Indicate by check mark whether the registrant
files or will file annual reports under cover of Form 20-F or 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):
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):
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Inc. and to be a part thereof from the date on which this report is filed, to the extent not superseded by documents or reports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.
Notes to the Condensed Consolidated Financial Statements
For the nine-month periods ended September 30, 2018 and 2017 (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, 2017.
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 nine-month period ended September 30, 2018 are not necessarily indicative of results that may be expected for any future periods.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated Financial Statements
For the nine-month periods ended September 30, 2018 and 2017 (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, 2017, except for revenue recognition policy that has changed in accordance with ASC 606 Revenue Recognition-
Revenue from Contracts with customers.
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 losses 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.
Revenue recognition
The Company’s
revenues consist of sales by Company-operated restaurants and revenues from restaurants operated by franchisees. Sales by Company-operated
restaurants are recognized at the point of sale. The Company presents sales net of sales tax and other sales-related taxes. Revenues
from restaurants operated by franchisees include rental income, initial franchise fees and royalty income. Rental income is measured
on a monthly basis based on the greater of a fixed rent, computed on a straight-line basis, or a certain percentage of gross sales
reported by franchisees. Initial franchise fees represent the difference between the amount the Company collects from the franchisee
and the amount the Company pays to McDonald’s Corporation upon the opening of a new restaurant. Royalty income represents
the difference, if any, between the amount the Company collects from the franchisee and the amount the Company is required to pay
to McDonald’s Corporation. Royalty income is recognized in the period earned.
In May 2014, the FASB
issued Accounting Standards Update No. 2014-09 (ASC 606), “Revenue Recognition - Revenue from Contracts with Customers”,
which amends the guidance in former ASC 605, “Revenue Recognition”, and requires entities to recognize revenue when
it transfers promised goods or services to customers, in an amount that reflects the consideration to which the company expects
to be entitled in exchange for those goods or services.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated Financial Statements
For the nine-month periods ended September 30, 2018 and 2017 (Unaudited)
Amounts in thousands of US dollars, except for share data and as otherwise indicated
|
3.
|
Summary of significant accounting policies (continued)
|
Revenue recognition (continued)
On January 1, 2018,
the Company adopted this new accounting standard using modified retrospective method and concluded that the sole source of revenue
affected is the initial franchise fee. The Company’s previous accounting policy was to recognize it when a new restaurant
opens or at the start of a new franchise term, however, in accordance with the new guidance, the initial franchise services are
not distinct from the continuing rights or services offered during the term of the franchise agreement, and should be treated as
a single performance obligation. As such, initial franchise fees received are deferred over the term of the franchise agreement.
In accordance with
the modified retrospective method, the Company recognized the cumulative effect of applying the new standard at the date of initial
application with no restatement to the comparative information. Furthermore, the changes made to the consolidated balance sheet
as of January 1, 2018 for the adoption of ASC 606 were as follows:
Balance Sheet
|
|
Balance at December 31, 2017
|
|
Adjustments Due to ASC 606
|
|
Balance at January 1, 2018
|
ASSETS
|
|
|
|
|
|
|
Non-current Assets
|
|
|
|
|
|
|
Deferred income taxes
|
|
74,299
|
|
|
1,555
|
|
|
75,854
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Accrued payroll and other liabilities
|
|
119,088
|
|
|
339
|
|
|
119,427
|
|
Non-current liabilities
|
|
|
|
|
|
|
Accrued payroll and other liabilities
|
|
29,366
|
|
|
5,012
|
|
|
34,378
|
|
EQUITY
|
|
|
|
|
|
|
Retained earning
|
|
401,134
|
|
|
(3,796
|
)
|
|
397,338
|
|
There are no expectations
that the adoption of the new revenue standard will have a material impact within the net income on an ongoing basis. The disclosure
of the impact of adoption on the consolidated balance sheet and income statement, as of September 30, 2018 and for the nine-month
period ended in September 30, 2018, is as follows:
|
|
As of September 30, 2018
|
Balance Sheet
|
|
As Reported
|
|
Balances Without Adoption of ASC 606
|
|
Effect of Change
|
ASSETS
|
|
|
|
|
|
|
Non-current Assets
|
|
|
|
|
|
|
Deferred income taxes
|
|
61,566
|
|
|
59,918
|
|
|
1,648
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Accrued payroll and other liabilities
|
|
105,285
|
|
|
104,932
|
|
|
353
|
|
Non-current liabilities
|
|
|
|
|
|
|
Accrued payroll and other liabilities
|
|
33,890
|
|
|
28,583
|
|
|
5,307
|
|
EQUITY
|
|
|
|
|
|
|
Retained earning
|
|
403,837
|
|
|
407,849
|
|
|
(4,012
|
)
|
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated Financial Statements
For the nine-month periods ended September 30, 2018 and 2017 (Unaudited)
Amounts in thousands of US dollars, except for share data and as otherwise indicated
|
3.
|
Summary of significant accounting policies (continued)
|
Revenue recognition (continued)
|
|
For the nine-month period ended September 30, 2018
|
Income Statement
|
|
As Reported
|
|
Balances Without Adoption of ASC 606
|
|
Effect of Change
|
|
|
|
|
|
|
|
Revenues from franchised restaurants
|
|
111,444
|
|
|
111,753
|
|
|
(309
|
)
|
Income tax expense
|
|
(32,978
|
)
|
|
(33,071
|
)
|
|
93
|
|
Recent accounting pronouncements
In February 2016, the
FASB issued ASU No. 2016-02, Leases (Topic 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 will 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
will adopt ASU 2016-02 in its first quarter of 2019 utilizing the modified retrospective transition method and expects to apply
the transition practical expedients allowed by the standard. The Company is currently evaluating the impact this guidance will
have on its consolidated financial statements.
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.
Short-term debt consists
of the following:
|
|
As of
|
|
|
|
|
|
September 30, 2018
|
|
|
As of
|
|
|
(Unaudited)
|
|
|
December 31, 2017
|
Bank overdrafts
|
$
|
374
|
|
|
$
|
—
|
|
|
$
|
374
|
|
|
$
|
—
|
|
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, 2017, ADBV renewed its revolving credit facility with JPMorgan Chase Bank, N.A, for up to $25 million
maturing on November 10, 2018, 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.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated Financial Statements
For the nine-month periods ended September 30, 2018 and 2017 (Unaudited)
Amounts in thousands of US dollars, except for share data and as otherwise indicated
|
4.
|
Short-term debt (continued)
|
Revolving credit
facilities (continued)
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 to 1.0 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 September 30,
2018, the mentioned ratio was 0.89 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.
Long-term debt consists
of the following:
|
|
As of
|
|
|
|
|
September 30, 2018
|
|
As of
|
|
|
(Unaudited)
|
|
December 31, 2017
|
2027 Notes
|
|
$
|
265,000
|
|
|
$
|
265,000
|
|
2023 Notes
|
|
348,069
|
|
|
348,069
|
|
Capital lease obligations
|
|
3,691
|
|
|
4,539
|
|
Other long-term borrowings
|
|
16,639
|
|
|
22,900
|
|
Subtotal
|
|
633,399
|
|
|
640,508
|
|
Discount, net on 2023 Notes
|
|
(2,068
|
)
|
|
(2,366
|
)
|
Deferred financing costs
|
|
(4,174
|
)
|
|
(4,641
|
)
|
Total
|
|
627,157
|
|
|
633,501
|
|
Current portion of long-term debt
|
|
3,739
|
|
|
4,359
|
|
Long-term debt, excluding current portion
|
|
$
|
623,418
|
|
|
$
|
629,142
|
|
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
|
|
September 30, 2018 (Unaudited)
|
December 31, 2017
|
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
|
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated Financial Statements
For the nine-month periods ended September 30, 2018 and 2017 (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):
|
|
Interest Expense (i)
|
|
DFC Amortization (i)
|
|
Amortization of Discount, net (i)
|
|
|
|
2018
(Unaudited)
|
|
2017
(Unaudited)
|
|
2018
(Unaudited)
|
|
2017
(Unaudited)
|
|
2018
(Unaudited)
|
|
2017
(Unaudited)
|
|
2027 Notes
|
|
$
|
11,677
|
|
|
$
|
7,655
|
|
|
$
|
224
|
|
|
$
|
150
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
2023 Notes
|
|
|
17,295
|
|
|
|
18,120
|
|
|
|
243
|
|
|
|
530
|
|
|
|
298
|
|
|
|
655
|
|
|
|
(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.
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 (described
in Note 6), 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.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated Financial Statements
For the nine-month periods ended September 30, 2018 and 2017 (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 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.
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 bore 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 BRL 613,850. Refer
to Note 6 for more details.
Considering the cross
currency interest rate swap agreements, the final interest rate of the Loan was the Interbank Market reference interest rate (known
in Brazil as “CDI”) plus 4.50% per year. Interest payments were made quarterly, beginning June 2016 and principal payments
were made semi-annually, beginning September 2017.
The Loan would have
matured on March 30, 2020 and periodic payments of principal were required. Prepayments were allowed without penalty. On April
11, 2017, the Company repaid the Loan with a total payment of $169.7 million including the outstanding principal, plus accrued
and unpaid interest and certain transaction costs.
The Company incurred
$3,243 of financing costs related to the issuance of the Loan, which were capitalized as DFC and were amortized over the life of
the Loan. As a consequence of the repayment, the remaining DFC were recognized as interest expense in the consolidated statement
of income.
The following table
presents information related to the Secured Loan Agreement:
Interest Expense (i)
|
|
DFC Amortization (i)
|
|
Other Costs (i) (ii)
|
2018
(Unaudited)
|
2017
(Unaudited)
|
2018
(Unaudited)
|
2017
(Unaudited)
|
|
2018
(Unaudited)
|
|
2017
(Unaudited)
|
$
|
—
|
|
|
$
|
2,570
|
|
|
$
|
—
|
|
|
$
|
3,251
|
|
|
$
|
—
|
|
|
$
|
2,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
These charges are included within “Net interest expense” in the consolidated statement of income.
|
|
(ii)
|
Transaction costs related to the repayment of the Loan.
|
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated Financial Statements
For the nine-month periods ended September 30, 2018 and 2017 (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 September 30, 2018 and
December 31, 2017:
|
|
Derivatives
|
|
|
|
|
Fair Value
|
|
|
|
|
As of
|
|
|
Type of Derivative
|
|
Balance Sheets Location
|
|
September 30, 2018
|
|
As of
|
|
|
(Unaudited)
|
|
December 31, 2017
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedge
|
|
|
|
|
|
|
Forward contracts
|
|
Other receivables
|
|
$
|
259
|
|
|
$
|
309
|
|
Forward contracts
|
|
Accrued payroll and other liabilities
|
|
(719
|
)
|
|
(517
|
)
|
Cross-currency interest rate swap (i)
|
|
Derivative instruments
|
|
47,465
|
|
|
7,835
|
|
Call spread (i)
|
|
Derivative instruments
|
|
14,624
|
|
|
15,114
|
|
Coupon-only swap (i)
|
|
Derivative instruments
|
|
(1,315
|
)
|
|
(10,908
|
)
|
|
|
|
|
$
|
60,314
|
|
|
$
|
11,833
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
Forward contracts
|
|
Other receivables
|
|
572
|
|
|
—
|
|
|
|
|
|
$
|
572
|
|
|
$
|
—
|
|
Total derivative instruments
|
|
|
|
$
|
60,886
|
|
|
$
|
11,833
|
|
|
(i)
|
At September 30, 2018, presented in the consolidated balance sheet as follows: $70,747 as
non-current asset, $9,197 as a current liability and $776 as a non-current liability. At December 31, 2017, presented in the
consolidated balance sheet as follows: $35,069 as non-current asset, $15,522 as a current liability and $7,506 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 September 30, 2018, the Company has forward contracts outstanding with
a notional amount of $24,868 that mature during 2018 and 2019.
The Company made net
payments totaling $808 and $1,170 during the nine-month periods ended September 30, 2018 and 2017, respectively, as a result of
the net settlements of these derivatives.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated Financial Statements
For the nine-month periods ended September 30, 2018 and 2017 (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)
|
|
BRL
|
|
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 $10,671
and $6,163 of net interest during the nine-month period ended September 30, 2018 and 2017, 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.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated Financial Statements
For the nine-month periods ended September 30, 2018 and 2017 (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
|
%
|
|
$
|
|
50,000
|
|
|
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 $2,900
and $1,390 of net interest during the nine-months periods ended September 30, 2018 and 2017 respectively, related to these
agreements.
Additional disclosures
The following table
present the pretax amounts affecting income and other comprehensive income for the nine-month periods ended September 30, 2018
and 2017 for each type of derivative relationship:
Derivatives in Cash Flow
Hedging Relationships
|
|
Gain (Loss) Recognized in Accumulated OCI on Derivative (Effective Portion) (Unaudited)
|
|
(Gain) Loss 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) (ii)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Forward contracts
|
|
$
|
(1,060
|
)
|
|
$
|
(1,298
|
)
|
|
$
|
808
|
|
|
$
|
1,170
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cross-currency interest rate swaps
|
|
31,175
|
|
|
(12,928
|
)
|
|
(29,416
|
)
|
|
7,461
|
|
|
—
|
|
|
—
|
|
Call Spread
|
|
2,439
|
|
|
14,410
|
|
|
(20,126
|
)
|
|
(1,390
|
)
|
|
—
|
|
|
—
|
|
Coupon-only swap
|
|
5,904
|
|
|
(16,754
|
)
|
|
1,794
|
|
|
1,900
|
|
|
(808
|
)
|
|
236
|
|
Total
|
|
$
|
38,458
|
|
|
$
|
(16,570
|
)
|
|
$
|
(46,940
|
)
|
|
$
|
9,141
|
|
|
$
|
(808
|
)
|
|
$
|
236
|
|
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated Financial Statements
For the nine-month periods ended September 30, 2018 and 2017 (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 was 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:
a gain (loss) of $36,695 and ($1,186), respectively, as an adjustment to foreign currency exchange results and a (loss) of ($7,279)
and ($6,275), as an adjustment to net interest expense. 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 “Loss from derivative instruments”.
|
Fair value hedge
Cross-currency interest
rate swaps
On March 29, 2016,
the Company entered into five cross-currency interest rate swap agreements 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 cross-currency interest rate swap agreements matched the terms of
the Secured Loan Agreement. Pursuant to these agreements, the Company received interest in US dollar at an interest rate equal
to the one it had to pay to the off-shore lenders over a notional amount of $167.3 million and paid interest in BRL at CDI plus
4.50% per year, over a notional amount of BRL 613.9 million quarterly, beginning June 2016.
During April 2017,
the Company unwound these agreements as a consequence of the repayment of the Secured Loan Agreement mentioned in Note 5. The total
payment amounted to $39.1 million (BRL 122.7 million), including $0.9 million of accrued and unpaid interest.
Until settlement, the
accrued interest amounted to $6,921. This charge does not include the effect of the Secured Loan Agreement mentioned in Note 5,
amounting to a loss of $2,570. Including this effect the total interest cost amounts to $9,491.
This amount was recorded
within “Net interest expense” in the Company’s consolidated statement of income. 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.
The following table
presents the pretax amounts affecting income for the nine-month period ended September 30, 2017:
|
|
Cross-currency swaps (i)
|
|
Derivatives in Fair Value Hedging Relationships
|
|
|
2017 (Unaudited)
|
|
|
|
|
|
Loss recognized in Income on hedging derivatives
|
|
|
(9,599
|
)
|
|
Gain recognized in Income on hedging items
|
|
|
4,118
|
|
|
|
(i)
|
The loss amounting to $5,481 related to the ineffective portion of derivatives, was recorded within
“Loss from derivative instruments” in the Company’s consolidated statement of income.
|
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated Financial Statements
For the nine-month periods ended September 30, 2018 and 2017 (Unaudited)
Amounts in thousands of US dollars, except for share data and as otherwise indicated
|
6.
|
Derivative instruments (continued)
|
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 “loss
from derivative instruments”.
Derivatives Not Designated as Hedging Instruments
|
|
|
Gain (Loss) Recognized in Income on Derivative instruments
|
|
2018
|
|
2017
|
Forward Contracts
|
|
|
$
|
646
|
|
|
$
|
(1,911
|
)
|
|
|
|
|
|
|
|
|
|
|
Others
|
|
|
(29
|
)
|
|
120
|
|
Total
|
|
|
$
|
617
|
|
|
$
|
(1,791
|
)
|
The Company collected $53 during the nine-month
period ended September 30, 2018 and paid $1,156 during the nine-month period ended September 30, 2017, 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.
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 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.
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 September 30, 2018, the outstanding units related to this liability award
were 289,969.
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 $2,853 and $2,357 during the nine-month periods ended September 30, 2018 and 2017. Stock-based compensation expense is
included within “General and administrative expenses” in the consolidated statements of income.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated Financial Statements
For the nine-month periods ended September 30, 2018 and 2017 (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)
Stock Options
The following table
summarizes the activity of stock options units as of September 30, 2018:
|
|
Units
|
|
Weighted-average strike Price
|
|
Weighted-average grant-date fair value
|
Outstanding at December 31, 2017
|
|
634,489
|
|
|
14.28
|
|
|
4.28
|
|
Expired (i)
|
|
(143,416
|
)
|
|
21.20
|
|
|
5.89
|
|
Outstanding at September 30, 2018
|
|
491,073
|
|
|
12.26
|
|
|
3.81
|
|
Exercisable at September 30, 2018
|
|
455,719
|
|
|
12.55
|
|
|
3.95
|
|
|
(i)
|
As at September 30, 2018, additional paid-in capital included $844 related to expired stock options.
|
The following table
provides a summary of outstanding stock options at September 30, 2018:
|
|
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
|
%
|
|
88.6
|
%
|
|
99.6
|
%
|
Stock-based compensation recognized in Additional paid-in capital
|
|
1,800
|
|
|
62
|
|
|
1,862
|
|
Compensation expense not yet recognized (iii)
|
|
—
|
|
|
8
|
|
|
8
|
|
|
(i)
|
Related to exercisable awards.
|
|
(ii)
|
Related to awards that will vest in 2019.
|
|
(iii)
|
Expected to be recognized in 7.5 months.
|
Restricted Share Units
The following table
summarizes the activity of restricted share units during the nine-month period ended September 30, 2018:
|
|
Units
|
|
Weighted-average grant-date fair value
|
Outstanding at December 31, 2017
|
|
1,736,845
|
|
|
6.65
|
|
2018 annual Grant
|
|
520,393
|
|
|
8.50
|
|
Partial vesting of 2013 grant
|
|
(23,309
|
)
|
|
14.31
|
|
Partial vesting of 2014 grant
|
|
(43,907
|
)
|
|
8.58
|
|
Partial vesting of 2015 grant
|
|
(134,184
|
)
|
|
6.33
|
|
Partial vesting of 2016 grant
|
|
(300,451
|
)
|
|
4.70
|
|
Partial vesting of 2017 grant
|
|
(3,116
|
)
|
|
9.20
|
|
Forfeitures
|
|
(35,841
|
)
|
|
6.70
|
|
Outstanding at September 30, 2018
|
|
1,716,430
|
|
|
7.41
|
|
Exercisable at September 30, 2018
|
|
—
|
|
|
—
|
|
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated Financial Statements
For the nine-month periods ended September 30, 2018 and 2017 (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 (continued)
The Company issued
498,398 Class A shares in connection with this partial vesting (including 10,192 Class A shares related to retired employees).
Therefore, accumulated recorded compensation expense totaling $2,965 was reclassified from “Additional paid-in capital”
to “Common Stock” upon issuance. As September 30, 2018, there were 6,569 Class A shares, amounting to $36, pending
of issuance in connection with this partial vesting.
The resulting value of restricted share
units granted during fiscal year 2018 was $4,423.
The following table
provides a summary of outstanding restricted share units at September 30, 2018:
Number of units outstanding (i)
|
1,716,430
|
|
Weighted-average grant-date fair market value per unit
|
7.41
|
|
Total grant-date fair value
|
12,725
|
|
Weighted-average accumulated percentage of service
|
43.7
|
|
Stock-based compensation recognized in Additional paid-in capital
|
5,566
|
|
Compensation expense not yet recognized (ii)
|
7,159
|
|
|
(i)
|
Related to awards that will vest between fiscal years 2019 and 2023.
|
|
(ii)
|
Expected to be recognized in a weighted-average period of 2.2 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 5.7% in 2018 and 5.9% in 2019.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated Financial Statements
For the nine-month periods ended September 30, 2018 and 2017 (Unaudited)
Amounts in thousands of US dollars, except for share data and as otherwise indicated
|
8.
|
Commitments and contingencies (continued)
|
For the nine-month
period ended September 30, 2018, the Company was in compliance with the ratio requirements mentioned in point (v) above. The ratios
for the period mentioned, were as follows:
|
|
September 30, 2018
(Unaudited)
|
June 30, 2018
(Unaudited)
|
March 31, 2018
(Unaudited)
|
Fixed Charge Coverage Ratio
|
|
1.81
|
|
1.74
|
|
1.70
|
|
Leverage Ratio
|
|
3.83
|
|
4.02
|
|
4.05
|
|
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 September 30, 2018 and December 31, 2017, the Company maintains a provision for contingencies,
net of judicial deposits, amounting to $33,312 ($27,956 at December 31, 2017). Presented as follow: $2,028 and $2,529 as a
current liability and $31,284 and $25,427 as a non-current liability, respectively. The breakdown of the provision for contingencies
is as follows:
|
|
As of
|
|
|
|
|
September 30, 2018
|
|
As of
|
|
|
(Unaudited)
|
|
December 31, 2017
|
Tax contingencies in Brazil
|
|
$
|
8,952
|
|
|
$
|
9,324
|
|
Labor contingencies in Brazil
|
|
25,774
|
|
|
21,061
|
|
Others
|
|
11,676
|
|
|
15,646
|
|
Subtotal
|
|
46,402
|
|
|
46,031
|
|
Judicial deposits
|
|
(13,090
|
)
|
|
(18,075
|
)
|
Provision for contingencies
|
|
$
|
33,312
|
|
|
$
|
27,956
|
|
As of September 30,
2018, 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 $83 million and $113 million.
As of September 30,
2018, 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 $125 million, related
to assessments for the fiscal years 2009 to 2013. 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 that has not be resolved by the Commissioner assigned to this case. The Company believes that the probability of a loss is
remote.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated Financial Statements
For the nine-month periods ended September 30, 2018 and 2017 (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 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 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 September 30, 2018,
the provision for contingencies includes $1,567 ($2,489 at December 31, 2017), 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.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated Financial Statements
For the nine-month periods ended September 30, 2018 and 2017 (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 nine-month periods ended
|
|
|
September 30,
|
|
|
2018
|
|
2017
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Revenues:
|
|
|
|
|
Brazil
|
|
$
|
991,785
|
|
|
$
|
1,093,338
|
|
Caribbean division
|
|
375,190
|
|
|
331,941
|
|
NOLAD
|
|
302,282
|
|
|
282,770
|
|
SLAD
|
|
658,972
|
|
|
714,595
|
|
Total revenues
|
|
$
|
2,328,229
|
|
|
$
|
2,422,644
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA:
|
|
|
|
|
Brazil
|
|
$
|
150,736
|
|
|
$
|
139,912
|
|
Caribbean division
|
|
(15,508
|
)
|
|
13,372
|
|
NOLAD
|
|
23,319
|
|
|
23,456
|
|
SLAD
|
|
57,112
|
|
|
64,790
|
|
Total reportable segments
|
|
215,659
|
|
|
241,530
|
|
Corporate and others (i)
|
|
(43,762
|
)
|
|
(48,013
|
)
|
Total adjusted EBITDA
|
|
$
|
171,897
|
|
|
$
|
193,517
|
|
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated Financial Statements
For the nine-month periods ended September 30, 2018 and 2017 (Unaudited)
Amounts in thousands of US dollars, except for share data and as otherwise indicated
|
9.
|
Segment and geographic information (continued)
|
|
|
For the nine-month periods ended
|
|
|
September 30,
|
|
|
2018
|
|
2017
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Adjusted EBITDA reconciliation:
|
|
|
|
|
Total adjusted EBITDA
|
|
$
|
171,897
|
|
|
$
|
193,517
|
|
|
|
|
|
|
Plus (Less) items excluded from computation that affect operating income:
|
|
|
|
|
Depreciation and amortization
|
|
(77,285
|
)
|
|
(73,190
|
)
|
Gains from sale or insurance recovery of property and equipment
|
|
2,775
|
|
|
57,310
|
|
Write-offs of property and equipment
|
|
(1,270
|
)
|
|
(3,427
|
)
|
Impairment of long-lived assets and goodwill
|
|
(12,089
|
)
|
|
(200
|
)
|
ADBV Long-Term Incentive Plan incremental compensation from modification
|
|
575
|
|
|
(1,329
|
)
|
Operating income
|
|
84,603
|
|
|
172,681
|
|
|
|
|
|
|
Less:
|
|
|
|
|
Net interest expense
|
|
(39,326
|
)
|
|
(54,503
|
)
|
Loss from derivative instruments
|
|
(191
|
)
|
|
(7,036
|
)
|
Foreign currency exchange results
|
|
15,651
|
|
|
(18,476
|
)
|
Other non-operating expenses, net
|
|
(9
|
)
|
|
(607
|
)
|
Income tax expense
|
|
(32,978
|
)
|
|
(31,888
|
)
|
Net income attributable to non-controlling interests
|
|
(140
|
)
|
|
(277
|
)
|
Net income attributable to Arcos Dorados Holdings Inc.
|
|
$
|
27,610
|
|
|
$
|
59,894
|
|
Depreciation and amortization:
|
|
|
|
|
Brazil
|
|
$
|
38,495
|
|
|
$
|
38,428
|
|
Caribbean division
|
|
17,379
|
|
|
18,572
|
|
NOLAD
|
|
15,521
|
|
|
15,577
|
|
SLAD
|
|
14,578
|
|
|
11,345
|
|
Total reportable segments
|
|
85,973
|
|
|
83,922
|
|
Corporate and others (i)
|
|
4,442
|
|
|
4,350
|
|
Purchase price allocation (ii)
|
|
(13,130
|
)
|
|
(15,082
|
)
|
Total depreciation and amortization
|
|
$
|
77,285
|
|
|
$
|
73,190
|
|
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated Financial Statements
For the nine-month periods ended September 30, 2018 and 2017 (Unaudited)
Amounts in thousands of US dollars, except for share data and as otherwise indicated
|
9.
|
Segment and geographic information (continued)
|
|
|
For the nine-month periods ended
|
|
|
September 30,
|
|
|
2018
|
|
2017
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Property and equipment expenditures:
|
|
|
|
|
Brazil
|
|
$
|
56,988
|
|
|
$
|
59,829
|
|
Caribbean division
|
|
12,163
|
|
|
12,033
|
|
NOLAD
|
|
12,467
|
|
|
8,156
|
|
SLAD
|
|
37,380
|
|
|
28,494
|
|
Total reportable segments
|
|
118,998
|
|
|
108,512
|
|
Corporate and others (i)
|
|
—
|
|
|
46
|
|
Total property and equipment expenditures
|
|
$
|
118,998
|
|
|
$
|
108,558
|
|
|
|
As of
|
|
|
September 30,
|
|
|
|
|
2018
|
|
December 31,
|
|
|
(Unaudited)
|
|
2017
|
Total assets:
|
|
|
|
|
Brazil
|
|
$
|
679,964
|
|
|
$
|
786,897
|
|
Caribbean division
|
|
310,313
|
|
|
416,541
|
|
NOLAD
|
|
245,173
|
|
|
271,558
|
|
SLAD
|
|
259,648
|
|
|
297,581
|
|
Total reportable segments
|
|
1,495,098
|
|
|
1,772,577
|
|
Corporate and others (i)
|
|
156,579
|
|
|
172,400
|
|
Purchase price allocation (ii)
|
|
(125,848
|
)
|
|
(141,234
|
)
|
Total assets
|
|
$
|
1,525,829
|
|
|
$
|
1,803,743
|
|
|
(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 September 30, 2018 and December 31, 2017, 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 $806,061 and $890,736 at September 30, 2018 and December 31, 2017, respectively. All
of the Company’s long-lived assets are related to foreign operations.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated Financial Statements
For the nine-month periods ended September 30, 2018 and 2017 (Unaudited)
Amounts in thousands of US dollars, except for share data and as otherwise indicated
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 December 31,
2017, the Company had 211,072,508 shares issued and outstanding with no par value, consisting of 131,072,508 Class A shares and
80,000,000 Class B shares.
During the nine-month
period ended September 30, 2018, the Company issued 498,398 Class A shares in connection with the partial vesting of restricted
share units under the 2011 Equity Incentive Plan.
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 will expire at the close of business on May 22, 2019. However, it could terminate prior to such date.
As of September 30,
2018, the Company purchased 3,900,103 shares amounting to $28,255.
Therefore, at September
30, 2018 the Company had 207,670,803 shares outstanding with no par value, consisting of 127,670,803 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 20, 2018,
the Company approved a dividend distribution to all Class A and Class B shareholders of $0.10 per share, to be paid in two equal
installments of $0.05 per share on April 5, 2018 and October 5, 2018.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated Financial Statements
For the nine-month periods ended September 30, 2018 and 2017 (Unaudited)
Amounts in thousands of US dollars, except for share data and as otherwise indicated
|
10.
|
Shareholders’ equity (continued)
|
Accumulated Other Comprehensive Loss
The following table
sets forth information with respect to the components of “Accumulated other comprehensive loss” as of September 30,
2018 and their related activity during the nine-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 gain (loss) before reclassifications (Unaudited)
|
|
(61,682
|
)
|
|
30,157
|
|
|
—
|
|
|
(31,525
|
)
|
Net loss reclassified from accumulated other comprehensive loss (income) to consolidated statement of income (Unaudited)
|
|
—
|
|
|
(35,053
|
)
|
|
371
|
|
|
(34,682
|
)
|
Net current-period other comprehensive (loss) income (Unaudited)
|
|
(61,682
|
)
|
|
(4,896
|
)
|
|
371
|
|
|
(66,207
|
)
|
Balances at September 30, 2018 (Unaudited)
|
|
$
|
(497,963
|
)
|
|
$
|
3,463
|
|
|
$
|
(1,054
|
)
|
|
$
|
(495,554
|
)
|
The following table
sets forth information with respect to the components of “Accumulated other comprehensive loss” as of September 30,
2017 and their related activity during the nine-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 before reclassifications (Unaudited)
|
|
26,961
|
|
|
(14,469
|
)
|
|
—
|
|
|
12,492
|
|
Net (gain) loss reclassified from accumulated other comprehensive income to consolidated statement of income (Unaudited)
|
|
—
|
|
|
8,405
|
|
|
290
|
|
|
8,695
|
|
Net current-period other comprehensive gain (Unaudited)
|
|
26,961
|
|
|
(6,064
|
)
|
|
290
|
|
|
21,187
|
|
Balances at September 30, 2017 (Unaudited)
|
|
$
|
(414,120
|
)
|
|
$
|
(5,759
|
)
|
|
$
|
(583
|
)
|
|
$
|
(420,462
|
)
|
|
(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.
|
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated Financial Statements
For the nine-month periods ended September 30, 2018 and 2017 (Unaudited)
Amounts in thousands of US dollars, except for share data and as otherwise indicated
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.
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 nine-month periods ended
|
|
|
September 30,
|
|
|
2018
|
|
2017
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Net income attributable to Arcos Dorados Holdings Inc. available to common shareholders
|
|
$
|
27,610
|
|
|
$
|
59,894
|
|
Weighted-average number of common shares outstanding - Basic
|
|
210,084,482
|
|
|
210,889,576
|
|
Incremental shares from assumed exercise of stock options (i)
|
|
|
|
—
|
|
Incremental shares from vesting of restricted stock units
|
|
926,635
|
|
|
940,547
|
|
Weighted-average number of common shares outstanding - Diluted
|
|
211,011,117
|
|
|
211,830,123
|
|
|
|
|
|
|
Basic net income per common share attributable to Arcos Dorados Holdings Inc.
|
|
$
|
0.13
|
|
|
$
|
0.28
|
|
Diluted net income per common share attributable to Arcos Dorados Holdings Inc.
|
|
$
|
0.13
|
|
|
$
|
0.28
|
|
|
(i)
|
Options to purchase shares of common stock were outstanding during the nine-month periods ended
September 30, 2018 and 2017. See Note 7 for details. The options for the nine-month period ended September 30, 2017 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.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated Financial Statements
For the nine-month periods ended September 30, 2018 and 2017 (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 outstanding balances between the Company and the Axionlog Business as of September 30, 2018 and December 31,
2017:
|
|
As of
|
|
|
September 30,
|
|
|
|
|
2018
|
|
December 31,
|
|
|
(Unaudited)
|
|
2017
|
Accounts and notes receivable, net
|
|
$
|
721
|
|
|
$
|
1,097
|
|
Other receivables
|
|
997
|
|
|
979
|
|
Prepaid expenses and other current assets
|
|
1,182
|
|
|
—
|
|
Miscellaneous
|
|
3,063
|
|
|
3,126
|
|
Accounts payable
|
|
(7,844
|
)
|
|
(11,727
|
)
|
The following table
summarizes the transactions between the Company and the Axionlog Business for the nine-month periods ended September 30, 2018 and
2017:
|
|
For the nine-month periods ended
|
|
|
September 30,
|
|
|
2018
|
|
2017
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Food and paper (i)
|
|
$
|
(133,115
|
)
|
|
$
|
(130,816
|
)
|
Occupancy and other operating expenses
|
|
(4,071
|
)
|
|
(3,472
|
)
|
|
(i)
|
Includes $32,179 of distribution fees and $100,936 of suppliers purchases managed through the Axionlog
Business for the nine-month period ended September 30, 2018; and, $36,684 and $94,132, respectively, for the nine-month period
ended September 30, 2017.
|
As of September 30,
2018 and December 2017, the Company had other receivables totaling $3,022 and $2,112, respectively and accounts payable with Lacoop,
A.C. and Lacoop II, S.C. totaling $nil and $1,113, 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
or 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. Therefore, the Company reassessed
the exchange rate used for remeasurement purposes several times. During February 2018, the Venezuelan government announced the
unification of the formerly exchange rate systems, DIPRO and DICOM II, into a sole foreign exchange mechanism called DICOM. The
unified system operates through an auction mechanism similar to the formerly DICOM II. The first auction was published on February
5, 2018, with an exchange rate of 25,000 VEF per US dollar. As a result of the announcement, the Company reassessed the exchange
rate used for remeasurement purposes. As of the date of the reassessment, the Company recognized a foreign currency exchange income
of $11,223 and a write down of certain inventories of $38,095 due to the currency exchange rate change impact on their net recoverable
value.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated Financial Statements
For the nine-month periods ended September 30, 2018 and 2017 (Unaudited)
Amounts in thousands of US dollars, except for share data and as otherwise indicated
|
13
.
|
Venezuelan operations (continued)
|
Although the Company
has participated in several auctions since the new mechanism was in place, on June 1, 2018, it was granted with $20 for the first
time at an exchange rate of 600,000 VEF per US dollar. Furthermore, on June 21, 2018, the Company received $10 at an exchange rate
of 2,200,000 VEF per US dollar. 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 DICOM at an exchange
rate greater than the one published by the governmental authorities, the Company has decided to reassess the exchange rate used
for remeasurement purposes considering the exchange rate of the last auction granted (2,200,000 VEF per US dollar). As of the date
of the reassessment, the Company recognized a foreign currency exchange loss of $2,896 and a write down of certain inventories
of $12,496 due to the currency exchange rate change impact on their net recoverable value.
On August 20, 2018,
the Government announced the removal of five zeros from the Venezuelan currency and renamed it as “Sovereign Bolivar”
(VES). In addition, the new currency devaluated from 2.48 to 59.93 VES per US dollar. Since the Company could not access to DICOM
after devaluation, the exchange rate published by the governmental authorities is considering the applicable rate at which a particular
transaction could be settled. As of September 30, 2018, the exchange rate was VES 62.2 per US dollar.
Revenues and operating
loss of the Venezuelan operations were $70,633 and $48,886, respectively, for the nine-month period ended September 30, 2018; and
$55,467 and $4,793, respectively, for the nine-month period ended September 30, 2017.
The Company performed
the impairment testing of its long-lived assets in Venezuela considering the operating losses incurred in this market as a consequence
of the Company’s currency exchange rate change (indicator of potential impairment). The long-lived asset impairment test
was performed in accordance with the guidance within ASC 360-10-35. As a result of this analysis, the Company recorded an impairment
charge of $12,089. The Company will continue closing monitor any indicator of impairment in Venezuela.
As of September 30,
2018, 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 $1 million (including $1.5 million of cash and cash equivalents). In addition,
Venezuela’s non-monetary assets were $17 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
nine-month period ended September 30, 2018.
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.
On October 5, 2018
the Company paid the second cash dividend installment disclosed in Note 10 amounting to $10.4 million.