McDonalds 2008 Annual Report Download - page 51

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
Boston Market
Revenues $444.1 $691.2
Pretax income (loss) (17.0) 12.0
Chipotle
Revenues $631.7
Pretax income 39.8
LATAM TRANSACTION
In August 2007, the Company completed the sale of its
businesses in Brazil, Argentina, Mexico, Puerto Rico, Venezuela
and 13 other countries in Latin America and the Caribbean, which
totaled 1,571 restaurants, to a developmental licensee orga-
nization. The Company refers to these markets as “Latam”. Based
on approval 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 approximately
$675 million in cash proceeds received. This loss in value was
primarily due to a historically difficult economic environment cou-
pled with volatility experienced in many of the markets included in
this transaction. The charges also included historical foreign cur-
rency translation losses of $769.5 million recorded in
shareholders’ equity. The Company recorded a tax benefit of
$62.0 million in connection with this transaction. The tax benefit
was minimal in 2007 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 agreed to
indemnify the buyers for certain tax and other claims, certain of
which are reflected in other long-term liabilities on McDonald’s
Consolidated balance sheet, totaling $141.8 million at
December 31, 2008 and $179.2 million at December 31, 2007.
The change in the balance was primarily due to foreign currency
translation. The Company mitigates the currency impact to income
through the use of forward foreign exchange agreements.
The buyers of the Company’s operations in Latam 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 by the end of 2010 and pay an initial
fee for each new restaurant opened; and (iii) commit to specified
annual capital expenditures for existing restaurants.
IMPAIRMENT AND OTHER CHARGES, NET
On a pretax basis, the Company recorded impairment and other
charges, net of $6.0 million in 2008, $1,670.3 million in 2007 and
$134.2 million in 2006.
In 2008, the charges primarily related to market restructuring
costs in Greece.
In 2007, the Company recorded a charge of $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 transfer of
a small market in Europe to a developmental licensee.
In 2006, the charges primarily related to losses of $35.8 million
incurred on the transfers of the Company’s ownership interest in
certain markets, primarily in APMEA and Europe, to developmental
licensees, costs of $35.3 million related to the closing of certain
restaurants in the U.K. in conjunction with an overall restaurant
portfolio review, costs of $29.3 million to buy out certain litigating
franchisees in Brazil, asset write-offs and other charges in APMEA
of $17.5 million, and a loss of $13.1 million related to the decision
to dispose of supply chain operations in Russia.
OTHER OPERATING (INCOME) EXPENSE, NET
In millions 2008 2007 2006
Gains on sales of restaurant
businesses $(126.5) $ (88.9) $ (38.3)
Equity in earnings of unconsolidated
affiliates (110.7) (115.6) (76.8)
Asset dispositions and other
expense 72.0 193.4 184.2
Total $(165.2) $ (11.1) $ 69.1
• Gains on sales of restaurant businesses
Gains on sales of restaurant businesses include gains from sales
of Company-operated restaurants as well as gains from exercises
of purchase options by franchisees with business facilities lease
arrangements (arrangements where the Company leases the busi-
nesses, including equipment, to franchisees who generally have
options to purchase the businesses). The Company’s purchases
and sales of businesses with its franchisees are aimed at achieving
an optimal ownership mix in each market. Resulting gains or losses
are recorded in operating income because the transactions are a
recurring part of our business.
• Equity in earnings of unconsolidated affiliates
Unconsolidated affiliates and partnerships are businesses in which
the Company actively participates but does not control. The Com-
pany records equity in earnings from these entities representing
McDonald’s share of results. For foreign affiliated markets –
primarily Japan – results are reported after interest expense and
income taxes. McDonald’s share of results for partnerships in cer-
tain consolidated markets such as the U.S. are reported before
income taxes. These partnership restaurants are operated under
conventional franchise arrangements and are included in conven-
tional franchised restaurant counts.
• Asset dispositions and other expense
Asset dispositions and other expense consists of gains or losses
on excess property and other asset dispositions, provisions for
store closings, contingencies and uncollectible receivables, and
other miscellaneous income and expenses.
McDonald’s Corporation Annual Report 2008 49