Prepare a three (3) year forecast of estimated future cash flows for you company and give valid economic/business reasons for your projections. This means you will have a statement of incremental cash flows. One year in the future, develop a future market value of equity and an estimated future price per share for the company?s common stock.

2012 Annual Report 2012 Highlights Global Comparable Sales Growth 3.1 % Earnings Per Share Growth 5 % * * in constant currencies Average Number of Customers Served Every Day 69 million McWraps | Europe McCaf Strawberry Banana Smoothie | USA Now more than ever, customers truly care about good food. The Golden Arches have always stood for quality, consistency and value. But today they also promise unique tastes, modern choices and real ingredients. Our World Famous Fries and our iconic Big Mac sandwich share the menu with tempting specialty coffees and creative new selections that put the fun in real fruits and vegetables. Wholesome ingredients like 100% beef, whole grains and freshly cracked eggs make it easy to enjoy quality food, every time, all at the speed of McDonald's. Le M Burger | France Green Salad | Argentina McDonald's Corporation 2012 Annual Report | 1 Sydney | Australia To Our Valued Shareholders: Our founder, Ray Kroc, made a statement about how we operate our business that is as relevant today as it was 60 years ago: \"Take calculated risks. Act boldly and thoughtfully. Be an agile company.\" 2012 was a testament to our resilient business model, the talented and aligned System of McDonald's franchisees, supplier partners and company employees, and our broad experience in every type of operating environment. We grew global comparable sales 3.1% and Systemwide sales 5%*. We increased operating income 4%* and diluted earnings per share 5%*. And, we returned $5.5 billion to shareholders through dividends and share repurchases. Don Thompson, President and CEO & Tim Fenton, COO Operating Income (in billions) '10 $ 7.5 '11 '10 $ 7.5 $ 8.5 '12 '11 $ 8.6 $ 8.5 '12 $ 8.6 3-Year500 10.9% S&P Compound Annual Total Return (2010 -2012) DJIA S&P 500 10.3% 10.9% MCD DJIA 10.3% 15.7% MCD 15.7% '10 31.0% '11 '10 31.6% 31.0% '12 '11 31.2% 31.6% '12 31.2% '10 $ 4.58 '11 '10 We grew market share despite the flat to declining trend in the informal eating-out industry. The key: our ability to remain focused on our Plan to Win and our three global growth priorities to optimize our menu, modernize the customer experience and broaden accessibility to Brand McDonald's. Most importantly, we're doing it with franchisees, suppliers, company employees, managers and crew who are proud to be affiliated with us, and with a talented and diverse Board of Directors who provide sage guidance and strong corporate governance as we work together to deliver shareholder value. Every day, 69 million customers visit our restaurants because we offer great-tasting food, exceptional service, and a clean, modern and engaging restaurant experience - all at a reasonable price. We continued to build our business through our menu focus by encouraging markets to learn from each other and scale proven solutions. New products like McWraps from Poland or our McCaf specialty beverages that originated in Australia complement classic favorites - like the Big Mac, our Quarter Pounder with Cheese, our Egg McMuffin and our World Famous Fries - to give our customers compelling reasons to visit. We also made significant progress toward becoming more modern and relevant. Nearly 60% of our restaurant interiors around the world have been re-imaged, and we expect to reach 50% with our exteriors by 2015. And, we continued evolving how we talk with our customers through our creative, digital and social media efforts. In our journey to be accessible whenever and wherever our customers want McDonald's, we added 1,439 new restaurants in established markets including the U.S., France, Germany and Australia ... as well as in emerging markets like China, Brazil, India and Russia. We also grew delivery in APMEA and evolved our value offers to always have something for our customers with Value Lunch in China, P'tit Prix in France, our Loose Change Menu in Australia and our Dollar Menu in the U.S., to name a few. $ 5.27 $ 4.58 $ 5.36 $ 5.27 '12 24-Hour Accessibility | USA | Canada '11 $ 5.36 '12 2 | McDonald's Corporation 2012 Annual Report '10 $ 2.4 * in constant currencies When I proudly took on the role of CEO, I became even more motivated by the fact that within our success lies even greater opportunity. There is much more potential we can capture and we have a clear, straightforward vision for growth. We must continue driving enduring, profitable growth. We must strengthen consumers' trust in our brand. And, we must always champion talent and leadership development. I have no doubt we will serve more customers more often ... that our customers will be more loyal ... and that our restaurants will be more profitable. We've continued to invest in our operating platforms, our restaurants, our global food pipeline, our people and the customer experience. Moving forward, our challenge is two-fold: 1) be even more nimble in synthesizing the lessons we learn, sharing insights across borders and scaling proven solutions, and 2) increase our appeal by anticipating, innovating and seizing opportunities through the Plan to Win and our three global growth priorities. Growing our business is about appealing to and serving more customers. It's also about leveraging our incredible iconic brand to build consumers' trust in us and drive long-term sustainable growth. We need to make sure our customers feel good about eating at McDonald's and want to visit us again and again ... that they feel good about the way we treat our people ... and that they feel good about the deep connections we make in the communities where we operate. It's clear that outstanding people are the reason for the success of a dynamic global business like ours. We are a leading developer of today's workforce and tomorrow's leaders, whether franchisees, leading citizens who started as crew, or those who aspire to grow with and through McDonald's. In this increasingly demanding marketplace, our collective charge is to do everything we can to strengthen our people and help them achieve their best. On behalf of the entire McDonald's System, please accept our sincere gratitude for your investment and confidence in our direction. The late Fred Turner - our first grill man and the visionary who helped Ray transform his dream into reality - once said, \"Satisfied customers will assure a vigorous and growing McDonald's System.\" I'm energized by our opportunity to continue being a bright spot in our customers' day and confident in our ability to grow our business as we become even more relevant and more trusted all over the world. Sincerely, '10 $ 7.5 '10 '11 $ 7.5 $ 8.5 '10 '11 '12 $ 7.5 $ 8.5 $ 8.6 New Restaurant | Korea $ 8.5 $ 8.6 '11 '12 $ 8.6 '12 S&P 500 10.9% S&P DJIA 500 10.9% 10.3% S&P 500 DJIA MCD 10.9% 10.3% 15.7% DJIA MCD 10.3% 15.7% Combined Operating Margin MCD 15.7% '10 31.0% '10 '11 31.0% 31.6% '10 '11 '12 31.0% 31.6% 31.2% '11 '12 31.6% 31.2% '12 31.2% Earnings Per Share '10 $ 4.58 '10 '11 $ 4.58$ 5.27 '10 '11 '12 $ 4.58$ 5.27 $ 5.36 '11 '12 $ 5.27 $ 5.36 '12 $ 5.36 '10 $ 2.4 Dividends Paid (in billions)$ 2.42.6 '10 $ '11 '10 '11 '12 $ 2.42.6 $ $ 2.9 '11 '12 $ 2.6$ 2.9 '12 $ 2.9 Don Thompson President and CEO McDonald's Corporation 2012 Annual Report | 3 Dear Fellow Shareholders: McDonald's Corporation continued moving forward in 2012 despite a challenging environment, as we remained committed to meeting the ever-evolving needs of our customers around the world. Guided by the Plan to Win, the McDonald's System of franchisees, suppliers and employees continued working to make our brand more modern and in step with consumers everywhere. Your Board of Directors is pleased with the company's continued focus on driving customer relevance and enhancing all aspects of the McDonald's experience. We continue to manage our business for the long-term, while staying committed to driving near-term growth. Our focus remains on leveraging the hard-earned competitive advantages that differentiate Brand McDonald's in the marketplace and building a stronger, more profitable company. Andy McKenna, Chairman Guided by the Plan to Win, the McDonald's System of franchisees, suppliers and employees continued working to make our brand more modern and in step with consumers everywhere. McDonald's strong, consistent leadership positions the company well to continue achieving these goals. We recognize Fred Turner, one of McDonald's pioneers, who passed away recently and left a legacy of excellence for all to follow, and recently retired CEO Jim Skinner for his remarkable tenure - and now President and CEO Don Thompson and his global leadership team. Don is a tremendous leader with a deep knowledge and passion for our brand, and his team is skilled, seasoned and committed to raising the bar on all those things that drive our success - from our food and service to our convenience and value. We believe that McDonald's will continue to skillfully navigate through the current business environment to drive growth and deliver shareholder value. We remain confident in the company's overall strategies, its strong leadership and the many talented employees around the world who deliver for our millions of guests every day. McDonald's Board of diverse and experienced business leaders remains committed to overseeing the company's direction and advancing strong corporate governance. We eagerly embrace our responsibilities to help ensure the strength of this great brand moving forward. On behalf of the entire Board of Directors, it is an honor and privilege to serve you, our shareholders. Very truly yours, Andy McKenna Chairman Egg McMuffin & Hash Browns | USA 4 | McDonald's Corporation 2012 Annual Report When good people are engaged and valued, they're empowered to make a difference for their guests, themselves and the world. Joining the McFamily opens doors to innovative training and genuinely unlimited opportunity. A McDonald's career brings people together for good. Talent is rewarded. Ambition is stoked. Pride is earned. A culture of inclusion and respect creates lifelong brand ambassadors who feel connected to each other, their restaurants and especially their customers. The ways we stand up for our people help us stand out from the competition. Bangkok | Thailand Madrid | Spain McDonald's Corporation 2012 Annual Report | 5 Columbus, Ohio | USA Being a good neighbor means honestly caring about our local communities and the planet we all share. Our restaurants are committed to enriching neighborhoods by being a responsible employer and a welcoming, friendly place. Many local sports teams and schools find a champion under the Golden Arches. Across the globe we're exploring bold ways to use less energy and reduce our carbon footprint. As we address the challenges of sustainability, we will leverage our size and scope as tools for good. Our charity of choice, Ronald McDonald House Charities helps families in crisis. Dirk Giannini, Lettuce Supplier | USA Green Restaurant | Germany 6 | McDonald's Corporation 2012 Annual Report Ronald McDonald House, Chicago, Illinois | USA 2012 Financial Report 2012 Financial Report 9 10 11 28 29 30 31 32 33 45 46 47 48 49 49 50 8 McDonald's Corporation 2012 Annual Report 6-year Summary Stock Performance Graph Management's Discussion and Analysis of Financial Condition and Results of Operations Consolidated Statement of Income Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Shareholders' Equity Notes to Consolidated Financial Statements Quarterly Results (Unaudited) Management's Assessment of Internal Control over Financial Reporting Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting Executive Management & Business Unit Officers Board of Directors Investor Information 6-Year Summary Dollars in millions, except per share data Company-operated sales Franchised revenues Total revenues Operating income Income from continuing operations Net income Cash provided by operations Cash used for investing activities Capital expenditures Cash used for financing activities Treasury stock purchases(7) Common stock cash dividends Financial position at year end: Total assets Total debt Total shareholders' equity Shares outstanding in millions Per common share: Income from continuing operations-diluted Earnings-diluted Dividends declared Market price at year end Company-operated restaurants Franchised restaurants Total Systemwide restaurants Franchised sales(8) 2012 $18,603 $ 8,964 $27,567 $ 8,605 $ 5,465 $ 5,465 $ 6,966 $ 3,167 $ 3,049 $ 3,850 $ 2,605 $ 2,897 2011 18,293 8,713 27,006 8,530 5,503 5,503 7,150 2,571 2,730 4,533 3,373 2,610 2010 16,233 7,842 24,075 7,473 4,946 4,946 6,342 2,056 2,135 3,729 2,648 2,408 2009 2008 2007 15,459 16,561 16,611 7,286 6,961 6,176 22,745 23,522 22,787 3,879(4) 6,841(1) 6,443 (1,2) 4,313(3) 4,551 2,335(4,5) (1,2) 4,313(3) 4,551 2,395(4,5,6) 5,751 5,917 4,876 1,655 1,625 1,150 1,952 2,136 1,947 4,421 4,115 3,996 2,854 3,981 3,949 2,235 1,823 1,766 $35,386 $13,633 $15,294 1,003 32,990 12,500 14,390 1,021 31,975 11,505 14,634 1,054 30,225 10,578 14,034 1,077 $ 5.36 $ 5.36 $ 2.87 $ 88.21 6,598 27,882 34,480 $69,687 5.27 5.27 2.53 100.33 6,435 27,075 33,510 67,648 4.58 4.58 2.26 76.76 6,399 26,338 32,737 61,147 1.93(4,5) 4.11(1,2) 3.76(3) (1,2) (3) 4.11 3.76 1.98(4,5,6) 2.05 1.63 1.50 62.44 62.19 58.91 6,262 6,502 6,906 26,216 25,465 24,471 32,478 31,967 31,377 56,928 54,132 46,943 28,462 10,218 13,383 1,115 29,392 9,301 15,280 1,165 (1) Includes pretax income due to Impairment and other charges (credits), net of $61.1 million ($91.4 million after tax or $0.08 per share) primarily related to the resolution of certain liabilities retained in connection with the 2007 Latin America developmental license transaction. (2) Includes income of $58.8 million ($0.05 per share) for gain on sale of investment related to the sale of the Company's minority ownership interest in Redbox Automated Retail, LLC. (3) Includes income of $109.0 million ($0.09 per share) for gain on sale of investment from the sale of the Company's minority ownership interest in U.K.- based Pret A Manger. (4) Includes pretax operating charges of $1.7 billion ($1.32 per share) due to Impairment and other charges (credits), net primarily as a result of the Company's sale of its businesses in 18 Latin American and Caribbean markets to a developmental licensee. (5) Includes a tax benefit of $316.4 million ($0.26 per share) resulting from the completion of an Internal Revenue Service examination of the Company's 2003-2004 U.S. federal tax returns. (6) Includes income of $60.1 million ($0.05 per share) related to discontinued operations primarily from the sale of the Company's investment in Boston Market. (7) Represents treasury stock purchases as reflected in Shareholders' equity. (8) 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 80% of McDonald's restaurants worldwide. McDonald's Corporation 2012 Annual Report 9 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. Stock Performance Graph At least annually, we consider which companies comprise a readily identifiable investment peer group. McDonald's is included in published restaurant indices; however, unlike most other companies included in these indices, which have no or limited international operations, McDonald's does business in 119 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 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, 2012. 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, 2007. 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. COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN $250 $200 $150 $100 $50 $0 Dec '07 '08 '09 '10 '11 '12 McDonald's Corporation 100 109 113 143 193 175 S&P 500 Index 100 63 80 92 94 109 Dow Jones Industrials 100 68 84 95 103 114 Source: Capital IQ, a Standard & Poor's business 10 McDonald's Corporation 2012 Annual Report Management's Discussion and Analysis of Financial Condition and Results of Operations Overview DESCRIPTION OF THE BUSINESS The Company franchises and operates McDonald's restaurants. Of the 34,480 restaurants in 119 countries at year-end 2012, 27,882 were franchised or licensed (including 19,869 franchised to conventional franchisees, 4,350 licensed to developmental licensees and 3,663 licensed to foreign affiliates (\"affiliates\") primarily Japan) and 6,598 were operated by the Company. Under our conventional franchise arrangement, franchisees provide a portion of the capital required by initially investing in the equipment, signs, seating and dcor of their restaurant business, and by reinvesting in the business over time. The Company 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. In certain circumstances, the Company participates in reinvestment for conventional franchised restaurants. Under our developmental license arrangement, licensees provide capital for the entire business, including the real estate interest, and the Company has no capital invested. In addition, the Company has an equity investment in a limited number of affiliates that invest in real estate and operate or franchise restaurants within a market. We view ourselves primarily as a franchisor and believe franchising is important to delivering great, locally-relevant customer experiences and driving profitability. However, directly operating restaurants is paramount to being a credible franchisor and is essential to providing Company personnel with restaurant operations experience. In our Company-operated restaurants, and in collaboration with franchisees, we further develop and refine operating standards, marketing concepts and product and pricing strategies, so that only those that we believe are most beneficial are introduced in the restaurants. We continually review, and as appropriate adjust, our mix of Company-operated and franchised or licensed (conventional franchised, developmental licensed and foreign affiliated) restaurants to help optimize overall performance. 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 managed as distinct geographic segments. Significant reportable segments include the United States (\"U.S.\"), Europe, and Asia/Pacific, Middle East and Africa (\"APMEA\"). In addition, throughout this report we present \"Other Countries & Corporate\" that includes operations in Canada and Latin America, as well as Corporate activities. The U.S., Europe and APMEA segments account for 32%, 39% and 23% of total revenues, respectively. The United Kingdom (\"U.K.\"), France and Germany, collectively, account for 51% of Europe's revenues; and China, Australia and Japan (a 50%-owned affiliate accounted for under the equity method), collectively, account for 56% of APMEA's revenues. These six markets along with the U.S. and Canada are referred to as \"major markets\" throughout this report and comprise 70% of total revenues. In analyzing business trends, management considers a variety of performance and financial measures, including comparable sales and comparable guest count growth, Systemwide sales growth and returns. 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 certain incentive compensation plans on these results because we believe this better represents the Company's underlying business trends. Comparable sales and comparable guest counts are key performance indicators used within the retail industry and are indicative of acceptance 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. Comparable sales are driven by changes in guest counts and average check, which is affected by changes in pricing and product mix. Generally, the goal is to achieve a balanced contribution from both guest counts and average check. McDonald's reports on a calendar basis and therefore the comparability of the same month, quarter and year with the corresponding period of the prior year will be impacted by the mix of days. The number of weekdays and weekend days in a given timeframe can have a positive or negative impact on comparable sales and guest counts. The Company refers to these impacts as calendar shift/trading day adjustments. In addition, the timing of holidays can impact comparable sales and guest counts. These impacts vary geographically due to consumer spending patterns and have the greatest effect on monthly comparable sales and guest counts while the annual impacts are typically minimal. 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. Return on incremental invested capital (\"ROIIC\") is a measure reviewed by management over one-year and three-year time periods to evaluate the overall profitability of the business units, the effectiveness of capital deployed and the future allocation of capital. The return is calculated by dividing the change in operating income plus depreciation and amortization McDonald's Corporation 2012 Annual Report 11 (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. STRATEGIC DIRECTION AND FINANCIAL PERFORMANCE The strength of the alignment between the Company, its franchisees and suppliers (collectively referred to as the \"System\") has been key to McDonald's success. This business model enables McDonald's to consistently deliver locally-relevant restaurant experiences to customers and be an integral part of the communities we serve. In addition, it facilitates our ability to identify, implement and scale innovative ideas that meet customers' changing needs and preferences. McDonald's customer-focused Plan to Win (\"Plan\") provides a common framework for our global business while allowing for local adaptation. Through the execution of multiple initiatives surrounding the five pillars of our PlanPeople, Products, Place, Price and Promotionwe have enhanced the restaurant experience for customers worldwide and grown global comparable sales and guest counts in each of the last nine years. This Plan, combined with financial discipline, has delivered strong results for our shareholders since its inception. To measure our performance as we continue to build the business, we have the following long-term, average annual constant currency financial targets: Systemwide sales growth of 3% to 5%; Operating income growth of 6% to 7%; ROIIC in the high teens. Prior to 2012, we exceeded each of these financial targets every year since the Plan's implementation in 2003, after adjusting for the loss in 2007 from the Latin America developmental license transaction. These targets have enabled us to make the best decisions for the long-term benefit of our shareholders, and we believe they remain realistic and sustainable for a company of our size. In 2012, Systemwide sales growth was 3% (5% in constant currencies), operating income growth was 1% (4% in constant currencies), one-year ROIIC was 15.4% and three-year ROIIC was 28.6% (see reconciliation on page 27). Persistent global economic headwinds, heightened competitive activity and inflationary costs impacted results. In addition, planned strategic decisions, such as the 2012 London Olympics sponsorship, investing in technology and the biennial Worldwide Owner/ Operator convention, also impacted results. In 2012, we continued to focus on customers' needs and remained aligned on our Plan and the three global growth priorities of optimizing our menu, modernizing the customer experience, and broadening accessibility to our brand. We believe these priorities are relevant and actionable, and combined with our competitive advantages, will drive long-term sustainable growth. Initiatives supporting these priorities resonated with customers and drove increases in global comparable sales and guest counts of 3.1% and 1.6%, respectively, despite challenging economies and a relatively flat or declining Informal Eating Out (\"IEO\") segment in most markets. In 2012, we continued to grow market share in the U.S., Europe and APMEA, amid a more competitive global environment and a slight decline in our fourth quarter comparable guest counts. Comparable sales are impacted by guest counts, product mix shifts and menu pricing. Specific menu pricing actions across our 12 McDonald's Corporation 2012 Annual Report system reflect local market conditions as well as other factors, notably food away from home and food at home inflation indices. In our Company-operated restaurants, we manage menu board prices to ensure value at all price points, increase profitability and mitigate inflation, all while trying to grow guest counts. In order to accomplish these objectives, we utilize a strategic pricing tool that balances price and product mix. Franchisees also have access to, and many utilize, this strategic pricing tool. In general, we believe franchisees employ a similar pricing strategy. We look to optimize product mix by utilizing a menu with entry-point value, core, premium and promotional offerings. We also introduce new products to meet customers' needs, which can expand average check and increase guest counts. In 2012, average prices increased at Company-operated restaurants in each area of the world, although increases varied by market and region. U.S. In the U.S., comparable sales increased for the tenth consecutive year, rising 3.3% in 2012, while comparable guest counts rose 1.9%. These results were achieved despite only modest growth in the IEO segment and heightened competitive activity. In the second half of the year, we experienced softer performance; therefore, we adjusted our plans to re-energize our all-day everyday value offerings while providing the menu variety customers expect from McDonald's. In 2012, we continued to highlight beverages, value, breakfast, and our classic core favorites. We expanded our McCaf beverage offerings with the Chocolate Chip Frapp and Cherry Berry Chiller. Limited-time offers, such as Chicken McBites and the Cheddar Bacon Onion premium sandwiches, complemented our core menu offerings. Modernizing the customer experience continued through our major remodeling initiative, which provides contemporary restaurant designs and retailing efforts. The enhanced appearance and functionality of our restaurants deliver a more relevant experience for our customers. Over 900 existing restaurants were remodeled during 2012 with the majority adding drive-thru capacity to capture additional guest counts. We broadened the accessibility of our convenient locations through extended hours and efficient drive-thru service. More than half of our restaurants use some form of multiple order points to maximize drive-thru capacity, including 1,500 with handheld order takers to help improve customer service times. To further build on our competitive advantage, we focused on operations excellence initiatives to drive customer satisfaction as we strive to deliver fast, accurate and friendly service with every order. Europe In Europe, comparable sales rose 2.4%, marking the ninth consecutive year of comparable sales increases, while guest counts declined 0.5%. While low consumer confidence continues to negatively affect overall retail sales and the IEO segment, we outperformed the market and grew market share. Major contributors to comparable sales were the U.K. and Russia. Despite ongoing economic challenges, the segment's priority remains growing the overall business by balancing a strong focus on our unique value offerings, ongoing premium product innovation, and new products. Europe continued to see the benefit of providing a relevant, contemporary customer experience and completed almost 750 restaurant reimages. By the end of 2012, over 90% of restaurant interiors and approximately 50% of exteriors had been reimaged. Europe also invested in a roll-out of a new point-ofsale system, which allows us to continue to expand our menu offerings and improve order accuracy. By the end of 2012, over 2,200 restaurants had deployed this system. We expanded our coffee business and have over 1,600 McCaf locations, which in Europe are generally separate areas inside the restaurants that serve specialty coffees, desserts and snacks. In addition, we increased our accessibility and convenience with extended operating hours, self-order kiosks, optimized drive-thrus, and opened over 250 new restaurants. APMEA In APMEA, comparable sales rose 1.4% and comparable guest counts rose 2.2%, despite a challenging year of economic pressures, partly due to Japan's uneven recovery and China's slower economic growth. Positive performance was driven by China, Australia and many other markets. Unique value platforms, great tasting premium menu selections, locally-relevant menu variety, and convenience and service enhancements differentiated the McDonald's experience. Australia launched the \"Loose Change Menu,\" which is a branded affordability menu, while China focused on breakfast, lunch, and dinner value platforms. Value initiatives were balanced with mid-tier offers, such as Bubble Tea in China, and premium limited-time offers, such as the Serious Lamb Burger and Wrap in Australia. Our breakfast business has expanded and is offered in approximately 75% of APMEA restaurants. Desserts continued to play a meaningful role, particularly in China, where we remain one of the largest ice cream retailers. We opened over 750 new restaurants in APMEA, of which over 250 were in China, where we have made significant progress toward our goal of 2,000 restaurants by the end of 2013. Nearly two-thirds of APMEA restaurants are offering some form of extended operating hours and over 5,400 restaurants are open 24 hours. Delivery is offered in many APMEA markets and is now available in over 1,700 restaurants, including nearly 550 in China. Since Japan's natural disaster in March of 2011, the economy remains a challenge. Despite a declining IEO segment, McDonald's is gaining market share through a value platform of 100, 250, and 500 YEN offerings, and family sharing boxes, such as 15-piece Chicken McNuggets. Japan augmented its value platform with strategic couponing to encourage add-on and Extra Value Meal purchases. Consolidated Globally, our approach to offering affordable value to our customers is complemented by a focus on driving operating efficiencies and leveraging our scale, supply chain infrastructure and our suppliers' risk management practices to manage costs. We were able to execute our strategies in every area of the world, grow comparable sales and control selling, general and administrative expenses. However, in 2012 we faced topand bottom-line pressures, some a result of planned strategic decisions, and others driven by the external environment. As a result, combined operating margin (operating income as a percent of total revenues) was 31.2% in 2012, down 0.4 percentage points as compared to 2011. In 2012, cash from operations was nearly $7.0 billion. Our substantial cash flow, strong credit rating and continued access to credit provide us flexibility to fund capital expenditures as well as return cash to shareholders. Capital expenditures of approximately $3.0 billion were invested in our business primarily to reimage existing restaurants and open new restaurants. Across the System, over 1,400 restaurants were opened and about 2,400 existing locations were reimaged. In addition, we returned $5.5 billion to shareholders consisting of $2.9 billion in dividends and $2.6 billion in share repurchases. Cash from operations continues to benefit from our heavily franchised business model as the rent and royalty income received from owner/operators is a stable revenue stream that has relatively low costs. In addition, the franchise business model is less capital intensive than the Company-owned model. We believe locally-owned and operated restaurants maximize brand performance and are at the core of our competitive advantages, making McDonald's not just a global brand but also a locally- relevant one. HIGHLIGHTS FROM THE YEAR INCLUDED: Comparable sales grew 3.1% and guest counts rose 1.6%, building on 2011 increases of 5.6% and 3.7%, respectively. Revenues increased 2% (5% in constant currencies). Operating income increased 1% (4% in constant currencies). Diluted earnings per share was $5.36, an increase of 2% (5% in constant currencies). Cash provided by operations was nearly $7.0 billion. One-year ROIIC was 15.4% and three-year ROIIC was 28.6% for the period ended December 31, 2012. The Company increased the quarterly cash dividend per share 10% to $0.77 for the fourth quarterbringing our current annual dividend to $3.08 per share. The Company returned $5.5 billion to shareholders through dividends and share repurchases. OUTLOOK FOR 2013 We will continue to build the business in 2013 and beyond by enhancing the customer experience across all pillars of our Plan and our three global growth priorities to optimize our menu, modernize the customer experience and broaden accessibility to our brand. We remain focused on seizing the long-term opportunities in the $1 trillion IEO segment by leveraging our competitive advantages. We have a brand advantage in convenience, menu variety and value, a resilient business model, and the experience and alignment throughout the McDonald's System to navigate the current environment. Our number one priority continues to be satisfying our customers' needs by serving great-tasting, high-quality food in contemporary restaurants. This focus on our customers is particularly critical in this uncertain environment, where ongoing volatility continues to negatively impact consumer sentiment and spending. We anticipate a continued flat to declining IEO segment in many of the markets where we operate. Growing market share will remain our focus to attain sustainable and profitable long-term growth. We will highlight promotions of our core menu favorites, while strategically expanding our menu with relevant new offerings across all dayparts, including premium products that can deliver a higher average check. We will place an even greater emphasis on scaling success quickly around the globe. For example, in many McDonald's Corporation 2012 Annual Report 13 markets we will expand our innovative McBites line-up, introduce existing products like our blended ice beverages and large McWraps into new markets, and offer even more of the unique, flavor-based promotional food events that have been successful. We will emphasize our daypartslike breakfast and extended hoursthat are still growing globally in both established and emerging markets. We will enhance the customer experience by continuing to reimage our building interiors and exteriors and by providing our restaurant teams with the appropriate tools, training, and technology. The accessibility efforts will include increasing the level and variety of conveniences provided to our customers through new restaurant openings, extended operating hours, stronger value platforms, and faster, more accurate service through innovative order taking. With operational and financial discipline, we will execute these priorities to increase McDonald's brand relevance. We will continue to build customer trust through our commitment to sustainabilityincluding nutrition and well-being, a sustainable supply chain, environmental responsibility, employee experience, and the community. U.S. In 2013, the U.S. business will focus on driving sales and guest counts by enhancing the entire customer experience through the pillars of the Plan and the three global priorities. Our menu pipeline is more balanced in 2013, with a continued focus on great taste, quality ingredients and variety. We will satisfy our customers' needs with the food they crave by balancing core favorites with limited time offers and innovative new products across the menu. Menu news will be augmented with brand messages that highlight our quality food ingredients, efforts around promoting children's well-being and community involvement. We will enhance our Dollar Menu and introduce new products to highlight McDonald's value at every price point, across all menu categories. We are continuing our major remodel program by updating about 800 locations in 2013. At the same time, we are continuing to improve restaurant operations through appropriate staffing and a focus on friendly, accurate service as well as innovative order taking. In addition, we will increase the number of restaurants that operate 24 hours a day and strive to be our customers' favorite eating-out destination. Europe In Europe, we see growth opportunities in breakfast, core menu items, beverages, and extended hours. Our business plans are focused on building market share by emphasizing value across all dayparts and new restaurant growth. In some markets, our value offerings will evolve from a low-end entry price to multiple entry prices across our menu. This value menu evolution is intended to grow guest counts with compelling affordability and enhanced trade-up opportunities through an extended range of options. In 2013, we will reimage approximately 450 restaurants as we progress towards our goal of having 100% of our interiors and over 85% of our exteriors reimaged by the end of 2015. We will also open nearly 300 restaurants. We will leverage production and service enhancements by optimizing kitchen platforms and accelerating the deployment of technologies, such as updating the point-of-sale system and rolling out multiple order points via self-order kiosks, hand-held order devices and side-by-side drivethrus. These initiatives will enhance the customer experience, help drive guest counts and improve labor efficiency. We will also 14 McDonald's Corporation 2012 Annual Report continue to reduce our impact on the environment with energy management tools. Despite the near-term headwinds due to economic uncertainty and government-initiated austerity measures implemented in many countries, Europe offers significant long-term opportunity, and we are well-positioned to capitalize on this segment's potential. APMEA In APMEA, we will advance efforts to become our customers' favorite place and way to eat and drink by reinvigorating our longterm value platforms, accelerating growth at breakfast, and focusing on menu variety and convenience. Value will continue to be a key strategy and growth driver to build traffic with a focus across the menu at all dayparts, combined with trade-up strategies to build average check. For example, Australia will evolve its Loose Change Menu, and Japan will focus on building average check through trade-up opportunities with promotional products and a focus on breakfast. We plan to grow breakfast traffic in APMEA through increased marketing efforts, value, accessibility and operations excellence. The markets will continue to balance core and limited-time offers and will execute a series of exciting food events that celebrate our core menu and the segment's all-time favorite product offerings. At the same time, we will continue to leverage the diversity of the segment to identify and scale new products and platforms. Convenience initiatives will focus on optimizing our drive-thru and delivery services through operation efficiencies and online capabilities. In China, for example, a new web-ordering system will enhance the customer experience and drive new demand through delivery. We will grow our business by opening approximately 850 new restaurants and reimaging about 225 existing restaurants while elevating our focus on service and operations. In China, we will continue to build a foundation for long-term growth by opening over 300 restaurants, consistent with our goal of reaching 2,000 restaurants by the end of 2013. Consolidated Globally, we will maintain financial discipline by effectively managing spending. In making capital allocation decisions, our goal is to make investments that elevate the McDonald's experience and drive sustainable growth in sales and market share. We focus on markets that generate acceptable returns or have opportunities for long-term growth. We remain committed to returning all of our free cash flow (cash from operations less capital expenditures) to shareholders over the long-term via dividends and share repurchases. McDonald's does not provide specific guidance on diluted earnings per share. The following information is provided to assist in analyzing the Company's results: Changes in Systemwide sales are driven by comparable sales and net restaurant unit expansion. The Company expects net restaurant additions to add approximately 2.5 percentage points to 2013 Systemwide sales growth (in constant currencies), most of which will be due to the 1,135 net traditional restaurants added in 2012. The Company does not generally provide specific guidance on changes in comparable sales. However, as a perspective, assuming no change in cost structure, a 1 percentage point increase in comparable sales for either the U.S. or Europe would increase annual diluted earnings per share by about 4 cents. With about 75% of McDonald's grocery bill comprised of 10 different commodities, a basket of goods approach is the most comprehensive way to look at the Company's commodity costs. For the full year 2013, the total basket of goods cost is expected to increase 1.5-2.5% in the U.S. and 3-4% in Europe. The Company expects full-year 2013 selling, general and administrative expenses to increase approximately 2-3% in constant currencies, with fluctuations expected between the quarters. Based on current interest and foreign currency exchange rates, the Company expects interest expense for the full year 2013 to increase approximately 4-6% compared with 2012. A significant part of the Company's operating income is generated outside the U.S., and about 35% of its total debt is denominated in foreign currencies. Accordingly, earnings are affected by changes in foreign currency exchange rates, particularly the Euro, British Pound, Australian Dollar and Canadian Dollar. Collectively, these currencies represent approximately 65% of the Company's operating income outside the U.S. If all four of these currencies moved by 10% in the same direction, the Company's annual diluted earnings per share would change by about 25 cents. The Company expects the effective income tax rate for the fullyear 2013 to be 31% to 33%. Some volatility may be experienced between the quarters resulting in a quarterly tax rate that is outside the annual range. As a result of the American Taxpayer Relief Act of 2012, our income tax provision for the first quarter of 2013 will include a tax benefit of about $50 million reflecting the retroactive impact of certain tax benefits, which may result in a first quarter effective tax rate below the full year range. The Company expects capital expenditures for 2013 to be approximately $3.2 billion. Over half of this amount will be used to open new restaurants. The Company expects to open between 1,500-1,600 restaurants including about 500 restaurants in affiliated and developmental licensee markets, such as Japan and Latin America, where the Company does not fund any capital expenditures. The Company expects net additions of between 1,200-1,300 traditional restaurants. The remaining capital will be used to reinvest in existing locations, in part through reimaging. More than 1,600 restaurants worldwide are expected to be reimaged, including locations in affiliated and developmental licensee markets that require no capital investment from the Company. McDonald's Corporation 2012 Annual Report 15 Consolidated Operating Results Operating results 2012 Amount Dollars in millions, except per share data Revenues Sales by Company-operated restaurants Revenues from franchised restaurants Total revenues Operating costs and expenses Company-operated restaurant expenses Franchised restaurants-occupancy expenses Selling, general & administrative expenses Impairment and other charges (credits), net Other operating (income) expense, net Total operating costs and expenses Operating income Interest expense Nonoperating (income) expense, net Income before provision for income taxes Provision for income taxes Net income Earnings per common sharediluted Weighted-average common shares outstanding diluted 2011 2010 Increase/ (decrease) Increase/ (decrease) Amount $ 18,603 8,964 27,567 Amount 2% 3 2 15,224 1,527 2,455 8 (252) 18,962 8,605 517 9 8,079 2,614 $ 5,465 $ 5.36 3 3 3 nm (8) 3 1 5 (64) 1 4 (1%) 2% 1,020.2 (2%) $ 18,293 8,713 27,006 13% 11 12 $ 16,233 7,842 24,075 14,838 1,481 2,394 (4) (233) 18,476 8,530 493 25 8,012 2,509 $ 5,503 $ 5.27 14 8 3 nm (18) 11 14 9 13 14 22 11% 15% 13,060 1,378 2,333 29 (198) 16,602 7,473 451 22 7,000 2,054 $ 4,946 $ 4.58 1,044.9 (3%) 1,080.3 nm Not meaningful IMPACT OF FOREIGN CURRENCY TRANSLATION ON REPORTED RESULTS While changes in foreign currency exchange rates affect reported results, McDonald's mitigates exposures, where practical, by financing in local currencies, hedging certain foreign-denominated cash flows, and purchasing goods and services in local currencies. In 2012, foreign currency translation had a negative impact on consolidated operating results primarily due to the weaker Euro, along with most other currencies. In 2011, foreign currency translation had a positive impact on consolidated operating results driven by the stronger Euro and Australian Dollar, as well as most other currencies. In 2010, foreign currency translation had a positive impact on consolidated operating results driven by stronger global currencies, primarily the Australian Dollar and Canadian Dollar, partly offset by the weaker Euro. Impact of foreign currency translation on reported results In millions, except per share data Revenues Company-operated margins Franchised margins Selling, general & administrative expenses Operating income Net income Earnings per common sharediluted 16 2012 $27,567 3,379 7,437 2,455 8,605 5,465 5.36 McDonald's Corporation 2012 Annual Report Reported amount 2011 2010 $27,006 3,455 7,232 2,394 8,530 5,503 5.27 $24,075 3,173 6,464 2,333 7,473 4,946 4.58 2012 $ (726) (97) (204) 40 (261) (178) (0.17) Currency translation benefit/(cost) 2011 2010 $ 944 134 213 (55) 301 195 0.19 $ 188 35 (14) (12) 13 13 0.01 NET INCOME AND DILUTED EARNINGS PER COMMON SHARE increased 15% (11% in constant currencies) to $5.27. Foreign currency translation had a positive impact of $0.19 per share on diluted earnings per share. Net income and diluted earnings per share growth in 2011 in constant currencies were positively impacted by growth in franchised margin dollars, and to a lesser extent, Company-operated margin dollars, partly offset by a higher effective income tax rate. A decrease of 3% in diluted weighted average shares outstanding also contributed to the diluted earnings per share growth in 2011. The Company repurchased 28.1 million shares of its stock for $2.6 billion in 2012 and 41.9 million shares of its stock for $3.4 billion in 2011, driving reductions in weighted average shares outstanding on a diluted basis in both periods. In 2012, net income decreased 1% (increased 3% in constant currencies) to $5.5 billion and diluted earnings per common share increased 2% (5% in constant currencies) to $5.36. Foreign currency translation had a negative impact of $0.17 per share on diluted earnings per share. Net income and diluted earnings per share growth in constant currencies were positively impacted by growth in franchised margin dollars, partly offset by a higher effective income tax rate and higher selling, general and administrative expenses. A decrease of 2% in diluted weighted average shares outstanding also contributed to the diluted earnings per share growth in 2012. In 2011, net income increased 11% (7% in constant currencies) to $5.5 billion and diluted earnings per common share REVENUES The Company's revenues consist of sales by Company-operated 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 franchised restaurants that are licensed to foreign affiliates and developmental licensees include a royalty based on a percent of sales, and generally include initial fees. In 2012 and 2011, constant currency revenue growth was driven primarily by positive comparable sales as well as expansion. Revenues Dollars in millions Company-operated sales: U.S. Europe APMEA Other Countries & Corporate Total Franchised revenues: U.S. Europe APMEA Other Countries & Corporate Total Total revenues: U.S. Europe APMEA Other Countries & Corporate Total 2012 2011 Amount 2010 $ 4,530 7,850 5,350 873 $18,603 $ 4,433 7,852 5,061 947 $18,293 $ 4,229 6,932 4,297 775 $16,233 2% 0 6 (8) 2% 5% 13 18 22 13% 2% 6 5 (7) 4% 5% 8 11 17 8% $ 4,284 2,977 1,041 662 $ 8,964 $ 4,096 3,034 958 625 $ 8,713 $ 3,883 2,637 769 553 $ 7,842 5% (2) 9 6 3% 5% 15 25 13 11% 5% 5 9 11 6% 5% 9 14 8 8% $ 8,814 10,827 6,391 1,535 $27,567 $ 8,529 10,886 6,019 1,572 $27,006 $ 8,112 9,569 5,066 1,328 $24,075 3% (1) 6 (2) 2% 5% 14 19 18 12% 3% 6 6 0 5% 5% 8 11 14 8% In the U.S., the increase in revenues in 2012 was primarily due to positive comparable sales. Everyday value offerings, menu variety and the enhanced customer experience due to reimaging contributed positively to results, despite broad competitive activity. Revenues in 2011 were positively impacted by the ongoing appeal of our iconic core products and the success of new products, including additions to the McCaf beverage line, as well as continued focus on everyday value, convenience and modernizing the customer experience. Europe's constant currency increases in revenues in 2012 and 2011 were primarily driven by positive comparable sales in Increase/(decrease) 2012 2011 Increase/(decrease) excluding currency translation 2012 2011 the U.K. and Russia, the segment's two largest Companyoperated restaurant markets, as well as expansion in Russia. Revenues in 2011 also benefited from comparable sales increases in France and Germany. In APMEA, the constant currency increase in revenues in 2012 was driven by positive comparable sales in China, Australia and many other markets. The constant currency increase in revenues in 2011 was primarily driven by comparable sales increases in China and most other markets. Expansion, primarily in China, also contributed to revenue growth in both periods. McDonald's Corporation 2012 Annual Report 17 The following tables present comparable sales, comparable guest counts and Systemwide sales increases/(decreases): Comparable sales and guest count increases/(decreases) Sales U.S. Europe APMEA Other Countries & Corporate Total 3.3% 2.4 1.4 7.7 3.1% 2012 Guest Counts 1.9% (0.5) 2.2 3.0 1.6% 2011 Guest Counts Sales 4.8% 5.9 4.7 10.1 5.6% 3.3% 3.4 4.3 4.5 3.7% Sales 3.8% 4.4 6.0 11.3 5.0% 2010 Guest Counts 5.3% 2.7 4.9 8.3 4.9% Systemwide sales increases/(decreases) 2012 U.S. Europe APMEA Other Countries & Corporate Total 4% (2) 5 4 3% 2011 5% 14 16 17 11% Excluding currency translation 2012 2011 4% 5 6 10 5% 5% 9 7 12 7% Franchised sales are not recorded as revenues by the Company, but are the basis on which the Company calculates and records franchised revenues and are indicative of the financial health of the franchisee base. The following table presents franchised sales and the related increases/(decreases): Franchised sales Dollars in millions U.S. Europe APMEA Other Countries & Corporate Total 2012 2011 Amount 2010 $31,063 16,857 13,723 8,044 $69,687 $29,739 17,243 13,041 7,625 $67,648 $28,166 15,049 11,373 6,559 $61,147 RESTAURANT MARGINS Franchised margins Franchised margin dollars represent revenues from franchised restaurants less the Company's occupancy costs (rent and depreciation) associated with those sites. Franchised margin dollars represented about two-thirds of the combined restaurant margins in 2012, 2011 and 2010. Franchised margin dollars increased $205 million or 3% (6% in constant currencies) in 2012 and $768 million or 12% (9% in constant currencies) in 2011. Positive comparable sales were the primary driver of the constant currency growth in franchised margin dollars in both years. Increase/(decrease) 2012 2011 4% (2) 5 5 3% 6% 15 15 16 11% Increase excluding currency translation 2012 2011 4% 5 6 12 6% 6% 9 6 12 7% Franchised margins In millions U.S. Europe APMEA Other Countries & Corporate Total 2012 2011 2010 $3,594 2,352 924 567 $7,437 $3,436 2,400 858 538 $7,232 $3,239 2,063 686 476 $6,464 Percent of revenues U.S. Europe APMEA Other Countries & Corporate Total 83.9% 79.0 88.8 85.6 83.0% 83.9% 79.1 89.5 86.1 83.0% 83.4% 78.2 89.3 86.0 82.4% In the U.S., the franchised margin percent was flat in 2012 as comparable sales performance was offset by higher depreciation related to reimaging. The increase in 2011 was primarily due to positive comparable sales, partly offset by higher occupancy expenses. 18 McDonald's Corporation 2012 Annual Report In Europe, the franchised margin percent decrease in 2012 reflected positive comparable sales and higher occupancy costs. The increase in 2011 was primarily due to positive comparable sales, partly offset by higher occupancy expenses. In APMEA, the franchised margin percent decrease in 2012 was primarily due to Australia, which was partly impacted by the 2012 change in classification of certain amounts from revenues to restaurant occupancy expenses. Although the change in classification resulted in a decrease to the franchised margin percentage, there was no impact on the reported franchised margin dollars. The increase in 2011 was primarily due to a contractual escalation in the royalty rate for Japan in addition to positive comparable sales in most markets, partly offset by a negative impact from the strengthening of the Australian dollar. The franchised margin percent in APMEA and Other Countries & Corporate is higher relative to the U.S. and Europe due to a larger proportion of developmental licensed and/or affiliated restaurants where the Company receives royalty income with no corresponding occupancy costs. Company-operated margins Company-operated margin dollars represent sales by Companyoperated restaurants less the operating costs of these restaurants. Company-operated margin dollars decreased $76 million or 2% (increased 1% in constant currencies) in 2012, and increased $282 million or 9% (5% in constant currencies) in 2011. In 2012, Company-operated margin dollars were negatively impacted by foreign currency translation of $97 million, primarily in Europe. On a constant currency basis, the increase in Company-operated margin dollars was due to positive performance in Europe, offset by lower results in APMEA and the U.S. as positive comparable sales were more than offset by higher costs. The growth in Company-operated margin dollars in 2011 was driven by positive comparable sales partly offset by higher costs, primarily commodity costs, in all segments. Foreign currency translation also had a positive impact on results. Company-operated margins In millions U.S. Europe APMEA Other Countries & Corporate Total 2012 2011 2010 $ 883 1,501 849 146 $3,379 $ 914 1,514 876 151 $3,455 $ 902 1,373 764 134 $3,173 Percent of sales U.S. Europe APMEA Other Countries & Corporate Total 19.5% 19.1 15.9 16.8 18.2% 20.6% 19.3 17.3 16.0 18.9% 21.3% 19.8 17.8 17.2 19.6% In the U.S., the Company-operated margin percent decreased in 2012 primarily due to higher commodity and labor costs, partly offset by positive comparable sales. The margin percent decreased in 2011 due to higher commodity and occupancy costs, partly offset by positive comparable sales. Europe's Company-operated margin percent decreased in 2012 primarily due to higher labor and commodity costs across several markets, despite positive comparable sales in Russia and the U.K. The margin percent decreased in 2011 as higher commodity, labor, and occupancy costs were partly offset by positive comparable sales. In APMEA, the Company-operated margin percent in 2012 decreased primarily due to higher labor and occupancy costs, partly offset by positive comparable sales. The margin percent decreased in 2011 as higher commodity, labor and occupancy costs were partly offset by positive comparable sales. Acceleration of new restaurant openings in China negatively impacted the margin percent in both periods. Similar to other markets, new restaurants in China initially open with lower margins that grow significantly over time. Supplemental information regarding Companyoperated restaurants We continually review our restaurant ownership mix with a goal of improving local relevance, profits and returns. In most cases, franchising is the best way to achieve these goals, but as previously stated, Company-operated restaurants are also important to our success. We report results for Company-operated restaurants based on their sales, less costs directly incurred by that business including occupancy costs. We report the results for franchised restaurants based on franchised revenues, less associated occupancy costs. For this reason and because we manage our business based on geographic segments and not on the basis of our ownership structure, we do not specifically allocate selling, general and administrative expenses and other operating (income) expenses to Company-operated or franchised restaurants. Other operating items that relate to the Company-operated restaurants generally include gains/losses on sales of restaurant businesses and write-offs of equipment and leasehold improvements. We believe the following information about Companyoperated restaurants in our most significant segments provides an additional perspective on this business. Management of the Company considers this information when evaluating restaurant ownership mix, subject to other relevant considerations. The following table seeks to illustrate the two components of our Company-operated margins. The first of these relates exclusively to restaurant operations, which we refer to as \"Store operating margin.\" The second relates to the value of our brand and the real estate interest we retain for which we charge rent and royalties. We refer to this component as \"Brand/real estate margin.\" Both Company-operated and conventional franchised restaurants are charged rent and royalties, although rent and royalties for Company-operated restaurants are eliminated in consolidation. Rent and royalties for both restaurant ownership types are based on a percentage of sales, and the actual rent percentage varies depending on the level of McDonald's investment in the restaurant. Royalty rates may also vary by market. As shown in the following table, in disaggregating the components of our Company-operated margins, certain costs with respect to Company-operated restaurants are reflected in Brand/real estate margin. Those costs consist of rent payable by McDonald's to third parties on leased sites and depreciation for buildings and leasehold improvements and constitute a portion of occupancy & other operating expenses recorded in the Consolidated statement of income. Store operating margins reflect rent and royalty expenses, and those amounts are accounted for as income in calculating Brand/real estate margin. McDonald's Corporation 2012 Annual Report 19 our Company-operated business. However, we believe that about $50,000 per restaurant, on average, is the typical cost to support this business in the U.S. The actual costs in markets outside the U.S. will vary depending on local circumstances and the organizational structure of the market. These costs reflect the indirect services we believe are necessary to provide the appropriate support of the restaurant. While we believe that the following information provides a perspective in evaluating our Company-operated business, it is not intended as a measure of our operating performance or as an alternative to operating income or restaurant margins as reported by the Company in accordance with accounting principles generally accepted in the U.S. In particular, as noted previously, we do not allocate selling, general and administrative expenses to U.S. Dollars in millions As reported Number of Company-operated restaurants at year end Sales by Company-operated restaurants Company-operated margin Store operating margin Company-operated margin Plus: Outside rent expense(1) Depreciationbuildings & leasehold improvements(1) Less: Rent & royalties(2) Store operating margin Brand/real estate margin Rent & royalties(2) Less: Outside rent expense(1) Depreciationbuildings & leasehold improvements(1) Brand/real estate margin Europe 2012 2011 2010 2012 2011 2010 1,552 $4,530 $ 883 1,552 $4,433 $ 914 1,550 $4,229 $ 902 2,017 $ 7,850 $ 1,501 1,985 $ 7,852 $ 1,514 2,005 $ 6,932 $ 1,373 $ 883 $ 914 $ 902 $ 1,501 $ 1,514 $ 1,373 59 56 60 245 242 223 77 69 65 123 118 105 (668) $ 351 (651) $ 388 (619) $ 408 (1,603) $ 266 $ (1,598) 276 $ 668 $ 651 $ 619 $ 1,603 $ 1,598 $ (1,409) 292 $ 1,409 (59) (56) (60) (245) (242) (223) (77) $ 532 (69) $ 526 (65) $ 494 (123) $ 1,235 (118) $ 1,238 (105) $ 1,081 (1) Represents certain costs recorded as occupancy & other operating expenses in the Consolidated statement of income - rent payable by McDonald's to third parties on leased sites and depreciation for buildings and leasehold improvements. This adjustment is made to reflect thes