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McDonald’s Corporation
2007 Annual Repor t
®
®

Table of contents

  • Page 1
    McDonald's Corporation 2007 Annual Report ® ®

  • Page 2
    Getting better ... Our Plan to Win, with its strategic focus on "being better, not just bigger," has delivered even better restaurant experiences to customers and superior value to shareholders. Cover photo: Taken at Sauchiehall Street restaurant, Glasgow, U.K.

  • Page 3
    1 2007 Highlights 6.8% global comparable sales increase 2005 2006 $4.3 billion $4.3 billion $4.9 billion $23 billion in total revenues - a record high 2007 Cash generated by operations 25% three-year compounded annual return to shareholders more than double the three-year returns of the S&P ...

  • Page 4
    ... because of our global alignment and ongoing focus on the Plan to Win. We have the world's best owner/operators, suppliers, and employees united in our commitment to customers. We are leveraging greater consumer insight to deliver sustainable business results for the long-term benefit of our...

  • Page 5
    ... operating performance. One important by-product of this alignment is our increased emphasis on collaborating throughout our System for the benefit of our customers and, ultimately, our shareholders. Throughout 2007, we shared best practices ...research and development ...new product successes...

  • Page 6
    ...example, average annual restaurant sales increased 15% to $2.2 million during the same period. And, our owner/operators are sharing in this success, recognizing a higher average cash ï¬,ow that enables them to re-invest in their restaurants, enhancing our overall customer experience. 2007 2006 2005...

  • Page 7
    ...meet our long-term financial targets: • 3-5% average annual sales and revenue growth • 6-7% average annual operating income growth • Returns on incremental invested capital in the high teens. I am confident because we have an exceptional Board of Directors ...an outstanding global leadership...

  • Page 8
    ... System ...One Plan ...Our System's alignment around the Plan to Win grounds us in what's most important to customers and provides a dynamic framework for how we approach our global business. We continue to learn, share and innovate within its five key areas ... People Product Place Price Promotion

  • Page 9
    ... dedicated to serving our customers 540 million Snack Wraps were sold in 2007 24,500 restaurants around the world offer extended or 24-hour service 1billion more customers were served in 2007 than in 2006 115 countries participated in one of McDonald's most successful promotions ever - our...

  • Page 10
    8 Our brand's best ambassadors are our people, who proudly serve customers and make the most of our unique employment opportunities.

  • Page 11
    ... through our global restaurant operations improvement process and regular employee surveys. As a result, we've seen crew and manager commitment levels increase in many countries. We support development from the crew room to the board room, starting with on-the-job training in our restaurants and...

  • Page 12
    10 Greater variety and quality choices surprise and delight customers with the food and beverage products they desire.

  • Page 13
    ...travel fast. Our System is aligned to leverage successes like this quickly, while also allowing the ï¬,exibility to adapt to local tastes. For example, in Japan, we offer the Ebi (shrimp) Wrap. We continue to expand our pipeline of new products. Our ongoing menu innovation is guided by a global food...

  • Page 14
    12 Convenient and modern, our places make life fun and easy for customers, crew and managers.

  • Page 15
    ... countries, the eating-out market is expanding rapidly. We plan to open about 125 new restaurants in China and 35 to 40 in Russia in 2008. Brand Expression Our restaurants are the ultimate expressions of our brand. We're continuing to invest so that they remain relevant for our customers and crew...

  • Page 16
    14 We offer a range of tastes, sizes and prices that deliver great value to customers.

  • Page 17
    ...products, premium salads and sandwiches, classic menu favorites and everyday affordable offerings around the world, we create value for customers and satisfy their demand for choice and variety. To serve customers great food at a great value, it's important we effectively manage restaurant operating...

  • Page 18
    16 Relevant marketing and promotions strengthen our connection with customers, building our business and brand trust.

  • Page 19
    ... Shrek'sâ„¢ "Treketh to Adventure" global kids' website inspired kids and their families to get active by playing games outside. In summer 2008, we'll proudly help the Olympic dreams come true for hundreds of children with the McDonald's Champion Kids program. More than 200 kids will be selected to...

  • Page 20
    18

  • Page 21
    ... Don Thompson Senior corporate and business unit officers Ralph Alvarez* President, Chief Operating Officer Jose Armario* President - Canada and Latin America Peter Bensen* Chief Financial Officer Peter Bush President - APMEA Pacific & South Africa Division Mary Dillon* Chief Marketing Officer...

  • Page 22
    20 Dear fellow shareholders, Your Board of Directors is pleased to report that McDonald's enjoyed another strong year satisfying our customers around the world. As we acknowledge in these pages, we continued to execute our Plan to Win in 2007, as evidenced by our record results. We believe that ...

  • Page 23
    ...statement of shareholders' equity 48 Notes to consolidated financial statements 60 Quarterly results (unaudited) 61 Management's assessment of internal control over financial reporting 62 Report of independent registered public accounting firm 63 Report of independent registered public accounting...

  • Page 24
    ...Financial position at year end: Total assets Total debt Total shareholders' equity Shares outstanding IN MILLIONS Per common share: Income from continuing operations-diluted Net income-diluted Dividends declared Market price at year end Company-operated restaurants Franchised restaurants Affiliated...

  • Page 25
    ... million after tax or $0.55 per share) primarily related to restructuring certain international markets and eliminating positions, restaurant closings/asset impairment and the write-off of technology costs. (10) Includes pretax operating charges of $378 million primarily related to the U.S. business...

  • Page 26
    ...McDonald's restaurant business as we believe the opportunities for long-term growth remain significant. Accordingly, during the third quarter 2007, the Company sold its investment in Boston Market. In 2006, the Company disposed of its investment in Chipotle Mexican Grill (Chipotle) via public stock...

  • Page 27
    ...a blend of premium sandwiches and salads, classic menu favorites, new products, limited-time food promotions as well as everyday value offerings. In APMEA, our business posted strong sales performance, driven by positive comparable sales in nearly every country, led by Japan, Australia and China. In...

  • Page 28
    ... by operations totaled $4.9 billion and capital expenditures totaled $1.9 billion. • The Company announced that for 2007 through 2009, we expect to return $15 billion to $17 billion to shareholders through share repurchases and dividends, subject to business and market conditions. In 2007, the...

  • Page 29
    ...$17 billion to shareholders through share repurchases and dividends, subject to business and market conditions. In 2007, the Company returned $5.7 billion of this goal to shareholders. • As a result of the new developmental licensee structure, the Company's operating results in Latin America will...

  • Page 30
    ... 2007 DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA 2006 Amount Increase/ (decrease) 2005 Amount Amount Increase/ (decrease) Revenues Sales by Company-operated restaurants Revenues from franchised and affiliated restaurants Total revenues Operating costs and expenses Company-operated restaurant...

  • Page 31
    ... Revenue Service's (IRS) examination of the Company's 2003-2004 U.S. federal income tax returns; partly offset by • $0.02 per share of income tax expense related to the impact of a tax law change in Canada. 2006 • $0.08 per share of operating expenses primarily related to strategic actions...

  • Page 32
    ... positive comparable sales as well as stronger foreign currencies. Revenue growth in 2007 was partly offset by the Company's sale of its Latam businesses. Upon completion of the Latam sale in August 2007, the Company receives royalties based on a percent of sales in these markets. Revenues Increase...

  • Page 33
    ...2007 increase in franchised margin for Other Countries & Corporate is primarily due to the sale of Latam in August 2007. As a result of the sale, the Company receives royalties based on a percent of sales in these markets. • Company-operated margins Company-operated margin dollars represent sales...

  • Page 34
    ...Although direct restaurant operation is significantly more capital-intensive relative to franchising and results in lower restaurant margins as a percent of revenues, Company-operated restaurants are important to our success in both mature and developing markets. In our Company-operated restaurants...

  • Page 35
    ... IN MILLIONS 2007 2006 U.S. 2005 2007 2006 Europe 2005 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) Depreciation - buildings & leasehold...

  • Page 36
    ...In 2007, the Company recorded $1.7 billion of pretax impairment charges primarily related to the Company's sale of its Latam businesses to a developmental licensee organization. In addition, the Company recorded a $16 million write-off of assets associated with the Toasted Deli Sandwich products in...

  • Page 37
    ... the one-time opportunity provided under HIA. The net of these items decreased the effective income tax rate by about 2 percentage points. • Combined operating margin Combined operating margin is defined as operating income as a percent of total revenues. Combined operating margin for 2007, 2006...

  • Page 38
    ...on the McDonald's restaurant business as it believes the opportunities for long-term growth remain significant. Accordingly, during the third quarter 2007, the Company sold its investment in Boston Market. In 2006, the Company disposed of its investment in Chipotle via public stock offerings in the...

  • Page 39
    ... operating results, offset by changes in working capital primarily due to higher income tax payments. Cash used for investing activities totaled $1.2 billion in 2007, a decrease of $124 million compared to 2006, primarily due to net proceeds received from the Latam transaction and the sale of Boston...

  • Page 40
    ... in 2006 and 2005, primarily related to new Chipotle restaurants. Capital expenditures invested in major markets, excluding Japan, represented approximately 75% of the total in 2007 and about 70% of the total in 2006 and 2005. Japan is accounted for under the equity method, and accordingly its...

  • Page 41
    ... 2007 and 2006, return on average assets and return on average common equity both benefited from strong operating results in the U.S. and Europe, as well as improved results in APMEA. During 2008, the Company will continue to concentrate restaurant openings and new capital invested in markets with...

  • Page 42
    ... in McDonald's Consolidated balance sheet totaling $179 million at year-end 2007. OTHER MATTERS Critical accounting policies and estimates Management's discussion and analysis of financial condition and results of operations is based upon the Company's consolidated financial statements, which...

  • Page 43
    ... The Company has a share-based compensation plan which authorizes the granting of various equity-based incentives including stock options and restricted stock units (RSUs) to employees and nonemployee directors. The expense for these equity-based incentives is based on their fair value at date of...

  • Page 44
    .... The temporary differences consist primarily of undistributed earnings that are considered permanently invested in operations outside the U.S. If management's intentions change in the future, deferred taxes may need to be provided. Effects of changing prices- inï¬,ation The Company has demonstrated...

  • Page 45
    ...related to Boston Market & Chipotle (203.8) Less: Cash generated from investing activities related to Latam transaction Adjusted cash used for investing activities $1,477.9 AS A PERCENT Quarters ended: March 31 June 30 September 30 December 31 2007 $1,150.1 (184.3) (647.5) $1,981.9 (5) Share-based...

  • Page 46
    ... STATEMENT OF INCOME IN MILLIONS, EXCEPT PER SHARE DATA Years ended December 31, 2007 $16,611.0 6,175.6 22,786.6 2006 $15,402.4 5,492.8 20,895.2 2005 $14,017.9 5,099.4 19,117.3 REVENUES Sales by Company-operated restaurants Revenues from franchised and affiliated restaurants Total revenues...

  • Page 47
    ... of businesses held for sale Discontinued operations Total current liabilities Long-term debt Other long-term liabilities Deferred income taxes Shareholders' equity Preferred stock, no par value; authorized - 165.0 million shares; issued - none Common stock, $.01 par value; authorized - 3.5 billion...

  • Page 48
    ...of tax Share-based compensation Other Changes in working capital items: Accounts receivable Inventories, prepaid expenses and other current assets Accounts payable Income taxes Other accrued liabilities Cash provided by operations Investing activities Property and equipment expenditures Purchases of...

  • Page 49
    ... translation adjustments Fair value adjustments-cash ï¬,ow hedges (including taxes of $2.9) Adjustments related to pensions (including taxes of $19.7) Comprehensive income Common stock cash dividends ($1.50 per share) ESOP loan payment Treasury stock purchases Share-based compensation Adjustment to...

  • Page 50
    ...ACCOUNTING POLICIES Nature of business The Company primarily franchises and operates McDonald's restaurants in the food service industry. The Company also has a minority ownership in U.K.-based Pret A Manger. Prior to August 2007, the Company operated Boston Market in the U.S., which it sold in 2007...

  • Page 51
    ... 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 international subsidiaries or affiliates...

  • Page 52
    ... difference between the net book value of the business (including any foreign currency translation adjustments recorded in accumulated other comprehensive income in shareholders' equity) and the estimated cash sales price, less costs of disposal. The Company bases its accounting policy on management...

  • Page 53
    ... maturity dates through 2013. net investments. During the year ended December 31, 2005, the Company recorded an increase in translation adjustments of $356.8 million after tax related to hedges of net investments. Sales of stock by subsidiaries and affiliates As permitted by Staff Accounting...

  • Page 54
    ... of SFAS No. 158 effective December 31, 2006, as required, which resulted in a net adjustment to other comprehensive income of $89.0 million for a limited number of applicable international markets. In 2007, the Company recorded an unrecognized actuarial gain, net of tax, of $51.3 million in...

  • Page 55
    ... as certain strategic actions in 2006. In 2007, the Company recorded $1.7 billion related to the sale of the Latam businesses to a developmental licensee. In addition, the charges for 2007 included a $15.7 million write-off of assets associated with the Toasted Deli Sandwich products in Canada and...

  • Page 56
    ... Company based upon a percent of sales, as well as initial fees. The results of operations of restaurant businesses purchased and sold in transactions with franchisees, affiliates and others were not material to the consolidated financial statements for periods prior to purchase and sale. Revenues...

  • Page 57
    ... fair-value market adjustments. The timing of these escalations generally ranges from annually to every five years. For most locations, the Company is obligated for the related occupancy costs including property taxes, insurance and maintenance; however, for franchised sites, the Company requires...

  • Page 58
    ...(ii) receive Company-provided allocations that cannot be made under the Profit Sharing and Savings Plan because of Internal Revenue Service limitations. The investment alternatives and returns are based on certain market-rate investment alternatives under the Profit Sharing and Savings Plan. Total...

  • Page 59
    ... transfers of the Company's ownership interest in certain markets to developmental licensees and certain other strategic actions. (3) Includes ($28.4) million of charges/(credits) (Europe-$4.1 million; APMEA-($9.1) million and Other Countries & Corporate-($23.4) million) primarily related to a gain...

  • Page 60
    ... to the risk designated as being hedged. The related hedging instrument is also recorded at fair value in either miscellaneous other assets or other long-term liabilities. A portion ($37.1 million) of the adjustments at December 31, 2007 related to interest rate exchange agreements that were...

  • Page 61
    ... RSUs that are performance-based vesting. The fair value of each RSU granted is equal to the market price of 2007 RSUs Nonvested at beginning of year Granted Vested Forfeited Nonvested at end of year Shares IN MILLIONS Weighted-average grant date fair value the Company's stock at date of grant less...

  • Page 62
    ...following Boston Market activity, which is presented as discontinued operations: IN MILLIONS Quarter ended December 31 2006 Quarter ended September 30 2006 Quarters ended June 30 2007 2006 Quarters ended March 31 2007 2006 Revenues Sales by Company-operated restaurants Revenues from franchised...

  • Page 63
    ... that the Company's internal controls over financial reporting are effective. Ernst & Young, LLP, independent registered public accounting firm, has audited the financial statements of the Company for the fiscal years ended December 31, 2007, 2006 and 2005 and the Company's internal control over...

  • Page 64
    ... method of recognizing the funded status of its defined benefit postretirement plans. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), McDonald's Corporation's internal control over financial reporting as of December 31, 2007...

  • Page 65
    ... internal control over financial reporting as of December 31, 2007, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated financial statements of McDonald's Corporation...

  • Page 66
    ... below. Key phone numbers Investor Relations 1.630.623.7428 MCDirect Shares (direct stock purchase plan) 1.800.228.9623 Financials-by-fax 1.630.623.0172 U.S. customer comments/inquiries 1.800.244.6227 Financial media 1.630.623.3678 Franchising 1.630.623.6196 Ronald McDonald House Charities, Inc...

  • Page 67

  • Page 68
    McDonald's Corporation McDonald's Plaza Oak Brook, IL 60523 www.mcdonalds.com