McDonalds 2007 Annual Report Download - page 42

The Company uses foreign currency debt and derivatives to
hedge the foreign currency risk associated with certain royalties,
intercompany fi nancings and long-term investments in foreign
subsidiaries and affi liates. This reduces the impact of fl uctuating
foreign currencies on cash fl ows and shareholders’ equity. Total
foreign currency-denominated debt, including the effects of foreign
currency exchange agreements, was $6.1 billion and $6.8 billion at
December 31, 2007 and 2006, respectively. In addition, where
practical, the Company’s restaurants purchase goods and
services in local currencies resulting in natural hedges.
The Company does not have signifi cant exposure to any
individual counterparty and has master agreements that contain
netting arrangements. Certain 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,
2007 and 2006, the Company was required to post collateral of
$55 million and $49 million, respectively, which was used to
reduce the carrying value of the derivatives recorded in other
long-term liabilities.
The Company’s net asset exposure is diversifi ed among a
broad basket of currencies. The Company’s largest net asset
exposures (defi ned as foreign currency assets less foreign
currency liabilities) at year end were as follows:
Foreign currency net asset exposures
IN MILLIONS OF U.S. DOLLARS 2007 2006
Euro $3,999 $2,758
Australian Dollars 1,147 837
Canadian Dollars 929 1,099
British Pounds Sterling 634 770
Russian Ruble 463 359
The Company prepared sensitivity analyses of its fi nancial
instruments to determine the impact of hypothetical changes
in interest rates and foreign currency exchange rates on the
Company’s results of operations, cash fl ows and the fair value
of its fi nancial instruments. The interest rate analysis assumed
a one percentage point adverse change in interest rates on
all fi nancial instruments but did not consider the effects of the
reduced level of economic activity that could exist in such an
environment. The foreign currency rate analysis assumed that
each foreign currency rate would change by 10% in the same
direction relative to the U.S. Dollar on all fi nancial instruments;
however, the analysis did not include the potential impact on
sales levels, local currency prices or the effect of fl uctuating cur-
rencies on the Company’s anticipated foreign currency royalties
and other payments received in the U.S. Based on the results of
these analyses of the Company’s fi nancial instruments, neither
a one percentage point adverse change in interest rates from
2007 levels nor a 10% adverse change in foreign currency rates
from 2007 levels would materially affect the Company’s results of
operations, cash fl ows or the fair value of its fi nancial instruments.
Contractual obligations and commitments
The Company has long-term contractual obligations primarily
in the form of lease obligations (related to both Company-
operated and franchised restaurants) and debt obligations. In
addition, the Company has long-term revenue and cash fl ow
streams that relate to its franchise arrangements. Cash provided
by operations (including cash provided by these franchise
arrangements) along with the Company’s borrowing capacity
and other sources of cash will be used to satisfy the obligations.
The following table summarizes the Company’s contractual
obligations and their aggregate maturities as well as future
minimum rent payments due to the Company under existing
franchise arrangements as of December 31, 2007. (See discus-
sions of cash fl ows and fi nancial position and capital resources
as well as the Notes to the consolidated fi nancial statements for
further details.)
Contractual cash outfl ows Contractual cash infl ows
Operating Debt Minimum rent under
IN MILLIONS leases obligations
(1)
franchise arrangements
2008 $ 1,054 $1,991 $ 2,054
2009 974 449 1,990
2010 898 540 1,920
2011 822 552 1,834
2012 757 2,217 1,768
Thereafter 6,009 3,467 12,532
Total $10,514 $9,216 $22,098
(1) The maturities refl ect reclassifi cations of short-term obligations to long-term obliga-
tions of $1.3 billion, as they are supported by a long-term line of credit agreement
expiring in 2012. Debt obligations do not include $85 million of SFAS No. 133
noncash fair value adjustments because these adjustments have no impact on the
obligation at maturity, as well as $148 million of accrued interest.
The Company maintains certain supplemental benefi t plans
that allow participants to (i) make tax-deferred contributions and
(ii) receive Company-provided allocations that cannot be made
under the qualifi ed benefi t plans because of IRS limitations. The
investment alternatives and returns are based on certain market-rate
investment alternatives under the Company’s qualifi ed Profi t
Sharing and Savings Plan. Total liabilities for the supplemental
plans were $415 million at December 31, 2007 and $379 million
at December 31, 2006 and were included in other long-term
liabilities in the Consolidated balance sheet. Also included in
other long-term liabilities at December 31, 2007 were gross
unrecognized tax benefi ts of $250 million and liabilities for
international retirement plans of $129 million.
In connection with the Latam transaction, the Company
has agreed to indemnify the buyers for certain tax and other
claims, certain of which are refl ected as liabilities 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 fi nancial condition
and results of operations is based upon the Company’s
consolidated fi nancial statements, which have been prepared
in accordance with accounting principles generally accepted in
the U.S. The preparation of these fi nancial statements requires
the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses
as well as related disclosures. On an ongoing basis, the Com-
pany evaluates its estimates and judgments based on historical
experience and various other factors that are believed to be
reasonable under the circumstances. Actual results may differ
from these estimates under various assumptions or conditions.
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