6-K 1 dp106787_6k-1.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, 2019

 

 

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

 

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   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   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 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of Arcos Dorados Holdings Inc. and to be a part thereof from the date on which this report is filed, to the extent not superseded by documents or reports subsequently filed or furnished.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, 2019 and December 31, 2018 and for the three-month periods ended March 31, 2019 and 2018 (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 15, 2019

 

 

 

Item 1

 

Arcos Dorados Holdings Inc.

 

 

Condensed Consolidated Financial Statements 

As of March 31, 2019 and December 31, 2018 and for the three-month periods ended March 31, 2019 and 2018 (Unaudited)

 

 

 

 

 

F-1

 

Arcos Dorados Holdings Inc.

Consolidated Statements of Income 

 For the three-month periods ended March 31, 2019 and 2018 (Unaudited) 

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

 

    2019   2018
REVENUES        
Sales by Company-operated restaurants   $ 695,384     $ 807,061  
Revenues from franchised restaurants   35,615     42,826  
Total revenues   730,999     849,887  
         
OPERATING COSTS AND EXPENSES        
Company-operated restaurant expenses:        
Food and paper   (247,035 )   (285,267 )
Payroll and employee benefits   (142,056 )   (173,114 )
Occupancy and other operating expenses   (199,904 )   (216,622 )
Royalty fees   (39,329 )   (42,171 )
Franchised restaurants – occupancy expenses   (17,874 )   (19,155 )
General and administrative expenses   (52,359 )   (57,650 )
Other operating expenses, net   (1,118 )   (43,837 )
Total operating costs and expenses   (699,675 )   (837,816 )
Operating income   31,324     12,071  
Net interest expense   (12,446 )   (14,640 )
Gain (loss) from derivative instruments   769     (98 )
Foreign currency exchange results   1,538     8,177  
Other non-operating (expenses) income, net   (85 )   16  
Income before income taxes   21,100     5,526  
Income tax expense   (8,876 )   (4,963 )
Net income   12,224     563  
Less: Net income attributable to non-controlling interests   (59 )   (45 )
Net income attributable to Arcos Dorados Holdings Inc.   $ 12,165     $ 518  
         
         
Earnings per share information:        
Basic net income per common share attributable to Arcos Dorados Holdings Inc.   $ 0.06     $ 0.00  
Diluted net income per common share attributable to Arcos Dorados Holdings Inc.   0.06     0.00  

 

See Notes to the Condensed Consolidated Financial Statements.

 

F-2

 

Arcos Dorados Holdings Inc. 

 Consolidated Statements of Comprehensive Income (Loss) 

 For the three-month periods ended March 31, 2019 and 2018 (Unaudited) 

Amounts in thousands of US dollars

 

    2019   2018
Net income   $ 12,224     $ 563  
Other comprehensive income (loss), net of tax:        
Foreign currency translation   (2,483 )   8,759  
Post-employment benefits:        
Reclassification of net loss to consolidated statement of income   216     124  
Post-employment benefits (net of deferred income taxes of $111 and $64)   216     124  
Cash flow hedges:        
Net loss recognized in accumulated other comprehensive loss   (1,377 )   (21,492 )
Reclassification of net (gain) loss to consolidated statement of income   (326 )   4,129  
Cash flow hedges (net of deferred income taxes of $762 and $4,928)   (1,703 )   (17,363 )
Total other comprehensive loss   (3,970 )   (8,480 )
Comprehensive income (loss)   8,254     (7,917 )
Less: Comprehensive income attributable to non-controlling interests   (49 )   (37 )
Comprehensive income (loss) attributable to Arcos Dorados Holdings Inc.   $ 8,205     $ (7,954 )

 

See Notes to the Condensed Consolidated Financial Statements.

 

F-3

 

Arcos Dorados Holdings Inc. 

 Consolidated Balance Sheet 

As of March 31, 2019 and December 31, 2018 

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

 

    As of    
    March 31, 2019   As of
    (Unaudited)   December 31, 2018
ASSETS        
Current assets        
Cash and cash equivalents   $ 172,624     $ 197,282  
Accounts and notes receivable, net   61,079     84,287  
Other receivables   22,745     25,350  
Inventories   37,810     46,089  
Prepaid expenses and other current assets   104,751     109,230  
McDonald’s Corporation’s indemnification for contingencies   2,324     2,324  
Total current assets   401,333     464,562  
Non-current assets        
Miscellaneous   102,437     99,049  
Collateral deposits   2,500     2,500  
Property and equipment, net   852,275     856,192  
Net intangible assets and goodwill   41,231     41,021  
Deferred income taxes   58,555     58,334  
Derivative instruments   57,903     54,735  
McDonald’s Corporation’s indemnification for contingencies   1,633     1,646  
Leases right of use asset   848,111     —  
Total non-current assets   1,964,645     1,113,477  
Total assets   $ 2,365,978     $ 1,578,039  
LIABILITIES AND EQUITY        
Current liabilities        
Accounts payable   $ 221,560     $ 242,455  
Royalties payable to McDonald’s Corporation   15,212     14,576  
Income taxes payable   35,180     53,843  
Other taxes payable   58,782     61,006  
Accrued payroll and other liabilities   105,281     94,166  
Provision for contingencies   2,337     2,436  
Interest payable   8,059     9,951  
Short-term debt   —     356  
Current portion of long-term debt   3,722     3,836  
Derivative instruments   10,295     10,687  
Leases operating liabilities   61,989     —  
Total current liabilities   522,417     493,312  
Non-current liabilities        
Accrued payroll and other liabilities   18,696     35,322  
Provision for contingencies   27,004     26,073  
Long-term debt, excluding current portion   625,756     626,424  
Derivative instruments   2,995     3,192  
Deferred income taxes   772     957  
Leases operating liabilities   802,955     —  
Total non-current liabilities   1,478,178     691,968  
Total liabilities   2,000,595     1,185,280  
Equity        
Class A shares of common stock   379,921     379,845  
Class B shares of common stock   132,915     132,915  
Additional paid-in capital   15,682     14,850  
Retained earnings   402,666     413,074  
Accumulated other comprehensive loss   (506,226 )   (502,266 )
Common stock in treasury   (60,000 )   (46,035 )
Total Arcos Dorados Holdings Inc. shareholders’ equity   364,958     392,383  
Non-controlling interests in subsidiaries   425     376  
Total equity   365,383     392,759  
Total liabilities and equity   $ 2,365,978     $ 1,578,039  

 

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, 2019 and 2018 (Unaudited) 

Amounts in thousands of US dollars

 

    2019   2018
Operating activities        
Net income attributable to Arcos Dorados Holdings Inc.   $ 12,165     $ 518  
Adjustments to reconcile net income attributable to Arcos Dorados Holdings Inc. to cash provided by operating activities:        
Non-cash charges and credits:        
Depreciation and amortization   28,948     26,517  
Gain of property and equipment sales   (168 )   (332 )
Deferred income taxes   231     (3,883 )
Foreign currency exchange results   (2,270 )   (11,292 )
Gain on Sales of restaurants businesses   (504 )   (851 )
Others, net   (257 )   277  
Changes in assets and liabilities   (10,148 )   (36,807 )
Net cash provided by (used in) operating activities   27,997     (25,853 )
Investing activities        
Property and equipment expenditures   (35,995 )   (23,751 )
Purchases of restaurant businesses   (1,345 )   —  
Proceeds from sale of property and equipment and related advances   175     448  
Proceeds from sale of restaurant businesses and related advances   —     1,278  
Other investing activity   569     536  
Net cash used in investing activities   (36,596 )   (21,489 )
Financing activities        
Treasury stock purchases   (13,965 )   —  
Other financing activities   (1,860 )   (1,734 )
Net cash used in financing activities   (15,825 )   (1,734 )
Effect of exchange rate changes on cash and cash equivalents   (234 )   (22,374 )
Decrease in cash and cash equivalents   (24,658 )   (71,450 )
Cash and cash equivalents at the beginning of the year   $ 197,282     $ 308,491  
Cash and cash equivalents at the end of the period   $ 172,624     $ 237,041  
         
Supplemental cash flow information:        
Cash paid during the period for:        
Interest   $ 17,888     $ 20,646  
Income tax   10,924     8,392  
Non-cash investing activities:        
Dividend declared pending of payment   22,397     21,107  
Seller financing pending of payment and settlement of franchise receivables related to purchases of restaurant businesses   905     —  

 

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, 2019 (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

capital

  

Retained

earnings

  

Accumulated

other

comprehensive

loss

   Common stock in treasury   Total  

Non-

controlling

interests

   Total
Number   Amount   Number   Amount   Number   Amount  
Balances at beginning of fiscal year   131,593,073     $ 379,845     80,000,000     $ 132,915     $ 14,850     $ 413,074     $ (502,266 )   (6,360,826 )   $ (46,035 )   $ 392,383     $ 376     $ 392,759  
Net income for the period (Unaudited)   —     —     —     —     —     12,165     —     —     —     12,165     59     12,224  
Other comprehensive loss (Unaudited)   —     —     —     —     —     —     (3,960 )   —     —     (3,960 )   (10 )   (3,970 )
Dividends to Arcos Dorados Holdings Inc.’s shareholders ($0.11 per share) (Unaudited)   —     —     —     —     —     (22,397 )   —     —     —     (22,397 )   —     (22,397 )
Dividends  on restricted share units under the 2011 Equity Incentive Plan (Unaudited)   —     —     —     —     —     (176 )   —     —     —     (176 )   —     (176 )
Issuance of shares in connection with the partial vesting of outstanding restricted share units under the 2011 Equity Incentive Plan (Unaudited)   9,528     76     —     —     (76 )   —     —     —     —     —     —     —  
Stock-based compensation related to the 2011 Equity Incentive Plan (Unaudited)   —     —     —     —     908     —     —     —     —     908     —     908  
Treasury stock purchases (Unaudited)   —     —     —     —     —     —     —     (1,632,776 )   (13,965 )   (13,965 )   —     (13,965 )
Balances at end of period (Unaudited)   131,602,601     $ 379,921     80,000,000     $ 132,915     $ 15,682     $ 402,666     $ (506,226 )   (7,993,602 )   $ (60,000 )   $ 364,958     $ 425     $ 365,383  

 

 

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, 2018 (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

capital

  

Retained

earnings

  

Accumulated

other

comprehensive

loss

   Total  

Non-

controlling

interests

   Total
Number   Amount   Number   Amount  
Balances at beginning of fiscal year   131,072,508     $ 376,732     80,000,000     $ 132,915     $ 14,216     $ 401,134     $ (429,347 )   $ 495,650     $ 492     $ 496,142  
Net income for the period (Unaudited)   —     —     —     —     —     518     —     518     45     563  
Other comprehensive loss (Unaudited)   —     —     —     —     —     —     (8,472 )   (8,472 )   (8 )   (8,480 )
Dividends to Arcos Dorados Holdings Inc.’s shareholders ($0.10 per share) (Unaudited)   —     —     —     —     —     (21,107 )   —     (21,107 )   —     (21,107 )
Dividends on restricted share units under the 2011 Equity Incentive Plan  (Unaudited)   —     —     —     —     —     (174 )   —     (174 )   —     (174 )
Stock-based compensation related to the 2011 Equity Incentive Plan (Unaudited)   —     —     —     —     999     —     —     999     —     999  
Adoption of accounting standard ASC 606 -net of $1,555 of deferred income tax- (Unaudited)                       (3,796 )       (3,796 )       (3,796 )
Balances at end of period (Unaudited)   131,072,508     $ 376,732     80,000,000     $ 132,915     $ 15,215     $ 376,575     $ (437,819 )   $ 463,618     $ 529     $ 464,147  

 

 

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, 2019 and 2018 (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 through its wholly-owned Company Arcos Dorados Group B.V., 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 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, 2018.

 

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.

 

Operating results for the three-month period ended March 31, 2019 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, 2019 and 2018 (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, 2018, except for lease accounting policy that has changed in accordance with ASU No. 2016-02 Leases (topic 842).

 

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 and Argentinian 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 sheet date exchange rates, and revenues, expenses and cash flow are translated at average rates prevailing during the periods. Translation adjustments are included in the “Accumulated other comprehensive loss” 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.

 

Since January 1, 2010 and July 1, 2018, Venezuela and Argentina, respectively, were considered to be highly inflationary, and as such, the financial statements of these subsidiaries are remeasured as its functional currency was the reporting currency of the immediate parent company (US dollars for Venezuelan operation and BRL for Argentinian operation). As a result, remeasurement gains and loss are recognized in earnings rather than in the cumulative translation adjustment, component of “Accumulated other comprehensive loss” 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, the FASB issued ASU No. 2016-02, Leases (ASC 842), which modifies lease accounting for lessees to increase transparency and comparability by recording a right-of-use asset and lease liability on their balance sheet for operating leases. Entities need to disclose qualitative and quantitative information about their leases, including characteristics and amounts recognized in the financial statements. This standard is effective for annual periods beginning after December 15, 2018, including interim periods.

 

The Company adopted ASU 2016-02 in its first quarter of 2019 utilizing the modified retrospective method, without restatement of comparative financial information periods, and applied the package of practical expedients permitted under the transition guidance within the standard which, among other things, allowed the Company to carry forward the historical lease classification. The adoption, and the ultimate effect on the consolidated financial statements, was based on an evaluation of the contract-specific facts and circumstances. The Company adoption of the standard resulted in the recognition of lease right-of-use assets and lease liabilities of $ 887 million, as of January 1, 2019. The right-of-use assets and lease liabilities were recognized at the commencement date based on the present value of the remaining future minimum lease payments. As the interest rate implicit in the Company’s leases was not readily determinable, the Company utilizes its incremental borrowing rate to discount the lease payments.

 

  

 

F-9

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2019 and 2018 (Unaudited)

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

3.Summary of significant accounting policies (continued)

 

Recent accounting pronouncements (continued)

 

Furthermore, the changes made to the consolidated balance sheet as of January 1, 2019 for the adoption of ASC 842, were as follows:

 

Consolidated Balance Sheet  Balance at December 31, 2018  Adjustments Due to ASC 842  Balance at January 1, 2019   
ASSETS                    
Non-current Assets                    
Leases right of use asset   —      871,004    871,004    (i) 
LIABILITIES AND EQUITY                    
Current liabilities                    
Leases operating liabilities   —      64,404    64,404    (ii) 
Non-current liabilities                    
Accrued payroll and other liabilities   35,322    (16,404)   18,918    (iii) 
Leases operating liabilities
   —      823,004    823,004    (iv) 

 

(i)Represents capitalization of operating lease right of use asset of $887,408, net of the reclassification of straight-line rent accrual of $16,404.

(ii)Represents recognition of current portion of operating leases liabilities.

(iii)Represents reclassification of straight-line rent accrual to leases right of use asset.

(iv)Represents recognition of non-current portion of operating lease liabilities.

 

The standard did not have a significant impact on the Company’s consolidated statements of income and cash flows, except for the exchange results related to lease liabilities denominated in other currencies than its functional one. The disclosure of the impact of adoption on the consolidated balance sheet and income statement, as of March 31, 2019 and for the three-month period ended in March 31, 2019, are as follows:

 

   As of March 31, 2019
Consolidated Balance Sheet  As Reported  Balances Without Adoption of ASC 842  Effect of Change
ASSETS         
Non-current Assets               
Leases right of use asset   848,111    —      848,111 
LIABILITIES AND EQUITY               
Current liabilities               
Leases operating liabilities   61,989    —      61,989 
Non-current liabilities               
Accrued payroll and other liabilities   18,696    35,407    (16,711)
Leases operating liabilities   802,955    —      802,955 
EQUITY               
Retained earnings   402,666    401,859    807 
Accumulated other comprehensive loss   (506,226)   (505,297)   (929)
                

   

F-10

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2019 and 2018 (Unaudited)

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

3.Summary of significant accounting policies (continued)

 

Recent accounting pronouncements (continued)

 

   For the three-month period ended March 31, 2019
Consolidated Statement of Income  As Reported  Balances Without Adoption of ASC 842  Effect of Change
                
Foreign currency exchange results   1,538    731    807 

 

 

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, 2019     As of
    (Unaudited)     December 31, 2018
Bank overdrafts $ —     $ 356  
  $ —     $ 356  

 

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 3, 2018, 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, 2019. Each loan made to ADBV under this agreement will bear interest at an annual rate equal to LIBOR plus 2.40%. In addition, on November 1, 2018, ADBV renewed its revolving credit facility with JPMorgan Chase Bank, N.A, for up to $25 million maturing on November 10, 2019, with an annual interest rate equal to LIBOR plus 2.25%. 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. Principal is due upon maturity.

 

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, (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 as of any last day of the fiscal quarter of the borrower. 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, 2019, the mentioned ratio was 0.90 and thus the Company is currently in compliance with the ratio requirement under both revolving credit facilities.

 

No amounts are due at the date of issuance of these condensed consolidated financial statements in connection with these revolving credit facilities.

 

F-11

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2019 and 2018 (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, 2019   As of
    (Unaudited)   December 31, 2018
2027 Notes   $ 265,000     $ 265,000  
2023 Notes   348,069     348,069  
Finance lease obligations   6,376     6,503  
Other long-term borrowings   15,770     16,676  
Subtotal   635,215     636,248  
Discount, net on 2023 Notes   (2,997 )   (3,156 )
Premium on 2023 Notes   1,125     1,187  
Deferred financing costs   (3,865 )   (4,019 )
Total   629,478     630,260  
Current portion of long-term debt   3,722     3,836  
Long-term debt, excluding current portion   $ 625,756     $ 626,424  

 

2027 and 2023 Notes:

 

The following table presents additional information related to the 2027 and 2023 Notes (the "Notes"):

 

         Principal as of   
   Annual interest rate  Currency  March 31, 2019 (Unaudited)  December 31, 2018  Maturity
 2027 Notes    5.875%   USD   $265,000   $265,000    April 4, 2027 
 2023 Notes    6.625%   USD    348,069    348,069    September 27, 2023 

 

 

   Interest Expense (i)  DFC Amortization  (i)  Amortization of Discount, net (i)
   2019 (Unaudited)  2018 (Unaudited)  2019 (Unaudited)  2018 (Unaudited)  2019 (Unaudited)  2018 (Unaudited)
 2027 Notes   $3,892   $3,892   $74   $74   $—     $—   
 2023 Notes    5,765    5,765    80    80    97    97 

 

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

 

On September 27, 2013, the Company issued senior notes for an aggregate principal amount of $473.8 million, 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 financing costs ("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 16.90% of the outstanding principal. The total payment was $80,800 (including $800 of early tender payment) plus accrued and unpaid interest.

 

  

 

F-12

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2019 and 2018 (Unaudited)

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

5.Long-term debt (continued)

 

2027 and 2023 Notes (continued):

 

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.

 

Furthermore, on March 16, 2017, the Company launched another 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%. As a consequence of this transaction, 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. 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.

 

In April 2017, the Company issued senior notes for an aggregate principal amount of $265 million, which are due in 2027 (the “2027 Notes”). Periodic payments of principal are not required and interest is paid semi-annually commencing on October 4, 2017. The proceeds from the issuance of the 2027 Notes were used to repay the Secured Loan Agreement, unwind the related derivative instruments, pay the principal and premium on the 2023 Notes (in connection with the aforementioned tender offer) and for general purposes. The Company incurred $3,001 of financing costs related to the issuance of 2027 Notes, which were capitalized as DFC and are being amortized over the life of the 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. In addition, the indenture governing the 2027 Notes, limits the Company’s and its subsidiaries’ ability to: incur in additional indebtedness and make certain restricted payments, including dividends. 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 occurs, would permit or require the principal, premium, if any, and interest on all the then-outstanding Notes to be due and payable immediately.

 

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

 

F-13

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2019 and 2018 (Unaudited)

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

6.Derivative instruments

 

The following table presents the fair values of derivative instruments included in the consolidated balance sheets as of March 31, 2019 and December 31, 2018:

 

    Derivatives
        Fair Value
        As of    
Type of Derivative   Balance Sheets Location   March 31, 2019   As of
    (Unaudited)   December 31, 2018
Derivatives designated as hedging instruments            
Cash flow hedge            
Forward contracts   Other receivables   $ 194     $ 628  
Forward contracts   Accrued payroll and other liabilities   (165 )   (180 )
Cross-currency interest rate swap (i)   Derivative instruments   32,046     29,141  
Call spread (i)   Derivative instruments   17,434     16,867  
Coupon-only swap (i)   Derivative instruments   (4,867 )   (5,152 )
Subtotal       $ 44,642     $ 41,304  
Derivatives not designated as hedging instruments            
Forward contracts   Other receivables   $ 1,011     $ 99  
Forward contracts   Accrued payroll and other liabilities   —     (144 )
Subtotal       $ 1,011     $ (45 )
Total derivative instruments       $ 45,653     $ 41,259  

 

(i)At March 31, 2019, presented in the consolidated balance sheet as follows: $57,903 as non-current asset, $10,295 as a current liability and $2,995 as a non-current liability. At December 31, 2018, presented in the consolidated balance sheet as follows: $54,735 as non-current asset, $10,687 as a current liability and $3,192 as non-current liability.

 

Derivatives designated as hedging instruments

 

Cash flow hedge

 

Forward contracts

 

The Company has entered into various forward contracts in a few territories to hedge a portion of the foreign exchange risk associated with forecasted imports of goods. The effect of the hedges results 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, 2019, the Company has forward contracts outstanding with a notional amount of $24,908 that mature during 2019.

 

The Company made net collections (payments) totaling $167 and $(635) during the three-month periods ended March 31, 2019 and 2018, respectively, as a result of the net settlements of these derivatives.

 

F-14

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2019 and 2018 (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 (continued)

 

Cross-currency interest rate swap

 

The Company entered into three cross-currency interest rate swap agreements to hedge all the variability in a portion (73%) of the principal and interest collections of its BRL intercompany loan receivables with ADBV. The agreements were signed during November 2013 (amended in February 2017), June and July 2017. The following table presents information related to the terms of the agreements:

 

Bank   Payable   Receivable   Interest payment dates   Maturity
  Currency   Amount   Interest rate   Currency   Amount   Interest rate  
JP Morgan Chase Bank, N.A.   BRL   108,000     13 %   $   35,400     4.38 %   March 31/ September 30   September 2023
JP Morgan Chase Bank, N.A.   BRL   98,670     13 %   $   30,000     6.02 %   March 31/ September 30   September 2023
Citibank N.A.   BRL   94,200     13 %   $   30,000     6.29 %   March 31/ September 30   September 2023

 

During April 2017, the Company’s Brazilian subsidiary entered into similar agreements in order to hedge all the variability in a portion (50%) of the principal and interest payable of intercompany loan payables nominated in US dollar.

 

The following table presents information related to the terms of the agreements:

 

Bank   Payable   Receivable   Interest payment dates   Maturity
  Currency   Amount   Interest rate   Currency   Amount   Interest rate  
BAML (i)  

BR

L

   156,250     13.64 %   $   50,000     6.91 %   March 31/ September 30   April 2027
Banco Santander S.A.   BRL   155,500     13.77 %   $   50,000     6.91 %   June 30/ December 31   September 2023

 

(i)                  Bank of America Merrill Lynch Banco Múltiplo S.A.

 

The Company paid $4,615 and $6,449 of net interest during the three-month periods ended March 31, 2019 and 2018, respectively.

 

Call spread

 

During April 2017, the Company’s Brazilian subsidiary entered into two call spread agreements in order to hedge the all variability in a portion (50%) of the principal of intercompany loan payables nominated in US dollar. Call spread agreements consist of a combination of two call options: the Company bought an option to buy US dollar at a strike price equal to the BRL exchange rate at the date of the agreements, and wrote an option to buy US dollar at a higher strike price than the previous one. Both pair of options have the same notional amount and are based on the same underlying with the same maturity date.

 

  

 

F-15

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2019 and 2018 (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 (continued)

 

Call spread (continued)

 

The following table presents information related to the terms of the agreements:

 

Bank   Nominal Amount   Strike price   Maturity
  Currency   Amount   Call option written   Call option bought  
Citibank S.A.   $   50,000     4.49   3.11   September 2023
JP Morgan S.A.   $   50,000     5.20   3.13   April 2027

 

Coupon-only swap

 

During April 2017, the Company’s Brazilian subsidiary entered into two coupon-only swap agreements in order to hedge the all variability (50%) in the interest payable related to the intercompany loan aforementioned.

 

The following table presents information related to the terms of the agreements:

 

Bank   Payable   Receivable   Interest payment dates   Maturity
  Currency   Amount   Interest rate   Currency   Amount   Interest rate  
Citibank S.A.   BRL   155,500     11.08 %   $  

5

0,000

     6.91 %   June 30/ December 31   September  2023
JP Morgan S.A.   BRL   156,250     11.18 %   $   50,000     6.91 %   March 31/ September 30   April 2027

 

The Company paid $1,104 and $1,901 of net interest during the three-months periods ended March 31, 2019 and 2018 respectively, related to these agreements.

 

Additional disclosures

 

The following table present the pretax amounts affecting income and other comprehensive income for the three-month periods ended March 31, 2019 and 2018 for each type of derivative relationship: 

 

Derivatives in Cash Flow

 

Hedging Relationships

 

   (Loss) Gain Recognized in Accumulated OCI on Derivative (Effective Portion) (Unaudited)    (Gain) Loss Reclassified from Accumulated OCI into Income (Effective Portion) (i) (Unaudited)   Loss Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing and Ineffective Portion) (Unaudited) (ii)
  2019   2018   2019   2018   2019   2018
Forward contracts   $ (252 )   $ (1,292 )   $ (167 )   $ 635     $ —     $ —  
Cross-currency interest rate swaps   (1,647 )   (20,475 )   212     3,359     —     —  
Call Spread   762     (1,161 )   (1,137 )   132     —     —  
Coupon-only swap   (778 )   (4,422 )   542     933     (153 )   (130 )
Total   $ (1,915 )   $ (27,350 )   $ (550 )   $ 5,059     $ (153 )   $ (130 )

  

 

F-16

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2019 and 2018 (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 (continued)

 

Additional disclosures (continued)

 

(i)The results recognized in income related to forward contracts were recorded as an adjustment to food and paper. The net gain (loss) recognized in income, related to cross-currency interest rate swaps is presented as follows:

 

  For the three-month periods ended March 31,
Adjustment to: 2019 (Unaudited)   2018 (Unaudited)
Foreign currency exchange results $ 2,029     $ (222 )
Net interest expense (2,241 )   (3,137 )
Total $ (212 )   $ (3,359 )

 

The results recognized in income related to call spread agreements and coupon-only swap agreements were recorded as an adjustment to foreign currency exchange and interest expense, respectively.

 

(ii)The loss recognized in income is presented within "Gain (loss) from derivative instruments".

 

Derivatives not designated as hedging instruments

 

The Company enters into certain derivatives that are not designated for hedge accounting, therefore the changes in the fair value of these derivatives are recognized immediately in earnings together with the gain or loss from the hedged balance sheet position within "Gain (loss) from derivative instruments".

 

The Company collected $124 during the three-month period ended March 31, 2019 related to those forward contracts.

 

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.

 

F-17

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2019 and 2018 (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)

 

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 2018 (from 2015 to 2018 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. However, in the event of death, disability or retirement of the employee, any unvested portion of the annual award will be fully vested. 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 date of grant.The value of restricted shares units is based on the quoted market price of the Company’s class A shares at the grant date.

 

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.

 

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 $908 and $936 during the three-month periods ended March 31, 2019 and 2018, respectively. Stock-based compensation expense is included within “General and administrative expenses” in the consolidated statements of income.

 

Stock Options

 

The following table summarizes the activity of stock options units as of March 31, 2019:

 

    Units   Weighted-average strike Price   Weighted-average grant-date fair value
Outstanding at March 31, 2019 and December 31, 2018   491,073     12.26     3.81  
Exercisable at March 31, 2019   455,719     12.55     3.95  

 

The following table provides a summary of outstanding stock options at March 31, 2019: 

 

    Vested (i)   Non-vested (ii)   Total
Number of units outstanding   455,719     35,354     491,073  
Weighted-average grant-date fair market value per unit   3.95     1.98     3.81  
Total grant-date fair value   1,800     70     1,870  
Weighted-average accumulated percentage of service   100 %   98.6 %   99.9 %
Stock-based compensation recognized in Additional paid-in capital   1,800     69     1,869  
Compensation expense not yet recognized (iii)   —     1     1  

 

(i)Related to exercisable awards.

(ii)Related to awards that will vest in 2019.

(iii)Expected to be recognized in 1.33 months.

 

  

 

F-18

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2019 and 2018 (Unaudited)

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

7.Share-based compensation (continued)

 

Restricted Share Units

 

The following table summarizes the activity of restricted share units during the three-month period ended March 31, 2019:

 

    Units   Weighted-average grant-date fair value
Outstanding at December 31, 2018   1,605,049     7.41  
Forfeitures   (7,947 )   7.21  
Outstanding at March 31, 2019   1,597,102     7.42  
Exercisable at March 31, 2019   —     —  

 

The Company issued 9,528 Class A shares, during the first quarter of 2019, in connection with the 2018 partial vesting. Therefore, accumulated recorded compensation expense totaling $76 was reclassified from “Additional paid-in capital” to “Common Stock” upon issuance.

 

The following table provides a summary of outstanding restricted share units at March 31, 2019:

 

Number of units outstanding (i) 1,597,102  
Weighted-average grant-date fair market value per unit 7.42  
Total grant-date fair value 11,843  
Weighted-average accumulated percentage of service 59.6 %
Stock-based compensation recognized in Additional paid-in capital 7,062  
Compensation expense not yet recognized (ii) 4,781  

 

(i)Related to awards that will vest between fiscal years 2019 and 2023.

(ii)Expected to be recognized in a weighted-average period of 1.8 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. 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 a consolidated effective royalty rate of 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, 2019 and 2018 (Unaudited)

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

8.Commitments and contingencies (continued)

 

For the three-month period ended March 31, 2019, 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, 2019
(Unaudited)
Fixed Charge Coverage Ratio   1.83  
Leverage Ratio   3.83  

 

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, 2019 and December 31, 2018, the Company maintains a provision for contingencies, net of judicial deposits, amounting to $29,341 and $28,509, respectively, presented as follow: $2,337 and $2,436 as a current liability and $27,004 and $26,073 as a non-current liability, respectively. The breakdown of the provision for contingencies is as follows:

 

    As of    
    March 31, 2019   As of
    (Unaudited)   December 31, 2018
Tax contingencies in Brazil   $ 9,787     $ 9,497  
Labor contingencies in Brazil   21,529     21,108  
Others   11,253     11,462  
Subtotal   42,569     42,067  
Judicial deposits   (13,228 )   (13,558 )
Provision for contingencies   $ 29,341     $ 28,509  

 

As of March 31, 2019, there are certain matters related to the interpretation of tax, labor and civil laws which there is a possibility that a loss may have been incurred in accordance with ASC 450-20-50-4 within a range of $189 million and $198 million.

 

As of March 31, 2019, 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 $182 million, related to assessments for the fiscal years 2009 to 2014. No formal claim has been made for fiscal years within the statute of limitation by Tax authorities in any of the mentioned matters, however those years are still subject to audit and claims may be asserted in the future.

 

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. At that time, the Company filed a Motion of Non Suit. As of today, the Company has not been notified of any resolution made by the Commissioner assigned to this case. The Company believes that the probability of a loss is remote.

 

F-20

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2019 and 2018 (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. The Company also believes that the litigation probability of a loss is remote, 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 First Instance 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. By means of a Motion to Reconsider, the Company opposed such determination. In December 2018, the First Instance Court confirmed his determination and the Company filed a Certiorari in the Court of Appeals. The Company continues to oppose this determination 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 the probability of a loss is remote, 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, 2019, the provision for contingencies includes $3,957 ($3,970 at December 31, 2018), related to Brazilian claims that are covered by the indemnification agreement. As a result, the Company has recorded a current asset 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, 2019 and 2018 (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,
    2019   2018
    (Unaudited)   (Unaudited)
Revenues:        
Brazil   $ 340,764     $ 364,683  
Caribbean division   97,694     146,874  
NOLAD   99,356     97,151  
SLAD   193,185     241,179  
Total revenues   $ 730,999     $ 849,887  
         
         
Adjusted EBITDA:        
Brazil   $ 46,904     $ 48,727  
Caribbean division   3,852     (25,651 )
NOLAD   6,748     7,295  
SLAD   16,153     22,985  
Total reportable segments   73,657     53,356  
Corporate and others (i)   (13,038 )   (14,750 )
Total adjusted EBITDA   $ 60,619     $ 38,606  

  

 

    For the three-month periods ended
    March 31,
    2019   2018
    (Unaudited)   (Unaudited)
Adjusted EBITDA reconciliation:        
Total adjusted EBITDA   $ 60,619     $ 38,606  
         
Plus (Less) items excluded from computation that affect operating income:        
Depreciation and amortization   (28,948 )   (26,517 )
Gains from sale or insurance recovery of property and equipment   147     324  
Write-offs of property and equipment   (494 )   (736 )
ADBV Long-Term Incentive Plan incremental compensation from modification   —     394  
Operating income   31,324     12,071  
         
Less:        
Net interest expense   (12,446 )   (14,640 )
Gain (loss) from derivative instruments   769     (98 )
Foreign currency exchange results   1,538     8,177  
Other non-operating (expenses) income, net   (85 )   16  
Income tax expense   (8,876 )   (4,963 )
Net income attributable to non-controlling interests   (59 )   (45 )
Net income attributable to Arcos Dorados Holdings Inc.   $ 12,165     $ 518  

  

 

F-22

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2019 and 2018 (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,
    2019   2018
    (Unaudited)   (Unaudited)
Depreciation and amortization:        
Brazil   $ 14,508     $ 13,732  
Caribbean division   4,954     6,028  
NOLAD   5,351     5,346  
SLAD   4,522     4,725  
Total reportable segments   29,335     29,831  
Corporate and others (i)   1,255     1,610  
Purchase price allocation (ii)   (1,642 )   (4,924 )
Total depreciation and amortization   $ 28,948     $ 26,517  

 

 

Property and equipment expenditures:        
Brazil   $ 17,182     $ 10,900  
Caribbean division   2,695     3,036  
NOLAD   2,735     1,155  
SLAD   13,383     8,660  
Total property and equipment expenditures   $ 35,995     $ 23,751  

 

 

    As of
    March 31,    
    2019   December 31,
    (Unaudited)   2018
Total assets:        
Brazil   $ 1,195,754     $ 751,550  
Caribbean division   400,051     303,467  
NOLAD   391,097     247,697  
SLAD   363,855     291,300  
Total reportable segments   2,350,757     1,594,014  
Corporate and others (i)   134,940     105,835  
Purchase price allocation (ii)   (119,719 )   (121,810 )
Total assets   $ 2,365,978     $ 1,578,039  

 

(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, 2019 and December 31, 2018, 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.

 

  

 

F-23

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2019 and 2018 (Unaudited)

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

9. Segment and geographic information (continued)

 

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 $852,275 and $856,192 at March 31, 2019 and December 31, 2018, respectively. All of the Company’s long-lived assets are related to foreign operations.

 

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, 2019 and December 31, 2018, the Company had issued 211,602,601 and 211,593,073 shares with no par value, respectively, consisting of 131,602,601 and 131,593,073 Class A shares, respectively, and 80,000,000 Class B shares for each period.

 

In addition, on May 22, 2018, the Board of Directors approved the adoption of a share repurchase program, pursuant to which the Company may repurchase from time to time up to $60,000 of issued and outstanding Class A shares of no par value of the Company (“The Repurchase Program”). The Repurchase Program began on May 22, 2018 and would expire at the close of business on May 22, 2019. However, it could terminate prior to such date. As of February 15, 2019, the Company purchased 7,993,602 shares amounting to $60,000. As a result the Repurchase Program concluded.

 

Therefore, at March 31, 2019 the Company had 203,608,999 shares outstanding, consisting of 123,608,999 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.

 

On March 26, 2019, the Company approved a dividend distribution to all Class A and Class B shareholders of $0.11 per share to be paid in three installments, as follows: $0.05 per share on April 12, 2019, $0.03 per share on August 14, 2019 and $0.03 per share on December 12, 2019.

 

Accumulated Other Comprehensive Loss

 

The following table sets forth information with respect to the components of “Accumulated other comprehensive loss” as of March 31, 2019 and their related activity during the three-month period then ended:

 

  

 

F-24

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2019 and 2018 (Unaudited)

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

10.Shareholders’ equity (continued)

 

Accumulated Other Comprehensive Loss (continued)

 

   

Foreign currency translation

  

Cash flow hedges 

  

Post-employment benefits (i)

   Total Accumulated other comprehensive loss
Balances at December 31, 2018   $ (499,277 )   $ (1,640 )   $ (1,349 )   $ (502,266 )
Other comprehensive loss before reclassifications (Unaudited)   (2,473 )   (1,377 )   —     (3,850 )
Net (loss) gain reclassified from accumulated other comprehensive loss (income) to consolidated statement of income (Unaudited)   —     (326 )   216     (110 )
Net current-period other comprehensive (loss) income (Unaudited)   (2,473 )   (1,703 )   216     (3,960 )
Balances at March 31, 2019 (Unaudited)   $ (501,750 )   $ (3,343 )   $ (1,133 )   $ (506,226 )

 

The following table sets forth information with respect to the components of “Accumulated other comprehensive loss” as of March 31, 2018 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, 2017   $ (436,281 )   $ 8,359     $ (1,425 )   $ (429,347 )
Other comprehensive income (loss) before reclassifications (Unaudited)   8,767     (21,492 )   —     (12,725 )
Net loss reclassified from accumulated other comprehensive income to consolidated statement of income (Unaudited)   —     4,129     124     4,253  
Net current-period other comprehensive (loss) income (Unaudited)   8,767     (17,363 )   124     (8,472 )
Balances at March 31, 2018 (Unaudited)   $ (427,514 )   $ (9,004 )   $ (1,301 )   $ (437,819 )

 

(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 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-25

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2019 and 2018 (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,
    2019   2018
    (Unaudited)   (Unaudited)
Net income attributable to Arcos Dorados Holdings Inc. available to common shareholders   $ 12,165     $ 518  
Weighted-average number of common shares outstanding - Basic   204,035,213     211,072,508  
Incremental shares from assumed exercise of stock options (i)   —     17,340  
Incremental shares from vesting of restricted share units   972,066     1,183,376  
Weighted-average number of common shares outstanding - Diluted   205,007,279     212,273,224  
         
Basic net income per common share attributable to Arcos Dorados Holdings Inc.   $ 0.06     $ 0.00  
Diluted net income per common share attributable to Arcos Dorados Holdings Inc.   $ 0.06     $ 0.00  

 

(i)Options to purchase shares of common stock were outstanding during the three-month periods ended March 31, 2019 and 2018. See Note 7 for details. These options for the three-month period ended March 31, 2019 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, Ecuador, Mexico, Peru, Uruguay and Venezuela (the “Axionlog Business”). Pursuant to this agreement Axionlog provides the Company distribution inventory, storage and transportation services in the countries in which it operates.

 

The following table summarizes the outstanding balances between the Company and the Axionlog Business as of March 31, 2019 and December 31, 2018:

 

    As of
    March 31,    
    2019   December 31,
    (Unaudited)   2018
Accounts and notes receivable, net   $ 907     $ 860  
Other receivables   1,290     1,676  
Miscellaneous   2,999     2,963  
Accounts payable   (10,412 )   (14,984 )

  

 

F-26

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2019 and 2018 (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, 2019 and 2018:

 

    For the three-month periods ended
    March 31,
    2019   2018
    (Unaudited)   (Unaudited)
Food and paper (i)   $ (45,015 )   $ (44,194 )
Occupancy and other operating expenses   (3,223 )   (1,467 )

 

(i)Includes $9,754 of distribution fees and $35,261 of suppliers purchases managed through the Axionlog Business for the three-month period ended March 31, 2019; and, $11,728 and $32,466, respectively, for the three-month period ended March 31, 2018.

 

As of March 31, 2019 and December 2018, the Company had other receivables totaling $2,984 and $2,692, respectively and accounts payable with Lacoop, A.C. and Lacoop II, S.C. totaling $164 and $1,634, 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 (VES), 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.

 

Since February 2013, the Venezuelan government has announced several changes in the currency exchange regulations. The last modification was in February 2018, when the Venezuelan government announced the unification of the formerly exchange rate systems, DIPRO and DICOM II, into a sole foreign exchange mechanism (NEW DICOM). The unified system operates through an auction mechanism similar to the formerly DICOM II.

 

Occasionally, the Company could access to the new mechanism. Those transactions occurred at an exchange rate greater than the one published by the governmental authorities. Considering that under ASC 830, foreign currency transactions are required to be remeasured at the applicable rate at which a particular transaction could be settled and that the Company could access to the NEW DICOM at an exchange rate greater than the one published, this rate was considered for remeasurements purposes.

 

Revenues and operating (loss) of the Venezuelan operations were $3,056 and ($1,660), respectively, for the three-month period ended March 31, 2019; and $47,133 and ($30,984), respectively, for the three-month period ended March 31, 2018.

 

As of March 31, 2019, the Company’s local currency denominated net monetary position, which would be subject to remeasurement in the event of further changes in the exchange rate, was net asset $0.4 million (including $0.9 million of cash and cash equivalents). In addition, Venezuela’s non-monetary assets were $15.5 million (mainly fixed assets).

 

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. The Company was able to increase prices during the three-month period ended March 31, 2019.

 

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.

 

F-27

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2019 and 2018 (Unaudited)

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

14.Lease

 

The Company leases locations through ground leases (the Company leases the land and owns the building) and through improved leases (the Company leases land and buildings). The operating leases are mainly related to restaurant and dessert center locations. The average of lease’s terms is about 20 years and, in many cases, include renewal options provided by the agreement or government’s regulations, as there are reasonably certain to be exercised. Therefore, its associated payments are included in the measurement of the right-of-use asset and lease liability. Although, certain leases contain purchase options, is not reasonably certain that the Company will exercise them. In addition, many agreements include escalations amounts that vary by reporting unit, with examples including fixed-rent escalations, escalations based on an inflation index, and fair value adjustments. According to rental terms, the Company pays monthly rent based on the greater of a fixed rent or a certain percentage of the Company’s gross sales. The lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

The Company has elected not to separate non-lease components from lease components in its lessee portfolio. For most locations, the Company is obligated for the related occupancy costs including property taxes, insurance and maintenance. However, for franchised sites, the Company requires the franchisees to pay these costs. Furthermore, the Company is the lessee under non-cancelable leases covering certain offices and warehouses.

 

In March 2010, the Company entered into an aircraft operating lease agreement for a term of 8 years, which provides for quarterly payments of $690. On December 22, 2017, the Company signed an amendment, extending the term of the aircraft operating lease for an additional 10 years, with quarterly payments (retroactively effective as of December 5, 2017) of $442.

 

The Company maintains a few finance leases agreements, previously classified as capital leases. The obligation amounts to $6,376.

 

As a lessor, the Company subleases locations to franchisees. Individual franchisee arrangements include a continuing rent based upon a percentage of sales with minimum rent payments.

 

The following table is a summary of the Company’s components of net lease cost for the three-month period ended March 31, 2019:

 

   For the three-month period ended March 31,
Lease Expense, net  Statements of Income Location  2019
Operating lease expense - Minimum rentals:     $(37,277)
Company-operated restaurants  Occupancy and other operating expenses   (26,700)
Franchised restaurants  Franchised restaurants - occupancy expenses   (8,591)
General and administrative  General and administrative expenses   (1,986)
Variable lease expense - Contingent rentals based on sales:      (10,333)
Company-operated restaurants  Occupancy and other operating expenses   (7,172)
Franchised restaurants  Franchised restaurants - occupancy expenses   (3,161)
Sublease income  Revenues from franchised restaurants   35,297 
Total lease expense, net     $(12,313)

    

 

F-28

Arcos Dorados Holdings Inc.

Notes to the Condensed Consolidated Financial Statements

For the three-month periods ended March 31, 2019 and 2018 (Unaudited)

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

14.Lease (continued)

 

   For the three-month period ended March 31,
Other information  2019
Cash paid for amounts included in the measurement of leases liabilities     
Operating cash flows from operating leases  $(47,184)
Weighted-average remaining lease term (years)     
Operating leases   10 
Weighted-average discount rate     
Operating leases   6%

 

At March 31, 2019, future minimum payments required under existing operating leases with initial terms of one year or more are:

 

    Restaurant   Other   Total
2019   104,985     4,374     109,359  
2020   133,416     4,825     138,241  
2021   126,388     3,553     129,941  
2022   119,297     2,570     121,867  
2023   113,888     2,391     116,279  
Thereafter   950,868     10,028     960,896  
Total minimum payment   $ 1,548,842     $ 27,741     $ 1,576,583  
                         
(i)For sites that have lease escalations tied to an index, future minimum payments reflect the current index adjustments through December 31, 2018. In addition, future minimum payments include renewal options provided by government’s regulations.

 

15.Subsequent events

 

On April 12, 2019 the Company paid the first cash dividend installment disclosed in Note 10 amounting to $10.2 million.

 

F-29