Business context and reporting period
Arcos Dorados Holdings Inc. filed this audited Form 20-F for the fiscal year ended December 31, 2011; it is an annual report, not a standalone fourth-quarter filing. The company operates and franchises McDonald’s restaurants in 20 Latin American and Caribbean territories. Financial statements are prepared under U.S. GAAP and presented in U.S. dollars. Unless noted otherwise, figures below are in millions of U.S. dollars.
Key financial metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total revenue | $3,657.6 | $3,018.1 | +21.2% |
| Operating income | $250.8 | $204.6 | +22.6% |
| Net income attributable to Arcos Dorados | $115.5 | $106.0 | +9.0% |
| Adjusted EBITDA | $339.8 | $299.1 | +13.6% |
| Operating margin | 6.9% | 6.8% | +0.1 percentage point |
| Adjusted EBITDA margin | 9.3% | 9.9% | -0.6 percentage point |
| Net cash from operating activities | $261.6 | $263.9 | Down $2.3 |
| Capital expenditures | $325.9 | $176.2 | +85.0% |
| Cash and cash equivalents at year-end | $176.3 | $208.1 | Down $31.8 |
Growth was supported by 13.7% systemwide comparable-sales growth, 85 net restaurant additions, and favorable currency translation in most territories. Management said higher average checks generated 81.9% of comparable-sales growth, with traffic accounting for the remainder. Company-operated restaurants generated 95.8% of revenue in 2011.
Operating costs grew broadly with revenue. Food and paper costs were $1,216.1 million, or 34.7% of Company-operated restaurant sales, down 0.7 percentage point as a share of sales. Payroll and benefits were $701.3 million, or 20.0% of those sales, up 0.4 point. Adjusted EBITDA is a non-GAAP measure defined by the company and may not be comparable across issuers.
Liquidity, debt and capital structure
Year-end current assets were $588.6 million and current liabilities were $589.3 million, leaving working capital of negative $0.7 million. The company reported $261.6 million of operating cash flow and $320.1 million of cash used in investing activities. Cash declined to $176.3 million. Total financial debt was reported as $532.3 million, including $0.8 million short-term debt, $528.9 million long-term debt and $2.6 million related to derivative fair value; debt balances and derivative liabilities are presented separately in the financial statements.
In July 2011 the company issued R$400 million of 10.25% notes due 2016, payable in U.S. dollars, and redeemed $141.4 million principal amount of its 7.5% notes due 2019. The redemption produced a one-time $13.9 million loss. A $50 million committed revolving credit facility was available for working capital and general purposes; the company reported no borrowings under it at the financial-statement issuance date. Management stated that available liquidity was adequate for anticipated requirements for at least the next 12 months.
Material changes versus prior comparable period
- Revenue and operating income rose, but net income grew more slowly as interest expense increased 46.0% to $60.7 million and income tax expense rose to $44.6 million from $3.5 million. The 2010 tax expense benefited from a substantial deferred-tax valuation-allowance release.
- Adjusted EBITDA increased, while its margin fell from 9.9% to 9.3%, reflecting cost and mix pressures, including increased payroll costs and higher corporate expenses.
- Operating cash flow was nearly flat year over year while capital expenditures rose sharply to $325.9 million, as the company accelerated restaurant development and reinvestment.
- The restaurant system grew from 1,755 to 1,840 locations. The company opened 101 restaurants, closed 16, and reimaged 122 existing restaurants in 2011.
- Foreign-exchange results shifted from a $3.2 million gain in 2010 to a $23.9 million loss in 2011. Derivative losses eased to $9.2 million from $32.8 million, largely after the company unwound most cross-currency swaps.
Outlook, commentary, risks and unusual items
The company forecast 2012 capital expenditures of $340–$350 million and approximately 130 gross restaurant openings. Under its McDonald’s master franchise agreements, it committed to at least $60 million of annual reinvestment and at least 250 new restaurants over 2011–2013. Management expected growth opportunities from rising consumer purchasing power and convenience demand, and said general and administrative costs as a percentage of sales could decline as recent investments generate revenue. These are forward-looking expectations, not guarantees.
- Franchise dependence: The company’s operating rights depend on McDonald’s agreements, generally through 2027. The agreements impose opening, reinvestment, marketing, ownership and financial requirements; material breaches can lead to termination or McDonald’s call-option rights.
- Foreign exchange and controls: Revenues are earned mainly in local currencies, while material debt and royalty obligations are U.S.-dollar-linked. Argentine controls can delay or restrict transfers; Venezuelan currency approvals and access to foreign currency remain constrained. Venezuelan results are especially sensitive to exchange-rate and accounting changes.
- Costs and operations: Inflation, food commodities, wages, imports, competition, price controls, supplier concentration and the largely oral nature of supplier arrangements may pressure margins or disrupt supply. Labor regulation and food-safety, nutrition and advertising rules could add costs or constrain operations.
- Commitments and contingencies: The company reported a $65.0 million net provision for contingencies, including Brazilian tax and labor matters. A Puerto Rico franchisee lawsuit seeks $66.7 million plus attorneys’ fees; the company recorded no provision, citing a low probability of an adverse final resolution. The filing says actual outcomes could exceed reserves.
- Unusual items: The company recorded a $34.0 million cash settlement of a CEO award following its IPO, a $13.9 million loss on the 2019-note redemption, $1.7 million of long-lived-asset impairments and a $2.1 million goodwill impairment. The Axionlog distribution business was split off in March 2011; the company continued to rely on it for distribution services and maintained $16.1 million of supplier guarantee deposits for its benefit.
- Other investor considerations: The company declared $50.0 million in dividends in 2011 and paid $56.6 million in dividends during the year. Its operating lease obligations totaled $925.9 million. The annual report disclosed effective disclosure controls, but no management assessment or auditor attestation of internal control over financial reporting because of the transition period for newly public companies.
Most important facts for investors to verify
- Whether comparable-sales growth and pricing can continue without further deterioration in Adjusted EBITDA margin, particularly as wages, commodities and inflation rise.
- How the planned 2012 capital spending and 2011–2013 franchise commitments will be funded, and how they affect cash, leverage and dividends.
- The practical availability of cash held in Argentina and Venezuela, and the sensitivity of reported results and debt service to currency movements and controls.
- The status and possible financial exposure from Brazilian tax and labor matters, the Puerto Rico franchisee litigation, and the Brazilian royalty-tax contingency.
- The terms, headroom and compliance status of debt covenants and McDonald’s franchise-agreement requirements, including the required financial ratios.
- The company’s reliance on Axionlog after the split-off, related-party arrangements and guarantees, and the extent to which these create operational or credit exposure.