Business context and reporting period
Arcos Dorados Holdings Inc. filed this Form 20-F annual report for the fiscal year ended December 31, 2013; it is not a standalone fourth-quarter filing. The company operates and franchises McDonald’s restaurants in 20 Latin American and Caribbean territories. At year-end it had 2,062 restaurants, including 1,538 company-operated and 524 franchised. Financial statements are in U.S. dollars and prepared under U.S. GAAP.
Key financial metrics
| Metric | FY2013 | FY2012 |
|---|---|---|
| Total revenue | $4,033.3 million | $3,797.4 million |
| Operating income | $228.5 million | $236.6 million |
| Operating margin | 5.7% | 6.2% |
| Adjusted EBITDA | $344.5 million | $340.6 million |
| Adjusted EBITDA margin | 8.5% | 9.0% |
| Net income attributable to Arcos Dorados | $53.9 million | $114.3 million |
| Diluted earnings per share | $0.26 | $0.55 |
| Cash from operating activities | $217.0 million | $230.1 million |
| Cash and cash equivalents | $175.6 million | $184.9 million |
| Working capital | $7.3 million | $23.2 million |
Capital expenditures were $313.5 million, compared with $294.5 million in 2012. Cash used in investing activities was $310.7 million; financing provided $102.3 million. Total financial debt was $785.0 million at year-end, versus $659.8 million in 2012. It included $7.5 million of short-term debt and $775.9 million of long-term debt, with the remainder representing the net fair value of derivatives. The company reported a fixed-charge coverage ratio of 1.65 and leverage ratio of 3.84 against MFA thresholds of at least 1.50 and no more than 4.25, respectively.
Material changes versus the prior comparable period
- Revenue grew 6.2%; systemwide comparable sales rose 11.2% on a constant-currency basis, primarily from higher average checks and price increases. Systemwide sales growth was 16.7% in constant currency but 6.2% in reported nominal terms, reflecting currency depreciation.
- Operating income declined 3.4%, and operating margin contracted by 0.5 percentage points. Payroll, food and paper, occupancy, and depreciation costs increased.
- Net income attributable to the company fell 52.9%. Net interest expense rose 62.5% to $88.2 million, including a $23.5 million one-time loss from the purchase, exchange and redemption of the 2019 notes. Foreign-exchange losses increased to $38.8 million, including the impact of Venezuela’s 2013 devaluation.
- Adjusted EBITDA increased 1.1% in dollars, but its margin fell 0.5 percentage points. Adjusted EBITDA is a non-GAAP measure and may not be comparable with similarly named measures at other companies.
- Restaurant count increased by 114 net during 2013. Brazil and the Caribbean division reported lower operating income; SLAD improved, while NOLAD remained loss-making.
Outlook, risks and unusual items
Management stated that available liquidity and capital resources should be adequate for anticipated needs over at least the next 12 months. For 2014, the company expected capital expenditures of approximately $200 million and about 90 gross restaurant openings. Under its McDonald’s franchise agreements, it committed to open 250 restaurants and reinvest at least $180 million during 2014–2016; estimated opening costs alone were $175–$350 million. Management expected to fund commitments from operating cash flow and possible future debt or equity financing.
- Currency and country risk: Argentina’s peso depreciated 32.6% against the U.S. dollar in 2013 and about 23% in January 2014. Argentina and Venezuela maintain significant foreign-exchange controls that can delay or restrict transfers and payments. In Venezuela, the company used the official 6.30 bolívares-per-dollar rate for year-end reporting, while alternative SICAD rates were substantially weaker; management said it would reassess the appropriate rate in 2014. A change could cause a further foreign-exchange loss. Venezuela also introduced price, profit and commercial-rent controls, and authorities required price reductions on certain menu items.
- Franchise agreement and investment obligations: The McDonald’s master franchise agreements run principally through 2027 and require significant openings, reinvestment and advertising. Failure to meet specified obligations could trigger termination or McDonald’s call rights. The agreements also require an $80 million standby letter of credit in McDonald’s favor.
- Debt and investment demands: Debt increased following the 2023 notes issuance and refinancing of the 2019 notes. The 2016 notes mature in 2016; debt covenants and refinancing access could constrain liquidity. Contractual operating lease obligations totaled $1.16 billion, separate from reported debt.
- Contingencies: The company reported net provisions for contingencies of $14.8 million and disclosed tax matters with a possible loss range of $13–$20 million. A Puerto Rico franchisee case sought $66.7 million plus legal fees; no provision was recorded because management assessed an adverse outcome as having low probability. Brazilian labor proceedings resulted in settlement commitments, including payments and a four-year advertising campaign obligation.
- Other items: A $50 million dividend was declared for 2014. The auditor issued unqualified opinions on the financial statements and internal controls; management reported effective disclosure controls and internal control over financial reporting.
Most important facts for investors to verify
- Whether the reported 6.30 bolívares-per-dollar rate remained appropriate for Venezuela and how any subsequent exchange-rate reassessment affected reported earnings, assets and cash availability.
- Progress and funding for the 2014–2016 commitment to open 250 restaurants and reinvest at least $180 million, alongside the 2014 capital-expenditure outlook.
- Debt maturities, covenant headroom, refinancing needs and the effect of interest and currency exposure on cash generation.
- Developments in Argentine and Venezuelan exchange controls, price controls and rent rules, and their effects on repatriation, costs and franchise revenues.
- Outcomes and reserve adequacy for the disclosed tax and labor matters, including the possible $13–$20 million tax-loss range and Puerto Rico litigation.
- Whether comparable-sales growth, margin trends and operating cash flow support the dividend and planned investment without further leverage.