McDonalds 2007 Annual Report Download - page 55

DISCONTINUED OPERATIONS
The Company continues to focus its management and fi nancial
resources on the McDonald’s restaurant business as it believes
the opportunities for growth remain signifi cant. Accordingly,
during the third quarter 2007, the Company sold its investment
in Boston Market. In 2006, the Company disposed of its invest-
ment in Chipotle via public stock offerings in the fi rst and second
quarters and a tax-free exchange for McDonald’s common
stock in the fourth quarter. As a result of the disposals during
2007 and 2006, both Boston Market’s and Chipotle’s results
of operations and transaction gains are refl ected as
discontinued operations.
In connection with the Company’s sale of its investment in
Boston Market in August 2007, the Company received proceeds of
approximately $250 million and recorded a gain of $68.6 million
after tax. In addition, Boston Market’s net income (loss) for
2007, 2006 and 2005 was ($8.5) million, $6.9 million and
$8.8 million, respectively.
In fi rst quarter 2006, Chipotle completed an IPO of 6.1 million
shares resulting in a tax-free gain to McDonald’s of $32.0 million
to refl ect an increase in the carrying value of the Company’s
investment as a result of Chipotle selling shares in the public
offering. Concurrent with the IPO, McDonald’s sold 3.0 million
Chipotle shares, resulting in net proceeds to the Company of
$61.4 million and an additional gain of $13.6 million after tax. In
second quarter 2006, McDonald’s sold an additional 4.5 million
Chipotle shares, resulting in net proceeds to the Company of
$267.4 million and a gain of $127.8 million after tax, while still
retaining majority ownership. In fourth quarter 2006, the Company
completely separated from Chipotle through a noncash, tax-free
exchange of its remaining Chipotle shares for its common
stock. McDonald’s accepted 18.6 million shares of its common
stock in exchange for the 16.5 million shares of Chipotle class
B common stock held by McDonald’s and recorded a tax-free
gain of $479.6 million. In addition, Chipotle’s net income for
2006 was $18.2 million and 2005 was $15.8 million.
Boston Market’s and Chipotle’s results of operations (exclusive
of the transaction gains), which previously were included in Other
Countries & Corporate, consisted of revenues and pretax income
(loss) as follows:
IN MILLIONS 2007 2006 2005
Boston Market
Revenues $444.1 $691.2 $715.2
Pretax income (loss) (17.0) 12.0 14.2
Chipotle
Revenues $631.7 $627.7
Pretax income 39.8 27.2
LATAM TRANSACTION
In the third quarter 2007, the Company completed the sale of
the Company’s businesses in Brazil, Argentina, Mexico, Puerto
Rico, Venezuela and 13 other countries in Latin America and
the Caribbean to a developmental licensee organization. The
Company refers to these markets as “Latam”. Based on ap-
proval by the Company’s Board of Directors on April 17, 2007,
the Company concluded Latam was “held for sale” as of that
date in accordance with the requirements of SFAS No. 144. As
a result, the Company recorded an impairment charge of $1.7
billion in 2007, substantially all of which was noncash. The total
charges for the full year included $895.8 million for the difference
between the net book value of the Latam business and ap-
proximately $675 million in cash proceeds received. This loss
in value was primarily due to a historically diffi cult economic
environment coupled with volatility experienced in many of the
markets included in this transaction. The charges also included
historical foreign currency translation losses of $769.5 million
recorded in shareholders’ equity. The Company has recorded
a tax benefi t of $62.0 million in connection with this transaction.
The tax benefi t was minimal due to the Company’s inability to
utilize most of the capital losses generated by this transaction.
As a result of meeting the “held for sale” criteria, the Company
ceased recording depreciation expense with respect to Latam
effective April 17, 2007. In connection with the sale, 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 $179.2 million at year-
end 2007.
The buyers of the Company’s operations in Latam have
entered into a 20-year master franchise agreement that requires
the buyers, among other obligations to (i) pay monthly royalties
commencing at a rate of approximately 5% of gross sales of
the restaurants in these markets, substantially consistent with
market rates for similar license arrangements; (ii) commit to
adding approximately 150 new McDonald’s restaurants over the
fi rst three years and pay an initial fee for each new restaurant
opened; and (iii) commit to specifi ed annual capital expendi-
tures for existing restaurants.
IMPAIRMENT AND OTHER CHARGES (CREDITS), NET
On a pretax basis, the Company recorded impairment and other
charges (credits), net of $1,670.3 million in 2007, $134.2 million
in 2006 and ($28.4) million in 2005 associated with impairment,
as well 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 a net gain of $14.1 million as a result of the
transfer of the Company’s ownership interest in three European
markets to a developmental licensee, partly offset by a loss
on the anticipated transfer of a small market in Europe to a
developmental licensee.
In 2006, the charges primarily related to the following items:
losses incurred on the transfers of the Company’s ownership
interest in certain markets to developmental licensees
($35.8 million); the closing of certain restaurants in the U.K.
in conjunction with an overall restaurant portfolio review
($35.3 million); costs to buy out certain litigating franchisees
in Brazil ($29.3 million); asset write-offs and other charges in
APMEA ($17.5 million); and a loss related to the decision to
dispose of supply chain operations in Russia ($13.1 million).
In 2005, the Company recorded $22.8 million of pretax
impairment charges primarily in South Korea. In addition, the
Company recorded $51.2 million of pretax income, primarily due
to the transfer of the Company’s ownership interest in Turkey to
a developmental licensee and a favorable adjustment to certain
liabilities established in prior years due to lower than originally
anticipated employee-related and lease termination costs.
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