0000950103-17-004257.txt : 20170503 0000950103-17-004257.hdr.sgml : 20170503 20170503081416 ACCESSION NUMBER: 0000950103-17-004257 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20170503 FILED AS OF DATE: 20170503 DATE AS OF CHANGE: 20170503 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Arcos Dorados Holdings Inc. CENTRAL INDEX KEY: 0001508478 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-35129 FILM NUMBER: 17807223 BUSINESS ADDRESS: STREET 1: DR. LUIS BONAVITA 1294, OFFICE 501 STREET 2: WTC FREE ZONE CITY: MONTEVIDEO STATE: X3 ZIP: 11300 BUSINESS PHONE: 598 2626-3000 MAIL ADDRESS: STREET 1: DR. LUIS BONAVITA 1294, OFFICE 501 STREET 2: WTC FREE ZONE CITY: MONTEVIDEO STATE: X3 ZIP: 11300 6-K 1 dp75841_6k-2.htm FORM 6-K

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16
OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of May, 2017

 

 

 

Commission File Number: 001-35129

 

Arcos Dorados Holdings Inc.

(Exact name of registrant as specified in its charter)

 

Dr. Luis Bonavita 1294, Office 501 

Montevideo, Uruguay, 11300 WTC Free Zone

(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

 

Form 20-F

 x

  Form 40-F  o

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

 

Yes  o   No

 x

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

 

Yes  o   No

 x

         
         
 

 

 

ARCOS DORADOS HOLDINGS INC.

 

INCORPORATION BY REFERENCE

 

This report on Form 6-K shall be deemed to be incorporated by reference into the registration statements on Form F-3ASR (Registration Number: 333-187531) and Form S-8 (Registration Number: 333-173496) of Arcos Dorados Holdings Inc. and to be a part thereof from the date on which this report is filed, to the extent not superseded by documents or reports subsequently filed or furnished.

 

 

 

ARCOS DORADOS HOLDINGS INC.

 

TABLE OF CONTENTS

 

ITEM  
1. Condensed Consolidated Financial Statements as of March 31, 2017 and December 31, 2016 and for the three-month periods ended March 31, 2017 and 2016 (Unaudited)

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    Arcos Dorados Holdings Inc.  
       
       
      By: /s/ Juan David Bastidas  
        Name: Juan David Bastidas  
        Title: Chief Legal Counsel  

 

Date: May 3, 2017

 

 

 

Item 1

 

 

Arcos Dorados Holdings Inc.

 

Condensed Consolidated Financial Statements

As of March 31, 2017 and December 31, 2016 and for the three-month periods ended March 31, 2017 and 2016 (Unaudited)

 

F-1

 

Arcos Dorados Holdings Inc.

Consolidated Statements of Income

 For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

    2017   2016
REVENUES        
Sales by Company-operated restaurants   $ 745,408     $ 631,013  
Revenues from franchised restaurants   36,072     27,501  
Total revenues   781,480     658,514  
         
OPERATING COSTS AND EXPENSES        
Company-operated restaurant expenses:        
Food and paper   (263,464 )   (228,018 )
Payroll and employee benefits   (166,276 )   (139,152 )
Occupancy and other operating expenses   (202,803 )   (175,709 )
Royalty fees   (38,512 )   (32,096 )
Franchised restaurants – occupancy expenses   (16,111 )   (12,596 )
General and administrative expenses   (54,903 )   (48,787 )
Other operating income, net   49,919     19  
Total operating costs and expenses   (692,150 )   (636,339 )
Operating income   89,330     22,175  
Net interest expense   (16,415 )   (14,259 )
(Loss) gain from derivative instruments   (642 )   7  
Foreign currency exchange results   (8,560 )   16,719  
Other non-operating expenses, net   (695 )   (174 )
Income before income taxes   63,018     24,468  
Income tax expense   (22,339 )   (8,342 )
Net income   40,679     16,126  
Less: Net income attributable to non-controlling interests   (77 )   (62 )
Net income attributable to Arcos Dorados Holdings Inc.   $ 40,602     $ 16,064  
         
         
Earnings per share information:        
Basic net income per common share attributable to Arcos Dorados Holdings Inc.   $ 0.19     $ 0.08  
Diluted net income per common share attributable to Arcos Dorados Holdings Inc.   0.19     0.08  

 

See Notes to the Condensed Consolidated Financial Statements.

 

F-2

 

Arcos Dorados Holdings Inc.

 Consolidated Statements of Comprehensive Income

 For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars

 

    2017   2016
Net income   $ 40,679     $ 16,126  
Other comprehensive income, net of tax:        
Foreign currency translation   28,301     13,424  
Post-employment benefits:        
Reclassification of loss to consolidated statement of income   97     112  
Post-employment benefits (net of $50 and $58 of deferred income taxes, respectively)   97     112  
Cash flow hedges:        
Net (loss) recognized in accumulated other comprehensive loss   (4,938 )   (17,626 )
Reclassification of net loss (gain) to consolidated statement of income   3,022     (3,184 )
Cash flow hedges (net of $nil of income taxes)   (1,916 )   (20,810 )
Total other comprehensive income (loss)   26,482     (7,274 )
Comprehensive income   67,161     8,852  
Less: Comprehensive income attributable to non-controlling interests   (89 )   (50 )
Comprehensive income attributable to Arcos Dorados Holdings Inc.   $ 67,072     $ 8,802  

 

See Notes to the Condensed Consolidated Financial Statements.

 

F-3

 

Arcos Dorados Holdings Inc.

 Consolidated Statements of Balance Sheet

As of March 31, 2017 and December 31, 2016

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

    As of    
    March 31, 2017   As of
    (Unaudited)   December 31, 2016
ASSETS        
Current assets        
Cash and cash equivalents   $ 187,729     $ 194,803  
Accounts and notes receivable, net   74,718     83,239  
Other receivables   26,531     28,841  
Inventories   53,446     48,915  
Prepaid expenses and other current assets   94,737     87,643  
McDonald’s Corporation’s indemnification for contingencies   2,454     1,749  
Total current assets   439,615     445,190  
Non-current assets        
Miscellaneous   98,657     89,661  
Collateral deposits   5,325     5,325  
Property and equipment, net   880,820     847,966  
Net intangible assets and goodwill   43,732     43,044  
Deferred income taxes   60,142     70,446  
McDonald’s Corporation’s indemnification for contingencies   3,528     3,421  
Total non-current assets   1,092,204     1,059,863  
Total assets   $ 1,531,819     $ 1,505,053  
LIABILITIES AND EQUITY        
Current liabilities        
Accounts payable   $ 209,758     $ 217,914  
Royalties payable to McDonald’s Corporation   16,224     17,585  
Income taxes payable   30,495     38,912  
Other taxes payable   67,584     73,681  
Accrued payroll and other liabilities   117,354     144,442  
Provision for contingencies   707     764  
Interest payable   516     7,035  
Short-term debt   27      
Current portion of long-term debt   212,511     28,099  
Derivative instruments   36,786     19,876  
Total current liabilities   691,962     548,308  
Non-current liabilities        
Accrued payroll and other liabilities   26,529     23,760  
Provision for contingencies   21,007     17,348  
Long-term debt, excluding current portion   370,438     551,580  
Derivative instruments   729     10,615  
Deferred income taxes   1,921     1,866  
Total non-current liabilities   420,624     605,169  
Total liabilities   1,112,586     1,153,477  
Equity        

Class A shares - no par value common stock; 420,000,000 shares authorized; 130,711,224 shares issued and outstanding at March 31, 2017 and December  31, 2016

  373,969     373,969  
Class B shares - no par value common stock; 80,000,000 shares authorized, issued and outstanding at March 31, 2017 and December 31, 2016   132,915     132,915  
Additional paid-in capital   14,284     13,788  
Retained earnings   312,570     271,968  
Accumulated other comprehensive losses   (415,179 )   (441,649 )
Total Arcos Dorados Holdings Inc. shareholders’ equity   418,559     350,991  
Non-controlling interests in subsidiaries   674     585  
Total equity   419,233     351,576  
Total liabilities and equity   $ 1,531,819     $ 1,505,053  

 

See Notes to the Condensed Consolidated Financial Statements.

 

F-4

 

Arcos Dorados Holdings Inc.

 Condensed Consolidated Statements of Cash Flows

 For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars

 

    2017   2016
Operating activities        
Net income attributable to Arcos Dorados Holdings Inc.   $ 40,602     $ 16,064  
Adjustments to reconcile net income attributable to Arcos Dorados Holdings Inc. to cash used in operating activities:        
Non-cash charges and credits:        
Depreciation and amortization   23,452     25,187  
Gain of property and equipment sales   (51,874 )   (93 )
Deferred income taxes   13,048     (12,833 )
Foreign currency exchange results   9,085     (16,337 )
Gain on Sales of restaurants businesses   (647 )   (3,039 )
Others, net   4,321     2,446  
Changes in assets and liabilities   (42,532 )   (30,254 )
Net cash used in operating activities   (4,545 )   (18,859 )
Investing activities        
Property and equipment expenditures   (28,612 )   (9,223 )
Proceeds from sale of property and equipment and related advances   22,430     15,095  
Proceeds from sale of restaurant businesses and related advances   4,055     4,015  
Other investing activity   (166 )   (585 )
Net cash (used in) provided by investing activities   (2,293 )   9,302  
Financing activities        
Proceeds from Secured Loan Agreement       167,262  
Purchase of 2016 Notes       (288 )
Net payment of derivative instruments   (2,689 )    
Net short-term borrowings   25     (2,500 )
Other financing activities   (981 )   (4,960 )
Net cash (used in) provided by financing activities   (3,645 )   159,514  
Effect of exchange rate changes on cash and cash equivalents   3,409     3,659  
(Decrease) increase in cash and cash equivalents   (7,074 )   153,616  
Cash and cash equivalents at the beginning of the year   $ 194,803     $ 112,519  
Cash and cash equivalents at the end of the period   $ 187,729     $ 266,135  
         
Supplemental cash flow information:        
Cash paid during the period for:        
Interest   $ 23,731     $ 25,866  
Income tax   7,595     9,647  

Non-cash investing activities:

       
Exchange of assets   $ 2,000     $  

 

See Notes to the Condensed Consolidated Financial Statements.

 

F-5

 

Arcos Dorados Holdings Inc.

 Consolidated Statement of Changes in Equity

 For the three-month period ended March 31, 2017 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

    Arcos Dorados Holdings Inc.’ Shareholders        
   

Class A shares of

common stock 

 

Class B shares of

common stock 

 

Additional

paid-in 

 

Retained

 

Accumulated 

other comprehensive

     

Non-

controlling 

   
  Number   Amount   Number   Amount   capital earnings losses Total interests Total
Balances at beginning of fiscal year   130,711,224     $ 373,969     80,000,000     $ 132,915     $ 13,788     $ 271,968     $ (441,649 )   $ 350,991     $ 585     $ 351,576  
Net income for the period (Unaudited)                       40,602         40,602     77     40,679  
Other comprehensive loss (Unaudited)                           26,470     26,470     12     26,482  
Stock-based compensation related to the 2011 Equity Incentive Plan (Unaudited)                   496             496         496  
Balances at end of period (Unaudited)   130,711,224     $ 373,969     80,000,000     $ 132,915     $ 14,284     $ 312,570     $ (415,179 )   $ 418,559     $ 674     $ 419,233  

 

See Notes to the Condensed Consolidated Financial Statements.

 

F-6

 

Arcos Dorados Holdings Inc.

Consolidated Statement of Changes in Equity

 For the three-month period ended March 31, 2016 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

  

    Arcos Dorados Holdings Inc.’ Shareholders        
   

Class A shares of

common stock

 

Class B shares of

common stock

 

Additional

paid-in

 

Retained 

 

Accumulated 

other comprehensive

     

Non- 

controlling

   
  Number   Amount   Number   Amount   capital earnings losses Total interests Total
Balances at beginning of fiscal year   130,538,896     $ 371,857     80,000,000     $ 132,915     $ 12,606     $ 193,158     $ (424,263 )   $ 286,273     $ 617     $ 286,890  
Net income for the period (Unaudited)                       16,064         16,064     62     16,126  
Other comprehensive loss (Unaudited)                           (7,262 )   (7,262 )   (12 )   (7,274 )
Stock-based compensation related to the 2011 Equity Incentive Plan (Unaudited)                   875             875         875  
Balances at end of period (Unaudited)   130,538,896     $ 371,857     80,000,000     $ 132,915     $ 13,481     $ 209,222     $ (431,525 )   $ 295,950     $ 667     $ 296,617  

 

See Notes to the Condensed Consolidated Financial Statements.

 

F-7

 

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

1.Organization and nature of business

 

Arcos Dorados Holdings Inc. (the “Company”) is a limited liability company organized and existing under the laws of the British Virgin Islands. The Company’s fiscal year ends on the last day of December. The Company has a 99.999% equity interest in Arcos Dorados Cooperatieve U.A., which has a 100% equity interest in Arcos Dorados B.V. (“ADBV”).

 

On August 3, 2007 the Company, indirectly through its wholly-owned subsidiary ADBV, entered into a Stock Purchase Agreement and Master Franchise Agreements (“MFAs”) with McDonald’s Corporation pursuant to which the Company completed the acquisition of the McDonald’s business in Latin America and the Caribbean (“LatAm business”). Prior to this acquisition, the Company did not carry out operations. The Company’s rights to operate and franchise McDonald’s-branded restaurants in the Territories, and therefore the ability to conduct the business, derive exclusively from the rights granted by McDonald’s Corporation in the MFAs through 2027. The initial term of the MFA for French Guyana, Guadeloupe and Martinique was ten years through August 2, 2017 with an option to extend the agreement for these territories for an additional period of ten years, through August 2, 2027.  On July 20, 2016, the Company has exercised its option to extend the MFA for these three territories

 

The Company, through ADBV’s wholly-owned and majority owned subsidiaries operates and franchises McDonald’s restaurants in the food service industry. The Company has operations in twenty territories as follows: Argentina, Aruba, Brazil, Chile, Colombia, Costa Rica, Curacao, Ecuador, French Guyana, Guadeloupe, Martinique, Mexico, Panama, Peru, Puerto Rico, Trinidad and Tobago, Uruguay, the U.S. Virgin Islands of St. Croix and St. Thomas (USVI) and Venezuela. All restaurants are operated either by the Company’s subsidiaries or by independent entrepreneurs under the terms of sub-franchisee agreements (franchisees).

 

2.Basis of presentation and principles of consolidation

 

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) for interim financial information and include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company has elected to report its consolidated financial statements in United States dollars (“$” or “US dollars”).

 

The accompanying condensed consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted for purposes of this presentation. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated annual financial statements of the Company as of December 31, 2016.

 

The accompanying condensed consolidated financial statements are unaudited and include, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are considered necessary for the fair presentation of the information in the consolidated financial statements.

 

The Company’s revenues are generally greater in the second half of the year. Although the impact on the Company’s results of operations is relatively small, this impact is due to increased consumption of the Company’s products during the winter and summer holiday seasons, affecting July and December, respectively (for the Southern hemisphere).

 

Operating results for the three-month period ended March 31, 2017 are not necessarily indicative of results that may be expected for any future periods.

 

F-8

 

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

3.Summary of significant accounting policies

 

There have been no material changes in the Company’s accounting policies disclosed in the notes to the consolidated annual financial statements as of December 31, 2016.

 

Use of estimates

 

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

Foreign currency matters

 

The financial statements of the Company’s foreign operating subsidiaries are translated in accordance with guidance in ASC 830 Foreign Currency Matters. Except for the Company’s Venezuelan operations, the functional currencies of the Company’s foreign operating subsidiaries are the local currencies of the countries in which they conduct their operations. Therefore, assets and liabilities are translated into US dollars at the balance sheets date exchange rates, and revenues and expenses are translated at average rates prevailing during the periods. Translation adjustments are included in the “Accumulated other comprehensive losses” component of shareholders’ equity. The Company includes foreign currency exchange results related to monetary assets and liabilities transactions, including intercompany transactions, denominated in currencies other than its functional currencies in its income statement.

 

Effective January 1, 2010, Venezuela is considered to be highly inflationary, and as such, the financial statements of the Company’s Venezuelan subsidiaries are remeasured as if their functional currencies were the reporting currency (US dollars). As a result, remeasurement gains and losses are recognized in earnings rather than in the cumulative translation adjustment, component of “Accumulated other comprehensive losses” within shareholders’ equity.

 

See Note 13 for additional information pertaining to the Company’s Venezuelan operations, including currency restrictions and controls existing in the country and a discussion of the exchange rate used for remeasurement purposes.

 

Recent accounting pronouncements

 

In February 2016, new guidance about leases was issued. The new standard (ASC 842) supersede the lease requirements of ASC 840. The objective of the new guidance is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. This standard is effective for annual periods beginning after December 15, 2018, including interim periods. The Company is currently evaluating the impact of the provisions of ASC 842.

 

No other new accounting pronouncement issued or effective during the period had or is expected to have a material impact on the Company’s consolidated financial statements.

 

4.Short-term debt

 

Short-term debt consists of the following:

 

    As of    
    March 31, 2017   As of
    (Unaudited)   December 31, 2016
Bank overdrafts   $ 27     $  
    $ 27     $  

F-9

 

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

4.Short-term debt (continued)

 

Revolving credit facilities

 

The Company entered into revolving credit facilities in order to borrow money from time to time to cover its working capital needs and for other general corporate purposes.

 

On August 1, 2016, ADBV renewed its committed revolving credit facility with Bank of America, N.A. (BOFA), as lender, for up to $25 million maturing on August 3, 2017. In addition, on November 10, 2016, ADBV entered into a revolving credit facility with JPMorgan Chase Bank, N.A, for up to $25 million maturing on November 10, 2017. Each loan made to ADBV under these agreements will bear interest at an annual rate equal to LIBOR plus 2.50%. Interest on each loan will be payable at maturity and on a quarterly basis, beginning with the date that is three calendar months following the date the loan is made.

 

The obligations of ADBV under the revolving credit facilities are jointly and severally guaranteed by certain of the Company’s subsidiaries on an unconditional basis. Furthermore, the agreements include customary covenants including, among others, restrictions on the ability of ADBV, the guarantors and certain material subsidiaries to: (i) incur liens (except for the case where the event of default that may occur derives from the credit and debit card receivables that secure the Secured Loan Agreement mentioned in Note 5), (ii) enter into any merger, consolidation or amalgamation; (iii) sell, assign, lease or transfer all or substantially all of the borrower’s or guarantor’s business or property; (iv) enter into transactions with affiliates; (v) engage in substantially different lines of business; (vi) engage in transactions that violate certain anti-terrorism laws; and (vii) is required to comply with a consolidated net indebtedness to EBITDA ratio lower than 3.0 to 1 as of the last day of the fiscal quarter ended December 31, 2016 and thereafter. The revolving credit facilities provide for customary events of default, which, if any of them occurs, would permit or require the lender to terminate its obligation to provide loans under the revolving credit facilities and/or to declare all sums outstanding under the loan documents immediately due and payable.

 

As of March 31, 2017, the mentioned ratio was 1.53 and thus the Company is currently in compliance with the ratio requirement under both revolving credit facilities.

 

F-10

 

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

5.Long-term debt

 

Long-term debt consists of the following: 

 

    As of    
    March 31, 2017   As of
    (Unaudited)   December 31, 2016
2023 Notes   $ 393,767     $ 393,767  
Secured Loan Agreement   167,262     167,262  
Capital lease obligations   4,612     4,704  
Other long-term borrowings   26,586     25,553  
Subtotal   592,227     591,286  
Discount on 2023 Notes   (4,850 )   (5,029 )
Premium on 2023 Notes   1,839     1,910  
Fair value adjustment related to Secured Loan Agreement (i)   (869 )   (2,877 )
Deferred financing costs   (5,398 )   (5,611 )
Total   582,949     579,679  
Current portion of long-term debt   212,511     28,099  
Long-term debt, excluding current portion   $ 370,438     $ 551,580  
                 
(i)The carrying value of hedged items in fair value hedges, are adjusted for fair value changes to the extent they are attributable to the risks designated as being hedged. The related hedging instrument is also recorded at fair value included within "Derivative instruments" in liabilities current.

 

2023 and 2016 Notes

 

 The following table presents additional information related to the 2023 and 2016 Notes:

 

             Principal as of  
  Annual interest rate   Currency   March 31, 2017 (Unaudited) December 31, 2016 Maturity
2023 Notes 6.625 %   USD   $ 393,767   $ 393,767   September 27, 2023
2016 Notes 10.25 %   BRL       July 13, 2016
                     
     Interest Expense (i)    DFC Amortization  (i)    Accretion of Premium and Amortization of Discount (i)
    2017 (Unaudited)   2016 (Unaudited)   2017 (Unaudited)   2016 (Unaudited)   2017 (Unaudited)   2016 (Unaudited)  
2023 Notes   $ 6,522     $ 7,847     $ 91     $ 109     $ 108     $ 129    
2016 Notes           3,998             176             (104 )  

 

(i)These charges are included within "Net interest expense" in the consolidated statements of income.

 

F-11

 

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

5.Long-term debt (continued)

 

2023 and 2016 Notes (continued)

 

On July 13, 2011 and April 24, 2012, the Company issued Brazilian reais notes due in 2016 (the "2016 Notes") amounting to Brazilian reais (“BRL”) 675,000. Periodic payments of principal were not required and interest was paid semi-annually beginning on January 13, 2012. The Company incurred $3,699 of financing costs related to these issuances, which were capitalized as deferred financing costs ("DFC") and were amortized over the life of the notes.

 

The following table presents information related to the purchase and repayments of the principal of the 2016 Notes:

 

    Amount
Date Redemption price BRL $       
November 25, 2015 93.75% 40,000     9,995    
November 30, 2015 93.75% 7,039     1,715    
January 29, 2016 97.75% 1,180     288    
April 21, 2016 100.00% 421,765     118,797    
May 5, 2016 97.00% 4,025     1,106    
July 13, 2016 100.00% 200,991     60,965    
Total   675,000     192,866    

 

On September 27, 2013, the Company issued senior notes, which are due in 2023 (the "2023 Notes"). Periodic payments of principal are not required and interest is paid semi-annually commencing on March 27, 2014. The Company incurred $3,313 of financing costs related to the cash issuance of 2023 Notes, which were capitalized as deferred DFC and are being amortized over the life of the notes.

 

On June 1, 2016, the Company launched a cash tender offer to purchase $80,000 of its outstanding 2023 Notes, at a redemption price equal to 98%, which expired on June 28, 2016. The holders who tendered their 2023 Notes prior to June 14, received a redemption price equal to 101%. As a consequence of this transaction, the Company redeemed 16.9% of the outstanding principal. The total payment was $80,800 (including $800 of early tender payment) plus accrued and unpaid interest. The results related to the cash tender offer and the accelerated amortization of the related DFC were recognized as interest expense within the consolidated statement of income.

 

On March 16, 2017, the Company launched a cash tender offer to purchase $80,000 of its outstanding 2023 Notes, at a redemption price equal to 104%, which expired on April 12, 2017. The holders who tendered their 2023 Notes prior to March 29, 2017, received a redemption price equal to 107%. Refer to Note 14 for more details.

 

The 2023 Notes, (the “Notes”) are redeemable, in whole or in part, at the option of the Company at any time at the applicable redemption price set forth in the indenture governing them. The Notes are fully and unconditionally guaranteed on a senior unsecured basis by certain of the Company’s subsidiaries. The Notes and guarantees (i) are senior unsecured obligations and rank equal in right of payment with all of the Company’s and guarantors’ existing and future senior unsecured indebtedness; (ii) will be effectively junior to all of the Company’s and guarantors’ existing and future secured indebtedness to the extent of the value of the Company’s assets securing that indebtedness; and (iii) are structurally subordinated to all obligations of the Company’s subsidiaries that are not guarantors.

 

The indenture governing the Notes limits the Company’s and its subsidiaries’ ability to, among other things, (i) create certain liens; (ii) enter into sale and lease-back transactions; and (iii) consolidate, merge or transfer assets. These covenants are subject to important qualifications and exceptions. The indenture governing the Notes also provides for events of default, which, if any of them occur, would permit or require the principal, premium, if any, and interest on all of the then outstanding Notes to be due and payable immediately.

 

F-12

 

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

5.Long-term debt (continued)

 

2023 and 2016 Notes (continued)

 

The 2023 Notes are listed on the Luxembourg Stock Exchange and trade on the Euro MTF Market.

 

Secured Loan Agreement

 

On March 29, 2016, the Company’s Brazilian subsidiary signed a $167,262 Secured Loan Agreement (the "Loan") with five off-shore lenders namely: Citibank N.A., Itaú BBA International plc, Santander (Brasil) S.A., Cayman Islands Branch, Bank of America N.A. and JP Morgan Chase Bank, N.A. Each loan under the agreement bears interest at the following annual interest rates:

 

Lender   Annual Interest Rate
Citibank N.A.   3M LIBOR + 2.439%
Itaú BBA International plc   5.26%
Banco Santander (Brasil) S.A., Cayman Islands Branch   4.7863%
Bank of America N.A.   3M LIBOR + 4.00%
JP Morgan Chase Bank, N.A.   3M LIBOR + 3.92%

 

In order to fully convert each loan of the agreement into BRL, the Brazilian subsidiary entered into five cross-currency interest rate swap agreements with the local subsidiaries of the same lenders. Consequently, the loans were fully converted into BRL amounting to BRL613,850. Refer to Note 6 for more details.

 

Considering the cross currency interest rate swap agreements, the final interest rate of the Loan is the Interbank Market reference interest rate (known in Brazil as “CDI”) plus 4.50% per year. Interest payments are made quarterly, beginning June 2016 and principal payments will be made semi-annually, beginning September 2017.

 

The Company incurred $3,243 of financing costs related to this issuance, which were capitalized as DFC, and are being amortized over the life of the loan.

 

The following table presents information related to the Secured Loan Agreement:

 

 Interest Expense (i) (ii)    DFC Amortization  (ii)  
2017
(Unaudited)
2016
(Unaudited)
2017
(Unaudited)
2016
(Unaudited)
$2,292     $—     $257     $—    
                               
                               
(i)This charge does not include the effect of the 2016 Cross-currency interest rate swap agreements mentioned in Note 6, amounting to a loss of $5,999. Including this effect the total interest cost amounts to $8,291.

 

(ii)These charges are included within "Net interest expense" in the consolidated statement of income.

 

The Loan matures on March 30, 2020 and periodic payments of principal are required: 10% of principal in September 2017, 15% in March and September 2018, and 20% in March and September 2019 and in March 2020. Prepayments are allowed without penalty. On April 11, 2017, the Company repaid the Secured Loan Agreement. Refer to Note 14 for more details.

 

The Loan is fully and unconditionally guaranteed on a senior secured basis by the Company and certain subsidiaries and is secured by certain credit and debit card receivables arising from sales in certain Brazilian restaurants operated by the Brazilian subsidiary. The Loan ranks at least pari passu in right of payment with all other unsubordinated and unsecured indebtedness of the borrower and the guarantors.

 

F-13

 

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

5.Long-term debt (continued)

 

Secured Loan Agreement (continued)

 

The Loan proceeds were used primarily to repay the 2016 Notes mentioned above.

 

The Loan agreement includes customary covenants including, among others, restrictions on the ability of the Company and certain subsidiaries to (i) pay dividends; (ii) create liens; (iii) sell certain real estate assets; (iv) enter into sale and lease-back transactions; (v) pay interest or principal on intercompany loans; and (vi) consolidate, merge or transfer assets. These covenants are subject to important qualifications and exceptions.

 

Under the Loan, the Company must maintain (i) a Consolidated Net Indebtedness to EBITDA ratio (as defined therein) lower than (a) 3.5 to 1 as of the last day of the fiscal quarter ended March 31 and June 30, 2016, (b) 3.25 to 1 as of the last day of the fiscal quarter ended September 30, 2016 and (c) 3.0 to 1 as of the last day of the fiscal quarter ended December 31, 2016 and thereafter; and (ii) an EBITDA to Consolidated Interest Expense ratio (as defined therein) greater than 2.5 to 1 as of the last day of any fiscal quarter. The Brazilian subsidiary must maintain an Adjusted Net Indebtedness to EBITDA ratio lower than 2.0 to 1 as of the last day of any fiscal quarter. The calculation of Adjusted Net Indebtedness of the Brazilian subsidiary shall exclude any intercompany indebtedness.

 

As of March 31, 2017 the Company was in compliance with the ratio requirements; Consolidated Net Indebtedness to EBITDA ratio and EBITDA to consolidated Interest Expense ratio were 1.75 and 3.14, respectively; and, the net indebtedness to EBITDA ratio of the Brazilian subsidiary was 1.08.

 

The Loan also provides for customary events of default, which, if any of them occur, would permit or require the principal and interest on all of the outstanding amount to be due and payable immediately.

 

6.       Derivative instruments

 

The following table presents the fair values of derivative instruments included in the consolidated balance sheets as of March 31, 2017 and December 31, 2016: 

 

    Liability Derivatives
        Fair Value
         As of      
  Balance Sheets   March 31, 2017     As of
Type of Derivative   Location   (Unaudited)     December 31, 2016
Derivatives designated as hedging instruments              
               
Forward contracts   Accrued payroll and other liabilities $ (404 )   $ (100 )
2013 Cross-currency interest rate swap (i)   Derivative instruments   (3,431 )     (3,274 )
2016 Cross-currency interest rate swap (i)   Derivative instruments   (34,084 )     (27,217 )
      $ (37,919 )   $ (30,591 )

 

F-14

 

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

6.Derivative instruments (continued)

 

Derivatives designated as hedging instruments

 

(i)At March 31, 2017, presented in the consolidated balance sheet as follows: $36,786 as a current liability and $729 as a non-current liability. At December 31, 2016, presented in the consolidated balance sheet as follows: $19,876 as a current liability and $10,615 as a non-current liability.

 

Cash flow hedge

 

Forward contracts

 

The Company has entered into various forward contracts in a few territories in order to hedge a portion of the foreign exchange risk associated with forecasted imports of goods. The effect of the hedges result in fixing the cost of goods acquired (i.e. the net settlement or collection adjusts the cost of inventory paid to the suppliers). As of March 31, 2017, the Company has forward contracts outstanding with a notional amount of $11,374 that mature during 2017.

 

The Company made net (payments) collections totaling $(305) and $2,631 during the three-month periods ended March 31, 2017 and 2016, respectively, as a result of the net settlements of these derivatives.

 

2013 Cross-currency interest rate swap

 

On November 7, 2013, the Company entered into a cross-currency interest rate swap agreement (the "2013 cross-currency interest rate swap"), with JP Morgan Chase Bank, N.A., to hedge all the variability in a portion (53.08%) of the principal and interest collections of its BRL intercompany loan receivable with ADBV. During the three-month period ended March 31, 2017 the agreement was amended twice: on February 9, 2017 and February 22, 2017. All the terms of the swap agreement match the terms of the BRL intercompany loan receivable. Pursuant to this agreement, the Company receives interests at a fixed rate of 4.38% over a notional amount of 35.4 million ($33.2 million until February 9, 2017 and $34.4 million before last amendment) and pays interest at a fixed rate of 13% over a notional amount of R$108 million on March 31 and September 30 of each year.  This agreement matures on September 29, 2023 with exchange of principal.

 

As a result of the amendments made during the three-month period ended March 31, 2017, the Company paid $ 2,689. According to ASC 815-30-40, the amount deferred in accumulated other comprehensive income (loss) until the date of the last amendments amounting to $(764) as of March 31, 2017, will be amortized to earnings as the originally hedged cash flows affected the statement of income.

 

The Company paid $1,484 and $1,331 of net interest during the three-month periods ended March 31, 2017 and 2016, respectively.

 

F-15

 

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

6.Derivative instruments (continued)

 

Derivatives designated as hedging instruments (continued)

 

Cash flow hedge

 

The following table present the pretax amounts affecting income and other comprehensive income for the three-month periods ended March 31, 2017 and 2016 for each type of derivative relationship: 

 

Derivatives in Cash Flow

 

Hedging Relationships

 

  (Loss) Gain Recognized in Accumulated OCI on Derivative (Effective Portion) (Unaudited)   Loss (Gain) Reclassified from Accumulated OCI into Income (Effective Portion) (i) (Unaudited)   Gain (Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing and Ineffective Portion) (Unaudited)
  2017   2016   2017   2016   2017   2016
Forward contracts   $ (609 )   $ 1,647     $ 305     $ (2,631 )   $     $  
2013 Cross-currency interest rate swaps   (4,329 )   (19,273 )   2,717     (553 )        
Total   $ (4,938 )   $ (17,626 )   $ 3,022     $ (3,184 )   $     $  
                                                 
(i)The (loss) gain recognized in income related to forward contracts was recorded as an adjustment to food and paper. The net (loss) gain recognized in income related to the 2013 Cross-currency interest rate swap is presented in the consolidated statement of income as follows: a (loss) gain of $(1,963) and $1,373, respectively, as an adjustment to foreign currency exchange results and a loss of $754 and $820, respectively as an adjustment to net interest expense.

 

Fair value hedge

 

2016 Cross-currency interest rate swap

 

On March 29, 2016, the Company entered into five cross-currency interest rate swap agreements (the "2016 cross-currency interest rate swap") in order to fully hedge the principal and interest cash flows of the Secured Loan Agreement described in Note 5, into BRL. The agreements were signed with the Brazilian subsidiaries of the banks participating in the secured loan. All the terms of the 2016 cross-currency interest rate swap agreements match the terms of the Secured Loan Agreement. Pursuant to these agreements, the Company receives interest in US dollar at an interest rate equal to the one it has to pay to the off-shore lenders over a notional amount of $167.3 million and pays interest in BRL at CDI plus 4.50% per year, over a notional amount of BRL 613,9 million quarterly, beginning June 2016.

 

During the three-month period ended March 31, 2017, the accrued interest amounted to $5,999. This charge does not include the effect of the Secured Loan Agreement mentioned in Note 5, amounting to a loss of $2,292. Including this effect the total interest cost amounts to $8,291. As of March 31, 2017 all accrued interest were settled.

 

During April 2017, the Company unwound the 2016 Cross-currency interest rate swap. Refer to Note 14 for more details.

 

According to ASC 815-25-35, the change in the fair value of the hedging instrument and the change in the fair value of the hedged item shall be recognized in earnings. If those results are not perfectly offset, the difference shall be considered as hedge ineffectiveness.

 

F-16

 

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

6.Derivative instruments (continued)

 

Derivatives designated as hedging instruments (continued)

 

Fair value hedge (continued)

 

2016 Cross-currency interest rate swap (continued)

 

The following table presents the pretax amounts affecting income for the three-month period ended March 31, 2017:

 

   

2017

(Unaudited)

 
       
Derivatives in Fair Value Hedging Relationships   Loss recognized in Income on hedging derivatives     Gain recognized in Income on hedging items  
             
2016 Cross-currency interest rate swap (i)  

(5,708) 

   

4,981 

 

 

(i)The loss amounting to $727, related to the ineffective portion of derivatives, was recorded within “Loss from derivative instruments” in the Company’s consolidated statement of income.

 

7.Share-based compensation

 

2011 Equity Incentive Plan

 

In March 2011, the Company adopted its Equity Incentive Plan, or 2011 Plan, to attract and retain the most highly qualified and capable professionals and to promote the success of its business. This Plan is being used to reward certain employees for the success of the Company’s business through an annual award program. The 2011 Plan permits grants of awards relating to class A shares, including awards in the form of shares (also referred to as stock), options, restricted shares, restricted share units, share appreciation rights, performance awards and other share-based awards as will be determined by the Company’s Board of Directors. The maximum number of shares that may be issued under the 2011 Plan is 2.5% of the Company’s total outstanding class A and class B shares immediately following its initial public offering.

 

The Company made a special grant of stock options and restricted share units in 2011 in connection with its initial public offering, which are totally vested. The Company also made recurring grants of stock options and restricted share units in each of the fiscal years from 2011 to 2016 (for fiscal years 2016 and 2015 only restricted share units). Both types of these recurring annual awards vest as follows: 40% on the second anniversary of the date of grant and 20% on each of the following three anniversaries. For all grants, each stock option granted represents the right to acquire a Class A share at its grant-date fair market value, while each restricted share unit represents the right to receive a Class A share when vested. The exercise right for the stock options is cumulative and, once such right becomes exercisable, it may be exercised in whole or in part during quarterly window periods until the date of termination, which occurs at the seventh anniversary of the date of grant. The Company utilizes a Black-Scholes option-pricing model to estimate the value of stock options at the grant date. The value of restricted shares units is based on the quoted market price of the Company’s class A shares at the grant date.

 

F-17

 

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

7.Share-based compensation (continued)

 

Equity Incentive Plan (continued)

 

On June 28, 2016, 1,117,380 stock options were converted to a liability award maintaining the original conditions of the 2011 Plan. There were not incremental compensation costs resulting from the modification. The employees affected by this modification were 104. The accrued liability is remeasured on a monthly basis until settlement. As of March 31, 2017, the outstanding units related to this liability award were 928,731 and the accumulated Additional paid-in capital related to these units as from the grant date amounts to $5,843 (net of $52 reclassified to "Accrued payroll and other liabilities" in the Company’s consolidated balance sheet).

 

The Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. The Company recognized stock-based compensation expense in the amount of $539 and $875 during the three-month periods ended March 31, 2017 and 2016, respectively, of which $nil and a gain of $215 relates to the special awards granted in connection with the initial public offering. Stock-based compensation expense is included within “General and administrative expenses” in the consolidated statements of income.

 

Stock Options

 

The following table summarizes the outstanding and exercisable stock options units as of March 31, 2017:

 

    Units   Weighted-average strike Price   Weighted-average grant-date fair value
Outstanding at March 31, 2017 and December 31, 2016   776,475     15.55     4.46  
Exercisable at March 31, 2017   584,103     16.99     4.88  

 

(i)As of March 31, 2017, Additional paid-in capital included $nil related to expired stock options.

 

The following table provides a summary of outstanding stock options at March 31, 2017: 

 

    Vested (i)   Non-vested (ii)   Total
Number of units outstanding   584,103     192,372     776,475  
Weighted-average grant-date fair market value per unit   4.88     3.18     4.46  
Total grant-date fair value   2,852     612     3,464  
Weighted-average accumulated percentage of service   100     86.9     97.7  
Stock-based compensation recognized in Additional paid-in capital   2,852     532     3,384  
Compensation expense not yet recognized (iii)       80     80  
                   
(i)Related to exercisable awards.

(ii)Related to awards that will vest between fiscal years 2017 and 2019.

(iii)Expected to be recognized in a weighted-average period of 0.5 years.

 

F-18

 

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

7.Share-based compensation (continued)

 

2011 Equity Incentive Plan (continued)

 

Restricted Share Units

 

The following table summarizes the activity of restricted share units during the three-month period ended March 31, 2017:

 

    Units   Weighted-average
grant-date fair value
Outstanding at December 31, 2016   1,780,997     6.07  
Forfeitures   (123,222 )   5.75  
Outstanding at March 31, 2017   1,657,775     6.09  
Exercisable at March 31, 2017        

 

The following table provides a summary of outstanding restricted share units at March 31, 2017: 

 

Number of units outstanding (i) 1,657,775  
Weighted-average grant-date fair market value per unit 6.09  
Total grant-date fair value 10,099  
Weighted-average accumulated percentage of service 57.9  
Stock-based compensation recognized in Additional paid-in capital 5,849  
Compensation expense not yet recognized (ii) 4,250  
     
(i)Related to awards that will vest between fiscal years 2017 and 2021.

(ii)Expected to be recognized in a weighted-average period of 1.9 years.

 

8.Commitments and contingencies

 

Commitments

 

The MFAs require the Company and its MF subsidiaries, among other obligations:

 

(i)to pay monthly royalties commencing at a rate of approximately 5% of gross sales of the restaurants, during the first 10 years, substantially consistent with market. This percentage increases to 6% and 7% for the subsequent two 5-year periods of the agreement;

(ii)to agree with McDonald’s on a restaurant opening plan and a reinvestment plan for each three-year period and pay an initial franchise fee for each new restaurant opened;

(iii)to commit to funding a specified Strategic Marketing Plan;

(iv)to own (or lease) directly or indirectly, the fee simple interest in all real property on which any franchised restaurant is located; and

(v)to maintain a minimum fixed charge coverage ratio (as defined therein) at least equal to 1.50 as well as a maximum leverage ratio (as defined therein) of 4.25.

 

On January 26, 2017, the Company reached an agreement with McDonald’s Corporation related to the restaurant opening and reinvestment plan, mentioned in point (ii) above, for the three-year period commenced on January 1, 2017. Under the agreement, the Company committed to open 180 new restaurants and to reinvest $292 million in existing restaurants. In addition, on January 25, 2017, McDonald’s Corporation agreed to provide growth support for the same period. The Company projects that the impact of this support could result in an effective royalty rate of 5.3% in 2017, 5.7% in 2018 and 5.9% in 2019.

 

F-19

 

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

8.Commitments and contingencies (continued)

 

Commitments (continued)

 

For the three-month period ended March 31, 2017, the Company was in compliance with the ratio requirements mentioned in point (v) above. The ratios for the period mentioned, were as follows:

 

    March 31, 2017 (Unaudited)
Fixed Charge Coverage Ratio   1.65  
     
Leverage Ratio   4.12  

 

In addition, the Company maintains standby letters of credit with an aggregate drawing amount of $80 million in favor of McDonald’s Corporation as collateral for the obligations assumed under the MFAs. The letters of credit can be drawn if certain events occur, including the failure to pay royalties. No amounts have been drawn at the date of issuance of these financial statements.

 

Provision for contingencies

 

The Company has certain contingent liabilities with respect to existing or potential claims, lawsuits and other proceedings, including those involving labor, tax and other matters. At March 31, 2017, the Company maintains a provision for contingencies, net of judicial deposits, amounting to $21,714 ($18,112 at December 31, 2016). As of March 31, 2017 and December 31, 2016, the net amount of $21,714 and $18,112 is disclosed as follows: $707 and $764 as a current liability and $21,007 and $17,348 as a non-current liability, respectively. The breakdown of the provision for contingencies is as follows:

 

    As of    
    March 31, 2017   As of
    (Unaudited)   December 31, 2016
Tax contingencies in Brazil   $ 15,789     $ 13,312  
Labor contingencies in Brazil   13,821     11,150  
Others   13,247     12,222  
Subtotal   42,857     36,684  
Judicial deposits   (21,143 )   (18,572 )
Provision for contingencies   $ 21,714     $ 18,112  

 

As of March 31, 2017, there are certain matters related to the interpretation of tax and labor laws for which there is a possibility that a loss may have been incurred in accordance with ASC 450-20-50-4 within a range of $99 million and $135 million.

 

As of March 31, 2017, there are certain matters related to the interpretation of income tax laws for which there is a possibility that a loss may have been incurred, as of the date of the financial statements in accordance with ASC 740 in an amount of $21.4 million, related to assessments for the fiscal years 2010 and 2011.

 

Additionally, there is a lawsuit filed by several Puerto Rican franchisees against McDonald’s Corporation and certain subsidiaries purchased by the Company during the acquisition of the LatAm business (“the Puerto Rican franchisees lawsuit”). The claim seeks declaratory judgment and damages in the aggregate amount of $66.7 million plus plaintiffs’ attorney fees. At the end of 2014 the plaintiffs finalized their presentation of evidence whereas the Company has not started yet. The Company believes that a final negative resolution has a low probability of occurrence.

 

F-20

 

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

8.Commitments and contingencies (continued)

 

Provision for contingencies (continued)

 

During 2014, another franchisee filed a complaint (“the related Puerto Rican franchisee lawsuit”) against the Company and McDonald’s USA, LLC (a wholly owned subsidiary of McDonald’s Corporation), asserting a very similar claim to the one filed in the Puerto Rican franchisees lawsuit. The claim seeks declaratory judgment and damages in the amount of $30 million plus plaintiffs’ attorney fees. Although this case is in its early stages, the Company believes that a final negative resolution has a low probability of occurrence, since its close resemblance to the Puerto Rican franchisees lawsuit.

 

Furthermore, the Puerto Rico Owner Operator’s Association (“PROA”), an association integrated by the Company’s franchisees that meets periodically to coordinate the development of promotional and marketing campaigns (an association that at the time of the claim was formed solely by franchisees that are plaintiffs in the Puerto Rican franchisees lawsuit), filed a third party complaint and counterclaim (“the PROA claim”) against the Company and other third party defendants, in the amount of $31 million. On June 9, 2014, after several motions for summary judgment duly filed and opposed by the parties, the Court entered a “Partial Summary Judgment and Resolution” in favor of PROA, before initiating the discovery phase, finding that the Company must participate and contribute funds to the association. However, the Court did not specify any amount for which the Company should be held liable, due to its preliminary and interlocutory nature, and the lack of discovery conducted regarding the amounts claimed by the plaintiffs. The Company is opposing this claim vigorously because it believes that there is no legal basis for it, considering: (i) the obligation to contribute is not directed towards a cooperative, (ii) the franchise agreement does not contain a provision that makes it mandatory to participate in the cooperative, and (iii) PROA’s by-laws state that participation in the cooperative is voluntary, among other arguments. According to the points previously mentioned, the Company believes that a final negative resolution has a low probability of occurrence, therefore no provision has been recorded.

 

Pursuant to Section 9.3 of the Stock Purchase Agreement, McDonald’s Corporation indemnifies the Company for certain Brazilian claims as well as for specific and limited claims arising from the Puerto Rican franchisees lawsuit. Pursuant to the MFA, the Company indemnifies McDonald’s for the related Puerto Rican franchisee lawsuit and the PROA claim.

 

At March 31, 2017, the non-current portion of the provision for contingencies includes $5,982 ($5,170 at December 31, 2016) related to Brazilian claims that are covered by the indemnification agreement. As a result, the Company has recorded a current and non-current asset in respect of McDonald’s Corporation’s indemnity in the consolidated balance sheet. The current asset in respect of McDonald’s Corporation’s indemnity represents the amount of cash to be received as a result of settling certain Brazilian labor and tax contingencies.

 

9.Segment and geographic information

 

The Company is required to report information about operating segments in annual financial statements and interim financial reports issued to shareholders in accordance with ASC 280. Operating segments are components of a company about which separate financial information is available that is regularly evaluated by the chief operating decision maker(s) in deciding how to allocate resources and assess performance. ASC 280 also requires disclosures about the Company’s products and services, geographical areas and major customers.

 

As discussed in Note 1, the Company through its wholly-owned and majority-owned subsidiaries operates and franchises McDonald’s restaurants in the food service industry. The Company has determined that its reportable segments are those that are based on the Company’s method of internal reporting. The Company manages its business as distinct geographic segments and its operations are divided into four geographical divisions, which are as follows: Brazil; the Caribbean division, consisting of Aruba, Curacao, Colombia, French Guyana, Guadeloupe, Martinique, Puerto Rico, Trinidad and Tobago, the U.S. Virgin Islands of St. Croix and St. Thomas and Venezuela; the North Latin America division (“NOLAD”), consisting of Costa Rica, Mexico and Panama; and the South Latin America division (“SLAD”), consisting of Argentina, Chile, Ecuador, Peru and Uruguay. The accounting policies of the segments are the same as those used in the preparation of the consolidated financial statements.

 

F-21

 

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

9.Segment and geographic information (continued)

 

The following table presents information about profit or loss and assets for each reportable segment: 

 

    For the three-month periods ended
    March 31,
    2017   2016
    (Unaudited)   (Unaudited)
Revenues:        
Brazil   $ 359,995     $ 288,592  
Caribbean division   107,218     97,589  
NOLAD   84,343     85,289  
SLAD   229,924     187,044  
Total revenues   $ 781,480     $ 658,514  
         
         
Adjusted EBITDA:        
Brazil   $ 44,762     $ 35,292  
Caribbean division   5,638     2,461  
NOLAD   5,207     7,642  
SLAD   20,619     16,489  
Total reportable segments   76,226     61,884  
Corporate and others (i)   (13,542 )   (13,677 )
Total adjusted EBITDA   $ 62,684     $ 48,207  

F-22

 

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

9.Segment and geographic information (continued)

 

    For the three-month periods ended
    March 31,
    2017   2016
    (Unaudited)   (Unaudited)
Adjusted EBITDA reconciliation:        
Total adjusted EBITDA   $ 62,684     $ 48,207  
         
Plus (Less) items excluded from computation that affect operating income:        
Depreciation and amortization   (23,452 )   (25,187 )
Gains from sale or insurance recovery of property and equipment   51,892     332  
Write-offs of property and equipment   (1,077 )   (1,094 )
ADBV Long-Term Incentive Plan incremental compensation from modification   (717 )   (83 )
Operating income   89,330     22,175  
         
Less:        
Net interest expense   (16,415 )   (14,259 )
(Loss) gain from derivative instruments   (642 )   7  
Foreign currency exchange results   (8,560 )   16,719  
Other non-operating expenses, net   (695 )   (174 )
Income tax expense   (22,339 )   (8,342 )
Net income attributable to non-controlling interests   (77 )   (62 )
Net income attributable to Arcos Dorados Holdings Inc.   $ 40,602     $ 16,064  
         
         
Depreciation and amortization:        
Brazil   $ 12,483     $ 9,865  
Caribbean division   5,913     9,485  
NOLAD   5,041     5,714  
SLAD   3,704     3,595  
Total reportable segments   27,141     28,659  
Corporate and others (i)   1,338     1,297  
Purchase price allocation (ii)   (5,027 )   (4,769 )
Total depreciation and amortization   $ 23,452     $ 25,187  

F-23

 

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

9.Segment and geographic information (continued)

 

  For the three-month periods ended
    March 31,
    2017   2016
    (Unaudited)   (Unaudited)
Property and equipment expenditures:        
Brazil   $ 12,559     $ 3,423  
Caribbean division   3,332     1,532  
NOLAD   1,561     438  
SLAD   11,160     3,767  
Total reportable segments   28,612     9,160  
Corporate and others (i)       63  
Total property and equipment expenditures   $ 28,612     $ 9,223  
                 
                 
    As of
    March 31,    
    2017   December 31,
    (Unaudited)   2016
Total assets:        
Brazil   $ 729,894     $ 726,250  
Caribbean division   357,261     355,568  
NOLAD   249,952     247,546  
SLAD   256,552     246,344  
Total reportable segments   1,593,659     1,575,708  
Corporate and others (i)   93,005     82,822  
Purchase price allocation (ii)   (154,845 )   (153,477 )
Total assets   $ 1,531,819     $ 1,505,053  
                 
(i)Primarily relates to corporate general and administrative expenses, corporate supply chain operations in Uruguay, and related assets. Corporate general and administrative expenses consist of corporate office support costs in areas such as facilities, finance, human resources, information technology, legal, marketing, restaurant operations, supply chain and training. As of March 31, 2017 and December 31, 2016, corporate assets primarily includes corporate cash and cash equivalents.

(ii)Relates to the purchase price allocation adjustment made at corporate level, which reduces the total assets and the corresponding depreciation and amortization.

 

The Company’s revenues are derived from two sources: sales by Company-operated restaurants and revenues from restaurants operated by franchisees. All of the Company’s revenues are derived from foreign operations.

 

Long-lived assets consisting of property and equipment totaled $880,820 and $847,966 at March 31, 2017 and December 31, 2016, respectively. All of the Company’s long-lived assets are related to foreign operations.

 

F-24

 

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

10.Shareholders’ equity

 

Authorized capital

 

The Company is authorized to issue a maximum of 500,000,000 shares, consisting of 420,000,000 class A shares and 80,000,000 class B shares of no par value each.

 

Issued and outstanding capital

 

At March 31, 2017 and December 31, 2016, the Company had 210,711,224 shares issued and outstanding with no par value, consisting of 130,711,224 Class A shares and 80,000,000 Class B shares.

 

Rights, privileges and obligations

 

Holders of Class A shares are entitled to one vote per share and holders of Class B shares are entitled to five votes per share. Except with respect to voting, the rights, privileges and obligations of the Class A shares and Class B shares are pari passu in all respects, including with respect to dividends and rights upon liquidation of the Company.

 

Distribution of dividends

 

The Company can only make distributions to the extent that immediately following the distribution, its assets exceed its liabilities, and the Company is able to pay its debts as they become due.

 

For the three-month period ended March 31, 2017, and during fiscal year 2016, the Company did not declare a dividend distribution to its shareholders, with respect to its results of operations for fiscal year 2016 and 2015, respectively.

 

Accumulated Other Comprehensive Losses

 

The following table sets forth information with respect to the components of “Accumulated other comprehensive losses” as of March 31, 2017 and their related activity during the three-month period then ended:

 

   

Foreign currency translation

 

Cash flow hedges

  Post- employment benefits (i)   Total Accumulated other comprehensive loss
Balances at December 31, 2016   $ (441,081 )   $ 305     $ (873 )   $ (441,649 )
Other comprehensive gain (loss) before reclassifications (Unaudited)   28,289     (4,938 )       23,351  
Net loss reclassified from accumulated other comprehensive loss to consolidated statement of income (Unaudited)       3,022     97     3,119  
Net current-period other comprehensive loss (Unaudited)   28,289     (1,916 )   97     26,470  
Balances at March 31, 2017 (Unaudited)   $ (412,792 )   $ (1,611 )   $ (776 )   $ (415,179 )

F-25

 

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

10.Shareholders’ equity (continued)

 

Accumulated Other Comprehensive Losses (continued)

 

The following table sets forth information with respect to the components of “Accumulated other comprehensive losses” as of March 31, 2016 and their related activity during the three-month period then ended:

 

   

Foreign currency translation

 

 

Cash flow hedges

 

  Post- employment benefits (i)   Total Accumulated other comprehensive loss
Balances at December 31, 2015   $ (431,190 )   $ 7,876     $ (949 )   $ (424,263 )
Other comprehensive gain (loss) before reclassifications (Unaudited)   13,436     (17,626 )       (4,190 )
Net (gain) loss reclassified from accumulated other comprehensive loss to consolidated statement of income (Unaudited)       (3,184 )   112     (3,072 )
Net current-period other comprehensive loss (Unaudited)   13,436     (20,810 )   112     (7,262 )
Balances at March 31, 2016 (Unaudited)   $ (417,754 )   $ (12,934 )   $ (837 )   $ (431,525 )

 

(i)Related to a post-employment benefit in Venezuela established by the Organic Law of Labor and Workers (known as “LOTTT”, its Spanish acronym) in 2012. This benefit provides a payment of 30 days of salary per year of employment tenure based on the last wage earned to all workers who leave the job for any reason. The term of service to calculate the post-employment payment of active workers run retroactively since June 19, 1997. Annually, the Company obtains an actuarial valuation to measure the post-employment benefit obligation, using the projected unit credit actuarial method and measures this benefit in accordance with ASC 715-30, similar to pension benefit.

 

11.Earnings per share

 

The Company is required to present basic earnings per share and diluted earnings per share in accordance with ASC Topic 260. Earnings per share are based on the weighted average number of shares outstanding during the period after consideration of the dilutive effect, if any, for common stock equivalents, including stock options and restricted share units. Basic earnings per common share are computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share are computed by dividing net income by the weighted average number of shares of common stock outstanding and dilutive securities outstanding during the period under the treasury method.

 

F-26

 

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

11.Earnings per share (continued)

 

The following table sets forth the computation of basic and diluted net income per common share attributable to Arcos Dorados Holdings Inc. for all periods presented:

 

    For the three-month periods ended
    March 31,
    2017   2016
    (Unaudited)   (Unaudited)
Net income (loss) attributable to Arcos Dorados Holdings Inc. available to common shareholders   $ 40,602     $ 16,064  
Weighted-average number of common shares outstanding - Basic   210,711,224     210,538,896  
Incremental shares from assumed exercise of stock options (a)        
Incremental shares from vesting of restricted stock units   976,051     31,590  
Weighted-average number of common shares outstanding - Diluted   211,687,275     210,570,486  
         
Basic net income per common share attributable to Arcos Dorados Holdings Inc.   $ 0.19     $ 0.08  
Diluted net income per common share attributable to Arcos Dorados Holdings Inc.   $ 0.19     $ 0.08  

 

(a) Options to purchase shares of common stock were outstanding during the three-month periods ended March 31, 2017 and 2016. See Note 7 for details. These options were not included in the computation of diluted earnings per share because their inclusion would have been anti-dilutive.

 

12.Related party transactions

 

The Company has entered into a master commercial agreement on arm’s length terms with Axionlog, a company under common control that operates the distribution centers in Argentina, Chile, Colombia, Mexico, Venezuela, Uruguay and Peru (the “Axionlog Business”). Pursuant to this agreement Axionlog provides the Company distribution inventory, storage and transportation services in the countries in which it operates. On November 9, 2011, the Company entered into a revolving loan agreement as a creditor with Axionlog Distribution B.V., a holding company of the Axionlog Business, for a total amount of $12 million at an interest rate of LIBOR plus 6%, in line interest rates prevailing in the market at the time of the agreement. Notwithstanding the fact that the loan maturity date was November 7, 2016, the parties decided to terminate the agreement early as of May 27, 2016. As a result, the Company collected the outstanding principal amount of $1,800.

 

The following table summarizes the outstanding balances between the Company and the Axionlog Business as of March 31, 2017 and December 31, 2016:

 

    As of
    March 31,    
    2017   December 31,
    (Unaudited)   2016
Other receivables   $ 1,070     $ 1,050  
Prepaid expenses and other current assets   3,788      
Miscellaneous   3,760     3,612  
Accounts payable   (10,080 )   (10,355 )

F-27

 

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

12.Related party transactions (continued)

 

The following table summarizes the transactions between the Company and the Axionlog Business for the three-month periods ended March 31, 2017 and 2016:

 

    For the three-month periods ended
    March 31,
    2017   2016
    (Unaudited)   (Unaudited)
Food and paper (i)   $ (43,708 )   $ (37,381 )
Occupancy and other operating expenses   (1,125 )   (866 )
Net interest income       31  
             
(i)Includes $11,725 of distribution fees and $31,983 of suppliers purchases managed through the Axionlog Business for the three-month period ended March 31, 2017; and, $9,191 and $28,189, respectively, for the three-month period ended March 31, 2016.

 

As of March 31, 2017, the Company had other receivables and accounts payable with Lacoop, A.C. and Lacoop II, S.C. totaling $257 and $1,225, respectively.

 

13.Venezuelan operations

 

The Company conducts business in Venezuela where currency restrictions exist, limiting the Company’s ability to immediately access cash through repatriations at the government’s official exchange rate. The Company’s access to Venezuelan Bolívares (VEF) held by its Venezuelan subsidiaries remains available for use within this jurisdiction and is not restricted. The official exchange rate is established by the Central Bank of Venezuela and the Venezuelan Ministry of Finance and the acquisition of foreign currency at the official exchange rate by Venezuelan companies to pay foreign debt or dividends is subject to a registration and approval process by the relevant Venezuelan authorities. Since these restrictions are in place, the Company has not been able to access the official exchange rate to pay dividends and has been limited in its ability to pay royalties at the official exchange rate.

 

Revenues and operating income (loss) of the Venezuelan operations were $20,540 and $720, respectively, for the three-month period ended March 31, 2017; and $15,234 and $(4,815), respectively, for the three-month period ended March 31, 2016.

 

Since February 2013, the Venezuelan government has announced several changes in the currency exchange regulations. As a consequence, the Company reassessed the exchange rate used for remeasurement purposes several times. Effective from March 10, 2016, a new Exchange Agreement was issued that set forth the new rules that govern foreign exchange transactions carried out by public and private entities and individuals in Venezuela. Hereafter, the SICAD and SIMADI systems were eliminated and a dual exchange system was created: (i) the protected rate called DIPRO, with an initial exchange rate of 10 VEF per US dollar, and (ii) the supplementary floating market rate called DICOM, with an initial exchange rate of 215.34 VEF per US dollar. As a result of those announcements, the Company concluded that the DICOM was the rate applicable for remeasurement purposes as from March 10, 2016. There were not material impacts related to the exchange rate change. As of March 31, 2017, DICOM exchange rate settled at 709.75 VEF per US dollar.

 

As of March 31, 2017, the Company’s local currency denominated net monetary position, which would be subject to remeasurement in the event of further changes in the DICOM rate was $1.3 million (including $11.1 million of cash and cash equivalents). Venezuela’s non-monetary assets were $54.2 million at March 31, 2017 and included approximately $41.9 million of fixed assets and advances to suppliers.

 

F-28

 

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2017 and 2016 (Unaudited)

Amounts in thousands of US dollars, except for share data and as otherwise indicated

 

13.Venezuelan operations (continued)

 

In addition to exchange controls, the Venezuelan market is subject to price controls. The Venezuelan government issued a regulation establishing a maximum profit margin for companies and maximum prices for certain goods and services. Although these regulations caused a delay in the pricing plan, the Company was able to increase prices during the three-month period ended March 31, 2017.

 

The Company’s Venezuelan operations, and the Company’s ability to repatriate its earnings, continue to be negatively affected by these difficult conditions and would be further negatively affected by additional devaluations or the imposition of additional or more stringent controls on foreign currency exchange, pricing, payments, profits or imports or other governmental actions or continued or increased labor unrest. The Company continues to closely monitor developments in this dynamic environment, to assess evolving business risks and actively manage its operations in Venezuela.

 

14.Subsequent events

 

As a consequence of the cash tender offer of the 2023 Notes mentioned in Note 5, on April 4 and April 18, 2017 the Company redeemed 11.6% of the outstanding principal. The total payment was $48,885 (including $3,187 of early tender payment) plus accrued and unpaid interest.

 

On April 4, 2017, the Company issued senior notes for an aggregate principal amount of $265 million, which are due in 2027 (the “2027 Notes”). The 2027 Notes bear interest of 5.875% per year. Periodic payment of principal is not required and interest is paid semiannually, in April and October, commencing on October 4, 2017. The 2027 Notes are fully and unconditionally guaranteed on a senior unsecured basis by certain of the Company’s subsidiaries. The proceeds from the issuance of the 2027 Notes were used to repay the Secured Loan Agreement and unwind the related derivative instruments, to pay the principal and premium on the 2023 Notes in connection with the aforementioned tender offer, and for general corporate purposes.

 

On April 11, 2017, the Company repaid the Secured Loan Agreement, mentioned in Note 5. The total payment of $169.7 million included all outstanding principal, plus accrued and unpaid interest and certain transaction costs. In addition, on April 13, 2017 and April 17, 2017, the Company unwound the 2016 cross-currency interest rate swaps, mentioned in Note 6, related to the Secured Loan Agreement for BRL122.7 million.

 

F-29