Arcos Dorados Holdings Inc. — FY 2017 Form 20-F
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing; quarterly results are not clearly provided in the filing excerpt. Financial statements are audited under U.S. GAAP, with an unqualified audit opinion.
Business context and financial performance
Arcos Dorados operates and franchises McDonald’s restaurants across 20 Latin American and Caribbean territories. At year-end it had 2,188 restaurants: 1,546 company-operated and 642 franchised.
| Metric (US$ millions, except per share data and percentages) | 2017 | 2016 |
|---|---|---|
| Total revenue | 3,319.5 | 2,928.6 |
| Operating income | 272.9 | 178.6 |
| Operating margin | 8.2% | 6.1% |
| Net income attributable to Arcos Dorados | 129.2 | 78.8 |
| Basic and diluted EPS | $0.61 | $0.37 |
| Adjusted EBITDA (non-GAAP) | 304.9 | 238.4 |
| Adjusted EBITDA margin | 9.2% | 8.1% |
| Operating cash flow | 255.2 | 164.2 |
| Capital expenditures | 174.8 | 92.3 |
Company-operated restaurant sales rose 12.8%; franchised restaurant revenue increased 25.5%. Systemwide comparable sales grew 26.3%, while systemwide sales rose 16.3% in reported U.S. dollars and 27.8% on a constant-currency basis. These measures were materially affected by Venezuela’s hyperinflation and currency translation. Brazil generated 45.1% of revenue and Argentina 19%.
Liquidity, debt and financial position
- Cash and cash equivalents were $308.5 million at year-end, up from $194.8 million. Working capital was positive $47.5 million, versus negative $103.1 million in 2016.
- Net cash used in investing activities was $124.5 million; financing activities used $3.4 million. Investing included $174.8 million of property and equipment spending, partly offset by asset-sale proceeds.
- Reported total financial debt was $621.5 million. Balance-sheet long-term debt was $633.5 million, including $348.1 million of 2023 notes and $265.0 million of 2027 notes; cash and derivative valuation treatments mean these figures should not be treated as interchangeable.
- The company issued $265 million of 5.875% notes due 2027, repaid its secured loan, and repurchased $48.9 million of 2023 notes. The 2023 notes bear 6.625% interest and mature in 2023.
- Debt covenants were reported as compliant at year-end: MFA leverage ratio 3.80 and fixed-charge coverage ratio 1.77; revolving-credit net-debt-to-EBITDA ratio 0.75. The company also had $50 million in revolving credit facilities, described as available for working capital and general corporate purposes.
Material changes and unusual items
- Revenue increased 13.3%, operating income 52.8%, and attributable net income 63.9% versus 2016. Adjusted EBITDA rose 27.9%.
- Operating income included $68.6 million of other operating income, with $37.0 million attributed to the real-estate asset monetization plan. The plan generated cumulative redevelopment proceeds of $167.2 million; management said debt-reduction targets had been achieved and it did not plan further deals at that time.
- Currency results shifted from a $32.4 million gain in 2016 to a $14.3 million loss in 2017. Derivative losses were $7.1 million. The 2017 effective tax rate was 29.2%, compared with 43.0% in 2016.
- Venezuelan operations reported $101.5 million revenue and $6.8 million operating income in 2017, but results and comparability were affected by hyperinflation, exchange-rate changes, price controls and restrictions on repatriation. The company planned to reassess its Venezuela remeasurement rate in 2018 after the exchange mechanism changed.
- Hurricanes in Puerto Rico, St. Thomas and St. Croix affected operations in September 2017. Insurance payments partly offset related costs.
Outlook, commitments and risks
- For 2018, management expected capital expenditures of $200–$230 million, including 65–70 gross restaurant openings. For 2017–2019, it expected at least 200 openings and $390 million of reinvestment, versus contractual commitments of 180 openings and $292 million; total capital expenditures were expected to be about $660 million. Management expected to fund commitments primarily from operating cash flow but did not assure that cash generation would suffice.
- McDonald’s growth support helped produce a 5.2% effective royalty rate in 2017; management projected 5.7% in 2018 and 5.9% in 2019. Franchise rights under the master franchise agreements run through 2027, with renewal dependent on McDonald’s granting an option.
- Management cited near-term macroeconomic weakness and lower consumption in parts of the region, ongoing inflation and currency volatility, and increased competition that constrained pricing flexibility. Other principal risks include commodity and labor-cost inflation, foreign-exchange controls, franchisee financial health, supplier dependence, food safety, regulation, and execution of restaurant modernization and digital initiatives.
- Contingencies net of judicial deposits were $28.0 million at year-end. Separately, the filing describes possible losses of $89–$122 million for certain tax and labor matters and a potential $150 million tax-assessment exposure for 2009–2013; these are uncertain exposures, not stated as accrued liabilities. Brazilian labor proceedings and Puerto Rican franchisee-related claims remain important matters.
- The board approved a return to dividends in March 2018: $0.10 per share in two $0.05 installments. No dividend was declared for FY 2017.
Most important facts for investors to verify
- How much of 2017’s sales and earnings growth reflects underlying volume and pricing versus Venezuela’s hyperinflation, currency movements, and asset-sale gains.
- The composition, maturity schedule and covenant headroom of debt, and the distinction between reported financial debt and balance-sheet debt.
- Whether planned restaurant openings, reinvestment and capital spending can be financed from operating cash flow without additional borrowing.
- The outcome and potential financial impact of the Brazil labor matters, tax assessments and Puerto Rico franchisee litigation.
- Whether Venezuela’s exchange-rate and operating conditions permit reliable earnings measurement and cash repatriation, and whether projected royalty rates and dividends are sustainable.