Arcos Dorados Holdings Inc. — FY2019 Form 20-F
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing. Figures are in U.S. dollars unless stated otherwise; financial statements are audited under U.S. GAAP. The auditor issued an unqualified opinion, and management and the auditor reported effective internal control over financial reporting.
Business context
Arcos Dorados is the exclusive McDonald’s master franchisee in 20 Latin American and Caribbean countries and territories. At year-end it operated or franchised 2,293 restaurants: 1,580 company-operated and 713 franchised. Company-operated restaurants generated about 95% of revenue. Results are reported in four regions: Brazil, Caribbean, NOLAD and SLAD.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change / context |
|---|---|---|---|
| Total revenue | $2.959 billion | $3.082 billion | Down 4.0% |
| Operating income | $159.9 million | $123.5 million | Up 29.5%; operating margin 5.4%, versus 4.0% |
| Net income attributable to Arcos Dorados | $79.9 million | $36.8 million | Up 116.8%; diluted EPS $0.39, versus $0.18 |
| Adjusted EBITDA | $291.8 million | $258.0 million | Up 13.1%; margin 9.9%, versus 8.4%. Non-GAAP measure |
| Cash from operations | $223.5 million | $179.7 million | Up $43.8 million |
| Capital expenditures | $265.2 million | $197.0 million | Up $68.2 million |
| Cash and cash equivalents at year-end | $121.9 million | $197.3 million | Down $75.4 million |
| Working capital | $(190.1) million | $(28.8) million | More negative; current assets $405.4 million and current liabilities $595.4 million |
Net cash used in investing activities was $261.0 million; net cash used in financing was $29.6 million. Financing uses included $22.4 million of dividends and $14.0 million of share repurchases, partly offset by $13.2 million of net short-term borrowings. Cash fell despite higher operating cash flow, mainly as investment spending increased.
Year-end financial debt, net of the fair value of derivatives, was reported at $595.8 million. It included $348.1 million principal outstanding on 6.625% notes due 2023 and $265.0 million of 5.875% notes due 2027; short-term debt was $13.3 million. These debt figures exclude operating lease liabilities. Under lease accounting adopted in 2019, the company recognized $922.2 million of right-of-use assets and $931.7 million of operating lease liabilities at year-end. Undiscounted operating lease commitments were $1.660 billion.
Company-operated restaurant food and paper costs were 35.8% of sales, up 0.7 percentage points; payroll and benefits were 20.2%, down 0.5 points; and occupancy and other operating expenses were 28.4%, up 1.0 point. Higher delivery, IT and depreciation costs contributed to occupancy expense pressure.
Changes versus prior year
- Revenue declined in reported dollars largely because of local-currency depreciation, particularly in Argentina, Venezuela and Brazil. Regional revenue rose 3.0% in Brazil and 6.0% in NOLAD, but fell 17.5% in the Caribbean and 12.1% in SLAD.
- Management reported systemwide comparable-sales growth of 3,654.4% for 2019, largely reflecting hyperinflation in Venezuela and price increases in Venezuela and Argentina; the figure is not a straightforward indicator of underlying volume growth. Currency effects drove reported systemwide sales down 3.2%.
- Operating income benefited substantially from other operating income improving to a $4.9 million gain from a $61.1 million expense in 2018. The company cited a roughly $56.5 million lower Venezuelan inventory write-down and approximately $9.6 million lower long-lived-asset impairment.
- Net income also reflected lower income tax expense ($38.8 million versus $48.1 million) and a lower effective tax rate (32.6% versus 56.5%).
- The company opened 90 restaurants and closed 20, ending the year with 70 more systemwide locations. Property and equipment spending rose, including investment in new and existing restaurants.
Outlook, risks and unusual items
- COVID-19 subsequent event: The pandemic disrupted operations from mid-March 2020, after the reporting year. At the report date, some markets had closed restaurants, while others restricted service to drive-through and delivery or reduced hours. Management reported significant sales declines and anticipated continued disruption, lower operating cash flow, possible supply interruptions and food spoilage.
- As of March 31, 2020, the company had drawn $136 million of short-term debt, including $35 million from committed revolving facilities, and expected further borrowing as needed. Management stated liquidity was adequate for at least the next 12 months, but warned that credit availability and covenant compliance could deteriorate. It anticipated possible financial-ratio noncompliance in later 2020 quarters and sought lender waivers and a waiver from McDonald’s for MFA commitments.
- McDonald’s deferred franchise-fee payments on March–June 2020 sales until 2021. The parties also reduced the 2020 advertising-spend requirement from 5% to 4% of gross sales. The approved 2020–2022 restaurant-opening and reinvestment plan was withdrawn; a replacement plan was not yet finalized. Failure to agree revised plans or obtain waivers could breach the master franchise agreements.
- Key structural risks include dependence on McDonald’s franchise agreements, which run through 2027; renewal is not assured. MFA financial covenants, operating and investment requirements, and McDonald’s call-option rights can have material consequences if breached.
- Currency volatility and controls are significant risks. The Argentine peso depreciated 58.8% and the Brazilian real 25.5% against the U.S. dollar in 2019; Argentina reinstated exchange controls in September 2019. Revenue and cash generation in local currencies are exposed against U.S.-dollar debt and obligations.
- Contingencies: the recorded provision, net of judicial deposits, was $26.2 million. Separately, the filing disclosed potential losses within a range of $210 million to $227 million for certain tax, labor and civil matters; outcomes and timing are uncertain. The filing also identified $183 million of tax-law interpretation matters that could be challenged, with no formal claim then made for the cited years.
- Other notable items include $8.8 million of long-lived-asset impairment and $0.3 million of goodwill impairment in 2019. The company reported no off-balance-sheet arrangements. Venezuela remained subject to severe currency, inflation and price-control conditions.
Important facts for investors to verify
- Whether COVID-19 trading, borrowing and cash-preservation measures materially changed liquidity, operating results, or access to committed and uncommitted credit after the filing date.
- Progress on lender and McDonald’s covenant waivers, the revised 2020–2022 opening and reinvestment plans, and any changes to growth support or franchise-fee deferrals.
- The underlying sales and traffic trends obscured by hyperinflation and exchange-rate translation, especially in Venezuela and Argentina; assess constant-currency and regional results alongside reported U.S.-dollar revenue.
- Debt maturities and covenant headroom together with operating lease obligations, including the 2023 notes and the substantial lease commitments.
- Developments in the disclosed $210–$227 million potential-loss range, the $183 million tax matters, and the status and financial effect of settlements and other legal proceedings.
- Whether capital spending, restaurant openings and dividends remain appropriate given negative working capital, lower year-end cash, and pandemic-related uncertainty.