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 March, 2020


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

  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

 

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

         
 

 

 

 


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of Arcos Dorados Holdings Inc. and to be a part thereof from the date on which this report is filed, to the extent not superseded by documents or reports subsequently filed or furnished.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. Arcos Dorados Holdings Inc. - Consolidated Financial Statements as of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019

 

 

 

 

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: March 18, 2020

 

 

 

Item 1

 

Arcos Dorados Holdings Inc.

 

 

 

Consolidated Financial Statements 

As of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019

 

 

 

 

 

 

 

 

 

INDEX TO FINANCIAL STATEMENTS

 

Audited Consolidated Financial Statements – Arcos Dorados Holdings Inc.

 

 

Report of Independent Registered Public Accounting Firm F-3
Consolidated Statements of Income for the fiscal years ended December 3, 2019, 2018 and 2017 F-6
Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended December 31, 2019, 2018 and 2017 F-7
Consolidated Balance Sheet as of December 31, 2019 and 2018 F-8
Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2019, 2018 and 2017 F-9
Consolidated Statements of Changes in Equity for the fiscal years ended December 31, 2019, 2018 and 2017 F-10
Notes to the Consolidated Financial Statements as of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019 F-11

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

ARCOS DORADOS HOLDINGS INC.:

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Arcos Dorados Holdings Inc. (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income (loss), changes in equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

 

Adoption of New Accounting Standards

 

As discussed in note 3 to the consolidated financial statements, the Company changed its method of accounting for leases. The Company adopted Accounting Standard Codification Topic 842, Leases (“ASC 842”), on January 1, 2019. As explained below, auditing the Company’s leases accounting method change was a critical audit matter.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the account or disclosure to which they relate.

 

    Adoption of New Lease Accounting Standard
     
Description of the Matter  

As explained above and in Note 3 to the consolidated financial statements, the Company adopted Accounting Standard Codification Topic 842, Leases (“ASC 842”), on January 1, 2019. The adoption of ASC 842 resulted in the recognition of right of use assets and lease liabilities for thousands of $913,086 as of January 1, 2019. Management elected to adopt ASC 842 using the modified retrospective approach.

 

Certain aspects of adopting ASC 842 required management to exercise significant judgment. In particular, auditing management’s judgments involved in the determination of the lease term for a large volume of contracts in many jurisdictions and in estimating the incremental borrowing rate was complex and especially challenging.

 

How We Addressed the Matter in Our Audit  

We obtained an understanding, evaluated the design and tested the effectiveness of the Company’s internal controls around the implementation of the new guidance. For example, we tested controls over management’s review of the application of accounting policy elections to its portfolio of leases and over management’s review of the incremental borrowing rate (IBR) model.

 

 

 

   

To test the Company’s adoption of ASC 842, we performed audit procedures that included, among others, evaluating the completeness of the population of contracts that meet the definition of a lease under ASC 842, testing the assumptions made by management in determining the term of the contract based on the Company´s policy, and the accuracy of the Company’s calculations of right of use assets and lease liabilities. Additionally, we tested management’s model for estimating the IBRs, evaluating management’s methodology for developing the IBR and testing significant assumptions.

 

We also assessed the completeness of the related disclosures in Notes 3, 14 and 15 to the consolidated financial statements.

 

    Impairment of long-lived assets for markets with impairment indicators
     
Description of the Matter  

As of 31 December 2019, the carrying amount of long-lived assets is thousands of $1,919,412, including PPE, Leases right of use assets, net, and intangible assets. As a result of its impairment assessment exercise, the Company recorded a loss of thousands of $8,790, during 2019.

 

The Company operates in twenty countries in Latin America and the Caribbean with different economic and political circumstances. As explained in note 3 to the consolidated financial statements, management carries out an impairment assessment on long-lived assets annually that includes identifying the existence of impairment indicators at the country level. When impairment indicators are identified for any given country, an estimate of undiscounted future cash flows is prepared by the Company for each individual restaurant located in that country. The estimation of future cash flows requires management to make assumptions about the future business performance and other key inputs that entail significant judgments by management. These estimates can be significantly impacted by many factors, including changes in global and local business and economic conditions, operating costs, inflation, competition and consumer and demographic trends.

 

Auditing this area is especially challenging because the process of estimation of undiscounted future cash flows implies the determination of key assumptions that are complex and highly judgmental. The key assumptions used by management in the impairment calculation include country economic indicators projections of sales, margin growth rates, capital expenditures and useful lives of long-lived assets.

 

How We Addressed the Matter in Our Audit  

We obtained an understanding and evaluated the design, and tested controls of the impairment calculation process. For example, we identified and tested the operating effectiveness of the Company’s controls around the consistency of the estimation model inputs with the accounting records and the evaluation of the key assumptions made by management.

 

To test management assessment of impairment of long lived assets our audit procedures included, amongst others, testing the macroeconomic variables used by management, such as inflation rates and GDP growth, assessing the consistency between the estimated cash flows in the model and the business plan approved by management, comparing the remaining life of fixed assets with the accounting records and the clerical accuracy of the computations. Additionally, we evaluated the valuation methods used by management, including the key assumptions used in determining the undiscounted future cash flows of each restaurant. We also involved our valuation services personnel to assist in evaluating the methodology and the key assumptions used in the future cash flows estimation by management. We also compared forecasts to business plans and previous forecasts of projected cash flows to actual results to assess management estimation process.

 

We also assessed the completeness of the related disclosures in Note 3 to the consolidated financial statements.

 

 

    Tax and labor contingencies
     
Description of the Matter   The Company has operations in Brazil representing 47% of the revenues of the group for the year ended December 31,2019 and maintains a provision for tax and labor contingencies in that country that represents a 71% of the provision for contingencies balance of the group as of December 31, 2019. As

 

 

   

described in Note 18, the Company assesses the likelihood of any adverse judgments in labor claims or outcomes on its tax positions, including income tax and other taxes, based on the technical merits of a tax position derived from legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position or labor claim.

 

Auditing the measurement of tax and labor contingencies related to certain claims and transactions was challenging because their measurement is complex, highly judgmental, and is based on interpretations of tax laws, case-law and jurisprudence and requires estimating the future outcome of individual claims.

 

How We Addressed the Matter in Our Audit  

We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls around identification of matters, evaluation of tax and labor opinions, and tested management’s review controls over the assumptions made in the estimation of provisions and related disclosures.

 

To test the labor and tax contingencies provision, our audit procedures included, amongst others, involving personnel with specialized knowledge to assess the technical merits of the Company’s tax positions; assessing the Company’s correspondence with the relevant tax authorities; evaluating third-party tax opinions obtained by the Company; separately corresponding with certain key external tax and legal advisors of the Company, inspecting the minutes of the meetings of the Audit Committee and Board of Directors; obtaining a confirmation letter from the group’s chief legal counsel and evaluating the application of relevant tax law in the Company’s determination of its provision. As part of our evaluation, we have considered historical information to assess the assumptions made by management in relation to the potential outcomes.

 

We also evaluated the completeness of Company’s disclosures included in Note18 to the consolidated financial statements in relation to these matters.

 

 

 

/s/ Pistrelli, Henry Martin y Asociados S.R.L.

 

PISTRELLI, HENRY MARTIN Y ASOCIADOS S.R.L. 

Member of Ernst & Young Global

We have served as the Company’s auditor since 2007. 

Buenos Aires, Argentina

March 18, 2020

 

 

 

Arcos Dorados Holdings Inc.

Consolidated Statements of Income

For the fiscal years ended December 31, 2019, 2018 and 2017

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

 

REVENUES  2019  2018  2017
Sales by Company-operated restaurants  $2,812,287   $2,932,609   $3,162,256 
Revenues from franchised restaurants   146,790    148,962    157,269 
Total revenues   2,959,077    3,081,571    3,319,525 
                
OPERATING COSTS AND EXPENSES               
Company-operated restaurant expenses:               
Food and paper   (1,007,584)   (1,030,499)   (1,110,240)
Payroll and employee benefits   (567,653)   (607,793)   (683,954)
Occupancy and other operating expenses   (799,633)   (803,539)   (842,519)
Royalty fees   (155,388)   (157,886)   (163,954)
Franchised restaurants – occupancy expenses   (61,278)   (67,927)   (69,836)
General and administrative expenses   (212,515)   (229,324)   (244,664)
Other operating income (expenses), net   4,910    (61,145)   68,577 
Total operating costs and expenses   (2,799,141)   (2,958,113)   (3,046,590)
Operating income   159,936    123,458    272,935 
Net interest expense   (52,079)   (52,868)   (68,357)
Gain (loss) from derivative instruments   439    (565)   (7,065)
Foreign currency exchange results   12,754    14,874    (14,265)
Other non-operating (expenses) income, net   (2,097)   270    (435)
Income before income taxes   118,953    85,169    182,813 
Income tax expense   (38,837)   (48,136)   (53,314)
Net income   80,116    37,033    129,499 
Less: Net income attributable to non-controlling interests   (220)   (186)   (333)
Net income attributable to Arcos Dorados Holdings Inc.  $79,896   $36,847   $129,166 
                
                
Earnings per share information:               
Basic net income per common share attributable to Arcos Dorados Holdings Inc.  $0.39   $0.18   $0.61 
Diluted net income per common share attributable to Arcos Dorados Holdings Inc.   0.39    0.18    0.61 

 

See Notes to the Consolidated Financial Statements.

 

 

 

 

Arcos Dorados Holdings Inc.

Consolidated Statements of Comprehensive Income (Loss)

For the fiscal years ended December 31, 2019, 2018 and 2017

Amounts in thousands of US dollars

 

   2019  2018  2017
Net income  $80,116   $37,033   $129,499 
                
Other comprehensive income (loss), net of tax:               
                
Foreign currency translation   (12,246)   (63,130)   4,783 
Post-employment benefits (expenses):               
Loss recognized in accumulated other comprehensive loss   (55)   (418)   (938)
Reclassification of net loss to consolidated statement of income   864    494    386 
Post-employment benefits (expenses) (net of deferred income taxes of $42, $122 and $(272)).   809    76    (552)
Cash flow hedges:               
Net (loss) gain recognized in accumulated other comprehensive loss   (5,185)   13,888    6,462 
Reclassification of net loss (gain) to consolidated statement of income   85    (23,887)   1,592 
Cash flow hedges (net of deferred income taxes of $1,290, $4,062 and $(3,938))   (5,100)   (9,999)   8,054 
Total other comprehensive (loss) income   (16,537)   (73,053)   12,285 
Comprehensive income (loss)   63,579    (36,020)   141,784 
Less: Comprehensive income attributable to non-controlling interests   (142)   (52)   (316)
Comprehensive income (loss) attributable to Arcos Dorados Holdings Inc.  $63,437   $(36,072)  $141,468 

 

See Notes to the Consolidated Financial Statements.

 

 

 

Arcos Dorados Holdings Inc.

Consolidated Balance Sheet

As of December 31, 2019 and 2018

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

 

ASSETS  2019  2018
Current assets          
Cash and cash equivalents  $121,880   $197,282 
Short-term investment   25     
Accounts and notes receivable, net   99,862    84,287 
Other receivables   28,174    25,350 
Inventories   37,815    46,089 
Prepaid expenses and other current assets   117,612    109,230 
McDonald’s Corporation’s indemnification for contingencies       2,324 
Total current assets   405,368    464,562 
Non-current assets          
Miscellaneous   95,814    99,049 
Collateral deposits   2,500    2,500 
Property and equipment, net   960,986    856,192 
Net intangible assets and goodwill   43,044    41,021 
Deferred income taxes   68,368    58,334 
Derivative instruments   57,828    54,735 
McDonald’s Corporation’s indemnification for contingencies   1,612    1,646 
Lease right of use asset, net   922,165     
Total non-current assets   2,152,317    1,113,477 
Total assets  $2,557,685   $1,578,039 
LIABILITIES AND EQUITY          
Current liabilities          
Accounts payable  $259,577   $242,455 
Royalties payable to McDonald’s Corporation   17,132    14,576 
Income taxes payable   61,982    53,843 
Other taxes payable   61,823    61,006 
Accrued payroll and other liabilities   86,379    94,166 
Provision for contingencies   2,035    2,436 
Interest payable   9,936    9,951 
Short-term debt   13,296    356 
Current portion of long-term debt   3,233    3,836 
Derivative instruments   9,907    10,687 
Operating lease liabilities   70,147     
Total current liabilities   595,447    493,312 
Non-current liabilities          
Accrued payroll and other liabilities   23,497    35,322 
Provision for contingencies   24,123    26,073 
Long-term debt, excluding current portion   623,575    626,424 
Derivative instruments   3,598    3,192 
Deferred income taxes   4,297    957 
Operating lease liabilities   861,582     
Total non-current liabilities   1,540,672    691,968 
Total liabilities  $2,136,119   $1,185,280 
Equity          
Class A shares of common stock  $383,204   $379,845 
Class B shares of common stock   132,915    132,915 
Additional paid-in capital   13,375    14,850 
Retained earnings   471,149    413,074 
Accumulated other comprehensive loss   (519,505)   (502,266)
Common stock in treasury
   (60,000)   (46,035)
Total Arcos Dorados Holdings Inc. shareholders’ equity   421,138    392,383 
Non-controlling interests in subsidiaries   428    376 
Total equity   421,566    392,759 
Total liabilities and equity  $2,557,685   $1,578,039 

 

See Notes to the Consolidated Financial Statements.

 

 

 

Arcos Dorados Holdings Inc.

Consolidated Statements of Cash Flows

For the fiscal years ended December 31, 2019, 2018 and 2017

Amounts in thousands of US dollars

 

   2019  2018  2017
Operating activities               
Net income attributable to Arcos Dorados Holdings Inc.  $79,896   $36,847   $129,166 
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   123,218    105,800    99,382 
(Gain) loss from derivative instruments   (439)   565    7,065 
Amortization and accrual of letter of credit fees and deferred financing costs   3,190    3,189    3,433 
Gain of property and equipment sales   (664)   (2,030)   (93,122)
Deferred income taxes   (7,974)   648    1,731 
Foreign currency exchange results   (11,656)   (15,388)   20,366 
Accrued net share-based compensation expense   4,060    2,638    4,216 
Impairment of long-lived assets and goodwill   9,063    19,117    17,764 
Write-offs of property and equipment   4,733    4,167    8,528 
Gain on Sales of restaurants businesses   (5,078)   (6,154)   (14,742)
Others, net   (955)   8,896    6,305 
Changes in assets and liabilities:               
Accounts payable   39,434    16,563    102,660 
Accounts and notes receivable and other receivables   (27,988)   (35,770)   (50,211)
Inventories, prepaid and other assets   (21,802)   (12,074)   (53,466)
Income taxes payable   10,931    12,529    18,946 
Other taxes payable   20,891    8,675    12,672 
Interest payable   (14)   (35)   2,942 
Accrued payroll and other liabilities and provision for contingencies   1,320    27,134    35,075 
Others   3,315    4,414    (3,540)
Net cash provided by operating activities   223,481    179,731    255,170 
Investing activities               
Property and equipment expenditures   (265,235)   (197,041)   (174,766)
Purchases of restaurant businesses paid at acquisition date   (2,658)       (870)
Proceeds from sales of property and equipment and related advances   3,340    2,891    61,983 
Proceeds from sales of restaurant businesses and related advances   4,818    10,158    10,407 
Recovery (acquisitions) of short-term investments       19,588    (19,588)
Other investing activity   (1,256)   620    (1,646)
Net cash used in investing activities   (260,991)   (163,784)   (124,480)
Financing activities               
Issuance of 2027 Notes           265,000 
Repayment of secured loan agreement           (169,511)
Purchase of 2023 Notes           (48,885)
Net payment of derivative instruments           (40,822)
Dividend payments to Arcos Dorados Holdings Inc.’ shareholders   (22,425)   (20,937)    
Net short-term borrowings   13,159         
Treasury stock purchases   (13,965)   (46,035)    
Other financing activities   (6,401)   (6,470)   (9,135)
Net cash used in financing activities   (29,632)   (73,442)   (3,353)
Effect of exchange rate changes on cash and cash equivalents   (8,260)   (53,714)   (13,649)
(Decrease) increase in cash and cash equivalents   (75,402)   (111,209)   113,688 
Cash and cash equivalents at the beginning of the year   197,282    308,491    194,803 
Cash and cash equivalents at the end of the year  $121,880   $197,282   $308,491 
Supplemental cash flow information:               
Cash paid during the year for:               
   Interest  $52,458   $55,400   $53,206 
   Income tax   34,092    32,188    24,112 
Non-cash investing and financing activities:               
   Seller financing pending of payment and settlement of franchise receivables related to purchases of restaurant businesses   905    469    36 
   Exchange of assets           6,721 

 

See Notes to the Consolidated Financial Statements.

 

 

 

Arcos Dorados Holdings Inc.

Consolidated Statements of Changes in Equity

For the fiscal years ended December 31, 2019, 2018 and 2017

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 December 31, 2016   130,711,224    373,969    80,000,000    132,915    13,788    271,968    (441,649)           350,991    585    351,576 
Net income for the year                       129,166                129,166    333    129,499 
Other comprehensive loss                           12,302            12,302    (17)   12,285 
Issuance of shares in connection with the partial vesting of outstanding restricted share units under the 2011 Equity Incentive Plan   361,284    2,763            (2,763)                            
Stock-based compensation related to the 2011 Equity Incentive Plan                   3,191                    3,191        3,191 
Portion of non-controlling interests related to business sold                                           (108)   (108)
Dividends to non-controlling interests                                           (301)   (301)
Balances at December 31, 2017   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 year                       36,847                36,847    186    37,033 
Other comprehensive income                           (72,919)           (72,919)   (134)   (73,053)
Dividends to Arcos Dorados Holdings Inc.’s shareholders ($0.10 per share)                       (20,937)               (20,937)       (20,937)
Dividends on restricted share units under the 2011 Equity Incentive Plan                       (174)               (174)       (174)
Issuance of shares in connection with the partial vesting of outstanding restricted share units under the 2011 Equity Incentive Plan   520,565    3,113            (3,113)                            
Stock-based compensation related to the 2011 Equity Incentive Plan                   3,747                    3,747        3,747 
Treasury stock purchases                               (6,360,826)   (46,035)   (46,035)       (46,035)
Dividends to non-controlling interests                                           (168)   (168)
Adoption of accounting standard ASC 606 - net of $1,555 of deferred income tax                       (3,796)               (3,796)       (3,796)
Balances at December 31, 2018   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 year                       79,896                79,896    220    80,116 
Other comprehensive loss                           (16,459)           (16,459)   (78)   (16,537)
Dividends to Arcos Dorados Holdings Inc.’s shareholders ($0.11 per share)                       (22,425)               (22,425)       (22,425)
Dividends on restricted share units under the 2011 Equity Incentive Plan                       (176)               (176)       (176)
Issuance of shares in connection with the partial vesting of outstanding restricted share units under the 2011 Equity Incentive Plan   470,558    3,359            (3,359)                            
Stock-based compensation related to the 2011 Equity Incentive Plan                   1,884                    1,884        1,884 
Treasury stock purchases
                               (1,632,776)   (13,965)   (13,965)       (13,965)
Dividends to non-controlling interests                                           (90)   (90)
Adoption of ASU 2017-12
                       780    (780)                    
Balances at December 31, 2019   132,063,631    383,204    80,000,000    132,915    13,375    471,149    (519,505)   (7,993,602)   (60,000)   421,138    428    421,566 

 

 

See Notes to the Consolidated Financial Statements.

 

 

 

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”). See Note 4 for details. 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 consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) 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”).

 

3.Summary of significant accounting policies

 

The following is a summary of significant accounting policies followed by the Company in the preparation of the consolidated financial statements.

 

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 statements of income.

 

 

 

Foreign currency matters (continued)

 

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 if its functional currency was the reporting currency of the immediate parent company (US dollars for Venezuelan operation and Brazilian reais (“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.

 

Cash and cash equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less, from the date of purchase, to be cash equivalents.

 

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.

 

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:

 

 

 

Revenue recognition (continued)

 

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 earnings   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 statements, as of December 31, 2018 and for the fiscal year ended December 31, 2018, is as follows:

 

   As of December 31, 2018
Balance Sheet  As Reported  Balances Without Adoption of ASC 606  Effect of Change
ASSETS         
Non-current Assets               
Deferred income taxes   58,334    56,522    1,812 
LIABILITIES AND EQUITY               
Current liabilities               
Accrued payroll and other liabilities   94,166    93,770    396 
Non-current liabilities               
Accrued payroll and other liabilities   35,322    29,495    5,827 
EQUITY               
Retained earnings   413,074    417,485    (4,411)

 

 

   For the fiscal year ended December 31, 2018
Income Statement  As Reported  Balances Without Adoption of ASC 606  Effect of Change
          
Revenues from franchised restaurants   148,962    149,834    (872)
Income tax expense   (48,136)   (48,393)   257 

 

 

Accounts and notes receivable and allowance for doubtful accounts

 

Accounts receivable primarily consist of royalty and rent receivables due from franchisees and debit and credit card receivables. Accounts receivable are initially recorded at fair value and do not bear interest. Notes receivable relates to interest-bearing financing granted to certain franchisees in connection with the acquisition of equipment and third-party suppliers. The Company maintains an allowance for doubtful accounts in an amount that it considers sufficient to cover losses resulting from the inability of its franchisees to make required payments. In judging the adequacy of the allowance for doubtful accounts, the Company considers multiple factors including historical bad debt experience, the current economic environment and the aging of the receivables.

 

Other receivables

 

As of December 31, 2019, other receivables primarily consist of insurance claim receivables, value-added tax and other tax receivables, related party receivables, amounting to $17,046. As of December 31, 2018, other receivables primarily consist of insurance claim receivables, related party receivables, value-added tax and other tax receivables, amounting to $16,809.

 

Other receivables are reported at the amount expected to be collected.

 

Inventories

 

Inventories are stated at the lower of cost or market, with cost being determined on a first-in, first-out basis.

 

Property and equipment, net

 

Property and equipment are stated at cost, net of accumulated depreciation. Property costs include costs of land and building for both company-operated and franchise restaurants while equipment costs primarily relate to company-operated restaurants. Cost of property and equipment acquired from McDonald’s Corporation (as part of the acquisition of LatAm business) was determined based on its estimated fair market value at the acquisition date, then partially reduced by the allocation of the negative goodwill that resulted from the purchase price allocation. Cost of property and equipment acquired or constructed after the acquisition of LatAm business in connection with the Company’s restaurant reimaging and extension program is comprised of acquisition and construction costs and capitalized internal costs. Capitalized internal costs include payroll expenses related to employees fully dedicated to restaurant construction projects and related travel expenses. Capitalized payroll costs are allocated to each new restaurant location based on the actual time spent on each project. The Company commences capitalizing costs related to construction projects when it becomes probable that the project will be developed – when the site has been identified and the related profitability assessment has been approved. Maintenance and repairs are expensed as incurred. Accumulated depreciation is calculated using the straight-line method over the following estimated useful lives: buildings – up to 40 years; leasehold improvements – the lesser of useful lives of assets or lease terms which generally include renewal options; and equipment 3 to 10 years.

 

Intangible assets, net

 

Intangible assets include computer software costs, initial franchise fees, reacquired rights under franchise agreements, letter of credit fees and others.

 

The Company follows the provisions of ASC 350-40-30 within ASC 350 Intangibles, Subtopic 40 Internal Use Software which requires the capitalization of costs incurred in connection with developing or obtaining software for internal use. These costs are amortized over a period of three years on a straight-line basis.

 

The Company is required to pay to McDonald’s Corporation an initial franchisee fee upon opening of a new restaurant. The initial franchise fee related to Company-operated restaurants is capitalized as an intangible asset and amortized on a straight-line basis over the term of the franchise.

 

 

 

Intangible assets, net (continued)

 

A reacquired franchise right is recognized as an intangible asset as part of the business combination in the acquisition of franchised restaurants apart from goodwill with an assigned amortizable life limited to the remaining contractual term (i.e., not including any renewal periods). The value assigned to the reacquired franchise right excludes any amounts recognized as a settlement gain or loss and is limited to the value associated with the remaining contractual term and operating conditions for the acquired restaurants. The reacquired franchise right is measured using a valuation technique that considers restaurant's cash flows after payment of an at-market royalty rate to the Company. The cash flows are projected for the remaining contractual term, regardless of whether market participants would consider potential contractual renewals in determining its fair value.

 

Letter of credit fees are amortized on a straight-line basis over the term of the Letter of Credit.

 

Impairment and disposal of long-lived assets

 

In accordance with the guidance within ASC 360-10-35, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable. For purposes of reviewing assets for potential impairment, assets are grouped at a country level for each of the operating markets. The Company manages its restaurants as a group or portfolio with significant common costs and promotional activities; as such, each restaurant’s cash flows are not largely independent of the cash flows of others in a market. If an indicator of impairment exists for any grouping of assets, an estimate of undiscounted future cash flows produced by each individual restaurant within the asset grouping is compared to its carrying value. If an individual restaurant is determined to be impaired, the loss is measured by the excess of the carrying amount of the restaurant over its fair value considering its highest and best use, as determined by an estimate of discounted future cash flows or its market value.

 

The Company assessed all markets for impairment indicators during the fourth quarter of 2019, 2018 and 2017. In addition, during 2018, the Company performed impairment testings of its long-lived assets in Venezuela in previous quarters considering the operating losses incurred in this market as a consequence of currency exchange rate changes. As a result of those assessments, the Company concluded that the second step was required to be performed as a component of the impairment testing of its long-lived assets (including property and equipment, intangible assets with definite useful lives and lease right of use asset, net) on a per store basis, in: Curacao, Puerto Rico, Mexico, Peru, Aruba, USVI, Venezuela, and Colombia for the fiscal year ended December 31, 2019 and in Ecuador, Puerto Rico, Mexico, Peru, Aruba, USVI, Venezuela, Colombia and Trinidad and Tobago for the fiscal years ended December 31, 2018 and 2017.

 

As a result of the impairment testing the Company recorded the following impairment charges, for the markets indicated below, within Other operating income (expenses), net on the consolidated statements of income:

 

Fiscal year  Markets  Total
 2019   Mexico, Puerto Rico, USVI, Peru, Aruba, Curacao, Colombia and Venezuela  $8,790 
 2018   Mexico, Puerto Rico, USVI, Peru, Colombia, Venezuela and Trinidad and Tobago   18,950 
 2017   Mexico, Puerto Rico, USVI, Peru, Ecuador, Colombia, Venezuela and Trinidad and Tobago   17,564 

 

Goodwill

 

Goodwill represents the excess of cost over the estimated fair market value of net tangible assets and identifiable intangible assets acquired. In accordance with the guidance within ASC 350 Intangibles-Goodwill and Other, goodwill is stated at cost and reviewed for impairment on an annual basis. The annual impairment test is performed during the fourth quarter of the fiscal year and compares the fair value of each reporting unit, generally based on discounted future cash flows, with its carrying amount including goodwill. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss is measured as the difference between the implied fair value of the reporting unit’s goodwill and the carrying amount of goodwill.

 

 

 

Goodwill (continued)

 

In assessing the recoverability of the goodwill, the Company considers changes in economic conditions and makes assumptions regarding estimated future cash flows and other factors. Estimates of future cash flows are highly subjective judgments based on the Company’s experience and knowledge of its operations. These estimates can be significantly impacted by many factors including changes in global and local business and economic conditions, operating costs, inflation, competition, and consumer and demographic trends.

 

As a result of the analyses performed the Company recorded the following impairment charges, related to goodwill generated in the acquisition of franchised restaurants, for the markets indicated below within Other operating income (expenses), net on the consolidated statements of income:

 

Fiscal year  Markets  Total
 2019    Ecuador   $273 
 2018    Peru    167 
 2017    Mexico    200 

 

Advertising costs

 

Advertising costs are expensed as incurred. Advertising expenses related to Company-operated restaurants were $115,568, $120,839 and $130,277 in 2019, 2018 and 2017, respectively. Advertising expenses related to franchised operations do not affect the Company’s expenses since these are recovered from franchisees. Advertising expenses related to franchised operations were $43,039, $43,940 and $46,536 in 2019, 2018 and 2017, respectively.

 

Accounting for income taxes

 

The Company records deferred income taxes using the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The guidance requires companies to set up a valuation allowance for that component of net deferred tax assets which does not meet the more likely than not criterion for realization.

 

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

The Company is regularly audited by tax authorities, and tax assessments may arise several years after tax returns have been filed. Accordingly, tax liabilities are recorded when, in management’s judgment, an uncertain tax position does not meet the more likely than not threshold for recognition. For tax positions that meet the more likely than not threshold, a tax liability may be recorded depending on management’s assessment of how the tax position will ultimately be settled. The Company records interest and penalties on unrecognized tax benefits in the provision for income taxes.

 

Accounts payable outsourcing

 

The Company offers its suppliers access to an accounts payable services arrangement provided by third party financial institutions. This service allows the Company’s suppliers to view its scheduled payments online, enabling them to better manage their cash flow and reduce payment processing costs. Independent of the Company, the financial institutions also allow suppliers to sell their receivables to the financial institutions in an arrangement separately negotiated by the supplier and the financial institution. The Company has no economic interest in the sale of these receivables and no direct relationship with the financial institutions concerning the sale of receivables. All of the Company’s obligations, including amounts due, remain to the Company’s suppliers as stated in the supplier agreements. As of December 31, 2019 and 2018, $8,896 and $4,014, respectively, of the Company’s total accounts payable are available for this purpose and have been sold by suppliers to participating financial institutions.

 

 

 

Share-based compensation

 

The Company recognizes compensation expense as services required to earn the benefits are rendered. See Note 17 for details of the outstanding plans and the related accounting policies.

 

Derivative financial instruments

 

The Company utilizes certain hedge instruments to manage its interest rate and foreign currency rate exposures. The counterparties to these instruments generally are major financial institutions. The Company does not hold or issue derivative instruments for trading purposes. In entering into these contracts, the Company assumes the risk that might arise from the possible inability of counterparties to meet the terms of their contracts. The Company does not expect any losses as a result of counterparty defaults. All derivatives are recognized as either assets or liabilities in the balance sheets and are measured at fair value. Additionally, the fair value adjustments will affect either shareholders’ equity as accumulated other comprehensive loss or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.

 

Severance payments

 

Under certain laws and labor agreements of the countries in which the Company operates, the Company is required to make minimum severance payments to employees who are dismissed without cause and employees leaving its employment in certain other circumstances. The Company accrues severance costs if they relate to services already rendered, are related to rights that accumulate or vest, are probable of payment and can be reasonably estimated. Otherwise, severance payments are expensed as incurred.

 

Provision for contingencies

 

The Company accrues liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Such accruals are based on developments to date, the Company’s estimates of the outcomes of these matters and the Company’s lawyers’ experience in contesting, litigating and settling other matters. As the scope of the liabilities becomes better defined, there may be changes in the estimates of future costs. See Note 18 for details.

 

Comprehensive income (loss)

 

Comprehensive income (loss) includes net income as currently reported under generally accepted accounting principles and also includes the impact of other events and circumstances from non-owner sources which are recorded as a separate component of shareholders’ equity. The Company reports foreign currency translation gains and losses, unrealized results on cash flow hedges as well as unrecognized post-retirement benefits as components of comprehensive income (loss).

 

Sales of property and equipment and restaurant businesses

 

The Company recognizes the sale of property and equipment when: (a) the profit is determinable, that is, the collectibility of the sales price is reasonably assured or the amount that will not be collectible can be estimated, and (b) the earnings process is virtually complete, that is, the Company is not obliged to perform significant activities after the sale to earn the profit. The sale of restaurant businesses, related to the refranchising of company-operated restaurants, is recognized when the Company transfers substantially all of the risks and rewards of ownership.

 

In order to determine the gain or loss on the disposal, the goodwill associated with the sold of property and equipment and restaurant business, if any, is considered within the carrying value. The amount of goodwill to be included in that carrying amount is based on the relative fair value of the item to be disposed and the portion of the reporting unit that will be retained.

 

 

 

Sales of property and equipment and restaurant businesses (continued)

 

During fiscal years 2019, 2018 and 2017, the Company recorded results from sales of property and equipment and restaurant businesses, amounting to $6,415, $8,184 and $107,867, respectively, included within “Other operating income (expenses), net”. The sales performed during fiscal year 2017 were primarily related to the redevelopment of certain real estate assets.

 

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 $913 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, which include options that are reasonably assured of being exercised. 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.

 

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                    
Lease right of use asset, net       896,682    896,682    (i) 
LIABILITIES AND EQUITY                    
Current liabilities                    
Operating lease liabilities       72,272    72,272    (ii) 
Non-current liabilities                    
Accrued payroll and other liabilities   35,322    (16,404)   18,918    (iii) 
Operating lease liabilities       840,814    840,814    (iv) 

 

(i)Represents capitalization of operating lease right of use assets of $913,086 net of the reclassification of straight-line rent accrual of $16,404.

 

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

 

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

 

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

 

 

 

Recent accounting pronouncements (continued)

 

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 December 31, 2019 and for the fiscal year ended in December 31, 2019, are as follows:

 

   As of December 31, 2019
Consolidated Balance Sheet  As Reported  Balances Without Adoption of ASC 842  Effect of Change
ASSETS         
Non-current assets               
Lease right of use asset, net   922,165        922,165 
LIABILITIES AND EQUITY               
Current liabilities               
Operating lease liabilities   70,147        70,147 
Non-current liabilities               
Accrued payroll and other liabilities   23,497    41,084    (17,587)
Operating lease liabilities
   861,582        861,582 
EQUITY               
Retained earnings   471,149    467,560    3,589 
Accumulated other comprehensive loss   (519,505)   (523,939)   4,434 

 

 

 

   For the fiscal year ended December 31, 2019
Consolidated Statement of Income  As Reported  Balances Without Adoption of ASC 842  Effect of Change
                
Foreign currency exchange results   12,754    9,165    3,589 
                

 

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 expanded components of fair value hedging, specifies the recognition and presentation of the effects of hedging instruments, and eliminates the separate measurement and presentation of hedge ineffectiveness. The Company adopted the new standard during this year and applied the presentation and disclosure guidance on a prospective basis. The adoption of the standard did not have a material impact on the Company's consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", that modifies the measurement and recognition of expected credit losses on financial assets. The Company will adopt this guidance effective January 1, 2020, prospectively. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.

 

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

 

 

 

4.Acquisition of businesses

 

LatAm Business

 

On August 3, 2007, the Company, indirectly through its wholly-owned subsidiary ADBV, entered into a Stock Purchase Agreement with McDonald’s Corporation pursuant to which the Company completed the acquisition of the McDonald’s business in Latin America and the Caribbean for a final purchase price of $698,080.

 

The acquisition of the LatAm business was accounted for by the purchase method of accounting and, accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on the estimated fair values at the date of acquisition. When the fair value of the net assets acquired exceeded the purchase price, the resulting negative goodwill was allocated to partially reduce the fair value of the non-current assets acquired on a pro-rata basis.

 

In connection with this transaction, ADBV and certain subsidiaries (the “MF subsidiaries”) also entered into 20-year Master Franchise Agreements (“MFAs”) with McDonald’s Corporation which grants to the Company and its MF subsidiaries the following:

 

i.The right to own and operate, directly or indirectly, franchised restaurants in each territory;

 

ii.The right and license to grant sub franchises in each territory;

 

iii.The right to adopt and use, and to grant the right and license to sub franchisees to adopt and use, the system in each territory;

 

iv.The right to advertise to the public that it is a franchisee of McDonald’s;

 

v.The right and license to grant sub franchises and sublicenses of each of the foregoing rights and licenses to each MF subsidiary.

 

The Company is required to pay to McDonald’s Corporation continuing franchise fees (Royalty fees) on a monthly basis. The amount to be paid during the first 10 years of the MFAs is equal to 5% of the US dollar equivalent of the gross product sales of each of the franchised restaurants. This percentage increases to 6% and 7% for the subsequent two 5-year periods of the agreement. Payment of monthly royalties is due on the seventh business day of the next calendar month.

 

Pursuant to the MFAs provisions, McDonald’s Corporation has the right to (a) terminate the MFAs, or (b) exercise a call option over the Company’s shares or any MF subsidiary, if the Company or any MF subsidiary (i) fails to comply with the McDonald’s System (as defined in the MFAs), (ii) files for bankruptcy, (iii) defaults on its financial debt payments, (iv) substantially fails to achieve targeted openings and reinvestments requirements, or (v) upon the occurrence of any other event of default as defined in the MFAs.

 

Other acquisitions

 

During fiscal years 2019, 2018 and 2017, the Company acquired certain franchised restaurants in certain territories. Presented below is supplemental information about these acquisitions:

 

Purchases of restaurant businesses:  2019  2018  2017
Property and equipment  $1,471   $413   $429 
Identifiable intangible assets   1,347    56    5,346 
Goodwill   1,589        200 
Assumed debt   (77)        
Gain on purchase of franchised restaurants   (767)       (4,808)
Purchase price   3,563    469    1,167 
Restaurants sold in exchange           (261)
Settlement of franchise receivables   (905)   (469)   (36)
Net cash paid at acquisition date  $2,658   $   $870 

 

 

 

 

5.       Accounts and notes receivable, net

 

Accounts and notes receivable, net consist of the following at year end:

 

   2019  2018
Receivables from franchisees  $63,618   $55,672 
Debit and credit card receivables   43,741    40,474 
Meal voucher receivables   13,017    10,565 
Notes receivable   1,928    2,575 
Allowance for doubtful accounts   (22,442)   (24,999)
   $99,862   $84,287 

 

6.Prepaid expenses and other current assets

 

Prepaid expenses and other current assets consist of the following at year end:

 

   2019  2018
Prepaid taxes  $73,932   $74,538 
Prepaid expenses   24,266    21,868 
Promotion items and related advances   19,092    12,417 
Others   322    407 
   $117,612   $109,230 

 

7.Miscellaneous

 

Miscellaneous consist of the following at year end:

 

   2019  2018
Judicial deposits  $46,148   $43,168 
Tax credits   21,067    27,563 
Prepaid property and equipment   7,770    9,775 
Notes receivable   5,876    4,241 
Rent deposits   3,196    2,908 
Others   11,757    11,394 
   $95,814   $99,049 

 

 

8.Property and equipment, net

 

Property and equipment, net consist of the following at year-end:

 

   2019  2018
Land  $146,517   $142,262 
Buildings and leasehold improvements   710,046    623,612 
Equipment   784,181    673,117 
Total cost   1,640,744    1,438,991 
Total accumulated depreciation   (679,758)   (582,799)
   $960,986   $856,192 

 

 Total depreciation expense for fiscal years 2019, 2018 and 2017 amounted to $111,638, $94,490 and $89,085, respectively.

 

9.Net intangible assets and goodwill

 

Net intangible assets and goodwill consist of the following at year-end:

 

   2019  2018
Net intangible assets (i)          
Computer software cost  $75,224   $69,700 
Initial franchise fees   16,146    14,614 
Reacquired franchised rights   13,296    12,511 
Letter of credit fees   940    940 
Others   1,000    1,000 
Total cost   106,606    98,765 
Total accumulated amortization   (70,345)   (63,683)
Subtotal   36,261    35,082 

 

 

Goodwill (ii)  2019  2018
Brazil   4,124    4,280 
Argentina   1,585    226 
Chile   988    1,073 
Colombia   86    87 
Ecuador       273 
Subtotal   6,783    5,939 
   $43,044   $41,021 

 

(i)Total amortization expense for fiscal years 2019, 2018 and 2017 amounted to $11,580, $11,310 and $10,297, respectively. The estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows: $14,281 for 2020, $11,262 for 2021; $4,333 for 2022; $1,352 for 2023; $1,310 for 2024; and thereafter $3,723.

 

(ii)Related to the acquisition of franchised restaurants (Brazil, Argentina, Chile and Colombia) and non-controlling interests in subsidiaries (Ecuador and Chile).

 

 

 

10.Accrued payroll and other liabilities

 

Accrued payroll and other liabilities consist of the following at year end:

 

   2019  2018
Current:          
Accrued payroll  $77,087   $77,286 
Accrued expenses   6,586    10,330 
Other liabilities   2,706    6,550 
   $86,379   $94,166 
Non-current:          
Phantom RSU award liability  $2,102   $ 
Deferred rent       16,404 
Deferred revenues - Initial franchise fee   5,802    5,827 
Deferred income   6,392    6,272 
Security deposits   6,836    6,322 
Other liabilities   2,365    497 
   $23,497   $35,322 
           
11.Short-term debt

 

Short-term debt consists of the following:

 

   2019  2018
Short-term bank loans (i)   10,794     
Revolving Credit Facility (ii)   2,500     
Bank overdrafts   2    356 
   $13,296   $356 

 

(i)Short-term bank loans

 

As of December 31, 2019, comprised two loans. In Brazil, granted by Banco Bradesco S.A, amounting to $7,454, which matures in February 2020 and the interest rate is the Interbank Market reference interest rate (known in Brazil as “CDI” Certificados de Depósitos Interbancários) plus 0.67% per year. In Argentina, granted by Banco de la Ciudad de Buenos Aires, amounting to $ 3,340 which matures in January 2020 and the interest rate is 54% per year.

 

(ii)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 2, 2019, ADBV renewed its committed revolving credit facility with Bank of America, N.A. (BOFA), as lender, for up to $25 million maturing on August 2, 2020. Each loan made to ADBV under this agreement will bear interest at an annual rate equal to LIBOR plus 2.40%.

 

In addition, on December 11, 2019, the Company entered into a revolving credit facility with JPMorgan Chase Bank, N.A (JPMorgan), for up to $25 million maturing on December 11, 2020, with an annual interest rate equal to LIBOR plus 2.25%.

 

 

 

11.Short-term debt (continued)

 

Revolving credit facilities (continued)

 

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 the Company and 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 the Company, 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 December 31, 2019, the mentioned ratios were 0.95 and 1.66, for ADBV and the Company, respectively, and thus the Company is currently in compliance with the ratios requirements under both revolving credit facilities.

 

12.       Long-term debt

 

Long-term debt consists of the following at year-end:

 

   2019  2018
2027 Notes  $265,000   $265,000 
2023 Notes   348,069    348,069 
Finance lease obligations   5,419    6,503 
Other long-term borrowings   13,284    16,676 
Subtotal   631,772    636,248 
Discount on 2023 Notes   (2,504)   (3,156)
Premium on 2023 Notes   937    1,187 
Deferred financing costs   (3,397)   (4,019)
Total   626,808    630,260 
Current portion of long-term debt   3,233    3,836 
Long-term debt, excluding current portion  $623,575   $626,424 

 

2027 and 2023 Notes

 

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

 

         Principal as of December 31,   
   Annual interest rate  Currency  2019  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 

 

 

12. Long-term debt (continued)

 

2027 and 2023 Notes (continued)

 

   Interest Expense (i)  DFC Amortization (i)  Amortization of Discount, net (i)
   2019  2018  2017  2019  2018  2017  2019  2018  2017
 2027 Notes   $15,569   $15,569   $11,547   $299   $299   $224   $   $   $ 
 2023 Notes    23,060    23,060    23,885    323    323    610    402    397    752 

 

(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 13), 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 of 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.

 

 

 

12.Long-term debt (continued)

 

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 13 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) (ii)  DFC Amortization (ii)  Other Costs (ii) (iii)
2019  2018  2017  2019  2018  2017  2019  2018  2017
$   $   $2,570   $   $   $3,251   $   $   $2,249 
                                           

 

(i)This charge do not include the effect of the cross-currency interest rate swap agreements mentioned in Note 13, amounting to a loss of $6,921, during fiscal year 2017. Including this effect the total interest cost amounts to $9,491.

 

(ii)This charge is included within "Net interest expense" in the consolidated statement of income.

 

(iii)Transaction costs related to the repayment of the Loan.

 

 

 

12.Long-term debt (continued)

 

Other required disclosure

 

At December 31, 2019, future payments related to the Company’s long-term debt are as follows:

 

   Principal  Interest  Total
2020  $3,233   $40,190   $43,423 
2021   3,173    39,896    43,069 
2022   3,370    39,568    42,938 
2023   350,959    39,292    390,251 
2024   2,307    15,974    18,281 
Thereafter   268,730    41,151    309,881 
Total payments   631,772    216,071    847,843 
Interest       (216,071)   (216,071)
Discount on 2023 Notes   (2,504)       (2,504)
Premium on 2023 Notes   937        937 
Deferred financing cost   (3,397)       (3,397)
Long-term debt  $626,808   $   $626,808 

 

13.Derivative instruments

 

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

 

      Assets     Liabilities
Type of Derivative  Balance Sheets Location  2019  2018  Balance Sheets Location  2019  2018
Derivatives designated as hedging instruments         
Cash Flow hedge                  
Forward contracts  Other receivables  $259   $628   Accrued payroll and other liabilities  $(532)  $(180)
Cross-currency interest rate swap  Derivative instruments   37,219    37,869   Derivative instruments   (8,179)   (8,728)
Call spread  Derivative instruments   20,609    16,867   Derivative instruments        
Coupon-only swap  Derivative instruments          Derivative instruments   (5,326)   (5,152)
Subtotal      58,087    55,364       (14,037)   (14,060)
Derivatives not designated as hedging instruments                          
Forward contracts  Other receivables   20    99   Accrued payroll and other liabilities       (144)
Subtotal      20    99           (144)
Total derivative instruments     $58,107   $55,463      $(14,037)  $(14,204)

 

 

13.Derivative instruments (continued)

 

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 December 31, 2019, the Company has forward contracts outstanding with a notional amount of $25,700 that mature during 2020.

 

The Company made net collections (payments) totaling $711, $75 and $(1,236) during fiscal years 2019, 2018 and 2017, respectively, as a result of the net settlements of these derivatives.

 

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. (i)   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

 

(i)During the fiscal year ended December 31, 2017, the agreement was amended twice: on February 9, 2017 and February 22, 2017. All the terms of the swap agreement match the terms of the BRL intercompany loan receivable. As a result of the amendments the Company paid $2,689. According to ASC 815-30-40, the amount deferred in accumulated other comprehensive loss until the date of the last amendment, amounting to $677 as of December 31, 2017, will be amortized to earnings as the originally hedged cash flows affects the statement of income.

 

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.

 

 

 

13.Derivative instruments (continued)

 

Derivatives designated as hedging instruments (continued)

 

Cash flow hedge (continued)

 

Cross-currency interest rate swap (continued)

 

The Company paid $8,692, $10,671 and $6,163 of net interest during the fiscal years ended December 31, 2019, 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 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.

 

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.   $0   50,000       4.49   3.11   September 2023
JP Morgan S.A.   $0   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 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 $2,036, $2,900 and $1,390 of net interest during the fiscal years ended December 31, 2019, 2018 and 2017, respectively, related to these agreements.

 

 

 

13.Derivative instruments (continued)

 

Derivatives designated as hedging instruments (continued)

 

Cash flow hedge (continued)

 

Additional disclosures

 

The following table present the pretax amounts affecting income and other comprehensive income for the fiscal years ended December 31, 2019, 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)  (Gain) Loss Reclassified from Accumulated OCI into Income (Effective Portion) (i)
   2019  2018  2017  2019  2018  2017
Forward contracts  $(10)  $731   $(1,344)  $(711)  $(75)  $1,236 
Cross-currency interest rate swaps   (8,506)   11,279    5,828    2,056    (18,888)   1,965 
Call Spread   4,377    4,034    21,047    (3,561)   (15,421)   2,791 
Coupon-only swap   (1,889)   1,864    (13,598)   1,860    2,415    (5,933)
Total  $(6,028)  $17,908   $11,933   $(356)  $(31,969)  $59 

(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:

 

Adjustment to:  2019  2018  2017
Foreign currency exchange results  $6,346   $28,588   $7,532 
Net interest expense   (8,402)   (9,700)   (9,497)
Total  $(2,056)  $18,888   $(1,965)
                

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.

 

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 12, 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 12. The total payment amounted to $39.1 million (BRL122.7 million), including $0.9 million of accrued and unpaid interest.

 

 

 

13.Derivative instruments (continued)

 

Derivatives designated as hedging instruments (continued)

 

Fair value hedge (continued)

 

Cross-currency interest rate swaps (continued)

 

During fiscal year 2017, the accrued interest amounted to $6,921. This charge do not include the effect of the Secured Loan Agreement mentioned in Note 12, amounting to a loss of $2,570. Including this effect the total interest cost amounts to $9,491.

 

These amounts were 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 fiscal year ended December 31, 2017:

 

   Cross-currency swaps (i)
Derivatives in Fair Value Hedging Relationships  2017
    
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 in 2017, related to the ineffective portion of derivatives, was recorded within “Gain (loss) from derivative instruments” in the Company’s consolidated statement of income.

 

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 (paid) $787, ($81) and ($1,156) during the fiscal years ended December 31, 2019, 2018 and 2017, respectively, related to those forward contracts.

 

 

 

14.Leases

 

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 15 years and, in many cases, include renewal options provided by the agreement or government’s regulations, as there are reasonably certain to be exercised. Typically, renewal options are considered reasonably assured of being exercised if the associated asset lives of the building or leasehold improvements exceed the initial lease term, and the sales performance of the restaurant remains strong. 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, for example, 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. Furthermore, the Company is the lessee under non-cancelable leases covering certain offices and warehouses.

 

The Company has elected not to separate non-lease components from lease components in its lessee portfolio. For most locations, the Company is obliged for the related occupancy costs, such as maintenance.

 

In addition, 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. The agreement includes a purchase option at the end of the lease term at fair market value and also an early purchase option at a fixed amount of $26,685 at maturity of the 24th quarterly payment. 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 was required to make a cash collateral deposit of $2,500 under this agreement.

 

At December 31, 2019, future minimum payments required under existing operating leases are:

 

   Restaurant  Other  Total (i)
2020  $143,982   $5,387   $149,369 
2021   136,699    3,968    140,667 
2022   130,637    2,822    133,459 
2023   125,830    2,383    128,213 
2024   121,880    2,258    124,138 
Thereafter   976,397    8,017    984,414 
Total minimum payment  $1,635,425   $24,835   $1,660,260 
Lease discount             (728,531)
Operating lease liability            $931,729 

 

(i)The Company has certain leases subject to index adjustments. Historically, the Company has calculated and disclosed future minimum payments for these leases using the inflation index rate as of the end of the reporting period. As part of the adoption of ASC 842, the Company used the effective index rate at transition date in its disclosure and calculation of the lease liability. However, for leases entered into after January 1, 2019, the inflation index rate will be used to calculate the lease liability only when a lease modification occurs.

 

The Company maintains a few finance leases agreements, previously classified as capital leases. As of December 31, 2019 and 2018 the obligation amounts to $5,419 and $6,503 respectively, included within “Long-term debt” in the Consolidated Balance Sheet.

 

The following table is a summary of the Company´s components of lease cost for fiscal years 2019, 2018 and 2017:

 

Lease Expense  Statements of Income Location  2019  2018  2017
Operating lease expense - Minimum rentals:                  
Company-operated restaurants  Occupancy and other operating expenses  $(104,236)  $(105,358)  $(107,006)
Franchised restaurants  Franchised restaurants - occupancy expenses   (34,727)   (30,970)   (31,490)
General and administrative  General and administrative expenses   (7,614)   (7,610)   (9,319)
Subtotal      (146,577)   (143,938)   (147,815)
Variable lease expense - Contingent rentals based on sales:                  
Company-operated restaurants  Occupancy and other operating expenses   (29,562)   (33,921)   (41,499)
Franchised restaurants  Franchised restaurants - occupancy expenses   (12,878)   (14,595)   (23,221)
Subtotal      (42,440)   (48,516)   (64,720)
Total lease expense     $(189,017)  $(192,454)  $(212,535)

 

 

Other information  2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases  $135,788 
Right-of-use assets obtained in exchange for new lease liabilities     
Operating leases   118,285 
Weighted-average remaining lease term (years)     
Operating leases   8 
Weighted-average discount rate     
Operating leases   5%

 

 

 

 

 

15.Franchise arrangements

 

Individual franchise arrangements generally include a lease, a license and provide for payment of initial franchise fees, as well as continuing rent and service fees (royalties) to the Company based upon a percentage of sales with minimum rent payments. The company’s franchisees are granted the right to operate a restaurant using the McDonald’s system and, in most cases, the use of a restaurant facility, generally for a period of 20 years. At the end of the 20-year franchise arrangement, the Company maintains control of the underlying real estate and building and can either enter into a new franchise arrangement with the existing franchisee or a different franchisee, or close the restaurant. Franchisees pay related occupancy costs including property taxes, insurance and maintenance. Pursuant to the MFAs, the Company pays initial fees and continuing service fees for franchised restaurants to McDonald’s Corporation. Therefore, the margin for franchised restaurants is primarily comprised of rental income net of occupancy expenses (depreciation for owned property and equipment and/or rental expense for leased properties).

 

At December 31, 2019 and 2018, net property and equipment under franchise arrangements totaled $123,832 and $124,039, respectively (including land for $32,373 and $34,109, respectively).

 

Revenues from franchised restaurants for fiscal years 2019, 2018 and 2017 consisted of:

 

   2019  2018  2017
Rent (i)  $145,860   $148,094   $155,405 
Initial fees (ii) (iii)   287    195    1,205 
Royalty fees (iv)   643    673    659 
Total  $146,790   $148,962   $157,269 

 

(i)Includes rental income of own buildings and subleases. As of December 31, 2019 the subleases rental income amounted to $114,459.

 

(ii)Presented net of initial fees paid to McDonald’s Corporation for $1,456, $1,323 and $1,417 in 2019, 2018 and 2017, respectively.

 

(iii)On January 1, 2018, the Company adopted ASC 606 “Revenue Recognition - Revenue from Contracts with Customers”. As such, initial franchise fees received are deferred over the term of the franchise agreement. See Note 3 Revenue Recognition, for details.

 

(iv)Presented net of royalties fees paid to McDonald’s Corporation for $57,709, $57,733 and $64,806 in 2019, 2018 and 2017, respectively.

 

At December 31, 2019, future minimum rent payments due to the Company under existing franchised agreements are:

 

   Owned sites  Leased sites  Total
2020  $4,063   $59,424   $63,487 
2021   3,220    54,161    57,381 
2022   2,391    48,699    51,090 
2023   2,154    41,998    44,152 
2024   2,048    35,618    37,666 
Thereafter   9,938    173,639    183,577 
Total  $23,814   $413,539   $437,353 

 

16.Income taxes

 

The Company’s operations are conducted by its foreign subsidiaries in Latin America and the Caribbean. The foreign subsidiaries are incorporated under the laws of their respective countries and as such the Company is taxed in such foreign countries.

 

Statutory tax rates in the countries in which the Company operates for fiscal years 2019, 2018 and 2017 were as follows:

 

 

 

    2019   2018   2017
Puerto Rico   18.5%   20.0%   20.0%
Curacao   22.0%   22.0%   35.0%
USVI   22.5%   22.5%   35.0%
Aruba   25.0%   25.0%   35.0%
Panamá, Uruguay, Trinidad and Tobago and Netherlands   25.0%   25.0%   25.0%
Ecuador   25.0%   28.0%   25.0%
Chile   27.0%   27.0%   25.5%
Peru   29,5%   29,5%   29,5%
Argentina   30.0%   30.0%   35.0%
Costa Rica and Mexico   30.0%   30.0%   30.0%
Martinique, French Guyana and Guadeloupe   31.0%   33.3%   35.0%
Colombia   33.0%   37.0%   40.0%
Brazil and Venezuela   34.0%   34.0%   34.0%

 

Income tax expense for fiscal years 2019, 2018 and 2017 consisted of the following:

 

   2019  2018  2017
Current income tax expense  $46,811   $47,488   $51,215 
Deferred income tax expense   (7,974)   648    2,099 
Income tax expense  $38,837   $48,136   $53,314 

 

Income tax expense for fiscal years 2019, 2018 and 2017, differed from the amounts computed by applying the Company’s weighted-average statutory income tax rate to pre-tax income as a result of the following:

 

   2019  2018  2017
Pre-tax income  $118,953   $85,169   $182,813 
Weighted-average statutory income tax rate (i)   36.6%   42.7%   35.5%
Income tax expense at weighted-average statutory tax rate on pre-tax income   43,488    36,354    64,901 
Permanent differences:               
Change in valuation allowance (ii)   (24,864)   (24,307)   (21,241)
Expiration and changes in tax loss carryforwards (iii)   17,799    18,599    12,785 
Venezuelan remeasurement and inflationary impacts (iv)   1,743    16,857    2,683 
Non-taxable income and non-deductible expenses   7,667    8,406    10,157 
Tax benefits   (9,667)   (11,403)   (10,744)
Income taxes withholdings on intercompany transactions (v)   5,005    7,723    6,804 
Differences including exchange rate, inflation adjustment and filing differences   (2,647)   (2,815)   (11,909)
Alternative Taxes   658    (1,283)   156 
Others   (345)   5    (278)
Income tax expense  $38,837   $48,136   $53,314 

 

 

(i)Weighted-average statutory income tax rate is calculated based on the aggregated amount of the income before taxes by country multiplied by the prevailing statutory income tax rate, divided by the consolidated income before taxes.

 

(ii)Comprises net changes in valuation allowances for the year, mainly related to net operating losses.

 

(iii)Expiration of loss tax carryforwards are mainly generated by holding legal entities and the Caribbean division.

 

(iv)Comprises changes in valuation allowance during 2019, 2018 and 2017 for $983, $(304) and $2,108, respectively.

 

(v)Comprises income tax withheld on the payment of interest on intercompany loans.

 

The tax effects of temporary differences and carryforwards that comprise significant portions of deferred tax assets and liabilities at December 31, 2019 and 2018 are presented below:

 

   2019  2018
Tax loss carryforwards (i)  $144,759   $178,993 
Purchase price allocation adjustment   15,158    17,006 
Property and equipment, tax inflation   36,690    38,588 
Other accrued payroll and other liabilities   33,065    30,300 
Share-based compensation   2,062    2,591 
Provision for contingencies   2,534    2,708 
Other deferred tax assets (ii)   56,927    26,193 
Other deferred tax liabilities (iii)   (32,280)   (7,979)
Property and equipment - difference in depreciation rates   (418)   (11,103)
Valuation allowance (iv)   (194,426)   (219,920)
Net deferred tax asset  $64,071   $57,377 

 

(i)As of December 31, 2019, the Company and its subsidiaries has accumulated net operating losses amounting to $540,231. The Company has net operating losses amounting to $192,736, expiring between 2020 and 2024. In addition, the Company has net operating losses amounting to $122,109 expiring after 2024 and net operating losses amounting to $225,386 that do not expire. Changes in tax loss carryforwards for the year relate to expiration of net operating losses (NOLs), mainly in holding legal entities and uses of NOLs, mainly in Brazil and Chile.

 

(ii)Other deferred tax assets reflect the net tax effects of temporary differences between the carrying amounts of assets for financial reporting purposes (accounting base) and the amounts used for income tax purposes (tax base). For the fiscal year ended December 31, 2019, this item includes: difference in depreciation of leases (related to differences between ASC842 and local tax regulation) for $30,524 mainly in Brazil; provision for regular expenses for $10,376 mainly Brazil, Mexico and Colombia; and bad debt reserve in Puerto Rico for $4,218. For the fiscal year ended December 31, 2018 this item includes bad debt reserve in Puerto Rico for $4,967, provision for regular expenses for $10,458, mainly corresponding to Brazil, Mexico and Colombia; and foreign currency exchange differences in Argentina and Brazil for $4,736.

 

(iii)Primarily related to leases contracts (related to differences between ASC842 and local tax regulation) and accelerated depreciation of fixed assets.

 

(iv)In assessing the realization of deferred income tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized.

 

The total amount of $64,071 for the year ended December 31, 2019, is presented in the consolidated balance sheet as non-current asset and non-current liability amounting to $68,368 and $4,297, respectively.

 

 

 

The total amount of $57,377 for the year ended December 31, 2018, is presented in the consolidated balance sheet as non-current asset and non-current liability amounting to $58,334 and $957, respectively.

 

Deferred income taxes have not been recorded for temporary differences related to investments in certain foreign subsidiaries. These temporary differences, comprise undistributed earnings considered permanently invested in subsidiaries amounted to $188,232 at December 31, 2019. Determination of the deferred income tax liability on these unremitted earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.

 

As of December 31, 2019, and 2018, the Company has not identified unrecognized tax benefits that would favorably affect the effective tax rate if resolved in the Company’s favor.

 

The Company account for uncertain tax positions by determining the minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. This determination requires the use of significant judgment in evaluating the tax positions and assessing the timing and amounts of deductible and taxable items. The Company is regularly under audit in multiple tax jurisdictions and is currently under examination in several jurisdictions. The Company is generally no longer subject to income tax examinations by tax authorities for years prior to 2013.

 

As of December 31, 2019, there are certain matters related to the interpretation of income tax laws which could be challenged by tax authorities in an amount of $183 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.

 

It is reasonably possible that, as a result of audit progression within the next 12 months, there may be new information that causes the Company to reassess the tax positions because the outcome of tax audits cannot be predicted with certainty. While the Company cannot estimate the impact that new information may have on their unrecognized tax benefit balance, it believes that the liabilities recorded are appropriate and adequate as determined under ASC 740.

 

17.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 2019 (from 2015 to 2019 only restricted share units). From 2011 to 2018, 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. The 2019 award vests on May 10, 2020. 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 grant date. 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.

 

 

 

2011 Equity Incentive Plan (continued)

 

On June 28, 2016, 1,117,380 stock options were converted to a liability award maintaining the original conditions of the 2011 Plan. There were not incremental compensation costs resulting from the modification. The employees affected by this modification were 104. The accrued liability is remeasured on a monthly basis until settlement.

 

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 related to this award in the amount of $1,884, $3,661 and $3,267 during fiscal years 2019, 2018 and 2017, respectively. Stock-based compensation expense is included within “General and administrative expenses” in the consolidated statements of income.

 

The Company recognized $(422), $(175) and $151 of related income tax (expense) benefit during fiscal years 2019, 2018 and 2017, respectively.

 

Stock Options

 

The following table summarizes the activity of stock options during fiscal years 2019, 2018 and 2017:

 

   Units  Weighted-average strike price  Weighted-average grant-date fair value
Outstanding at December 31, 2016   776,475    15.55    4.46 
Expired (i)   (141,986)   21.20    5.28 
Outstanding at December 31, 2017   634,489    14.28    4.28 
Expired (i)   (143,416)   21.20    5.89 
Outstanding at December 31, 2018   491,073    12.26    3.81 
Expired (i)   (216,633)   14.35    5.13 
Outstanding at December 31, 2019   274,440    10.62    2.77 
Exercisable at December 31, 2019   274,440    10.62    2.77 

 

(i)As of December 31, 2019, 2018 and 2017, additional paid-in capital included $1,111, $844 and $750, respectively, related to expired stock options.

 

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

 

   Vested (i)
Number of units outstanding   274,440 
Weighted-average grant-date fair market value per unit   2.77 
Total grant-date fair value   760 
Weighted-average accumulated percentage of service   100%
Stock-based compensation recognized in Additional paid-in capital   760 

 

(i)Related to exercisable awards.

 

 

 

Restricted Share Units

 

The following table summarizes the activity of restricted share units during fiscal years 2019, 2018 and 2017:

 

   Units  Weighted-average grant-date fair value
Outstanding at December 31, 2016   1,780,997    6.07 
2017 annual grant   497,960    9.20 
Partial vesting   (361,284)   7.65 
Forfeitures   (180,828)   5.99 
Outstanding at December 31, 2017   1,736,845    6.65 
2018 annual grant   520,393    8.50 
Partial vesting   (534,589)   6.01 
Forfeitures   (117,600)   7.24 
Outstanding at December 31, 2018   1,605,049    7.41 
2019 annual grant   35,000    8.00 
Partial vesting of 2014 grant   (38,222)   8.58 
Partial vesting of 2015 grant   (115,634)   6.33 
Partial vesting of 2016 grant   (134,501)   4.70 
Partial vesting of 2017 grant   (174,232)   9.20 
Forfeitures   (239,621)   7.74 
Outstanding at December 31, 2019   937,839    7.50 
Exercisable at December 31, 2019        

 

The total fair value of restricted share units vested during 2019, 2018 and 2017 was $3,295, $3,214 and $2,763, respectively. As of December 31, 2019 the Company issued 470,558 Class A shares, of which 10,870 are related to the 2018 partial vesting. Therefore, accumulated recorded compensation expense totaling $3,359 was reclassified from “Additional paid-in capital” to “Common Stock” upon issuance. As of December 31, 2019, there were 3,154 and 2,901 Class A shares, amounting to $18 and $20, pending of issuance in connection with the partial vestings 2019 and 2018, respectively.

 

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

 

Number of units outstanding (i)   937,839 
Weighted-average grant-date fair market value per unit   7.50 
Total grant-date fair value   7,034 
Weighted-average accumulated percentage of service   67.40%
Stock-based compensation recognized in Additional paid-in capital   4,741 
Compensation expense not yet recognized (ii)   2,293 

 

(i)Related to awards that will vest between fiscal years 2020 and 2023.

 

(ii)Expected to be recognized in a weighted-average period of 1.2 years.

 

 

 

Phantom RSU Award

 

In May 2019, the Company implemented a new long-term incentive plan (called Phantom RSU Award) to reward employees giving them the opportunity to share the success of the Company in the creation of value for its shareholders. In accordance with this plan, the Company granted units (called “Phantom RSU”) to certain employees, pursuant to which they are entitled to receive, when vested, a cash payment equal to the closing price of one Class A share on the respective day in which this benefit is due and the corresponding dividends per-share (if any) formally declared and paid during the service period.

 

The award has two types of grant. Phantom RSU type one has 465,202 units which vest over a requisite service period of five years as follows: 40% at the second anniversary of the date of grant and 20% at each of the following three years. The Company recognizes compensation expense related to these benefits 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. Phantom RSU type two has 1,207,455 units which vest 100% at the fifth anniversary from the date of grant. The grant-date stock price of both types of grants was $6.78.

 

The total compensation cost as of December 31, 2019, amounts to $2,102 which has been recorded under “General and administrative expenses” within the consolidated statement of income. The accrued liability is remeasured at the end of each reporting period until settlement.

 

The following table summarizes the activity under the plan as of December 31, 2019:

 

   Units
Grant 2019   1,672,657 
Forfeited   (10,837)
Outstanding at December 31, 2019   1,661,820 

 

   Total Non-vested (i)
Number of units outstanding   1,661,820 
Current share price   8.10 
Total fair value of the plan   13,461 
Weighted-average accumulated percentage of service   15.62%
Accrued liability (ii)   2,102 
Compensation expense not yet recognized (iii)   11,359 
(i)Related to awards that will vest between May 2021 and May 2024.

 

(ii)Presented within “Accrued payroll and other liabilities” in the Company’s non current liabilities balance sheet.

 

(iii)Expected to be recognized in a weighted-average period of 3.97 years.

 

 

 

18.Commitments and contingencies

 

Commitments

 

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

 

(i)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;

 

(ii)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. Nevertheless, on occasions McDonald’s provides the Company with support in order to encourage the Company growth plan;

 

(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.

 

If the Company would not be in compliance with these commitments under the MFA, it could be in material breach. A breach of the MFA would give McDonald’s Corporation certain rights, including the ability to acquire all or portions of the business.

 

The following table summarize Company’s ratios requirements for the three-month periods ended from March 31, 2019 to December 31, 2019, for which the Company is in compliance:

 

   Fixed Charge Coverage Ratio  Leverage Ratio
March 31, 2019   1.83    3.83 
June 30, 2019   1.86    3.76 
September 30, 2019   1.80    3.83 
December 31, 2019   1.86    3.77 

 

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 December 31, 2019 and 2018, the Company maintains a provision for contingencies, net of judicial deposits, amounting to $26,158 and $28,509, respectively, presented as follow: $2,035 and $2,436 as a current liability and $24,123 and $26,073 as a non-current liability, respectively. The breakdown of the provision for contingencies is as follows:

 

Description  Balance at beginning of period  Accruals, net  Settlements  Reclassifications and increase of judicial deposits  Translation  Balance at end of period
Year ended December 31, 2019:                              
Tax contingencies in Brazil (i)  $9,497   $1,455   $   $   $(357)  $10,595 
Labor contingencies in Brazil (ii)   21,108    12,916    (16,068)       (1,117)   16,839 
Other (iii)   11,462    3,070    (1,700)       (1,428)   11,404 
Subtotal   42,067    17,441    (17,768)       (2,902)   38,838 
Judicial deposits (iv)   (13,558)           354    524    (12,680)
Provision for contingencies  $28,509   $17,441   $(17,768)  $354   $(2,378)  $26,158 
                               

 

 

Year ended December 31, 2018:

 

Tax contingencies in Brazil (i)  $9,324   $1,805   $   $   $(1,632)  $9,497 
Labor contingencies in Brazil (ii)   21,061    20,785    (17,718)       (3,020)   21,108 
Other (iii)   15,646    1,405    (1,984)       (3,605)   11,462 
Subtotal   46,031    23,995    (19,702)       (8,257)   42,067 
Judicial deposits (iv)   (18,075)           1,843    2,674    (13,558)
Provision for contingencies  $27,956   $23,995   $(19,702)  $1,843   $(5,583)  $28,509 

 

Year ended December 31, 2017:

 

Tax contingencies in Brazil (i)  $13,312   $(2,599)  $(337)  $(667)  $(385)  $9,324 
Labor contingencies in Brazil (ii)   11,150    31,448    (21,130)       (407)   21,061 
Other (iii)   12,222    7,150    (3,960)   17    217    15,646 
Subtotal   36,684    35,999    (25,427)   (650)   (575)   46,031 
Judicial deposits (iv)   (18,572)   161        (60)   396    (18,075)
Provision for contingencies  $18,112   $36,160   $(25,427)  $(710)  $(179)  $27,956 
(i)In 2019, 2018 and 2017, it includes mainly CIDE.

 

(ii)It primarily relates to dismissals in the normal course of business.

 

(iii)It relates to tax and labor contingencies in other countries and civil contingencies in all the countries.

 

(iv)It primarily relates to judicial deposits the Company was required to make in connection with the proceedings in Brazil.

 

 

 

As of December 31, 2019, there are certain matters related to the interpretation of tax, labor and civil 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 $210 million and $227 million.

 

Provision for contingencies (continued)

 

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. Nevertheless, during December 2019, some of the Puerto Rican franchisees reached a Confidential Settlement Agreement with the Company finalizing all controversies and disputes among such parties. As a consequence of this agreement, the aggregate amount will be reduced.

 

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. During December 2019, the franchisee reached a Confidential Settlement Agreement with the Company finalizing all controversies and disputes among them.

 

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. In July 2019, the Court of Appeals issued Judgment revoking the Court of First Instance’s summary judgment in favor of PROA. PROA filed in the Puerto Rico Supreme Court an appeal of such determination, which was denied by the Court and PROA filed a reconsideration.

 

The Company believes that the probability of a loss is remote, 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. 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 PROA claim.

 

At December 31, 2019, the provision for contingencies includes $1,612 ($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 non-current asset in respect of McDonald’s Corporation’s indemnity in the consolidated balance sheet. The 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.

 

 

 

19.Disclosures about fair value of financial instruments

 

As defined in ASC 820 Fair Value Measurement and Disclosures, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The transaction is based on a hypothetical transaction in the principal or most advantageous market considered from the perspective of the market participant that holds the asset or owes the liability. The valuation techniques that can be used under this guidance are the market approach, income approach or cost approach. The market approach uses prices and other information for market transactions involving identical or comparable assets or liabilities, such as matrix pricing. The income approach uses valuation techniques to convert future amounts to a single discounted present amount based on current market conditions about those future amounts, such as present value techniques, option pricing models (e.g. Black-Scholes model) and binomial models (e.g. Monte-Carlo model). The cost approach is based on current replacement cost to replace an asset.

 

The Company utilizes market data or assumptions that market participants who are independent, knowledgeable and willing and able to transact would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. The Company attempts to utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company is able to classify fair value balances based on the observance of those inputs. The guidance establishes a formal fair value hierarchy based on the inputs used to measure fair value. The hierarchy gives the highest priority to level 1 measurements and the lowest priority to level 3 measurements, and accordingly, level 1 measurement should be used whenever possible.

 

The three levels of the fair value hierarchy as defined by the guidance are as follows:

 

Level 1: Valuations utilizing quoted, unadjusted prices for identical assets or liabilities in active markets that the Company has the ability to access. This is the most reliable evidence of fair value and does not require a significant degree of judgment. Examples include exchange-traded derivatives and listed equities that are actively traded.

 

Level 2: Valuations utilizing quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly for substantially the full term of the asset or liability.

 

Financial instruments that are valued using models or other valuation methodologies are included. Models used should primarily be industry-standard models that consider various assumptions and economic measures, such as interest rates, yield curves, time value, volatilities, contract terms, current market prices, credit risk or other market-corroborated inputs. Examples include most over-the-counter derivatives (non-exchange traded), physical commodities, most structured notes and municipal and corporate bonds.

 

Level 3: Valuations utilizing significant unobservable inputs provides the least objective evidence of fair value and requires a significant degree of judgment. Inputs may be used with internally developed methodologies and should reflect an entity’s assumptions using the best information available about the assumptions that market participants would use in pricing an asset or liability. Examples include certain corporate loans, real-estate and private equity investments and long-dated or complex over-the-counter derivatives.

 

Depending on the particular asset or liability, input availability can vary depending on factors such as product type, longevity of a product in the market and other particular transaction conditions. In some cases, certain inputs used to measure fair value may be categorized into different levels of the fair value hierarchy. For disclosure purposes under this guidance, the lowest level that contains significant inputs used in valuation should be chosen. Pursuant to ASC 820-10-50, the Company has classified its assets and liabilities into these levels depending upon the data relied on to determine the fair values. The fair values of the Company’s derivatives are valued based upon quotes obtained from counterparties to the agreements and are designated as Level 2.

 

The following fair value hierarchy table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018:

 

 

 

  

Quoted Prices in

Active Markets 

For Identical Assets

(Level 1) 

 

Significant Other 

Observable Inputs

(Level 2) 

 

Significant

Unobservable Inputs 

(Level 3)

 

 

Balance as of 

December 31,

 

Balance as of 

December 31,

   2019  2018  2019  2018  2019  2018  2019  2018
Assets                        
Cash equivalents  $49,038   $118,948   $   $   $   $   $49,038   $118,948 
Short-term Investments   25                        25     
Derivatives           58,107    55,463            58,107    55,463 
Total Assets  $49,063   $118,948   $58,107   $55,463   $   $   $107,170   $174,411 
Liabilities                                        
Derivatives           14,037    14,203            14,037    14,203 
Total Liabilities  $   $   $14,037   $14,203   $   $   $14,037   $14,203 
                                         

The derivative contracts were valued using various pricing models or discounted cash flow analyses that incorporate observable market parameters, such as interest rate yield curves, option volatilities and currency rates that were observable for substantially the full term of the derivative contracts.

 

Certain financial assets and liabilities not measured at fair value

 

At December 31, 2019, the fair value of the Company’s short-term and long-term debt was estimated at $701,538, compared to a carrying amount of $650,040. This fair value was estimated using various pricing models or discounted cash flow analysis that incorporated quoted market prices, and is similar to Level 2 within the valuation hierarchy. The carrying amount for notes receivable approximates fair value.

 

Non-financial assets and liabilities measured at fair value on a nonrecurring basis

 

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment). At December 31, 2019, no material fair value adjustments or fair value measurements were required for non-financial assets or liabilities, except for those required in connection with the impairment of long-lived assets and goodwill. Refer to Note 3 for more details, including inputs and valuation techniques used to measure fair value of these non-financial assets.

 

20.Certain risks and concentrations

 

The Company’s financial instruments that are exposed to concentration of credit risk primarily consist of cash and cash equivalents and accounts and notes receivable. Cash and cash equivalents are deposited with various creditworthy financial institutions, and therefore the Company believes it is not exposed to any significant credit risk related to cash and cash equivalents. Concentrations of credit risk with respect to accounts and notes receivable are generally limited due to the large number of franchisees comprising the Company’s franchise base.

 

All the Company’s operations are concentrated in Latin America and the Caribbean. As a result, the Company’s financial condition and results of operations depend, to a significant extent, on macroeconomic and political conditions prevailing in the region. See Note 22 for additional information pertaining to the Company’s Venezuelan operations.

 

 

 

21.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 described in Note 3.

 

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

 

   For the fiscal years ended December 31,
   2019  2018  2017
Revenues:         
Brazil  $1,385,566   $1,345,453   $1,496,573 
Caribbean division   399,251    483,743    474,822 
NOLAD   431,266    406,848    386,874 
SLAD   742,994    845,527    961,256 
Total revenues  $2,959,077   $3,081,571   $3,319,525 
                
Adjusted EBITDA:               
Brazil  $227,844   $218,391   $218,172 
Caribbean division   24,955    (8,281    40,844 
NOLAD   39,027    32,313    33,717 
SLAD   63,120    73,670    87,083 
Total reportable segments   354,946    316,093    379,816 
Corporate and others (i)   (63,171)   (58,096)   (74,879)
Total adjusted EBITDA  $291,775    257,997    304,937 

 

 

   For the fiscal years ended December 31,
   2019  2018  2017
Adjusted EBITDA reconciliation:               
                
Total Adjusted EBITDA  $291,775   $257,997   $304,937 
                
(Less) Plus items excluded from computation that affect operating income:               
Depreciation and amortization   (123,218)   (105,800)   (99,382)
Gains from sale or insurance recovery of property and equipment   5,175    4,973    95,081 
Write-offs of property and equipment   (4,733)   (4,167)   (8,528)
Impairment of long-lived assets   (8,790)   (18,950)   (17,564)
Impairment of goodwill   (273)   (167)   (200)
Reorganization and optimization plan expenses       (11,003)    
2008 Long-Term Incentive Plan incremental compensation from modification       575    (1,409)
Operating income   159,936    123,458    272,935 
(Less) Plus:               
Net interest expense   (52,079)   (52,868)   (68,357)
Gain (loss) from derivative instruments   439    (565)   (7,065)
Foreign currency exchange results   12,754    14,874    (14,265)
Other non-operating (expenses) income, net   (2,097)   270    (435)
Income tax expense   (38,837)   (48,136)   (53,314)
Net income attributable to non-controlling interests   (220)   (186)   (333)
Net income attributable to Arcos Dorados Holdings Inc.  $79,896   $36,847   $129,166 

 

 

   For the fiscal years ended December 31,
   2019  2018  2017
Depreciation and amortization:               
Brazil  $63,467   $52,632   $52,442 
Caribbean division   18,481    22,835    25,210 
NOLAD   21,422    20,829    20,635 
SLAD   20,713    19,293    15,292 
Total reportable segments   124,083    115,589    113,579 
Corporate and others (i)   4,894    5,696    5,978 
Purchase price allocation (ii)   (5,759)   (15,485)   (20,175)
Total depreciation and amortization  $123,218   $105,800   $99,382 
                
Property and equipment expenditures:               
Brazil  $146,322   $100,926   $91,769 
Caribbean division   15,934    18,640    16,759 
NOLAD   32,662    24,145    17,565 
SLAD   70,280    53,300    48,621 
Others   37    30    52 
Total property and equipment expenditures  $265,235   $197,041   $174,766 

 

 

   As of December 31,
   2019  2018
Total assets:          
Brazil  $1,328,984   $751,550 
Caribbean division   429,170    303,467 
NOLAD   458,235    247,697 
SLAD   389,976    291,300 
Total reportable segments   2,606,365    1,594,014 
Corporate and others (i)   67,195    105,835 
Purchase price allocation (ii)   (115,875)   (121,810)
Total assets  $2,557,685   $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 December 31, 2019 and 2018, corporate assets primarily includes corporate cash and cash equivalents, lease right of use and derivatives.

 

(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 $960,986 and $856,192 at December 31, 2019 and 2018, respectively. All of the Company’s long-lived assets are related to foreign operations.

 

 

 

22.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.

 

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 into a sole foreign exchange mechanism called DICOM. The unified system operates through an auction mechanism. During 2018, the Company accessed to DICOM 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, each time the Company access to NEW DICOM at an exchange rate greater than the one published, this rate is considered for remeasurements purposes.

 

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 that moment, the Sovereign Bolivar has been depreciating its value against US dollar. As of December 31, 2019, the exchange rate was 44,080.58 VES per US dollar.

 

The consequence of several reassessment of the exchange rate used for remeasurement purposes, the Company recognized negative impacts within the Consolidated Statement of Income, mainly related to the write down of certain inventories due to the impact on their net recoverable value, impairment of long-lived assets and foreign currency exchange results. The following table summarizes the impacts during fiscal years 2019, 2018 and 2017:

 

   2019  2018  2017
Write down of inventories (i)  $(4,468)  $(61,007)  $(4,079)
Impairment of long-lived assets (i)   (2,123)   (12,089)   (8,563)
Foreign currency exchange (loss) income (ii)   (583)   5,061    (4,269)

 

(i)Presented within Other operating income (expenses), net.

 

(ii)Presented within Foreign currency exchange results.

 

Revenues and operating (loss) income of the Venezuelan operations were $10,184 and $(8,240), respectively, for fiscal year 2019; $78,859 and $(52,054), respectively, for fiscal year 2018; and $101,477 and $6,804, respectively, for fiscal year 2017.

 

As of December 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 $0.2 million (including $0.4 million of cash and cash equivalents). In addition, Venezuela’s non-monetary assets were $13.6 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. Although these regulations caused a delay in the pricing plan, the Company was able to increase prices during the fiscal year ended December 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.

 

 

 

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

 

During fiscal years 2019, 2018 and 2017, the Company issued 470,558, 520,565 and 361,284 Class A shares, respectively, in connection with the partial vesting of restricted share units under the 2011 Equity Incentive Plan.

 

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 December 31, 2019, 2018 and 2017 the Company had 212,063,631; 211,593,073 and 211,072,508 shares issued with no par value, consisting of 132,063,631; 131,593,073 and 131,072,508 Class A shares, respectively, and 80,000,000 for Class B shares for each year.

 

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, amounting to $22,425.

 

Accumulated other comprehensive income (loss)

 

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

 

 

 

Accumulated other comprehensive income (loss) (continued)

 

   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 income (loss) before reclassifications   4,800    6,462    (938)   10,324 
Net loss reclassified from accumulated other comprehensive loss to consolidated statement of income       1,592    386    1,978 
Net current-period other comprehensive income (loss)   4,800    8,054    (552)   12,302 
Balances at December 31, 2017   (436,281)   8,359    (1,425)   (429,347)
Other comprehensive (loss) income before reclassifications   (62,996)   13,888    (418)   (49,526)
Net (income) loss reclassified from accumulated other comprehensive income to consolidated statement of income       (23,887)   494    (23,393)
Net current-period other comprehensive (loss) income   (62,996)   (9,999)   76    (72,919)
Balances at December 31, 2018   (499,277)   (1,640)   (1,349)   (502,266)
Other comprehensive loss before reclassifications   (12,168)   (5,185)   (55)   (17,408)
Net loss reclassified from accumulated other comprehensive loss to consolidated statement income       85    864    949 
Adoption of ASU 2017-12       (780)       (780)
Net current-period other comprehensive (loss) income   (12,168)   (5,880)   809    (17,239)
Balances at December 31, 2019  $(511,445)  $(7,520)  $(540)  $(519,505)

 

 

(i)Mainly 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. 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.

 

24.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.

 

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

 

   For the fiscal years ended December 31,
   2019  2018  2017
Net income attributable to Arcos Dorados Holdings Inc. available to common shareholders  $79,896   $36,847   $129,166 
Weighted-average number of common shares outstanding - Basic   204,003,977    209,136,832    210,935,685 
Incremental shares from assumed exercise of stock options (i)            
Incremental shares from vesting of restricted share units   664,375    983,634    1,060,726 
Weighted-average number of common shares outstanding - Diluted   204,668,352    210,120,466    211,996,411 
                
Basic net income per common share attributable to Arcos Dorados Holdings Inc.  $0.39   $0.18   $0.61 
Diluted net income per common share attributable to Arcos Dorados Holdings Inc.  $0.39   $0.18   $0.61 

 

(i)Options to purchase shares of common stock were outstanding during fiscal years 2019, 2018 and 2017. See Note 17 for details. These options were not included in the computation of diluted earnings per share because their inclusion would have been anti-dilutive.

 

25.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 December 31, 2019 and 2018:

 

   As of December 31,
   2019  2018
Accounts and notes receivable, net  $177   $860 
Other receivables   2,201    1,676 
Miscellaneous   3,719    2,963 
Accounts payable   (8,747)   (14,984)

 

The following table summarizes the transactions between the Company and the Axionlog Business for the fiscal years ended December 31, 2019, 2018 and 2017:

 

   Fiscal years ended December 31,
   2019  2018  2017
Food and paper (i)  $(188,276)  $(177,356)  $(173,387)
Occupancy and other operating expenses   (7,252)   (5,322)   (4,281)

 

(i)Includes $38,658 of distribution fees and $149,618 of suppliers purchases managed through the Axionlog Business for the fiscal year ended December 31, 2019; $41,633 and $135,723, respectively, for the fiscal year ended December 31, 2018; and $48,773 and $124,614, respectively, for the fiscal year ended December 31, 2017.

  

As of December 31, 2019 and 2018, the Company had other receivables totaling $2,325 and $2,692, respectively, and accounts payable with Lacoop, A.C. and Lacoop II, S.C. totaling $nil and $1,634, respectively.

 

26.Valuation and qualifying accounts

 

The following table presents the information required by Rule 12-09 of Regulation S-X in regards to valuation and qualifying accounts for each of the periods presented:

 

Description  Balance at beginning of period  Additions (i)  Deductions (ii)  Translation  Balance at end of period
Year ended December 31, 2019:                         
Deducted from assets accounts:                         
Allowance for doubtful accounts (iii)  $25,539   $8,524   $(10,892)  $(95)  $23,076 
Valuation allowance on deferred tax assets   219,920    2,375    (26,252)   (1,617)   194,426 
Reported as liabilities:                         
        Provision for contingencies   28,509    17,795    (17,768)   (2,378)   26,158 
Total  $273,968   $28,694   $(54,912)  $(4,090)  $243,660 
Year ended December 31, 2018:                         
Deducted from assets accounts:                         
Allowance for doubtful accounts (iii)  $21,467   $6,064   $(1,860)  $(132)  $25,539 
Valuation allowance on deferred tax assets   271,651    13,107    (37,718)   (27,120)   219,920 
Reported as liabilities:                         
Provision for contingencies   27,956    25,838    (19,702)   (5,583)   28,509 
Total  $321,074   $45,009   $(59,280)  $(32,835)  $273,968 
Year ended December 31, 2017:                         
Deducted from assets accounts:                         
Allowance for doubtful accounts (iii)  $16,367   $6,386   $(1,244)  $(42)  $21,467 
Valuation allowance on deferred tax assets   290,620    8,382    (27,515)   164    271,651 
Reported as liabilities:                         
Provision for contingencies   18,112    36,160    (26,137)   (179)   27,956 
Total  $325,099   $50,928   $(54,896)  $(57)  $321,074 

 

(i)Additions in valuation allowance on deferred tax assets are charged to income tax expense.

 

Additions in provision for contingencies are explained as follows:

 

Fiscal years 2019, 2018 and 2017 – Relate to the accrual of $17,441, $23,995 and $36,160, respectively, and a reclassification of $354 and $1,843, during fiscal years 2019 and 2018, respectively. See Note 18 for details.

 

(ii)Deductions in valuation allowance on deferred tax assets are charged to income tax expense.

 

Deductions in provision for contingencies are explained as follows:

 

Corresponds to the settlements and reclassifications amounting to $17,768 and $nil, respectively, during fiscal year 2019; $19,702 and $nil, respectively, during fiscal year 2018; and $25,427 and $710, respectively, during fiscal year 2017; as discussed in Note 18.

 

(iii)Presented in the consolidated balance sheet as follow: $22,442 and $24,999 at December 31, 2019 and 2018, respectively, within Accounts and notes receivable, net and $634 and $540 at December 31, 2019 and 2018, respectively, within Other receivables.

 

 

 

27.Subsequent events

 

On March 03, 2020, 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 10, 2020, $0.03 per share on August 13, 2020, and $0.03 per share on December 10, 2020.