Business Context and Reporting Period
Arcos Dorados Holdings Inc. is the largest McDonald's franchisee in the world by systemwide sales and the largest fast-food chain in Latin America and the Caribbean. The company operates and franchises McDonald's-branded restaurants across 20 countries and territories in the region. This Form 20-F covers the fiscal year ended December 31, 2012. The company is incorporated in the British Virgin Islands and maintains its books in U.S. dollars under U.S. GAAP.
Key Financial Metrics (Year Ended Dec 31, 2012)
| Metric | 2012 Value | 2011 Value |
|---|---|---|
| Total Revenues | $3,797.4 million | $3,657.6 million |
| Operating Income | $236.6 million | $250.8 million |
| Net Income (Attributable to Arcos Dorados) | $114.3 million | $115.5 million |
| Diluted EPS | $0.55 | $0.54 |
| Adjusted EBITDA | $340.6 million | $339.8 million |
| Operating Margin | 6.2% | 6.9% |
| Adjusted EBITDA Margin | 9.0% | 9.3% |
| Cash and Cash Equivalents | $184.9 million | $176.3 million |
| Total Debt (Financial) | $659.8 million | $532.3 million |
| Capital Expenditures | $300.5 million | $325.9 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 3.8% to $3.797 billion, driven by a 9.2% systemwide comparable sales growth and the net addition of 108 restaurants. This growth was partially offset by the depreciation of local currencies (Brazilian real, Argentine peso, Mexican peso) against the U.S. dollar.
- Profitability Decline: Operating income decreased 5.6% to $236.6 million. The decline was primarily due to increased operating costs (payroll and occupancy) and foreign currency translation losses, which outweighed the benefits of comparable sales growth.
- Segment Performance:
- SLAD (South Latin America): The strongest performer with 17.4% revenue growth and 20.8% operating income growth, driven by high comparable sales growth (19.9%) in Argentina and Venezuela.
- Brazil: Revenue decreased 4.9% and operating income dropped 21.7% due to significant currency depreciation of the Brazilian real, despite positive constant currency sales growth.
- NOLAD (North Latin America): Revenue increased 8.1% and operating income improved significantly (36.2% increase) due to operational efficiencies and comparable sales growth.
- Debt Levels: Total financial debt increased to $659.8 million, primarily due to the issuance of additional 2016 notes in April 2012.
Guidance, Outlook, Risks, and Unusual Items
- Capital Commitments: Under the Master Franchise Agreements (MFAs), the company is committed to reinvesting at least $60 million annually and opening no less than 250 new restaurants during the 2011-2013 period. Estimated costs for these commitments range from $175 million to $385 million.
- Foreign Exchange Risk: The company faces significant exposure to currency fluctuations. In 2012, the depreciation of the Argentine peso (14.3%), Brazilian real (9.0%), and Mexican peso negatively impacted reported U.S. dollar results. Venezuela remains a high-risk jurisdiction with strict exchange controls and a highly inflationary economy.
- Legal Proceedings:
- Brazilian Labor Litigation: A civil complaint was filed regarding work schedules and labor laws. In March 2013, the company reached an agreement to implement fixed work schedules in certain states and pay fines/collective damages totaling approximately R$7.5 million over four years.
- Puerto Rican Franchisees: Ongoing litigation regarding the applicability of Puerto Rico's Dealers' Act (Law 75) to franchise agreements. No provision has been recorded as the company believes a negative outcome is unlikely.
- Dividends: The company declared a total dividend of $50.0 million for 2012 ($0.24 per share) and announced a similar $50.0 million dividend for 2013.
- Unusual Items: The company recorded a $13.9 million loss in 2011 related to the partial redemption of 2019 notes, which is not present in 2012. In 2012, the company recovered $12.0 million in Brazilian tax credits.
Investor Verification Checklist
- Currency Exposure: Verify the impact of ongoing currency depreciation in Argentina, Brazil, and Venezuela on future U.S. dollar reported earnings versus constant currency performance.
- Venezuela Operations: Assess the risk of exchange controls and the recent devaluation (announced Feb 2013) on the company's ability to repatriate cash and service dollar-denominated debt.
- Master Franchise Agreement (MFA) Compliance: Confirm the company's ability to meet the $60 million annual reinvestment and restaurant opening targets required by McDonald's to avoid material breach.
- Debt Covenants: Review the leverage ratio (4.07x as of Dec 31, 2012) against the MFA covenant limit of 4.25x and the fixed charge coverage ratio (1.92x) against the 1.50x minimum.
- Legal Reserves: Monitor the resolution of the Brazilian labor litigation and the Puerto Rican franchisee lawsuit for potential changes in the $27.8 million provision for contingencies.