

 
 
 
 
Foreign currency derivatives(1)
Interest expense
 
 
 
 
 
 
 
 
 
$
4.0

 
$

Net investment hedges
 
$
684.2

 
$
(1,608.6
)
 
$

 
$
8.6

 
$
4.0

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency
Nonoperating income/expense
 
 
 
 
 
 
 
 
 
$
22.1

 
$
(24.2
)
Equity
Selling, general & administrative expenses
 
 
 
 
 
 
 
 
 
0.4

 
92.7

Undesignated derivatives
 
 
 
 
 
 
 
 
 
$
22.5

 
$
68.5

(1)The amount of gain (loss) recognized in income related to components excluded from effectiveness testing.


Fair Value Hedges
The Company enters into fair value hedges to reduce the exposure to changes in fair values of certain liabilities. The Company enters into fair value hedges that convert a portion of its fixed rate debt into floating rate debt by use of interest rate swaps.  At December 31, 2018, the carrying amount of fixed-rate debt that was effectively converted was $738.0 million, which included a decrease of $12.0 million of cumulative hedging adjustments. For the year ended December 31, 2018, the Company recognized a $5.8 million loss on the fair value of interest rate swaps, and a corresponding gain on the fair value of the related hedged debt instrument to Interest expense.
Cash Flow Hedges
The Company enters into cash flow hedges to reduce the exposure to variability in certain expected future cash flows. To protect against the reduction in value of forecasted foreign currency cash flows (such as royalties denominated in foreign currencies), the Company uses foreign currency forwards to hedge a portion of anticipated exposures. The hedges cover the next 18 months for certain exposures and are denominated in various currencies. As of December 31, 2018, the Company had derivatives outstanding with an equivalent notional amount of $726.3 million that hedged a portion of forecasted foreign currency denominated cash flows.
Based on market conditions at December 31, 2018, the $32.4 million in cumulative cash flow hedging gains, after tax, is not expected to have a significant effect on earnings over the next 12 months.
Net Investment Hedges
The Company primarily uses foreign currency denominated debt (third party and intercompany) to hedge its investments in certain foreign subsidiaries and affiliates. Realized and unrealized translation adjustments from these hedges are included in shareholders' equity in the foreign currency translation component of OCI and offset translation adjustments on the underlying net assets of foreign subsidiaries and affiliates, which also are recorded in OCI. As of December 31, 2018, $10.8 billion of the Company's third party foreign currency denominated debt and $3.5 billion of intercompany foreign currency denominated debt were designated to hedge investments in certain foreign subsidiaries and affiliates.
Undesignated Derivatives
The Company enters into certain derivatives that are not designated for hedge accounting, therefore the changes in the fair value of these derivatives are recognized immediately in earnings together with the gain or loss from the hedged balance sheet position. As an example, the Company enters into equity derivative contracts, including total return swaps, to hedge market-driven changes in certain of its supplemental benefit plan liabilities. Changes in the fair value of these derivatives are recorded in Selling, general & administrative expenses together with the changes in the supplemental benefit plan liabilities. In addition, the Company uses foreign currency forwards to mitigate the change in fair value of certain foreign currency denominated assets and liabilities. The changes in the fair value of these derivatives are recognized in Nonoperating (income) expense, net, along with the currency gain or loss from the hedged balance sheet position.
Credit Risk
The Company is exposed to credit-related losses in the event of non-performance by its derivative counterparties. The Company did not have significant exposure to any individual counterparty at December 31, 2018 and has master agreements that contain netting arrangements. For financial reporting purposes, the Company presents gross derivative balances in the financial statements and supplementary data, including for counterparties subject to netting arrangements. Some of these agreements also require each party to post collateral if credit ratings fall below, or aggregate exposures exceed, certain contractual limits. At December 31, 2018, the Company was required to post an immaterial amount of collateral due to the negative fair value of certain derivative positions. The Company's counterparties were not required to post collateral on any derivative position, other than on certain hedges of the Company’s supplemental benefit plan liabilities where the counterparties were required to post collateral on their liability positions.

INCOME TAXES
Income Tax Uncertainties
The Company, like other multi-national companies, is regularly audited by federal, state and foreign tax authorities, and tax assessments may arise several years after tax returns have been filed. Accordingly, tax liabilities are recorded when, in management’s judgment, a tax position does not meet the more likely than not threshold for recognition. For tax positions that meet the more likely than not threshold, a tax liability may still be recorded depending on management’s assessment of how the tax position will ultimately be settled.
The Company records interest and penalties on unrecognized tax benefits in the provision for income taxes.
Accounting for Global Intangible Low-Taxed Income ("GILTI")
The Tax Act requires a U.S. shareholder of a foreign corporation to include GILTI in taxable income. The accounting policy of the Company is to record any tax on GILTI in the provision for income taxes in the year it is incurred.PER COMMON SHARE INFORMATIONDiluted earnings per common share is calculated using net income divided by diluted weighted-average shares. Diluted weighted-average shares include weighted-average shares outstanding plus the dilutive effect of share-based compensation calculated using the treasury stock method, of (in millions of shares): 20187.3; 20178.1; 20166.8. Stock options that were not included in diluted weighted-average shares because they would have been antidilutive were (in millions of shares): 20180.5; 20170.1; 20161.2.CASH AND EQUIVALENTSThe Company considers short-term, highly liquid investments with an original maturity of 90 days or less to be cash equivalents.SUBSEQUENT EVENTSThe Company evaluated subsequent events through the date the financial statements were issued and filed with the SEC. There were no subsequent events that required recognition or disclosure.
v3.10.0.1
Property and Equipment
12 Months Ended
Dec. 31, 2018
Property, Plant and Equipment [Abstract]  
Property and Equipment
Property and Equipment
 
Net property and equipment consisted of:
In millions
December 31, 2018

 
2017

Land
$
5,521.4

 
$
5,662.2

Buildings and improvements on owned land
15,377.4

 
14,776.9

Buildings and improvements on leased land
12,863.6

 
12,509.2

Equipment, signs and seating
2,942.6

 
3,165.7

Other
488.6

 
512.4

Property and equipment, at cost
37,193.6

 
36,626.4

Accumulated depreciation and amortization
(14,350.9
)
 
(14,178.1
)
Net property and equipment
$
22,842.7

 
$
22,448.3


Depreciation and amortization expense for property and equipment was (in millions): 2018$1,302.9; 2017$1,227.5; 2016$1,390.7.
v3.10.0.1
Other Operating (Income) Expense, Net
12 Months Ended
Dec. 31, 2018
Other Income and Expenses [Abstract]  
Other Operating (Income) Expense, Net
Other Operating (Income) Expense, Net
 
In millions
2018

 
2017

 
2016

Gains on sales of restaurant businesses
$
(304.1
)
 
$
(295.4
)
 
$
(283.4
)
Equity in earnings of unconsolidated affiliates
(151.5
)
 
(183.7
)
 
(54.8
)
Asset dispositions and other (income) expense, net
(12.9
)
 
18.7

 
72.3

Impairment and other charges (gains), net
231.7

 
(702.8
)
 
341.6

Total
$
(236.8
)
 
$
(1,163.2
)
 
$
75.7


 
Gains on sales of restaurant businesses
The Company’s purchases and sales of businesses with its franchisees are aimed at achieving an optimal ownership mix in each market. Resulting gains or losses on sales of restaurant businesses are recorded in operating income because these transactions are a recurring part of our business.
Equity in earnings of unconsolidated affiliates
Unconsolidated affiliates and partnerships are businesses in which the Company actively participates but does not control. The Company records equity in (earnings) losses from these entities representing McDonald’s share of results. For foreign affiliated markets—primarily China and Japan—results are reported after interest expense and income taxes.
Asset dispositions and other (income) expense, net
Asset dispositions and other (income) expense, net consists of gains or losses on excess property and other asset dispositions, provisions for restaurant closings and uncollectible receivables, asset write-offs due to restaurant reinvestment (including investment in EOTF), and other miscellaneous income and expenses.
Impairment and other charges (gains), net
Impairment and other charges (gains), net includes the losses that result from the write down of goodwill and long-lived assets from their carrying value to their fair value. Charges associated with strategic initiatives, such as refranchising and restructuring activities are also included. In addition, as the Company continues to make progress toward its long-term global refranchising goals, the realized gains/losses from the sale of McDonald's businesses in certain markets are reflected in this category, including the 2017 gain on the sale of the Company's businesses in China and Hong Kong.
v3.10.0.1
Contingencies
12 Months Ended
Dec. 31, 2018
Commitments and Contingencies Disclosure [Abstract]  
Contingencies
Contingencies
 
In the ordinary course of business, the Company is subject to proceedings, lawsuits and other claims primarily related to competitors, customers, employees, franchisees, government agencies, intellectual property, shareholders and suppliers. The Company is required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of accrual required, if any, for these contingencies is made after careful analysis of each matter. The required accrual may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters. The Company does not believe that any such matter currently being reviewed will have a material adverse effect on its financial condition or results of operations.
v3.10.0.1
Franchise Arrangements
12 Months Ended
Dec. 31, 2018
Disclosure Franchise Arrangements Additional Information [Abstract]  
Franchise Arrangements
Franchise Arrangements
 
Conventional franchise arrangements generally include a lease and a license and provide for payment of initial fees, as well as continuing rent and royalties to the Company based upon a percent of sales with minimum rent payments. Minimum rent payments are based on the Company's underlying investment in owned sites and parallel the Company’s underlying leases and escalations on properties that are leased. Under the franchise arrangement, franchisees are granted the right to operate a restaurant using the McDonald’s System and, in most cases, the use of a restaurant facility, generally for a period of 20 years. These franchisees pay related occupancy costs including property taxes, insurance and site maintenance. Developmental licensees and affiliates operating under license agreements pay a royalty to the Company based upon a percent of sales, and may pay initial fees.
Revenues from franchised restaurants consisted of:
In millions
2018

 
2017

 
2016

Rents
$
7,082.2

 
$
6,496.3

 
$
6,107.6

Royalties
3,886.3

 
3,518.7

 
3,129.9

Initial fees
44.0

 
86.5

 
89.4

Revenues from franchised restaurants
$
11,012.5

 
$
10,101.5

 
$
9,326.9


Future gross minimum rent payments due to the Company under existing conventional franchise arrangements are:
In millions
Owned sites
 
 
Leased sites

 
Total

2019
 
$
1,452.3

 
$
1,509.4

 
$
2,961.7

2020
 
1,417.1

 
1,438.5

 
2,855.6

2021
 
1,374.0

 
1,360.3

 
2,734.3

2022
 
1,322.8

 
1,275.0

 
2,597.8

2023
 
1,275.5

 
1,205.9

 
2,481.4

Thereafter
 
11,116.4

 
9,680.1

 
20,796.5

Total minimum payments
 
$
17,958.1

 
$
16,469.2

 
$
34,427.3


At December 31, 2018, net property and equipment under franchise arrangements totaled $17.8 billion (including land of $4.9 billion) after deducting accumulated depreciation and amortization of $10.4 billion.
v3.10.0.1
Leasing Arrangements
12 Months Ended
Dec. 31, 2018
Leases [Abstract]  
Leasing Arrangements
Leasing Arrangements
 
At December 31, 2018, the Company was the lessee at 12,334 restaurant locations through ground leases (the Company leases the land and the Company generally owns the building) and through improved leases (the Company leases land and buildings). Lease terms for most restaurants, where market conditions allow, are generally for 20 years and, in many cases, provide for rent escalations and renewal options, with certain leases providing purchase options. Escalation terms vary by market with examples including fixed-rent escalations, escalations based on an inflation index and fair-value market adjustments. The timing of these escalations generally range from annually to every five years. For most franchised locations, the related occupancy costs including property taxes, insurance and site maintenance; are required to be paid by the franchisees as part of the franchise arrangement. In addition, the Company is the lessee under non-restaurant related leases such as office buildings, vehicles and office equipment.
The following table provides detail of rent expense:
In millions
2018

 
2017

 
2016

Company-operated restaurants:
 
 
 
 
 
U.S.
$
29.4

 
$
37.4

 
$
48.6

Outside the U.S.
241.6

 
427.2

 
613.3

Total
271.0

 
464.6

 
661.9

Franchised restaurants:
 
 
 
 
 
U.S.
504.9

 
488.6

 
471.2

Outside the U.S.
658.0

 
609.3

 
589.8

Total
1,162.9

 
1,097.9

 
1,061.0

Other
87.9

 
82.0

 
91.3

Total rent expense
$
1,521.8

 
$
1,644.5

 
$
1,814.2


Rent expense included percent rents in excess of minimum rents (in millions) as follows–Company-operated restaurants: 2018$82.1; 2017$115.6; 2016$135.0. Franchised restaurants: 2018$200.8; 2017$204.9; 2016$186.4.
Future minimum payments required under existing operating leases with initial terms of one year or more are:
In millions
Restaurant
 
 
Other
 
 
Total *

2019
 
$
1,093.4

 
 
$
51.3

 
$
1,144.7

2020
 
1,032.1

 
 
51.0

 
1,083.1

2021
 
955.5

 
 
45.7

 
1,001.2

2022
 
873.8

 
 
35.7

 
909.5

2023
 
806.0

 
 
24.6

 
830.6

Thereafter
 
7,132.3

 
 
164.9

 
7,297.2

Total minimum payments
 
$
11,893.1

 
 
$
373.2

 
$
12,266.3

*
For sites that have lease escalations tied to an index, future minimum payments reflect the current index adjustments through December 31, 2018. In addition, future minimum payments exclude option periods that have not yet been exercised.
v3.10.0.1
Income Taxes
12 Months Ended
Dec. 31, 2018
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
 
Income before provision for income taxes, classified by source of income, was as follows:
In millions
2018

 
2017

 
2016

U.S.
$
2,218.0

 
$
2,242.0

 
$
2,059.4

Outside the U.S.
5,598.1

 
6,331.5

 
4,806.6

Income before provision for income taxes
$
7,816.1

 
$
8,573.5

 
$
6,866.0



In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” The goal of this update was to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The Company adopted this standard on January 1, 2018 using a modified retrospective method, resulting in a cumulative catch up adjustment of $57 million, the majority of which was recorded within Miscellaneous other assets on the Consolidated Balance Sheet. The adoption of this standard did not have a material impact on the consolidated statements of income and cash flows.
The Tax Act was enacted in the U.S. on December 22, 2017. The Tax Act reduced the U.S. federal corporate income tax rate to 21% from 35% and required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. In 2017, the Company recorded provisional amounts for certain enactment-date effects of the Tax Act by applying the guidance in SAB 118 because the Company had not yet completed its enactment-date accounting for these effects. In 2018, the Company recorded adjustments to the provisional amounts and completed its accounting for all of the enactment-date income tax effects of the Tax Act.
SAB 118 measurement period
At December 31, 2017, the Company had not completed its accounting for all of the enactment-date income tax effects of the Act under ASC 740, Income Taxes, primarily for the following aspects: remeasurement of deferred tax assets and liabilities, one-time transition tax, and its accounting position related to indefinite reinvestment of unremitted foreign earnings. As further discussed below, during 2018, the Company recognized adjustments of approximately $75 million to the provisional amounts recorded at December 31, 2017, primarily related to the transition tax. These adjustments are included as a component of income tax expense from continuing operations.
One-time transition tax: The one-time transition tax is based on the Company's total post-1986 earnings and profits ("E&P"), the tax on which it previously deferred from U.S. income taxes under U,S. law. The Company recorded a provisional amount for its one-time transition tax liability of approximately $1.2 billion at December 31, 2017. Upon further analyses of the Tax Act and notices and regulations issued and proposed by the U.S. Department of the Treasury and the IRS, the Company increased its December 31, 2017 provisional amount by approximately $75 million during 2018. The Company has elected to pay its transition tax over the eight-year period provided in the Tax Act.
Deferred tax assets and liabilities: As of December 31, 2017, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future (generally 21%), by recording a provisional amount of approximately $500 million. No adjustment to the provisional amount was made in 2018.
The provision for income taxes, classified by the timing and location of payment, was as follows:
In millions
2018

 
2017

 
2016

U.S. federal
$
292.9

 
$
2,030.8

 
$
1,046.6

U.S. state
183.9

 
169.8

 
121.3

Outside the U.S.
1,312.4

 
1,217.0

 
1,550.2

Current tax provision
1,789.2

 
3,417.6

 
2,718.1

U.S. federal
145.7

 
(120.1
)
 
(122.1
)
U.S. state
18.7

 
12.8

 
14.1

Outside the U.S.
(61.8
)
 
70.9

 
(430.6
)
Deferred tax provision
102.6

 
(36.4
)
 
(538.6
)
Provision for income taxes
$
1,891.8

 
$
3,381.2

 
$
2,179.5


Net deferred tax liabilities consisted of:
In millions
December 31, 2018
 
 
2017

Property and equipment
 
 
$
1,288.9

 
$
1,211.5

Intangible liabilities
 
 
312.3

 
296.2

Other
 
 
347.9

 
242.0

Total deferred tax liabilities
 
 
1,949.1

 
1,749.7

Property and equipment
 
 
(658.9
)
 
(633.8
)
Employee benefit plans
 
 
(213.3
)
 
(253.1
)
Intangible assets
 
 
(1,081.5
)
 
(228.8
)
Deferred foreign tax credits
 
 
(216.6
)
 
(208.6
)
Deferred revenue
 
 
(138.9
)
 

Operating loss carryforwards
 
 
(45.7
)
 
(71.1
)
Other
 
 
(269.2
)
 
(266.0
)
Total deferred tax assets before valuation allowance
 
 
(2,624.1
)
 
(1,661.4
)
Valuation allowance
 
 
671.1

 
163.2

Net deferred tax (assets) liabilities
 
 
$
(3.9
)
 
$
251.5

Balance sheet presentation:
 
 
 
 
 
Deferred income taxes
 
 
$
1,215.5

 
$
1,119.4

Other assets-miscellaneous
 
 
(1,219.4
)
 
(867.9
)
Net deferred tax (assets) liabilities
 
 
$
(3.9
)
 
$
251.5



At December 31, 2018, the Company had net operating loss carryforwards of $216.7 million, of which $136.6 million has an indefinite carryforward. The remainder will expire at various dates from 2019 to 2037.
Prior to 2018, the Company's effective income tax rate was generally lower than the U.S. statutory tax rate primarily because foreign income was generally subject to local statutory country tax rates that were below the 35% U.S. statutory tax rate and reflected the impact of global transfer pricing. Beginning in 2018, the Tax Act reduced the U.S. statutory tax rate to 21%. As a result, the Company’s 2018 effective income tax rate is higher than the U.S. statutory tax rate of 21% primarily due to the impact of state income taxes and foreign income that is subject to local statutory country tax rates that are above the 21% U.S. statutory tax rate.
The statutory U.S. federal income tax rate reconciles to the effective income tax rates as follows:
 
2018

 
2017

 
2016

Statutory U.S. federal income tax rate
21.0
 %
 
35.0
 %
 
35.0
 %
State income taxes, net of related federal income tax benefit
1.8

 
1.2

 
1.5

Foreign income taxed at different rates
1.5

 
(4.6
)
 
(6.5
)
Transition tax
1.0

 
13.7

 

US net deferred tax liability remeasurement

 
(6.0
)
 

Other, net
(1.1
)
 
0.1

 
1.7

Effective income tax rates
24.2
 %
 
39.4
 %
 
31.7
 %

As of December 31, 2018 and 2017, the Company’s gross unrecognized tax benefits totaled $1,342.8 million and $1,180.4 million, respectively. After considering the deferred tax accounting impact, it is expected that about $940 million of the total as of December 31, 2018 would favorably affect the effective tax rate if resolved in the Company’s favor.
The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax benefits:
In millions
2018

 
2017

Balance at January 1
$
1,180.4

 
$
924.1

Decreases for positions taken in prior years
(64.1
)
 
(13.7
)
Increases for positions taken in prior years
180.8

 
143.9

Increases for positions related to the current year
75.1

 
140.2

Settlements with taxing authorities
(24.1
)
 
(6.5
)
Lapsing of statutes of limitations
(5.3
)
 
(7.6
)
Balance at December 31(1)
$
1,342.8

 
$
1,180.4

(1)
Of this amount, $1,313.7 million and $1,132.3 million are included in Other long-term liabilities for 2018 and 2017, respectively, and $12.5 million and $30.8 million are included in Prepaid expenses and other current assets for 2018 and 2017, respectively, on the Consolidated Balance Sheet. The remainder is included in Deferred income taxes on the Consolidated Balance Sheet.

In 2015, the Internal Revenue Service (“IRS”) issued a Revenue Agent Report (“RAR”) that included certain disagreed transfer pricing adjustments related to the Company’s U.S. Federal income tax returns for 2009 and 2010. Also in 2015, the Company filed a protest with the IRS related to these disagreed transfer pricing matters. During 2017, the Company received a response to its protest. In December 2018, the Company met with the IRS Appeals team and additional meetings are anticipated in 2019.
In 2017, the IRS completed its examination of the Company’s U.S. Federal income tax returns for 2011 and 2012. In 2018, the IRS issued a RAR for these years. As expected, the RAR included the same disagreed transfer pricing matters as the 2009 and 2010 RAR. Also in 2018, the Company filed a protest with the IRS related to these disagreed transfer pricing matters. The transfer pricing matters for 2011 and 2012 are being addressed along with the 2009 and 2010 transfer pricing matters as part of the 2009-2010 appeals process. The Company is also under audit in multiple foreign tax jurisdictions for matters primarily related to transfer pricing, and the Company is under audit in multiple state tax jurisdictions. It is reasonably possible that the total amount of unrecognized tax benefits could decrease up to $900 million within the next 12 months, of which only a portion could favorably affect the effective tax rate. This would be due to the possible settlement of the IRS transfer pricing matters, completion of the aforementioned foreign and state tax audits and the expiration of the statute of limitations in multiple tax jurisdictions.
In addition, it is reasonably possible that, as a result of audit progression in both the U.S. and foreign tax audits within the next 12 months, there may be new information that causes the Company to reassess the total amount of unrecognized tax benefits recorded. While the Company cannot estimate the impact that new information may have on our unrecognized tax benefit balance, it believes that the liabilities recorded are appropriate and adequate.
The Company operates within multiple tax jurisdictions and is subject to audit in these jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2009.
The Company had $152.0 million and $155.3 million accrued for interest and penalties at December 31, 2018 and 2017, respectively. The Company recognized interest and penalties related to tax matters of $13.9 million in 2018, $34.9 million in 2017, and $41.7 million in 2016, which are included in the provision for income taxes.
In the fourth quarter of 2018, the Company completed the accounting of the income tax effects of the Tax Act, including the conclusion on the Company’s accounting position related to the indefinite reinvestment of unremitted foreign earnings. As of December 31, 2018, the Company has accumulated undistributed earnings generated by our foreign subsidiaries, which were predominantly taxed in the U.S. as a result of the transition tax provisions enacted under the Tax Act. Management does not assert that these previously-taxed unremitted earnings are indefinitely reinvested in operations outside the U.S. Accordingly, the Company has provided deferred taxes for the tax effects incremental to the transition tax. We have not provided for deferred taxes on outside basis differences in our investments in our foreign subsidiaries that are unrelated to these accumulated undistributed earnings, as these outside basis differences are indefinitely reinvested.  A determination of the unrecognized deferred taxes related to these other components of our outside basis differences is not practicable.
v3.10.0.1
Employee Benefit Plans
12 Months Ended
Dec. 31, 2018
Retirement Benefits [Abstract]  
Employee Benefit Plans
Employee Benefit Plans
 
The Company's 401k Plan is maintained for U.S.-based employees and includes a 401(k) feature, as well as an employer match. The 401(k) feature allows participants to make pre-tax contributions that are matched each pay period (with an annual true-up) from cash contributions and through July 31, 2018 from shares released under the Employee Stock Ownership Plan. Effective August 1, 2018, the contributions are matched only through cash contributions.
All current account balances, future contributions and related earnings can be invested in eight investment alternatives as well as McDonald’s stock in accordance with each participant’s investment elections. Future participant contributions are limited to 20% investment in McDonald’s stock. Participants may choose to make separate investment choices for current account balances and future contributions.
The Company also maintains certain nonqualified supplemental benefit plans that allow participants to (i) make tax-deferred contributions and (ii) receive Company-provided allocations that cannot be made under the 401k Plan because of IRS limitations. The investment alternatives and returns are based on certain market-rate investment alternatives under the 401k Plan. Total liabilities were $437.4 million at December 31, 2018, and $484.3 million at December 31, 2017, and were primarily included in other long-term liabilities on the Consolidated Balance Sheet.
The Company has entered into derivative contracts to hedge market-driven changes in certain of the liabilities. At December 31, 2018, derivatives with a fair value of $167.1 million indexed to the Company's stock and a total return swap with a notional amount of $169.2 million indexed to certain market indices were included at their fair value in Prepaid expenses and other current assets and Accrued payroll and other liabilities, respectively, on the Consolidated Balance Sheet. Changes in liabilities for these nonqualified plans and in the fair value of the derivatives are recorded primarily in Selling, general & administrative expenses. Changes in fair value of the derivatives indexed to the Company’s stock are recorded in the income statement because the contracts provide the counterparty with a choice to settle in cash or shares.
Total U.S. costs for the 401k Plan, including nonqualified benefits and related hedging activities, were (in millions): 2018$18.0; 2017$19.3; 2016$24.8. Certain subsidiaries outside the U.S. also offer profit sharing, stock purchase or other similar benefit plans. Total plan costs outside the U.S. were (in millions): 2018$33.7; 2017$43.3; 2016$46.0.
The total combined liabilities for international retirement plans were $40.6 million and $44.6 million at December 31, 2018 and 2017, respectively. Other post-retirement benefits and post-employment benefits were immaterial.
v3.10.0.1
Segment and Geographic Information
12 Months Ended
Dec. 31, 2018
Segment Reporting [Abstract]  
Segment and Geographic Information
Segment and Geographic Information
 
The Company franchises and operates McDonald’s restaurants in the global restaurant industry. The following reporting segments reflect how management reviews and evaluates operating performance through December 31, 2018:
U.S. - the Company's largest segment.
International Lead Markets - established markets including Australia, Canada, France, Germany, the U.K. and related markets.
High Growth Markets - markets the Company believes have relatively higher restaurant expansion and franchising potential including China, Italy, Korea, Poland, Russia, Spain, Switzerland, the Netherlands and related markets.
Foundational Markets & Corporate - the remaining markets in the McDonald's system, most of which operate under a largely franchised model. Corporate activities are also reported within this segment.
All intercompany revenues and expenses are eliminated in computing revenues and operating income. Corporate general and administrative expenses consist of home office support costs in areas such as facilities, finance, human resources, information technology, legal, marketing, restaurant operations, supply chain and training. Corporate assets include corporate cash and equivalents, asset portions of financial instruments and home office facilities.
In millions
2018

 
2017

 
2016

 
U.S.
$
7,665.8

 
$
8,006.4

 
$
8,252.7

 
International Lead Markets
7,600.1

 
7,340.3

 
7,223.4

 
High Growth Markets
3,988.7

 
5,533.2

 
6,160.7

 
Foundational Markets & Corporate
1,770.6

 
1,940.5

 
2,985.1

 
Total revenues
$
21,025.2

 
$
22,820.4

 
$
24,621.9

 
U.S.
$
4,015.6

 
$
4,022.4

 
$
3,768.7

 
International Lead Markets
3,485.7

 
3,166.5

 
2,838.4

 
High Growth Markets
1,001.2

 
2,001.4

 
1,048.8

 
Foundational Markets & Corporate
320.1

 
362.4

 
88.6

 
Total operating income
$
8,822.6

 
$
9,552.7

 
$
7,744.5

 
U.S.
$
14,483.8

 
$
12,648.6

 
$
11,960.6

 
International Lead Markets
12,713.0

 
11,844.3

 
9,112.5

 
High Growth Markets
4,404.9

 
4,480.7

 
5,208.6

 
Foundational Markets & Corporate
1,209.5

 
4,830.1

 
4,742.2

 
Total assets
$
32,811.2

 
$
33,803.7

 
$
31,023.9

 
U.S.
$
1,849.8

 
$
861.2

 
$
586.7

 
International Lead Markets
436.4

 
515.3

 
635.6

 
High Growth Markets
285.6

 
378.5

 
493.2

 
Foundational Markets & Corporate
169.9

 
98.7

 
105.6

 
Total capital expenditures
$
2,741.7

 
$
1,853.7

 
$
1,821.1

 
U.S.
$
598.4

 
$
524.1

 
$
510.3

 
International Lead Markets
472.9

 
461.1

 
451.6

 
High Growth Markets
233.0

 
231.7

 
362.0

 
Foundational Markets & Corporate
177.7

 
146.5

 
192.6

 
Total depreciation and amortization
$
1,482.0

 
$
1,363.4

 
$
1,516.5

 

Total long-lived assets, primarily property and equipment, were (in millions)–Consolidated: 2018$27,511.7; 2017$27,164.2; 2016$25,200.4; U.S. based: 2018$13,602.4; 2017$12,308.7; 2016$11,689.7.
Effective January 1, 2019, McDonald’s operates under a new organizational structure designed to continue the Company's efforts toward efficiently driving growth through the Velocity Growth Plan with the following three segments:
U.S. - the Company’s largest market.
International Operated Markets - comprised of wholly-owned markets, or countries in which the Company operates restaurants, including Australia, Canada, France, Germany, Italy, the Netherlands, Russia, Spain and the U.K.
International Developmental Licensed Markets - comprised primarily of developmental licensee and affiliate markets in the McDonald’s system. Corporate activities will also be reported in this segment.
v3.10.0.1
Debt Financing
12 Months Ended
Dec. 31, 2018
Debt Disclosure [Abstract]  
Debt Financing
Debt Financing
 
LINE OF CREDIT AGREEMENTS
At December 31, 2018, the Company had a $3.5 billion line of credit agreement expiring in December 2023 with fees of 0.080% per annum on the total commitment, which remained unused. Fees and interest rates on this line are primarily based on the Company’s long-term credit rating assigned by Moody’s and Standard & Poor’s. In addition, the Company's subsidiaries had unused lines of credit that were primarily uncommitted, short-term and denominated in various currencies at local market rates of interest.
The weighted-average interest rate of short-term borrowings was 2.6% at December 31, 2018 (based on $253.5 million of foreign currency bank line borrowings and $99.9 million of commercial paper outstanding) and 2.5% at December 31, 2017 (based on $268.0 million of foreign currency bank line borrowings).
DEBT OBLIGATIONS
The Company has incurred debt obligations principally through public an