Arcos Dorados Holdings Inc. — FY2020 Form 20-F
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone Q4 filing; the filing does not provide a clear set of Q4-only results. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars.
Business context and performance
Arcos Dorados operates and franchises McDonald’s restaurants in 20 Latin American and Caribbean countries and territories. At year-end, it had 2,236 restaurants: 1,576 company-operated and 660 franchised. COVID-19 restrictions drove closures, capacity limits and lower customer traffic; at the pandemic’s peak, about half the restaurant footprint was fully closed. By year-end, nearly all restaurants had at least one operating sales channel.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total revenue | $1.984 billion | $2.959 billion |
| Operating income (loss) | $(66.8) million | $159.9 million |
| Net income (loss) attributable to Arcos Dorados | $(149.5) million | $79.9 million |
| Basic and diluted earnings per share | $(0.73) | $0.39 |
| Adjusted EBITDA | $68.1 million | $291.8 million |
| Operating margin | (3.4)% | 5.4% |
| Adjusted EBITDA margin | 3.4% | 9.9% |
| Net cash from operating activities | $16.0 million | $223.5 million |
| Capital expenditures | $90.1 million | $267.9 million |
| Cash and cash equivalents at year-end | $166.0 million | $121.9 million |
Adjusted EBITDA is a non-GAAP measure. The company-operated restaurant food-and-paper cost ratio was 35.7% of sales, while payroll and benefits were 21.8% and occupancy and other operating expenses were 32.9%.
Material changes and liquidity
- Revenue fell 32.9%; systemwide comparable sales declined 17.4%. The reported decline reflected pandemic-related traffic losses and local-currency depreciation. Systemwide sales in constant currency declined 15.6%.
- The company reported a $149.5 million attributable net loss, compared with income of $79.9 million in 2019. Foreign-exchange results shifted from a $12.8 million gain to a $31.7 million loss; operating results also included a $25.7 million gain from securities.
- Operating cash flow fell to $16.0 million. Investing cash outflow declined to $88.7 million, mainly as capital spending was curtailed. Financing provided $126.0 million, including $153.4 million from issuance of 2027 notes.
- At year-end, cash was $166.0 million, short-term debt was zero, and working capital was negative $87.9 million. Long-term debt on the balance sheet was $776.6 million. The company separately reported total financial debt of about $673.3 million after the stated derivative fair-value offset; these figures use different presentations.
- During 2020, the company issued $150 million of additional 2027 notes and exchanged notes due 2023 for approximately $138.4 million of 2027 notes, extending part of its maturity profile. The 2023 notes carry 6.625% interest and mature in September 2023; the 2027 notes carry 5.875% and mature in April 2027.
- Undiscounted operating lease payments were $1.415 billion, including $128.2 million due in 2021; recorded operating lease liabilities were $809.4 million.
Management commentary, outlook and risks
- Management said liquidity and capital resources should cover anticipated needs for at least 12 months, while warning that renewed mobility restrictions, reduced credit availability or weaker sales could pressure liquidity. Uncommitted credit lines may be withdrawn.
- McDonald’s deferred royalty payments for sales in March through July 2020 until the first half of 2021, reduced the 2020 advertising-spend requirement from 5% to 4%, and replaced the prior 2020–2022 opening and reinvestment plan with a 2021-only plan. The company expected to discuss its 2022 plan in the second half of 2021 and expected an effective royalty rate of about 5.3% in 2021 with growth support. Advertising spend returned to 5% in 2021. The filing provides no quantified sales or earnings guidance.
- The company was out of compliance with Master Franchise Agreement leverage and fixed-charge coverage ratios in 2020. McDonald’s granted limited waivers through December 31, 2021. At December 31, 2020, the reported ratios were 7.71 leverage and 0.96 fixed-charge coverage, against ordinary agreement thresholds of 4.25 and 1.50. Failure to secure further relief or restore compliance could trigger default consequences, including McDonald’s rights under the agreements.
- COVID-19, inflation, currency depreciation and controls, especially in Argentina, Brazil and Venezuela, remain significant risks. The franchise rights generally run through 2027, and renewal is subject to McDonald’s decision and terms.
- At year-end, the net provision for contingencies was $26.9 million. The filing also disclosed possible losses of $226–$249 million on certain tax, labor and civil matters, and $169 million of potentially challengeable tax-law interpretations for fiscal years 2009–2015; no formal claim had been made for the latter matters within the relevant statutes of limitation.
- Management recorded $6.6 million of long-lived-asset impairment and $1.1 million of goodwill impairment in 2020. The audited financial statements received an unqualified opinion, and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether sales, traffic and margins recovered after year-end, and how much performance depended on delivery, takeout or government support.
- Repayment of deferred royalties, future MFA ratio compliance, lender waivers and renewal or replacement of the $80 million letters of credit.
- The terms and funding requirements of the 2021 restaurant-opening and reinvestment plan, and agreement on the 2022 plan.
- Cash available after lease payments, debt service and required capital spending; distinguish balance-sheet debt from the company’s derivative-adjusted debt presentation.
- Developments in the disclosed contingent-loss range and tax matters, and the effects of currency restrictions and devaluations on cash remittances and reported results.