McDonalds 2011 Annual Report Download - page 37

Gain on Sale of Investment
In 2009, the Company sold its minority ownership interest in
Redbox Automated Retail, LLC to Coinstar, Inc., the majority
owner, for total consideration of $144.9 million. As a result of the
transaction, the Company recognized a nonoperating pretax gain
of $94.9 million (after tax–$58.8 million or $0.05 per share).
Contingencies
In the ordinary course of business, the Company is subject to
proceedings, lawsuits and other claims primarily related to com-
petitors, customers, employees, franchisees, government
agencies, intellectual property, shareholders and suppliers. The
Company is required to assess the likelihood of any adverse
judgments or outcomes to these matters as well as potential
ranges of probable losses. A determination of the amount of
accrual required, if any, for these contingencies is made after
careful analysis of each matter. The required accrual may change
in the future due to new developments in each matter or changes
in approach such as a change in settlement strategy in dealing
with these matters.
In connection with the sale in 2007 of its businesses in
18 countries in Latin America and the Caribbean to a devel-
opmental licensee organization, the Company agreed to
indemnify the buyers for certain tax and other claims, certain of
which are reflected on McDonald’s Consolidated balance sheet
(2011 and 2010: other long-term liabilities–$49.4 million and
$49.6 million, respectively; 2011 and 2010: accrued payroll and
other liabilities–$21.2 million and $28.4 million, respectively).
The Company believes any other matters currently being
reviewed will not have a material adverse effect on its financial
condition or results of operations.
Franchise Arrangements
Conventional franchise arrangements generally include a lease
and a license and provide for payment of initial fees, as well as
continuing rent and royalties to the Company based upon a per-
cent of sales with minimum rent payments that parallel the
Company’s underlying leases and escalations (on properties that
are leased). Under this arrangement, franchisees are granted the
right to operate a restaurant using the McDonald’s System and, in
most cases, the use of a restaurant facility, generally for a period
of 20 years. These franchisees pay related occupancy costs
including property taxes, insurance and maintenance. Affiliates
and developmental licensees operating under license agree-
ments pay a royalty to the Company based upon a percent of
sales, and may pay initial fees.
The results of operations of restaurant businesses purchased
and sold in transactions with franchisees were not material either
individually or in the aggregate to the consolidated financial
statements for periods prior to purchase and sale.
Revenues from franchised restaurants consisted of:
In millions 2011 2010 2009
Rents $5,718.5 $5,198.4 $4,841.0
Royalties 2,929.8 2,579.2 2,379.8
Initial fees 64.9 63.7 65.4
Revenues from franchised
restaurants $8,713.2 $7,841.3 $7,286.2
Future minimum rent payments due to the Company under
existing franchise arrangements are:
In millions Owned sites Leased sites Total
2012 $ 1,277.9 $ 1,147.2 $ 2,425.1
2013 1,245.7 1,111.2 2,356.9
2014 1,207.2 1,065.3 2,272.5
2015 1,150.9 1,005.9 2,156.8
2016 1,090.5 946.4 2,036.9
Thereafter 8,914.2 7,035.1 15,949.3
Total minimum payments $14,886.4 $12,311.1 $27,197.5
At December 31, 2011, net property and equipment under
franchise arrangements totaled $13.8 billion (including land of
$4.0 billion) after deducting accumulated depreciation and amor-
tization of $7.1 billion.
Leasing Arrangements
At December 31, 2011, the Company was the lessee at 14,139
restaurant locations through ground leases (the Company leases
the land and the Company or franchisee owns the building) and
through improved leases (the Company leases land and
buildings). Lease terms for most restaurants, where market con-
ditions allow, are generally for 20 years and, in many cases,
provide for rent escalations and renewal options, with certain
leases providing purchase options. Escalation terms vary by
geographic segment with examples including fixed-rent escala-
tions, escalations based on an inflation index, and 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 fran-
chised sites, the Company requires the franchisees to pay these
costs. In addition, the Company is the lessee under non-
cancelable leases covering certain offices and vehicles.
Future minimum payments required under existing operating
leases with initial terms of one year or more are:
In millions Restaurant Other Total
2012 $ 1,172.6 $ 74.4 $ 1,247.0
2013 1,104.8 62.8 1,167.6
2014 1,019.5 55.4 1,074.9
2015 921.9 43.1 965.0
2016 813.9 37.9 851.8
Thereafter 6,039.1 208.8 6,247.9
Total minimum payments $11,071.8 $482.4 $11,554.2
McDonald’s Corporation Annual Report 2011 35