McDonalds 2012 Annual Report Download - page 41

• Equity in earnings of unconsolidated affiliates
Unconsolidated affiliates and partnerships are businesses in
which the Company actively participates but does not control.
The Company 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 part-
nerships in certain consolidated markets such as the U.S. are
reported before income taxes. These partnership restaurants are
operated under conventional franchise arrangements and, there-
fore, are classified as conventional franchised restaurants.
• Asset dispositions and other expense
Asset dispositions and other expense consists of gains or losses
on excess property and other asset dispositions, provisions for
restaurant closings and uncollectible receivables, asset write-offs
due to restaurant reinvestment, and other miscellaneous income
and expenses.
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
(2012 and 2011: other long-term liabilities–$42.0 million and
$49.4 million, respectively; 2012 and 2011: accrued payroll and
other liabilities–$0.0 million and $21.2 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.
Revenues from franchised restaurants consisted of:
In millions 2012 2011 2010
Rents $5,863.5 $5,718.5 $5,198.4
Royalties 3,032.6 2,929.8 2,579.2
Initial fees 68.4 64.9 63.7
Revenues from franchised
restaurants $8,964.5 $8,713.2 $7,841.3
Future minimum rent payments due to the Company under
existing franchise arrangements are:
In millions Owned sites Leased sites Total
2013 $ 1,266.0 $ 1,295.7 $ 2,561.7
2014 1,233.6 1,250.3 2,483.9
2015 1,184.3 1,198.2 2,382.5
2016 1,124.2 1,137.0 2,261.2
2017 1,061.7 1,067.9 2,129.6
Thereafter 9,125.9 7,921.0 17,046.9
Total minimum payments $14,995.7 $13,870.1 $28,865.8
At December 31, 2012, net property and equipment under
franchise arrangements totaled $14.6 billion (including land of
$4.2 billion) after deducting accumulated depreciation and amor-
tization of $7.6 billion.
Leasing Arrangements
At December 31, 2012, the Company was the lessee at 14,429
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.
The following table provides detail of rent expense:
In millions 2012 2011 2010
Company-operated
restaurants:
U.S. $ 59.1 $ 55.9 $ 60.4
Outside the U.S. 661.0 620.4 545.0
Total 720.1 676.3 605.4
Franchised restaurants:
U.S. 433.0 420.0 409.7
Outside the U.S. 519.7 514.7 463.5
Total 952.7 934.7 873.2
Other 104.2 101.7 98.1
Total rent expense $1,777.0 $1,712.7 $1,576.7
McDonald’s Corporation 2012 Annual Report 39