Arcos Dorados Holdings Inc 6-K/A, filed Apr 14, 2022
Arcos Dorados Holdings Inc. (ARCO)
6-K/A
2022-04-14
For: 2022-04-14
View Original
Added on
August 22, 2026
About this 6-K/A
Arcos Dorados Holdings Inc filed this 6-K/A on April 14, 2022.
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
6-K/A
REPORT
OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR
15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For
the month of April, 2022
Commission
File Number: 001-35129
Arcos
Dorados Holdings Inc.
(Exact
name of registrant as specified in its charter)
Dr.
Luis Bonavita 1294, Office 501
Montevideo,
Uruguay, 11300 WTC Free Zone
(Address
of principal executive office)
Indicate
by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
|
Form
20-F |
X |
Form
40-F |
||||||||||||
Indicate
by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
|
Yes |
No | X | ||||||||||||
Indicate
by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
|
Yes |
No | X | ||||||||||||
ARCOS
DORADOS HOLDINGS INC.
EXPLANATORY
NOTE
This
Form 6-K/A is being furnished by Arcos Dorados Holdings Inc. (“the Company”) to amend its previously filed report on Form
6-K (the “Form 6-K”) dated March 16, 2022 (the first such report on that date), which Form 6-K contains the Company’s
financial statements as of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021. The purpose
of this Form 6-K/A is to delete the “Incorporation by Reference” section set forth in the Form 6-K in its entirety. Other
than the deletion of this section, the Form 6-K is not being amended or modified in any way.
ARCOS
DORADOS HOLDINGS INC.
TABLE
OF CONTENTS
| ITEM | |||||
| 1 |
Arcos Dorados
Holdings Inc. – Consolidated Financial Statements as of December 31, 2021 and 2020 and for each of the three years in the period
ended December 31, 2021 | ||||
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
Arcos
Dorados Holdings Inc. | |||||||||||||||||
| By: | /s/ Juan David Bastidas | ||||||||||||||||
| Name: | Juan David Bastidas | ||||||||||||||||
| Title: |
Chief
Legal Counsel | ||||||||||||||||
Date:
April 14, 2022
Item
1
Arcos Dorados
Holdings Inc.
Consolidated
Financial Statements
As of December
31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
F-1
INDEX
TO FINANCIAL STATEMENTS
Audited
Consolidated Financial Statements – Arcos Dorados Holdings Inc.
| Report of Independent Registered Public Accounting Firm | |||||
| Consolidated Statements of Income (Loss) for the fiscal years ended December 31, 2021, 2020 and 2019 | |||||
| Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended December 31, 2021, 2020 and 2019 | |||||
| Consolidated Balance Sheet as of December 31, 2021 and 2020 | |||||
| Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2021, 2020 and 2019 | |||||
| Consolidated Statements of Changes in Equity for the fiscal years ended December 31, 2021, 2020 and 2019 | |||||
| Notes to the Consolidated Financial Statements as of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021 | |||||
F-2
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Shareholders of
ARCOS
DORADOS HOLDINGS INC.:
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of Arcos Dorados Holdings Inc. (the “Company”) as of December 31,
2021 and 2020, and the related consolidated statements of income (loss), comprehensive income (loss), changes in equity and cash flows
for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated
financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits
included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable
basis for our opinion.
Critical
Audit Matters
The
critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated
or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial
statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matters
does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the
critical audit matters below, providing a separate opinion on the critical audit matters or on the account or disclosure to which they
relate.
F-3
| Impairment of long-lived assets for markets with impairment indicators | ||||||||
| Description of the Matter |
As
of December 31, 2021, the carrying amount of long-lived assets is thousands of $1,540,711, including PPE, Leases right of use assets,
net, and intangible assets. As a result of its impairment assessment exercise, the Company recorded a loss of thousands of $1,573, during
2021.
The
Company operates in twenty countries in Latin America and the Caribbean with different economic and political circumstances. As explained
in note 3 to the consolidated financial statements, management carries out an impairment assessment on long-lived assets annually, or
whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable, that includes identifying
the existence of impairment indicators at the country level. When impairment indicators are identified for any given country, an estimate
of undiscounted future cash flows is prepared by the Company for each individual restaurant located in that country. The estimation of
future cash flows requires management to make assumptions about the future business performance and other key inputs that entail significant
judgments by management. These estimates can be significantly impacted by many factors, including changes in global and local business
and economic conditions, including the effects of the COVID-19 outbreak mentioned in note 1, operating costs, inflation, competition and
consumer and demographic trends.
Auditing
this area is especially challenging because the process of estimation of undiscounted future cash flows implies the determination of key
assumptions that are complex and highly judgmental. The key assumptions used by management in the impairment calculation include country
economic indicators projections of sales, margin growth rates, capital expenditures and useful lives of long-lived assets. These key assumptions
are forward looking and could be affected by future economic and market conditions.
| |||||||
| How We Addressed the Matter in Our Audit |
We
obtained an understanding, evaluated the design, and tested controls of the impairment calculation process. For example, we identified
and tested the operating effectiveness of the Company’s controls around the consistency of the estimation model inputs with the
accounting records and the evaluation of the key assumptions made by management.
To
test management assessment of impairment of long lived assets our audit procedures included, among others, testing the macroeconomic variables
used by management, such as inflation rates and GDP growth, assessing the consistency between the estimated cash flows in the model and
the business plan approved by management, comparing the remaining life of fixed assets with the accounting records and the clerical accuracy
of the computations. Additionally, we evaluated the valuation methods used by management, including the key assumptions used in determining
the undiscounted future cash flows of each restaurant. We also involved our valuation specialists to assist in evaluating the methodology
and the key assumptions used in the future cash flows estimation by management. We also compared forecasts to business plans and previous
forecasts of projected cash flows to actual results to assess management estimation process.
We also assessed
the completeness of the related disclosures in note 3 to the consolidated financial statements.
| |||||||
F-4
| Tax and labor contingencies | ||||||||
| Description of the Matter | The
Company has operations in Brazil representing 37.7% of the revenues of the group for the year ended December 31, 2021 and maintains a
provision for tax and labor contingencies in that country that represents a 68% of the provision for contingencies balance of the group
as of December 31, 2021. As described in note 18, the Company assesses the likelihood of any adverse judgments in labor claims or outcomes
on its tax positions, including income tax and other taxes, based on the technical merits of a tax position derived from legislation and
statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position
or labor claim. Auditing the measurement of tax and labor contingencies related to certain claims and transactions was challenging because their measurement is complex, highly judgmental, and is based on interpretations of tax laws, case-law jurisprudence and requires estimating the future outcome of individual claims. | |||||||
| How We Addressed the Matter in Our Audit |
We
obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls around identification
of matters, evaluation of tax and labor opinions, and tested management’s review controls over the assumptions made in the estimation
of provisions and related disclosures.
To
test the labor and tax contingencies provision, our audit procedures included, among others, involving personnel with specialized knowledge
to assess the technical merits of the Company’s tax positions; assessing the Company’s correspondence with the relevant
tax authorities; evaluating third-party tax opinions obtained by the Company; separately corresponding with certain key external
tax and legal advisors of the Company, inspecting the minutes of the meetings of the Audit Committee and Board of Directors; obtaining
confirmation letters from the group’s vice president of human resources and the group’s tax director, and evaluating the application
of relevant tax law in the Company’s determination of its provision. As part of our evaluation, we have considered historical information
to assess the assumptions made by management in relation to the potential outcomes.
We
also evaluated the completeness of Company’s disclosures included in note 18 to the consolidated financial statements in relation
to these matters.
| |||||||
| /s/ Pistrelli, Henry Martin y Asociados S.R.L. | ||
| PISTRELLI, HENRY MARTIN Y ASOCIADOS S.R.L. | ||
| Member of Ernst & Young Global | ||
| We have served as the Company’s auditor since 2007. | ||
Buenos Aires,
Argentina
March 16,
2022
F-5
Arcos
Dorados Holdings Inc.
Consolidated
Statements of Income (Loss)
For
the fiscal years ended December 31, 2021, 2020 and 2019
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
| REVENUES | 2021 | 2020 | 2019 | |||||||||||||||||
| Sales by Company-operated restaurants | $ | 2,543,907 | $ | 1,894,618 | $ | 2,812,287 | ||||||||||||||
| Revenues from franchised restaurants | 116,034 | 89,601 | 146,790 | |||||||||||||||||
| Total revenues | 2,659,941 | 1,984,219 | 2,959,077 | |||||||||||||||||
| OPERATING COSTS AND EXPENSES | ||||||||||||||||||||
| Company-operated restaurant expenses: | ||||||||||||||||||||
| Food and paper | (899,077) | (677,087) | (1,007,584) | |||||||||||||||||
| Payroll and employee benefits | (482,608) | (413,074) | (567,653) | |||||||||||||||||
| Occupancy and other operating expenses | (772,169) | (624,154) | (799,633) | |||||||||||||||||
| Royalty fees | (131,401) | (110,957) | (155,388) | |||||||||||||||||
| Franchised restaurants – occupancy expenses | (50,627) | (43,512) | (61,278) | |||||||||||||||||
| General and administrative expenses | (210,909) | (171,382) | (212,515) | |||||||||||||||||
| Other operating income (expenses), net | 26,369 | (10,807) | 4,910 | |||||||||||||||||
| Total operating costs and expenses | (2,520,422) | (2,050,973) | (2,799,141) | |||||||||||||||||
| Operating income (loss) | 139,519 | (66,754) | 159,936 | |||||||||||||||||
| Net interest expense | (49,546) | (59,068) | (52,079) | |||||||||||||||||
| (Loss) gain from derivative instruments | (5,183) | (2,297) | 439 | |||||||||||||||||
| Gain from securities | — | 25,676 | — | |||||||||||||||||
| Foreign currency exchange results | (9,189) | (31,707) | 12,754 | |||||||||||||||||
| Other non-operating income (expenses), net | 2,185 | 2,296 | (2,097) | |||||||||||||||||
| Income (loss) before income taxes | 77,786 | (131,854) | 118,953 | |||||||||||||||||
| Income tax expense | (31,933) | (17,532) | (38,837) | |||||||||||||||||
| Net income (loss) | 45,853 | (149,386) | 80,116 | |||||||||||||||||
| Less: Net income attributable to non-controlling interests | (367) | (65) | (220) | |||||||||||||||||
| Net income (loss) attributable to Arcos Dorados Holdings Inc. | $ | 45,486 | $ | (149,451) | $ | 79,896 | ||||||||||||||
| Eearnings per share information: | ||||||||||||||||||||
| Basic net income (loss) per common share attributable to Arcos Dorados Holdings Inc. | $ | 0.22 | $ | (0.72) | $ | 0.39 | ||||||||||||||
| Diluted net income (loss) per common share attributable to Arcos Dorados Holdings Inc. | 0.22 | (0.72) | 0.38 | |||||||||||||||||
See Notes to
the Consolidated Financial Statements.
F-6
Arcos
Dorados Holdings Inc.
Consolidated
Statements of Comprehensive Income (Loss)
For
the fiscal years ended December 31, 2021, 2020 and 2019
Amounts
in thousands of US dollars
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Net income (loss) | $ | 45,853 | $ | (149,386) | $ | 80,116 | ||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||
| Foreign currency translation | (37,372) | (76,382) | (12,246) | |||||||||||||||||
| Post-employment benefits (expenses): | ||||||||||||||||||||
| Loss recognized in accumulated other comprehensive loss | (190) | (195) | (55) | |||||||||||||||||
| Reclassification of net loss to consolidated statement of income | 152 | 236 | 864 | |||||||||||||||||
| Post-employment (expenses) benefits (net of deferred income taxes of $21, $70 and $42). | (38) | 41 | 809 | |||||||||||||||||
| Cash flow hedges: | ||||||||||||||||||||
| Net gain (loss) recognized in accumulated other comprehensive loss | 19,698 | 54,287 | (5,185) | |||||||||||||||||
| Reclassification of net (gain) loss to consolidated statement of income | (5,301) | (43,324) | 85 | |||||||||||||||||
| Cash flow hedges (net of deferred income taxes of $(2.332), $(2,582) and $1,290) | 14,397 | 10,963 | (5,100) | |||||||||||||||||
| Total other comprehensive loss | (23,013) | (65,378) | (16,537) | |||||||||||||||||
| Comprehensive income (loss) | 22,840 | (214,764) | 63,579 | |||||||||||||||||
| Less: Comprehensive income attributable to non-controlling interests | (262) | (42) | (142) | |||||||||||||||||
| Comprehensive income (loss) attributable to Arcos Dorados Holdings Inc. | $ | 22,578 | $ | (214,806) | $ | 63,437 | ||||||||||||||
See Notes to
the Consolidated Financial Statements.
F-7
Arcos
Dorados Holdings Inc.
Consolidated
Balance Sheet
As
of December 31, 2021 and 2020
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
| ASSETS | 2021 | 2020 | ||||||||||||
| Current assets | ||||||||||||||
| Cash and cash equivalents | $ | 278,830 | $ | 165,989 | ||||||||||
| Accounts and notes receivable, net | 82,180 | 94,249 | ||||||||||||
| Other receivables | 22,031 | 20,521 | ||||||||||||
| Inventories | 37,800 | 33,601 | ||||||||||||
| Prepaid expenses and other current assets | 119,275 | 100,469 | ||||||||||||
| Derivative instruments | — | 702 | ||||||||||||
| Total current assets | 540,116 | 415,531 | ||||||||||||
| Non-current assets | ||||||||||||||
| Miscellaneous | 71,442 | 72,268 | ||||||||||||
| Collateral deposits | 2,500 | 2,500 | ||||||||||||
| Property and equipment, net | 743,533 | 796,532 | ||||||||||||
| Net intangible assets and goodwill | 38,808 | 37,046 | ||||||||||||
| Deferred income taxes | 67,802 | 55,567 | ||||||||||||
| Derivative instruments | 120,371 | 121,901 | ||||||||||||
| Equity method investments | 13,105 | 1,640 | ||||||||||||
| Lease right of use asset, net | 763,580 | 790,969 | ||||||||||||
| Total non-current assets | 1,821,141 | 1,878,423 | ||||||||||||
| Total assets | $ | 2,361,257 | $ | 2,293,954 | ||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||
| Current liabilities | ||||||||||||||
| Accounts payable | $ | 269,215 | $ | 209,535 | ||||||||||
| Royalties payable to McDonald’s Corporation | 15,933 | 44,779 | ||||||||||||
| Income taxes payable | 70,276 | 34,447 | ||||||||||||
| Other taxes payable | 67,086 | 56,837 | ||||||||||||
| Accrued payroll and other liabilities | 89,923 | 79,218 | ||||||||||||
| Provision for contingencies | 2,140 | 2,024 | ||||||||||||
| Interest payable | 11,383 | 11,947 | ||||||||||||
| Current portion of long-term debt | 4,741 | 3,129 | ||||||||||||
| Derivative instruments | 8,046 | 4,727 | ||||||||||||
| Operating lease liabilities | 79,120 | 56,828 | ||||||||||||
| Total current liabilities | 617,863 | 503,471 | ||||||||||||
| Non-current liabilities | ||||||||||||||
| Accrued payroll and other liabilities | 21,900 | 21,884 | ||||||||||||
| Provision for contingencies | 31,946 | 24,924 | ||||||||||||
| Long-term debt, excluding current portion | 739,217 | 773,445 | ||||||||||||
| Derivative instruments | 14,880 | 14,534 | ||||||||||||
| Deferred income taxes | 7,170 | 5,067 | ||||||||||||
|
Operating
lease liabilities |
707,119 | 752,613 | ||||||||||||
| Total non-current liabilities | 1,522,232 | 1,592,467 | ||||||||||||
| Total liabilities | $ | 2,140,095 | $ | 2,095,938 | ||||||||||
| Equity | ||||||||||||||
| Class A shares of common stock | $ | 388,369 | $ | 386,603 | ||||||||||
| Class B shares of common stock | 132,915 | 132,915 | ||||||||||||
| Additional paid-in capital | 10,101 | 11,540 | ||||||||||||
| Retained earnings | 316,180 | 290,895 | ||||||||||||
| Accumulated other comprehensive loss | (607,768) | (584,860) | ||||||||||||
| Common stock in treasury | (19,367) | (39,547) | ||||||||||||
| Total Arcos Dorados Holdings Inc. shareholders’ equity | 220,430 | 197,546 | ||||||||||||
| Non-controlling interests in subsidiaries | 732 | 470 | ||||||||||||
| Total equity | 221,162 | 198,016 | ||||||||||||
| Total liabilities and equity | $ | 2,361,257 | $ | 2,293,954 | ||||||||||
See
Notes to the Consolidated Financial Statements.
F-8
Arcos
Dorados Holdings Inc.
Consolidated
Statements of Cash Flows
For
the fiscal years ended December 31, 2021, 2020 and 2019
Amounts
in thousands of US dollars
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Operating activities | ||||||||||||||||||||
| Net income (loss) attributable to Arcos Dorados Holdings Inc. | $ | 45,486 | $ | (149,451) | $ | 79,896 | ||||||||||||||
| Adjustments to reconcile net income (loss) attributable to Arcos Dorados Holdings Inc. to cash provided by operating activities: | ||||||||||||||||||||
| Non-cash charges and credits: | ||||||||||||||||||||
| Depreciation and amortization | 120,394 | 126,853 | 123,218 | |||||||||||||||||
| Loss (gain) from derivative instruments | 5,183 | 2,297 | (439) | |||||||||||||||||
| Amortization and accrual of letter of credit fees and deferred financing costs | 4,247 | 3,505 | 3,190 | |||||||||||||||||
| Gain of property and equipment sales | (1,428) | (201) | (664) | |||||||||||||||||
| Deferred income taxes | (16,066) | 471 | (7,974) | |||||||||||||||||
| Foreign currency exchange results | 4,031 | 35,928 | (11,656) | |||||||||||||||||
| Accrued net share-based compensation expense | 758 | 1,360 | 4,060 | |||||||||||||||||
| Impairment of long-lived assets and goodwill | 1,573 | 7,721 | 9,063 | |||||||||||||||||
| Write-offs of property and equipment | 3,095 | 4,501 | 4,733 | |||||||||||||||||
| Gain on Sales of restaurants businesses | — | — | (5,078) | |||||||||||||||||
|
Gain
on contribution of businesses in equity method investment |
(8,501) | — | — | |||||||||||||||||
| Others, net | 6,707 | (10,234) | (955) | |||||||||||||||||
| Changes in assets and liabilities: | ||||||||||||||||||||
| Accounts payable | 78,201 | (23,993) | 39,434 | |||||||||||||||||
| Accounts and notes receivable and other receivables | (4,689) | (13,210) | (27,988) | |||||||||||||||||
| Inventories, prepaid and other assets | (38,655) | (25,032) | (21,802) | |||||||||||||||||
| Income taxes payable | 41,530 | (5,825) | 10,931 | |||||||||||||||||
| Other taxes payable | 14,211 | 13,014 | 20,891 | |||||||||||||||||
| Accrued payroll and other liabilities and provision for contingencies | 29,992 | 16,755 | 1,320 | |||||||||||||||||
| Royalties payable to McDonald’s Corporation | (27,167) | 28,981 | 2,979 | |||||||||||||||||
| Others | (858) | 2,526 | 322 | |||||||||||||||||
| Net cash provided by operating activities | 258,044 | 15,966 | 223,481 | |||||||||||||||||
| Investing activities | ||||||||||||||||||||
| Property and equipment expenditures | (114,999) | (86,311) | (265,235) | |||||||||||||||||
| Purchases of restaurant businesses paid at acquisition date | (185) | (3,833) | (2,658) | |||||||||||||||||
| Proceeds from sales of property and equipment and related advances | 1,987 | 800 | 3,340 | |||||||||||||||||
| Proceeds from sales of restaurant businesses and related advances | — | — | 4,818 | |||||||||||||||||
| Other investing activity | 4,918 | 638 | (1,256) | |||||||||||||||||
| Net cash used in investing activities | (108,279) | (88,706) | (260,991) | |||||||||||||||||
| Financing activities | ||||||||||||||||||||
| Issuance of 2027 Notes | — | 153,375 | — | |||||||||||||||||
| Collection of derivative instruments | 23,240 | — | — | |||||||||||||||||
| Repurchase of 2027 Senior Notes | (18,364) | — | — | |||||||||||||||||
| Repurchase of 2023 Senior Notes | (16,231) | — | — | |||||||||||||||||
| Dividend payments to Arcos Dorados Holdings Inc. shareholders | (21) | (10,220) | (22,425) | |||||||||||||||||
| Net short-term borrowings | — | (10,578) | 13,159 | |||||||||||||||||
| Treasury stock purchases | — | — | (13,965) | |||||||||||||||||
| Other financing activities | (6,550) | (6,568) | (6,401) | |||||||||||||||||
| Net cash (used in) provided by financing activities | (17,926) | 126,009 | (29,632) | |||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (18,998) | (9,160) | (8,260) | |||||||||||||||||
| Increase (decrease) in cash and cash equivalents | 112,841 | 44,109 | (75,402) | |||||||||||||||||
| Cash and cash equivalents at the beginning of the year | 165,989 | 121,880 | 197,282 | |||||||||||||||||
| Cash and cash equivalents at the end of the year | $ | 278,830 | $ | 165,989 | $ | 121,880 | ||||||||||||||
F-9
Arcos
Dorados Holdings Inc.
Consolidated
Statements of Cash Flows
For
the fiscal years ended December 31, 2021, 2020 and 2019
Amounts
in thousands of US dollars
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Supplemental cash flow information: | ||||||||||||||||||||
| Cash paid during the year for: | ||||||||||||||||||||
| Interest | $ | 52,578 | $ | 57,066 | $ | 52,458 | ||||||||||||||
| Income tax | 34,543 | 22,502 | 34,092 | |||||||||||||||||
| Non-cash investing and financing activities: | ||||||||||||||||||||
| Stock dividend distribution to Arcos Dorados Holdings Inc.’ Shareholders, at cost | 20,180 | 20,453 | — | |||||||||||||||||
| Seller financing pending of payment and settlement of franchise receivables related to purchases of restaurant businesses | — | 1,606 | 905 | |||||||||||||||||
| Contribution of businesses in equity method investment | 11,012 | — | — | |||||||||||||||||
See Notes to
the Consolidated Financial Statements
F-10
Arcos
Dorados Holdings Inc.
Consolidated
Statements of Changes in Equity
For
the fiscal years ended December 31, 2021, 2020 and 2019
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
| Arcos Dorados Holdings Inc. Shareholders | |||||||||||||||||||||||||||||||||||||||||
| Class A shares of common stock | Class B shares of common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive loss | Common Stock in treasury | Total | Non-controlling interests | Total | |||||||||||||||||||||||||||||||||
| Number | Amount | Number | Amount | Number | Amount | ||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2018 | 131,593,073 | 379,845 | 80,000,000 | 132,915 | 14,850 | 413,074 | (502,266) | (6,360,826) | (46,035) | 392,383 | 376 | 392,759 | |||||||||||||||||||||||||||||
| Net income for the year | — | — | — | — | — | 79,896 | — | — | — | 79,896 | 220 | 80,116 | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (16,459) | — | — | (16,459) | (78) | (16,537) | |||||||||||||||||||||||||||||
| Dividends to Arcos Dorados Holdings Inc.’s shareholders ($0.11 per share) | — | — | — | — | — | (22,425) | — | — | — | (22,425) | — | (22,425) | |||||||||||||||||||||||||||||
| Dividends on restricted share units under the 2011 Equity Incentive Plan | — | — | — | — | — | (176) | — | — | — | (176) | — | (176) | |||||||||||||||||||||||||||||
| Issuance of shares in connection with the partial vesting of outstanding restricted share units under the 2011 Equity Incentive Plan | 470,558 | 3,359 | — | — | (3,359) | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Stock-based compensation related to the 2011 Equity Incentive Plan | — | — | — | — | 1,884 | — | — | — | — | 1,884 | — | 1,884 | |||||||||||||||||||||||||||||
| Treasury stock purchases | — | — | — | — | — | — | — | (1,632,776) | (13,965) | (13,965) | — | (13,965) | |||||||||||||||||||||||||||||
| Dividends to non-controlling interests | — | — | — | — | — | — | — | — | — | — | (90) | (90) | |||||||||||||||||||||||||||||
| Adoption of ASU 2017-12 | — | — | — | — | — | 780 | (780) | — | — | — | — | — | |||||||||||||||||||||||||||||
| Balances at December 31, 2019 | 132,063,631 | 383,204 | 80,000,000 | 132,915 | 13,375 | 471,149 | (519,505) | (7,993,602) | (60,000) | 421,138 | 428 | 421,566 | |||||||||||||||||||||||||||||
| Net loss for the year | — | — | — | — | — | (149,451) | — | — | — | (149,451) | 65 | (149,386) | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (65,355) | — | — | (65,355) | (23) | (65,378) | |||||||||||||||||||||||||||||
| Cash Dividends to Arcos Dorados Holdings Inc.’s shareholders ($0.05 per share) | — | — | — | — | — | (10,220) | — | — | — | (10,220) | — | (10,220) | |||||||||||||||||||||||||||||
| Cash Dividends on restricted share units under the 2011 Equity Incentive Plan | — | — | — | — | — | (130) | — | — | — | (130) | — | (130) | |||||||||||||||||||||||||||||
| Stock Dividends to Arcos Dorados Holdings Inc.’s shareholders (75 shares per share) | — | — | — | — | — | (20,453) | — | 2,723,614 | 20,453 | — | — | — | |||||||||||||||||||||||||||||
| Issuance of shares in connection with the partial vesting of outstanding restricted share units under the 2011 Equity Incentive Plan | 472,130 | 3,399 | — | — | (3,399) | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Stock-based compensation related to the 2011 Equity Incentive Plan | — | — | — | — | 1,564 | — | — | — | — | 1,564 | — | 1,564 | |||||||||||||||||||||||||||||
| Balances at December 31, 2020 | 132,535,761 | 386,603 | 80,000,000 | 132,915 | 11,540 | 290,895 | (584,860) | (5,269,988) | (39,547) | 197,546 | 470 | 198,016 | |||||||||||||||||||||||||||||
| Net income for the year | — | — | — | — | — | 45,486 | — | — | 45,486 | 367 | 45,853 | ||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (22,908) | — | — | (22,908) | (105) | (23,013) | |||||||||||||||||||||||||||||
|
Cash
Dividends to Arcos Dorados Holdings Inc.’s shareholders (fractional shares) |
— | — | — | — | — | (21) | — | — | — | (21) | — | (21) | |||||||||||||||||||||||||||||
|
Stock Dividends
to Arcos Dorados Holdings Inc.’s shareholders (70 shares per share) |
— | — | — | — | — | (20,180) | — | 2,960,926 | 20,180 | — | — | — | |||||||||||||||||||||||||||||
| Issuance of shares in connection with the partial vesting of outstanding restricted share units under the 2011 Equity Incentive Plan | 251,623 | 1,766 | — | — | (1,766) | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Stock-based compensation related to the 2011 Equity Incentive Plan | — | — | — | — | 327 | — | — | — | — | 327 | — | 327 | |||||||||||||||||||||||||||||
| Balances at December 31, 2021 | 132,787,384 | 388,369 | 80,000,000 | 132,915 | 10,101 | 316,180 | (607,768) | (2,309,062) | (19,367) | 220,430 | 732 | 221,162 | |||||||||||||||||||||||||||||
See Notes to
the Consolidated Financial Statements.
F-11
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
1. Organization
and nature of business
Arcos
Dorados Holdings Inc. (the “Company”) is a company limited by shares incorporated and existing under the laws of the British
Virgin Islands. The Company’s fiscal year ends on the last day of December. The Company has through its wholly-owned Company Arcos
Dorados Group B.V., a 100% equity interest in Arcos Dorados B.V. (“ADBV”).
On
August 3, 2007 the Company, indirectly through its wholly-owned subsidiary ADBV, entered into a Stock Purchase Agreement and Master Franchise
Agreements (“MFAs”) with McDonald’s Corporation pursuant to which the Company completed the acquisition of the McDonald’s
business in Latin America and the Caribbean (“LatAm business”). See Note 4 for details. Prior to this acquisition, the Company
did not carry out operations. The Company’s rights to operate and franchise McDonald’s-branded restaurants in the Territories,
and therefore the ability to conduct the business, derive exclusively from the rights granted by McDonald’s Corporation in the MFAs
through 2027. The initial term of the MFA for French Guyana, Guadeloupe and Martinique was ten years through August 2, 2017 with an option
to extend the agreement for these territories for an additional period of ten years, through August 2, 2027. On July 20, 2016, the
Company has exercised its option to extend the MFA for these three territories.
The
Company, through ADBV’s wholly-owned and majority owned subsidiaries, operates and franchises McDonald’s restaurants in the
food service industry. The Company has operations in twenty territories as follows: Argentina, Aruba, Brazil, Chile, Colombia, Costa
Rica, Curaçao, Ecuador, French Guyana, Guadeloupe, Martinique, Mexico, Panama, Peru, Puerto Rico, Trinidad and Tobago, Uruguay, the
U.S. Virgin Islands of St. Croix and St. Thomas (USVI) and Venezuela. All restaurants are operated either by the Company’s subsidiaries
or by independent entrepreneurs under the terms of sub-franchisee agreements (franchisees).
COVID
- 19
The
global pandemic resulting from COVID-19 has disrupted global health, economic and market conditions.
During
2020, federal, state and local governments mandated various restrictions, including travel restrictions, restrictions on public gatherings,
stay at home orders and advisories, curfews and quarantining of people who may have been exposed to the virus. These limitations significantly
disrupted the Company’s business operations with a negative impact on its financial results: revenues were affected by the temporary
closure of restaurants throughout Latin America and the Caribbean, which caused the Company to significantly reduce its capital expenditures
as well as all costs and expenses, in order to preserve liquidity. McDonald’s Corporation supported the Company by authorizing a
reduction in the advertising and promotion spending requirements, offering a deferral
of some royalty
payments and agreeing to withdraw the previously-approved restaurant opening plan and reinvestment plan. See Note 18 for further information.
During
2021, with the implementation of vaccination programs and increasing vaccination rates across the region, governments alleviated restrictions
and the Company was able to operate substantially all its restaurants throughout the year. As a result of this more normalized operating
environment, the Company loosened its cash preservation measures. With improved liquidity, the Company agreed to a new restaurant opening
plan for 2021, only. See Note 18 for further information. The Company did not need to increase financial debt during 2021 and was able
to significantly reduce its financial leverage over the course of the year through a consistent improvement in its operating results.
Since
the beginning of the pandemic, the Company benefited from certain government measures enacted in Latin America and the Caribbean to help
companies manage the economic impacts of COVID-19. Government measures included: modification of existing regulations to reduce workdays
or taxes, tax payment deferrals and subsidies related to labor costs, among others. All subsidies granted were recognized on a systematic
basis over the periods in which the related expenses were recorded, within “Payroll and employee benefits” or “General
and administrative expenses” in the Company´s consolidated statement of income/(loss). The Company complies with all the
terms and conditions required by the governments to maintain the benefits granted.
F-12
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
1.Organization
and nature of business (continued)
COVID-19
(Continued)
While
the Company cannot predict the duration or scope of the COVID-19 pandemic and the resurgence of infections or the emergence of new variants
in one or more markets; it continues to closely monitor the dynamic environment that could negatively impact its business. The Company
believes in its ability to obtain the sources of liquidity and capital resources that are necessary in this challenging economic environment
and also believes that its liquidity and capital resources, including working capital, are adequate for its present requirements and business
operations and will be adequate to satisfy its currently anticipated requirements during at least the next twelve months for working capital,
capital expenditures and other corporate needs.
2. Basis
of presentation and principles of consolidation
The
accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United
States of America (“US GAAP”) and include the accounts of the Company and its subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation. The Company has elected to report its consolidated financial statements in United
States dollars (“$” or “US dollars”).
3. Summary
of significant accounting policies
The following is a summary of significant accounting policies followed by the Company in the preparation of the
consolidated financial statements.
Use
of estimates
The
preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
Foreign
currency matters
The
financial statements of the Company’s foreign operating subsidiaries are translated in accordance with guidance in ASC 830 Foreign
Currency Matters. Except for the Company’s Venezuelan and Argentinian operations, the functional currencies of the Company’s
foreign operating subsidiaries are the local currencies of the countries in which they conduct their operations. Therefore, assets and
liabilities are translated into US dollars at the balance sheet date exchange rates, and revenues, expenses and cash flow are translated
at average rates prevailing during the periods. Translation adjustments are included in the “Accumulated other comprehensive loss”
component of shareholders’ equity. The Company includes foreign
currency
exchange results related to monetary assets and liabilities transactions, including intercompany transactions, denominated in currencies
other than its functional currencies in its statements of income (loss).
F-13
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
3. Summary of
significant accounting policies (continued)
Foreign
currency matters (continued)
Since
January 1, 2010 and July 1, 2018, Venezuela and Argentina, respectively, were considered to be highly inflationary, and as such, the financial
statements of these subsidiaries are remeasured as if its functional currency was the reporting currency of the immediate parent company
(US dollars for Venezuelan operation, Brazilian reais (“BRL”) for Argentinian operation from July 2018 to June 2020 and US
dollars since July 2020). As a result, remeasurement gains and losses are recognized in earnings rather than in the cumulative translation
adjustment, component of “Accumulated other comprehensive loss” within shareholders’ equity. In addition, in these territories,
there are foreign currency restrictions. Since 2019, in Argentina several measures have been adopted including, among others: (i)
limitation to hoarding and consumption in foreign currency for natural persons, (ii) taxes to increase the official exchange rate, (iii)
approvals issued by the Central Bank of Argentina to access foreign currency to settle imports of goods or services, principal and interest
from financial payables to foreign parties, profits and dividends. See Note 22 for information about foreign currency restrictions in
Venezuela.
Cash
and cash equivalents
The
Company considers all highly liquid investments with an original maturity of three months or less, from the date of purchase, to be cash
equivalents.
Revenue
recognition
The
Company’s revenues consist of sales by Company-operated restaurants and revenues from restaurants operated by franchisees. Sales
by Company-operated restaurants are recognized at the point of sale. The Company presents sales net of sales tax and other sales-related
taxes. Revenues from restaurants operated by franchisees include rental income, initial franchise fees and royalty income. Rental income
is measured on a monthly basis based on the greater of a fixed rent, computed on a straight-line basis, or a certain percentage of gross
sales reported by franchisees. Initial franchise fees represent the difference between the amount the Company collects from the franchisee
and the amount the Company pays to McDonald’s Corporation upon the opening of a new restaurant. Royalty income represents the difference,
if any, between the amount the Company collects from the franchisee and the amount the Company is required to pay to McDonald’s
Corporation. Royalty income is recognized in the period earned.
Accounts
and notes receivable and allowance for doubtful accounts
Accounts
receivable primarily consist of royalty and rent receivables due from franchisees, debit, credit and delivery vendor receivables. Accounts
receivable are initially recorded at fair value and do not bear interest. Notes receivable relates to interest-bearing financing granted
to certain franchisees in connection with the acquisition of equipment and third-party suppliers. The Company maintains an allowance for
doubtful accounts in an amount that it considers sufficient to cover the expected credit losses. In judging the adequacy of the allowance
for doubtful accounts, the Company follows ASC 326 “Financial Instruments - Credit Losses” considering, multiple factors including
historical bad debt experience, the aging of the receivables, the current economic environment, remote risks of loss and future economic
conditions.
Other
receivables
As
of December 31, 2021, other receivables primarily consist of related party receivables, value-added tax and other tax receivables, insurance
claim receivables and McDonald’s Corporation’s indemnification for contingencies, amounting to $13,141. As of December 31,
2020, other receivables primarily consist of insurance claim receivables, value-added tax, other tax receivables, McDonald’s Corporation’s
indemnification for contingencies and related party receivables, amounting to $10,685.
Other
receivables are reported at the amount expected to be collected.
F-14
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
3. Summary of
significant accounting policies (continued)
Inventories
Inventories
are stated at the lower of cost or market, with cost being determined on a first-in, first-out basis.
Property
and equipment, net
Property
and equipment are stated at cost, net of accumulated depreciation. Property costs include costs of land and building for both company-operated
and franchise restaurants while equipment costs primarily relate to company-operated restaurants. Cost of property and equipment acquired
from McDonald’s Corporation (as part of the acquisition of LatAm business) was determined based on its estimated fair market value
at the acquisition date, then partially reduced by the allocation of the negative goodwill that resulted from the purchase price allocation.
Cost of property and equipment acquired or constructed after the acquisition of LatAm business in connection with the Company’s
restaurant reimaging and extension program is comprised of acquisition and construction costs and capitalized internal costs. Capitalized
internal costs include payroll expenses related to employees fully dedicated to restaurant construction projects and related travel expenses.
Capitalized payroll costs are allocated to each new restaurant location based on the actual time spent on each project. The Company commences
capitalizing costs related to construction projects when it becomes probable that the project will be developed – when the site
has been identified and the related profitability assessment has been approved. Maintenance and repairs are expensed as incurred.
Accumulated depreciation is calculated using the straight-line method over the following estimated useful lives: buildings –
up to 40 years; leasehold improvements – the lesser of useful lives of assets or lease terms which generally include renewal
options; and equipment 3 to 10 years.
Intangible
assets, net
Intangible
assets include computer software costs, initial franchise fees, reacquired rights under franchise agreements, letter of credit fees and
others.
The
Company follows the provisions of ASC 350-40-30 within ASC 350 Intangibles, Subtopic 40 Internal Use Software which requires the capitalization
of costs incurred in connection with developing or obtaining software for internal use. These costs are amortized over a period of three
years on a straight-line basis.
The
Company is required to pay to McDonald’s Corporation an initial franchisee fee upon opening of a new restaurant. The initial franchise
fee related to Company-operated restaurants is capitalized as an intangible asset and amortized on a straight-line basis over the term
of the franchise.
A
reacquired franchise right is recognized as an intangible asset as part of the business combination in the acquisition of franchised restaurants
apart from goodwill with an assigned amortizable life limited to the remaining contractual term (i.e., not including any renewal periods).
The value assigned to the reacquired franchise right excludes any amounts recognized as a settlement gain or loss and is limited to the
value associated with the remaining contractual term and operating conditions for the acquired restaurants. The reacquired franchise right
is measured using a valuation technique that considers restaurant’s cash flows after payment of an at-market royalty rate to the
Company. The cash flows are projected for the remaining contractual term, regardless of whether market participants would consider potential
contractual renewals in determining its fair value.
Letter
of credit fees are amortized on a straight-line basis over the term of the Letter of Credit.
F-15
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
3. Summary of
significant accounting policies (continued)
Impairment
and disposal of long-lived assets
In
accordance with the guidance within ASC 360-10-35, the Company reviews long-lived assets
(including property and equipment, intangible assets with definite useful lives and lease right of use asset, net) for impairment whenever
events or changes in circumstances indicate the carrying value of the asset may not be recoverable. For purposes
of reviewing assets for potential impairment, assets are grouped at a country level for each of the operating markets. The Company manages
its restaurants as a group or portfolio with significant common costs and promotional activities; as such, each restaurant’s
cash flows are not largely independent of the cash flows of others in a market. If an indicator of impairment exists for any grouping
of assets, an estimate of undiscounted future cash flows produced by each individual restaurant within the asset grouping is compared
to its carrying value. If an individual restaurant is determined to be impaired, the loss is measured by the excess of the carrying amount
of the restaurant over its fair value considering its highest and best use, as determined by an estimate of discounted future cash flows
or its market value.
The
Company assessed all markets for impairment indicators during the fourth quarter of 2021, 2020 and 2019. However, as a consequence of
the impact that the spread of COVID-19 caused in Company’s operations, during 2020 the Company performed impairment testing of its
long-lived assets in some territories in previous quarters. As a result of those assessments, the Company concluded that the second step
was required to be performed as a component of the impairment testing of its long-lived assets on a per store basis, in: Mexico, Aruba,
Curaçao,
Peru, USVI, Venezuela, Trinidad and Tobago, Colombia and Argentina for the fiscal years ended December 31, 2021; Ecuador, Puerto Rico,
Mexico, Peru, Aruba, USVI, Venezuela, Colombia, Trinidad and Tobago, Curacao, Panama and Argentina for the fiscal years ended December
31, 2020 and in Curaçao,
Puerto Rico, Mexico, Peru, Aruba, USVI, Venezuela, Colombia and Trinidad and Tobago for the fiscal year ended December 31, 2019.
As
a result of the impairment testing the Company recorded the following impairment charges, for the markets indicated below, within Other
operating income (expenses), net on the consolidated statements of income:
| Fiscal year | Markets | Total | ||||||||||||
| 2021 | Mexico, USVI, Peru, Colombia, Venezuela and Argentina | $ | 1,573 | |||||||||||
| 2020 | Mexico, Puerto Rico, USVI, Peru, Aruba, Colombia, Venezuela, Ecuador, Panama and Argentina | 6,636 | ||||||||||||
| 2019 | Mexico, Puerto Rico, USVI, Peru, Aruba, Curacao, Colombia and Venezuela | 8,790 | ||||||||||||
While
the extent and duration of the economic fallout from the COVID-19 pandemic remains unclear, the Company will be monitoring the situation
closely.
F-16
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
3. Summary of
significant accounting policies (continued)
Goodwill
Goodwill
represents the excess of cost over the estimated fair market value of net tangible assets and identifiable intangible assets acquired.
In accordance with the guidance within ASC 350 Intangibles-Goodwill and Other, goodwill is stated at cost and reviewed for impairment
on an annual basis during the fourth quarter, or when an impairment indicator exists. The impairment test compares the fair value of each
reporting unit, generally based on discounted future cash flows, with its carrying amount including goodwill. If the carrying amount of
the reporting unit exceeds its fair value, an impairment loss is measured as the difference between the implied fair value of the reporting
unit’s goodwill and the carrying amount of goodwill.
In
assessing the recoverability of the goodwill, the Company considers changes in economic conditions and makes assumptions regarding estimated
future cash flows and other factors. Estimates of future cash flows are highly subjective judgments based on the Company’s experience
and knowledge of its operations. These estimates can be significantly impacted by many factors including changes in global and local business
and economic conditions, operating costs, inflation, competition, and consumer and demographic trends.
As a result of the analyses performed during the fiscal years 2021, 2020 and 2019, the Company recorded the following impairment charges,
related to goodwill generated in the acquisition of franchised restaurants, for the markets indicated below within Other operating income
(expenses), net on the consolidated statements of income:
| Fiscal year | Markets | Total | ||||||||||||
| 2021 | — | $ | — | |||||||||||
| 2020 | Mexico | 1,085 | ||||||||||||
| 2019 | Ecuador | 273 | ||||||||||||
Advertising
costs
Advertising
costs are expensed as incurred. Advertising expenses related to Company-operated restaurants were $104,010, $60,855 and $115,568 in 2021,
2020 and 2019, respectively. Advertising expenses related to franchised operations do not affect the Company’s expenses since these
are recovered from franchisees. Advertising expenses related to franchised operations were $32,809, $26,486 and $43,039 in 2021, 2020
and 2019, respectively.
Accounting
for income taxes
The
Company records deferred income taxes using the liability method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. The guidance requires companies to set up a valuation allowance for that component of net deferred tax assets
which does not meet the more likely than not criterion for realization.
Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
The
Company is regularly audited by tax authorities, and tax assessments may arise several years after tax returns have been filed. Accordingly,
tax liabilities are recorded when, in management’s judgment, an uncertain tax position does not meet the more likely than not threshold
for recognition. For tax positions that meet the more likely than not threshold, a tax liability may be recorded depending on management’s
assessment of how the tax position will ultimately be settled. The Company records interest and penalties on unrecognized tax benefits
in the provision for income taxes.
F-17
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
3. Summary of
significant accounting policies (continued)
Accounts
payable outsourcing
The
Company offers its suppliers access to an accounts payable services arrangement provided by third party financial institutions. This service
allows the Company’s suppliers to view its scheduled payments online, enabling them to better manage their cash flow and reduce
payment processing costs. Independent of the Company, the financial institutions also allow suppliers to sell their receivables to the
financial institutions in an arrangement separately negotiated by the supplier and the financial institution. The Company has no economic
interest in the sale of these receivables and no direct relationship with the financial institutions concerning the sale of receivables.
All of the Company’s obligations, including amounts due, remain to the Company’s suppliers as stated in the supplier agreements.
As of December 31, 2021 and 2020, $20,125 and $13,354, respectively, of the Company’s total accounts payable are available for this
purpose and have been sold by suppliers to participating financial institutions.
Share-based
compensation
The
Company recognizes compensation expense as services required to earn the benefits are rendered. See Note 17 for details of the outstanding
plans and the related accounting policies.
Derivative
financial instruments
The
Company utilizes certain hedge instruments to manage its interest rate and foreign currency rate exposures. The counterparties to these
instruments generally are major financial institutions. The Company does not hold or issue derivative instruments for trading purposes.
In entering into these contracts, the Company assumes the risk that might arise from the possible inability of counterparties to meet
the terms of their contracts. The Company does not expect any losses as a result of counterparty defaults. All derivatives are recognized
as either assets or liabilities in the balance sheets and are measured at fair value. Additionally, the fair value adjustments will affect
either shareholders’ equity as accumulated other comprehensive loss or net income depending on whether the derivative instrument
qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.
Severance
payments
Under
certain laws and labor agreements of the countries in which the Company operates, the Company is required to make minimum severance payments
to employees who are dismissed without cause and employees leaving its employment in certain other circumstances. The Company accrues
severance costs if they relate to services already rendered, are related to rights that accumulate or vest, are probable of payment and
can be reasonably estimated. Otherwise, severance payments are expensed as incurred.
Provision
for contingencies
The
Company accrues liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Such accruals
are based on developments to date, the Company’s estimates of the outcomes of these matters and the Company’s lawyers’
experience in contesting, litigating and settling other matters. As the scope of the liabilities becomes better defined, there may be
changes in the estimates of future costs. See Note 18 for details.
Comprehensive
income (loss)
Comprehensive
income (loss) includes net income as currently reported under generally accepted accounting principles and also includes the impact of
other events and circumstances from non-owner sources which are recorded as a separate component of shareholders’ equity. The Company
reports foreign currency translation losses and gains, unrealized results on cash flow hedges as well as unrecognized post-retirement
benefits as components of comprehensive income (loss).
F-18
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
3. Summary of
significant accounting policies (continued)
Sales
of property and equipment and restaurant businesses
The
Company recognizes the sale of property and equipment when: (a) the profit is determinable, that is, the collectability of the sales
price is reasonably assured or the amount that will not be collectible can be estimated, and (b) the earnings process is virtually complete,
that is, the Company is not obliged to perform significant activities after the sale to earn the profit. The sale of restaurant businesses,
related to the refranchising of company-operated restaurants, is recognized when the Company transfers substantially all of the risks
and rewards of ownership.
In
order to determine the gain or loss on the disposal, the goodwill associated with the sold of property and equipment and restaurant business,
if any, is considered within the carrying value. The amount of goodwill to be included in that carrying amount is based on the relative
fair value of the item to be disposed and the portion of the reporting unit that will be retained.
During
fiscal years 2021, 2020 and 2019, the Company recorded results from sales of property and equipment and restaurant businesses, amounting
to $1,428, $201 and $6,415, respectively, included within “Other operating income (expenses), net”.
Segment
information
In
accordance with ASC 280, Segment Reporting, the Company has restated its comparative segment information based on the new structure of
its geographic divisions.
Equity
method investments
The Company
utilizes the equity method to account for investments in companies when it provides the ability to exercise significant influence over
operating and financial policies of the investee. Consolidated net income includes the Company’s proportionate share of the net
income or loss of these companies. Company´s judgment regarding the level of influence over each equity method investee includes
considering key factors such as our ownership interest, representation on the board of directors, participation in policy-making decisions,
other commercial arrangements and material intercompany transactions.
In November 2021, the Company contributed 20 restaurants businesses for a total amount of $11 million to a company named “Operadora
de Franquicias Saile S.A.P.I. de C.V.”(“investee”) in exchange of 49% of total shares and votes of the investee. The
other investor, in turn, contributed 21 restaurants and cash in exchange of 51% of total shares and votes.
In accordance with ASC 323-10-30-2, the Company has measured the initial contribution of businesses given up in exchange for an equity
method investment at the fair value of the restaurants contributed, thus recording a gain of $8.5 million within “Other operating
income (expenses), net” on the consolidated statement of income, as of December 31, 2021.
The Company concluded that it has the ability to exercise significant influence over operating and financial policies of “Operadora
de Franquicias Saile S.A.P.I. de C.V.” and therefore subsequently measures its investment at equity method considering the effect
of basis differences (fair value adjustments). As of December 31, 2021, the Company recorded a gain of $531 within “Other operating
income (expenses), net” related to the equity method of its investments in companies.
Recent
accounting pronouncements
No
new accounting pronouncement issued or effective during the periods had or is expected to have a material impact on the Company’s
consolidated financial statements.
F-19
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
4. Acquisition
of businesses
LatAm
Business
On
August 3, 2007, the Company, indirectly through its wholly-owned subsidiary ADBV, entered into a Stock Purchase Agreement with McDonald’s
Corporation pursuant to which the Company completed the acquisition of the McDonald’s business in Latin America and the Caribbean
for a final purchase price of $698,080.
The
acquisition of the LatAm business was accounted for by the purchase method of accounting and, accordingly, the purchase price was allocated
to the assets acquired and liabilities assumed based on the estimated fair values at the date of acquisition. When the fair value of the
net assets acquired exceeded the purchase price, the resulting negative goodwill was allocated to partially reduce the fair value of the
non-current assets acquired on a pro-rata basis.
In
connection with this transaction, ADBV and certain subsidiaries (the “MF subsidiaries”) also entered into 20-year Master Franchise
Agreements (“MFAs”) with McDonald’s Corporation which grants to the Company and its MF subsidiaries the following:
i.The
right to own and operate, directly or indirectly, franchised restaurants in each territory;
ii.The
right and license to grant sub franchises in each territory;
iii.The
right to adopt and use, and to grant the right and license to sub franchisees to adopt and use, the system in each territory;
iv.The
right to advertise to the public that it is a franchisee of McDonald’s;
v.The
right and license to grant sub franchises and sublicenses of each of the foregoing rights and licenses to each MF subsidiary.
The
Company is required to pay to McDonald’s Corporation continuing franchise fees (Royalty fees) on a monthly basis. The amount to
be paid during the first 10 years of the MFAs was equal to 5% of the US dollar equivalent of the gross product sales of each of the franchised
restaurants. This percentage increased to 6% for the subsequent 5-year period and will increase to 7% during the last 5-year period of
the agreement. Payment of monthly royalties is due on the seventh business day of the next calendar month. As a consequence of the negative
impacts of the spread of COVID-19 on the Company’s operations, McDonald’s granted the Company a deferral of all the royalty
payments due related to sales from March to July 2020, settled during the first half of 2021.
Pursuant
to the MFAs provisions, McDonald’s Corporation has the right to (a) terminate the MFAs, or (b) exercise a call option over the Company’s
shares or any MF subsidiary, if the Company or any MF subsidiary (i) fails to comply with the McDonald’s System (as defined in the
MFAs), (ii) files for bankruptcy, (iii) defaults on its financial debt payments, (iv) substantially fails to achieve targeted openings
and reinvestments requirements, or (v) upon the occurrence of any other event of default as defined in the MFAs.
F-20
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
4. Acquisition
of businesses (continued)
Other
acquisitions
During
fiscal years 2021, 2020 and 2019, the Company acquired certain franchised restaurants in certain territories. Presented below is supplemental
information about these acquisitions:
| Purchases of restaurant businesses: | 2021 | 2020 | 2019 | ||||||||||||||
| Property and equipment | $ | 185 | $ | 16,756 | $ | 1,471 | |||||||||||
| Identifiable intangible assets | — | 4,922 | 1,347 | ||||||||||||||
| Goodwill | — | 1,224 | 1,589 | ||||||||||||||
| Assumed debt | — | — | (77) | ||||||||||||||
| Gain on purchase of franchised restaurants | — | (1,708) | (767) | ||||||||||||||
| Purchase price | 185 | 21,194 | 3,563 | ||||||||||||||
| Seller financing | — | (1,000) | — | ||||||||||||||
| Settlement of franchise receivables | — | (16,361) | (905) | ||||||||||||||
| Net cash paid at acquisition date | $ | 185 | $ | 3,833 | $ | 2,658 | |||||||||||
Since
the acquisition of the McDonald’s business in Latin America and the Caribbean, Puerto Rican franchisees had filed some lawsuits
against McDonald’s Corporation and certain subsidiaries purchased by the Company. On December 28, 2019 and March 31, 2020, the Company
reached confidential settlement agreements with these franchisees, finalizing all controversies and disputes among the parties. As a consequence
of the agreements, during January and May 2020, the Company acquired all the restaurants pertaining to the Puerto Rican franchisees, increasing
its property and equipment in $14,290.
5. Accounts
and notes receivable, net
Accounts
and notes receivable, net consist of the following at year end:
| 2021 | 2020 | |||||||||||||
| Receivables from franchisees | $ | 27,778 | $ | 45,427 | ||||||||||
| Debit and credit card receivables | 38,839 | 29,784 | ||||||||||||
| Delivery Sales Receivables | 7,871 | 8,604 | ||||||||||||
| Meal voucher receivables | 5,641 | 4,857 | ||||||||||||
| Notes receivable | 2,593 | 6,163 | ||||||||||||
| Allowance for doubtful accounts | (542) | (586) | ||||||||||||
| $ | 82,180 | $ | 94,249 | |||||||||||
6. Prepaid
expenses and other current assets
Prepaid
expenses and other current assets consist of the following at year end:
| 2021 | 2020 | |||||||||||||
| Prepaid taxes (i) | $ | 81,083 | $ | 48,781 | ||||||||||
| Prepaid expenses | 26,052 | 30,175 | ||||||||||||
| Promotion items and related advances | 10,935 | 20,701 | ||||||||||||
| Others | 1,205 | 812 | ||||||||||||
| $ | 119,275 | $ | 100,469 | |||||||||||
(i)
During 2021, Brazilian Supreme Court made its final decision about the unconstitutional inclusion of ICMS state tax in the taxable basis
of PIS/COFINS federal tax. As a consequence, the Company was able to recover taxes amounting to $18,457. This recovery was recorded
within Other Operating income (expenses), net. As of December 31, 2021 Prepaid taxes includes $8,805 related to this matter.
F-21
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
7. Miscellaneous
Miscellaneous
consist of the following at year end:
| 2021 | 2020 | |||||||||||||
| Judicial deposits | $ | 37,377 | $ | 36,943 | ||||||||||
| Tax credits | 12,289 | 10,365 | ||||||||||||
| Prepaid property and equipment | 5,936 | 5,967 | ||||||||||||
| Notes receivable | 3,942 | 4,484 | ||||||||||||
| Rent deposits | 3,146 | 2,991 | ||||||||||||
| Others | 8,752 | 11,518 | ||||||||||||
| $ | 71,442 | $ | 72,268 | |||||||||||
8. Property
and equipment, net
Property
and equipment, net consist of the following at year-end:
| 2021 | 2020 | |||||||||||||
| Land | $ | 128,055 | $ | 134,148 | ||||||||||
| Buildings and leasehold improvements | 660,745 | 657,652 | ||||||||||||
| Equipment | 750,963 | 734,995 | ||||||||||||
| Total cost | 1,539,763 | 1,526,795 | ||||||||||||
| Total accumulated depreciation | (796,230) | (730,263) | ||||||||||||
| $ | 743,533 | $ | 796,532 | |||||||||||
Total
depreciation expense for fiscal years 2021, 2020 and 2019 amounted to $109,462, $115,031 and $111,638, respectively.
9. Net
intangible assets and goodwill
Net
intangible assets and goodwill consist of the following at year-end:
| 2021 | 2020 | |||||||||||||
| Net intangible assets (i) | ||||||||||||||
| Computer software cost | $ | 79,054 | $ | 69,999 | ||||||||||
| Initial franchise fees | 13,652 | 14,223 | ||||||||||||
| Reacquired franchised rights | 15,403 | 16,884 | ||||||||||||
| Letter of credit fees | 940 | 940 | ||||||||||||
| Others | 1,000 | 1,000 | ||||||||||||
| Total cost | 110,049 | 103,046 | ||||||||||||
| Total accumulated amortization | (76,451) | (71,601) | ||||||||||||
| Subtotal | 33,598 | 31,445 | ||||||||||||
F-22
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
9. Net
intangible assets and goodwill (continued)
| Goodwill (ii) | 2021 | 2020 | ||||||||||||
| Brazil | 2,992 | 3,196 | ||||||||||||
| Argentina | 1,276 | 1,276 | ||||||||||||
| Chile | 873 | 1,047 | ||||||||||||
| Colombia | 69 | 82 | ||||||||||||
| Subtotal | 5,210 | 5,601 | ||||||||||||
| $ | 38,808 | $ | 37,046 | |||||||||||
(i)Total
amortization expense for fiscal years 2021, 2020 and 2019 amounted to $10,932, $11,822 and $11,580, respectively. The estimated aggregate
amortization expense for each of the five succeeding fiscal years and thereafter is as follows: $13,470 for 2022, $10,263 for 2023;
$4,465 for 2024; $1,777 for 2025; $1,656 for 2026; and thereafter $1,967.
(ii)Related
to the acquisition of franchised restaurants (Brazil, Argentina, Chile and Colombia) and non-controlling interests in Chile.
10. Accrued
payroll and other liabilities
Accrued
payroll and other liabilities consist of the following at year end:
| 2021 | 2020 | |||||||||||||
| Current: | ||||||||||||||
| Accrued payroll | $ | 75,439 | $ | 59,772 | ||||||||||
| Accrued expenses | 7,789 | 14,993 | ||||||||||||
| Other liabilities | 6,695 | 4,453 | ||||||||||||
| $ | 89,923 | $ | 79,218 | |||||||||||
| Non-current: | ||||||||||||||
| Phantom RSU award liability | $ | 4,761 | $ | 2,730 | ||||||||||
| Deferred revenues - Initial franchise fee | 4,536 | 4,612 | ||||||||||||
| Deferred income | 5,848 | 6,075 | ||||||||||||
| Security deposits | 5,460 | 5,976 | ||||||||||||
| Other liabilities | 1,295 | 2,491 | ||||||||||||
| $ | 21,900 | $ | 21,884 | |||||||||||
11. Short-term
debt
On
December 10, 2021, the Company renewed its committed revolving credit facility with JPMorgan Chase Bank, N.A (JPMorgan), for up to $25
million maturing on December 12, 2022. This revolving credit facility permits the Company to borrow money from time to time to cover its
working capital needs and for other general corporate purposes. Principal is due upon maturity. However, prepayments are permitted without
premium or penalty. Each loan made under this agreement will bear interest annually at SOFR plus 3.10% that will be payable on the date
of any prepayment or at maturity.
F-23
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
11. Short-term
debt (continued)
Revolving
credit facility
The
obligations of the Company under the revolving credit facility are jointly and severally guaranteed by certain of the Company’s
subsidiaries on an unconditional basis. The revolving credit facility includes customary covenants including, among others, restrictions
on the ability of the Company, the guarantors and certain material subsidiaries to: (i) incur liens, (ii) enter into any merger, consolidation
or amalgamation; (iii) sell, assign, lease or transfer all or substantially all of the borrower’s or guarantor’s business
or property; (iv) enter into transactions with affiliates; (v) engage in substantially different lines of business; (vi) engage
in transactions that violate certain anti-terrorism laws. In addition, the Company is required, among others, to comply, as of the last
day of each quarter during the agreement, with a consolidated net indebtedness (including interest payable) to EBITDA lower than 3.00x.
As of December 31, 2021, the Company’s net indebtedness (including interest payable) to EBITDA ratio was 1.39 and thus it is currently
in compliance with the ratio requirement.
The
revolving credit facility provides for customary events of default, which, if any of them occurs, would permit or require the lender to
terminate its obligation to provide loans under the revolving credit facility and/or to declare all sums outstanding under the loan
documents immediately due and payable.
No
amounts are due at the date of issuance of these consolidated financial statements in connection with this revolving credit facility.
F-24
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
12.
Long-term debt
Long-term
debt consists of the following at year-end:
| 2021 | 2020 | |||||||||||||
| 2027 Notes | $ | 535,986 | $ | 553,354 | ||||||||||
| 2023 Notes | 201,763 | 216,593 | ||||||||||||
| Finance lease obligations | 6,139 | 5,941 | ||||||||||||
| Other long-term borrowings | 7,509 | 10,199 | ||||||||||||
| Subtotal | 751,397 | 786,087 | ||||||||||||
| Discount on 2023 Notes | (687) | (1,147) | ||||||||||||
| Discount on 2027 Notes | (5,960) | (7,358) | ||||||||||||
| Premium on 2023 Notes | 254 | 427 | ||||||||||||
| Premium on 2027 Notes | 2,613 | 3,206 | ||||||||||||
| Deferred financing costs | (3,659) | (4,641) | ||||||||||||
| Total | 743,958 | 776,574 | ||||||||||||
| Current portion of long-term debt | 4,741 | 3,129 | ||||||||||||
| Long-term debt, excluding current portion | $ | 739,217 | $ | 773,445 | ||||||||||
2027
and 2023 Notes
The
following table presents additional information related to the 2027 and 2023 Notes (the “Notes”):
| Principal as of December 31, | |||||||||||||||||||||||||||||
| Annual interest rate | Currency | 2021 | 2020 | Maturity | |||||||||||||||||||||||||
| 2027 Notes | 5.875 | % | USD | $ | 535,986 | $ | 553,354 | April 4, 2027 | |||||||||||||||||||||
| 2023 Notes | 6.625 | % | USD | 201,763 | 216,593 | September 27, 2023 | |||||||||||||||||||||||
| Interest Expense (i) | DFC Amortization (i) |
Amortization
of Premium/Discount, net (i) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | December 31, 2019 | 2021 | 2020 | December 31, 2019 | 2021 | 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 2027 Notes | $ | 32,175 | $ | 20,269 | $ | 15,569 | $ | 758 | $ | 402 | $ | 299 | $ | 805 | $ | 133 | $ | — | ||||||||||||||||||||||||||||||||||||||
| 2023 Notes | 13,768 | 20,882 | 23,060 | 224 | 294 | 323 | 287 | 371 | 402 | |||||||||||||||||||||||||||||||||||||||||||||||
(i)These
charges are included within “Net interest expense” in the consolidated statements of income.
On
September 27, 2013, the Company issued senior notes for an aggregate principal amount of $473.8 million, which are due in 2023 (the “2023
Notes”). Periodic payments of principal are not required and interest is paid semi-annually commencing on March 27, 2014. The Company
incurred $3,313 of financing costs related to the cash issuance of 2023 Notes, which were capitalized as deferred financing costs (“DFC”)
and are being amortized over the life of the notes.
F-25
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
12.
Long-term debt
(continued)
2027
and 2023 Notes (continued)
On
June 1, 2016, the Company launched a cash tender offer to purchase $80,000 of its outstanding 2023 Notes, at a redemption price equal
to 98%, which expired on June 28, 2016. The holders who tendered their 2023 Notes prior to June 14, received a redemption price equal
to 101%. As a consequence of this transaction, the Company redeemed 16.90% of the outstanding principal. The total payment was $80,800
(including $800 of early tender payment) plus accrued and unpaid interest.
The
results related to the cash tender offer and the accelerated amortization of the related DFC were recognized as interest expense within
the consolidated statement of income.
Furthermore,
on March 16, 2017, the Company launched a second cash tender offer to purchase $80,000 of its outstanding 2023 Notes, at a redemption
price equal to 104%, which expired on April 12, 2017. The holders who tendered their 2023 Notes prior to March 29, 2017, received a redemption
price equal to 107%. As a consequence of this transaction, the Company redeemed 11.6% of the outstanding principal. The total payment
was $48,885 (including $3,187 of early tender payment) plus accrued and unpaid interest. The results related to the second cash tender
offer and the accelerated amortization of the related DFC were recognized as interest expense within the consolidated statement of income.
On
September 15, 2020 the Company launched an offer to exchange any and all of 2023 Notes for an additional issuance of 2027 Notes that expired
on October 13, 2020 (the “expiration date”). The purpose of the exchange offer was to extend the maturity profile of the Company’s
long-term debt. The settlement date was on October 15, 2020. Eligible holders who validly tendered their 2023 Notes for exchange prior
to September 28, 2020 (the “early participation date”), received $1,055 (expressed as whole number) of 2027 Notes per $1,000
(expressed as whole number) of 2023 Notes at the settlement date. Eligible holders who validly tendered their 2023 Notes for exchange
after the early participation date, but on or prior to the expiration date received $1,005 (expressed as whole number) of 2027 Notes per
$1,000 (expressed as whole number) of 2023 Notes at the settlement date. In addition, any fractional portion of the 2027 Notes less than
$1,000 (expressed as whole number) and accrued and unpaid interest were paid in cash.
As
of September 28, 2020, the early participation date, the Company accepted to exchange $126,801 of 2023 Notes, representing 36.43% of the
outstanding principal amount of the 2023 Notes. In addition, on October 13, 2020, the Company accepted to exchange $4,675, representing
1.34% of the outstanding principal amount of 2023 Notes. On October 15, 2020, the Company issued $133,668 of 2027 Notes, paid $107.1 for
fractional portion and $180.1 for accrued and unpaid interest related to the early participation and $4,686 of 2027 Notes, paid $12.4
for fractional portion and $7.1 for unpaid interest related to the exchange after the early participation date.
From
June 2021 to November 2021, the Company repurchased, through open market repurchases, $14,830 of the outstanding principal amount of 2023
Notes at a price equal to 109.45% (equivalent to $16,231) plus accrued and unpaid interests. All repurchased notes were cancelled by November
8, 2021.
On
April 2017, the Company issued senior notes for an aggregate principal amount of $265 million, which are due in 2027 (the “2027
Notes”). The proceeds from this issuance of the 2027 Notes were used to repay the Secured Loan Agreement, unwind the related derivative
instruments, pay the principal and premium on the 2023 Notes (in connection with the aforementioned second tender offer) and for general
purposes. In addition, on September 11, 2020, the Company issued additional 2027 Notes for an aggregate principal amount of $150 million
at a price of 102.250%. The proceeds from the second issuance were used mainly to repay short-term indebtedness. Periodic payments of
principal are not required, and interest is paid semi-annually commencing on October 4, 2017. The Company incurred $3,001 of financing
costs related to the first issuance of 2027 Notes and $2,000 related to the second issuance, which were capitalized as DFC and are being
amortized over the life of the notes.
From
June 2021 to September 2021, the Company repurchased, through open market repurchases, and cancelled $17,368 of the outstanding principal
amount of 2027 Notes at a price equal to 105.74% (equivalent to $18,364) plus accrued and unpaid interest.
F-26
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
12.
Long-term debt
(continued)
2027
and 2023 Notes (continued)
The
Notes are redeemable, in whole or in part, at the option of the Company at any time at the applicable redemption price set forth in the
indenture governing them. The Notes are fully and unconditionally guaranteed on a senior unsecured basis by certain of the Company’s
subsidiaries. The Notes and guarantees (i) are senior unsecured obligations and rank equal in right of payment with all of the Company’s
and guarantors’ existing and future senior unsecured indebtedness; (ii) will be effectively junior to all of the Company’s
and guarantors’ existing and future secured indebtedness to the extent of the value of the Company’s assets securing that
indebtedness; and (iii) are structurally subordinated to all obligations of the Company’s subsidiaries that are not guarantors.
The
indenture governing the Notes limits the Company’s and its subsidiaries’ ability to, among other things, (i) create certain
liens; (ii) enter into sale and lease-back transactions; and (iii) consolidate, merge or transfer assets. In addition, the indenture
governing the 2027 Notes, limits the Company’s and its subsidiaries’ ability to: incur in additional indebtedness and
make certain restricted payments, including dividends. These covenants are subject to important qualifications and exceptions. The indenture
governing the Notes also provides for events of default, which, if any of them occurs, would permit or require the principal, premium,
if any, and interest on all of the then-outstanding Notes to be due and payable immediately.
The
2023 Notes are listed on the Luxembourg Stock Exchange and trade on the Euro MTF Market.
Other
required disclosure
At
December 31, 2021, future payments related to the Company’s long-term debt are as follows:
| Principal | Interest | Total | ||||||||||||||||||
| 2022 | $ | 4,739 | $ | 45,767 | $ | 50,506 | ||||||||||||||
| 2023 | 204,596 | 45,449 | 250,045 | |||||||||||||||||
| 2024 | 2,436 | 31,869 | 34,305 | |||||||||||||||||
| 2025 | 663 | 31,763 | 32,426 | |||||||||||||||||
| 2026 | 113 | 31,750 | 31,863 | |||||||||||||||||
| Thereafter | 538,850 | 17,068 | 555,918 | |||||||||||||||||
| Total payments | 751,397 | 203,666 | 955,063 | |||||||||||||||||
| Interest | — | (203,666) | (203,666) | |||||||||||||||||
| Discount on 2023 Notes | (687) | — | (687) | |||||||||||||||||
| Discount on 2027 Notes | (5,960) | — | (5,960) | |||||||||||||||||
| Premium on 2023 Notes | 254 | — | 254 | |||||||||||||||||
| Premium on 2027 Notes | 2,613 | — | 2,613 | |||||||||||||||||
| Deferred financing cost | (3,659) | — | (3,659) | |||||||||||||||||
| Long-term debt | $ | 743,958 | $ | — | $ | 743,958 | ||||||||||||||
13. Derivative
instruments
F-27
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
13. Derivative
instruments (continued)
The
following table presents the fair values of derivative instruments included in the consolidated balance sheets as of December 31, 2021
and 2020:
| Assets | Liabilities | ||||||||||||||||||||||
| Type of Derivative | Balance Sheets Location | 2021 | 2020 | Balance Sheets Location | 2021 | 2020 | |||||||||||||||||
| Derivatives designated as hedging instruments | |||||||||||||||||||||||
| Cash Flow hedge | |||||||||||||||||||||||
| Forward contracts | Other receivables | $ | 660 | $ | — | Accrued payroll and other liabilities | $ | (51) | $ | (1,264) | |||||||||||||
| Cross-currency interest rate swap | Derivative instruments | 107,386 | 86,534 | Derivative instruments | (2,898) | (6,194) | |||||||||||||||||
| Call spread | Derivative instruments | — | 21,858 | Derivative instruments | — | — | |||||||||||||||||
| Coupon-only swap | Derivative instruments | — | 3,591 | Derivative instruments | — | — | |||||||||||||||||
| Subtotal | 108,046 | 111,983 | (2,949) | (7,458) | |||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||
| Call spread | Derivative instruments | 4,791 | 3,798 | Derivative instruments | — | — | |||||||||||||||||
| Coupon-only swap | Derivative instruments | — | 202 | Derivative instruments | (7,555) | (5,017) | |||||||||||||||||
| Call Spread + Coupon-only swap | Derivative instruments | 8,194 | 6,620 | Derivative instruments | (12,473) | (8,050) | |||||||||||||||||
| Subtotal | 12,985 | 10,620 | (20,028) | (13,067) | |||||||||||||||||||
| Total derivative instruments | $ | 121,031 | $ | 122,603 | $ | (22,977) | $ | (20,525) | |||||||||||||||
Derivatives
designated as hedging instruments
Cash
flow hedge
Forward
contracts
The
Company has entered into various forward contracts in a few territories to hedge a portion of the foreign exchange risk associated with
forecasted imports of goods. The effect of the hedges results in fixing the cost of goods acquired (i.e. the net settlement or collection
adjusts the cost of inventory paid to the suppliers). As of December 31, 2021, the Company had forward contracts outstanding with a notional
amount of $22,128 that mature during 2022.
The
Company made net (payments) collections totaling $(507), $1,757 and $711 during fiscal years 2021, 2020 and 2019, respectively, as a result
of the net settlements of these derivatives.
Cross-currency
interest rate swap
The
Company entered into four cross-currency interest rate swap agreements to hedge all the variability of the principal and interest collections
of its BRL intercompany loan receivables. The agreements were signed during November 2013 (amended in February 2017), June and July 2017
and October 2020. The following table presents information related to the terms of the agreements:
F-28
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
13. Derivative
instruments (continued)
Derivatives
designated as hedging instruments (continued)
Cash
flow hedge (continued)
Cross-currency
interest rate swap (continued)
| Bank | Payable | Receivable | Interest payment dates | Maturity | ||||||||||||||||||||||||||||||||||||||||||||||
| Currency | Amount | Interest rate | Currency | Amount | Interest rate | |||||||||||||||||||||||||||||||||||||||||||||
| JP Morgan Chase Bank, N.A. | BRL | 108,000 | 13 | % | $ | 35,390 | 4.38 | % | March 31/ September 30 | September 2023 | ||||||||||||||||||||||||||||||||||||||||
| JP Morgan Chase Bank, N.A. | BRL | 98,670 | 13 | % | $ | 30,000 | 6.02 | % | March 31/ September 30 | September 2023 | ||||||||||||||||||||||||||||||||||||||||
| Citibank N.A. | BRL | 94,200 | 13 | % | $ | 30,000 | 6.29 | % | March 31/ September 30 | September 2023 | ||||||||||||||||||||||||||||||||||||||||
| Citibank N.A. | BRL | 112,738 | 13 | % | $ | 20,049 | 8.08 | % | March 31/ September 30 | September 2023 | ||||||||||||||||||||||||||||||||||||||||
During
April 2017, the Company’s Brazilian subsidiary entered into similar agreements in order to hedge all the variability in a portion
(50%) of the principal and interest payable of certain intercompany loan payables nominated in US dollar.
The
following table presents information related to the terms of the agreements:
| Bank | Payable | Receivable | Interest payment dates | Maturity | ||||||||||||||||||||||||||||||||||||||||||||||
| Currency | Amount | Interest rate | Currency | Amount | Interest rate | |||||||||||||||||||||||||||||||||||||||||||||
| BAML (i) | BRL | 156,250 | 13.64 | % | $ | 50,000 | 6.91 | % | March 31/ September 30 | April 2027 | ||||||||||||||||||||||||||||||||||||||||
| Banco Santander S.A. | BRL | 155,500 | 13.77 | % | $ | 50,000 | 6.91 | % | June 30/ December 31 | September 2023 | ||||||||||||||||||||||||||||||||||||||||
(i)Bank
of America Merrill Lynch Banco Múltiplo S.A.
The
Company paid $4,132,
$4,031 and $8,692 of net interest during the fiscal years ended December 31, 2021, 2020 and 2019, respectively.
Call
spread
During
April 2017, the Company’s Brazilian subsidiary entered into two call spread agreements in order to hedge all the variability in
a portion (50%) of the principal of certain intercompany loan payables nominated in US dollar. Call spread agreements consist of a combination
of two call options: the Company bought an option to buy US dollar at a strike price equal to the BRL exchange rate at the date of
the agreements, and wrote an option to buy US dollar at a higher strike price than the previous one. Both pair of options have the same
notional amount and are based on the same underlying with the same maturity date.
F-29
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
13. Derivative
instruments (continued)
Derivatives
designated as hedging instruments (continued)
Cash
flow hedge (continued)
Call
spread (continued)
The
following table presents information related to the terms of the agreements:
| Bank | Nominal Amount | Strike price | Maturity | ||||||||||||||||||||||||||||||||
| Currency | Amount | Call option written | Call option bought | ||||||||||||||||||||||||||||||||
| Citibank S.A. | $ | 50,000 | 4.49 | 3.11 | September 2023 | ||||||||||||||||||||||||||||||
| JP Morgan S.A. | $ | 50,000 | 5.20 | 3.13 | April 2027 | ||||||||||||||||||||||||||||||
In
May 2021, the Company unwound these agreements before their maturity and collected $18.8 million (BRL99.7 million). Although the hedge
relationships were discontinued, the Company expects to maintain the underlying loans until maturity. As a consequence, the amounts recorded
in accumulated other comprehensive loss until May 2021 will be amortized to earnings as the originally hedged cash flows affected earnings.
Coupon-only
swap
During
April 2017, the Company’s Brazilian subsidiary entered into two coupon-only swap agreements in order to hedge all the variability
in a portion (50%) in the interest payable related to the intercompany loan aforementioned.
The
following table presents information related to the terms of the agreements:
| Bank | Payable | Receivable | Interest payment dates | Maturity | ||||||||||||||||||||||||||||||||||||||||||||||
| Currency | Amount | Interest rate | Currency | Amount | Interest rate | |||||||||||||||||||||||||||||||||||||||||||||
| Citibank S.A. | BRL | 155,500 | 11.08 | % | $ | 50,000 | 6.91 | % | June 30/ December 31 | September 2023 | ||||||||||||||||||||||||||||||||||||||||
| JP Morgan S.A. | BRL | 156,250 | 11.18 | % | $ | 50,000 | 6.91 | % | March 31/ September 30 | April 2027 | ||||||||||||||||||||||||||||||||||||||||
In
May 2021, the Company unwound these agreements before their maturity and collected $4.4 million (BRL 23.5 million). Although the hedge
relationships were discontinued, the Company expects to maintain the underlying loans until maturity. As a consequence, the amounts recorded
in accumulated other comprehensive loss until May 2021 will be amortized to earnings as the originally hedged cash flows affected earnings.
The
Company made net collections of $170
of
net interest during 2021 until the agreements were unwound, and payments amounting to $(197)
and $(2,036) of net interest during the fiscal years ended December 31, 2020, and 2019, respectively, related to these agreements.
F-30
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
13. Derivative
instruments (continued)
Derivatives
designated as hedging instruments (continued)
Cash
flow hedge (continued)
Additional
disclosures
The
following table present the pretax amounts affecting income and other comprehensive income for the fiscal years ended December 31, 2021,
2020 and 2019 for each type of derivative relationship:
| Derivatives
in Cash Flow Hedging Relationships |
Gain (Loss) Recognized in Accumulated OCI on Derivative | (Gain) Loss Reclassified from Accumulated OCI into income (loss)(i) | |||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||
| Forward contracts | $ | 1,366 | $ | 904 | $ | (10) | $ | 507 | $ | (1,895) | $ | (711) | |||||||||||||||||||||||||||||
| Cross-currency interest rate swaps | 23,802 | 55,124 | (8,506) | (8,564) | (37,376) | 2,056 | |||||||||||||||||||||||||||||||||||
| Call Spread (ii) | (2,593) | 6,758 | 4,377 | 1,915 | (18,153) | (3,561) | |||||||||||||||||||||||||||||||||||
| Coupon-only swap (ii) | 1,093 | 8,604 | (1,889) | (797) | (421) | 1,860 | |||||||||||||||||||||||||||||||||||
| Total | $ | 23,668 | $ | 71,390 | $ | (6,028) | $ | (6,939) | $ | (57,845) | $ | (356) | |||||||||||||||||||||||||||||
(i)The
results recognized in income related to forward contracts were recorded as an adjustment to food and paper.
(ii)Agreements
unwound in May 2021.
The
net gain (loss) recognized in income, related to cross-currency interest rate swaps is presented as follows:
| Adjustment to: | 2021 | 2020 | 2019 | ||||||||||||||
| Foreign currency exchange results | $ | 12,392 | $ | 40,353 | $ | 6,346 | |||||||||||
| Net interest expense | (3,828) | (2,977) | (8,402) | ||||||||||||||
| Total | $ | 8,564 | $ | 37,376 | $ | (2,056) | |||||||||||
The
results recognized in income related to call spread agreements and coupon-only swap agreements were recorded as an adjustment to foreign
currency exchange and interest expense, respectively.
Derivatives
not designated as hedging instruments
In
October 2020, the Company’s Brazilian subsidiary entered into certain derivatives that are not designated as hedge accounting, therefore
the changes in the fair value of these derivatives are recognized immediately in earnings, within “(Loss) Gain from derivative
instruments”. These agreements are:
–A
call spread with JPMorgan, consisting of a combination of two call options. This agreement matures in April 2027.
The
following table presents information related to the terms of the agreements:
F-31
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
13. Derivative
instruments (continued)
| Nominal Amount | Strike price | ||||||||||||||||||||||||||||
| Currency | Amount | Call option written | Call option bought | ||||||||||||||||||||||||||
| $ | 30,000 | 8.20 | 5.62 | ||||||||||||||||||||||||||
Derivatives
not designated as hedging instruments (continued)
–A
coupon-only swap with JP Morgan that matures in April 2027.
The
following table presents information related to the terms of the agreements:
| Payable | Receivable | Interest payment dates | ||||||||||||||||||||||||||||||||||||||||||
| Currency | Amount | Interest rate (i) | Currency | Amount | Interest rate | |||||||||||||||||||||||||||||||||||||||
| BRL | 168,690 |
CDI
plus 2.42% |
$ | 30,000 | 5.46 | % | April 30/ October 31 | |||||||||||||||||||||||||||||||||||||
(i)
“CDI” Certificados de Depósitos Interbancários
The
Company made net payments of $33 during fiscal year ended December 31, 2021, related to this agreement.
–A
combination of call spread + coupon only swap into one agreement with Itaú Unibanco S.A, that matures in April 2027.
The
following tables present information related to the terms of the agreements:
| Nominal Amount | Strike price | ||||||||||||||||||||||||||||
| Currency | Amount | Call option written | Call option bought | ||||||||||||||||||||||||||
| $ | 50,000 | 8.20 | 5.62 | ||||||||||||||||||||||||||
| Payable | Receivable | Interest payment dates | ||||||||||||||||||||||||||||||||||||
| Currency | Amount | Interest rate (i) | Currency | Amount | Interest rate | |||||||||||||||||||||||||||||||||
| BRL | 281,150 |
CDI
plus 2.47% |
$ | 50,000 | 5.46% | April 30/ October 31 | ||||||||||||||||||||||||||||||||
(i)
“CDI” Certificados de Depósitos Interbancários
The
Company made net payments of $94 during fiscal year ended December 31, 2021, related to this agreement.
In
addition, during the fiscal years ended December 31, 2020 and 2019, the Company entered into certain forward contracts that generated
net (payments) and collections of ($39) and $787, respectively.
F-32
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
14. Leases
The
Company leases locations through ground leases (the Company leases the land and owns the building) and through improved leases (the Company
leases land and buildings). The operating leases are mainly related to restaurant and dessert center locations. The average of lease’s
terms is about 15 years and, in many cases, include renewal options provided by the agreement or government’s regulations, as there
are reasonably certain to be exercised. Typically, renewal options are considered reasonably assured of being exercised if the associated
asset lives of the building or leasehold improvements exceed the initial lease term, and the sales performance of the restaurant remains
strong. Therefore, its associated payments are included in the measurement of the right-of-use asset and lease liability. Although, certain
leases contain purchase options, is not reasonably certain that the Company will exercise them. In addition, many agreements include escalations
amounts that vary by reporting unit, for example, including fixed-rent escalations, escalations based on an inflation index, and fair
value adjustments. According to rental terms, the Company pays monthly rent based on the greater of a fixed rent or a certain percentage
of the Company’s gross sales. The lease agreements do not contain any material residual value guarantees or material restrictive
covenants. Furthermore, the Company is the lessee under non-cancelable leases covering certain offices and warehouses.
The
right-of-use assets and lease liabilities are recognized using the present value of the remaining future minimum lease payments discounted
by the Company’s incremental borrowing rate. The Company has elected not to separate non-lease components from lease components
in its lessee portfolio. For most locations, the Company is obliged for the related occupancy costs, such as maintenance.
In
addition, in March 2010, the Company entered into an aircraft operating lease agreement for a term of 8 years, which provides for quarterly
payments of $690. The agreement includes a purchase option at the end of the lease term at fair market value and also an early purchase
option at a fixed amount of $26,685 at maturity of the 24th
quarterly payment. On December 22, 2017, the Company signed an amendment, extending the term of the aircraft operating lease for an additional
10 years, with quarterly payments (retroactively effective as of December 5, 2017) of $442. The Company was required to make a cash collateral
deposit of $2,500 under this agreement.
In
order to mitigate the negative impact of COVID-19 on its financial results, the Company has been renegotiating terms and conditions with
several lessors. The Company decided not to evaluate whether the potential concessions provided by the lessors are lease modifications
under ASU No. 2016-02, Leases (Topic 842) according to the interpretive guidance issued by the FASB staff in April 2020.
At
December 31, 2021, maturities of lease liabilities under existing operating leases are:
| Restaurant | Other | Total (i) | ||||||||||||||||||
| 2022 | $ | 118,356 | $ | 5,564 | $ | 123,920 | ||||||||||||||
| 2023 | 113,202 | 4,469 | 117,671 | |||||||||||||||||
| 2024 | 109,726 | 3,820 | 113,546 | |||||||||||||||||
| 2025 | 106,067 | 3,381 | 109,448 | |||||||||||||||||
| 2026 | 101,730 | 3,055 | 104,785 | |||||||||||||||||
| Thereafter | 781,260 | 5,598 | 786,858 | |||||||||||||||||
| Total lease payments | $ | 1,330,341 | $ | 25,887 | $ | 1,356,228 | ||||||||||||||
| Lease discount | (569,989) | |||||||||||||||||||
| Operating lease liability | $ | 786,239 | ||||||||||||||||||
F-33
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
14. Leases
(continued)
(i)The
Company has certain leases subject to index adjustments. As part of the adoption of ASC 842, the Company used the effective index rate
at transition date in its disclosure and calculation of the lease liability. However, for leases entered into after January 1, 2019, the
inflation index rate will be used to calculate the lease liability only when a lease modification occurs.
The
Company maintains a few finance leases agreements, previously classified as capital leases. As of December 31, 2021 and 2020 the
obligation amounts to $6,139 and $5,941 respectively, included within “Long-term debt” in the Consolidated Balance Sheet.
The
following table is a summary of the Company´s components of lease cost for fiscal years 2021, 2020 and 2019:
| Lease Expense | Statements of Income Location | 2021 | 2020 | 2019 | |||||||||||||||||||
| Operating lease expense - Minimum rentals: | |||||||||||||||||||||||
| Company-operated restaurants | Occupancy and other operating expenses | $ | (94,254) | $ | (69,151) | $ | (104,236) | ||||||||||||||||
| Franchised restaurants | Franchised restaurants - occupancy expenses | (29,969) | (23,510) | (34,727) | |||||||||||||||||||
| General and administrative | General and administrative expenses | (6,590) | (7,062) | (7,614) | |||||||||||||||||||
| Subtotal | (130,813) | (99,723) | (146,577) | ||||||||||||||||||||
| Variable lease expense - Contingent rentals based on sales: | |||||||||||||||||||||||
| Company-operated restaurants | Occupancy and other operating expenses | (27,262) | (26,153) | (29,562) | |||||||||||||||||||
| Franchised restaurants | Franchised restaurants - occupancy expenses | (9,505) | (13,248) | (12,878) | |||||||||||||||||||
| Subtotal | (36,767) | (39,401) | (42,440) | ||||||||||||||||||||
| Total lease expense | $ | (167,580) | $ | (139,124) | $ | (189,017) | |||||||||||||||||
| Other information | 2021 | |||||||||||||
| Weighted-average remaining lease term (years) | ||||||||||||||
| Operating leases | 8 | |||||||||||||
| Weighted-average discount rate | ||||||||||||||
| Operating leases | 6.5 | % | ||||||||||||
15. Franchise
arrangements
Individual
franchise arrangements generally include a lease, a license and provide for payment of initial franchise fees, as well as continuing rent
and service fees (royalties) to the Company based upon a percentage of sales with minimum rent payments. The company’s franchisees
are granted the right to operate a restaurant using the McDonald’s system and, in most cases, the use of a restaurant facility,
generally for a period of 20 years. At the end of the 20-year franchise arrangement, the Company maintains control of the underlying real
estate and building and can either enter into a new franchise arrangement with the existing franchisee or a different franchisee, or close
the restaurant. Franchisees pay related occupancy costs including property taxes, insurance and maintenance. Pursuant to the MFAs, the
Company pays initial fees and continuing service fees for franchised restaurants to McDonald’s Corporation. Therefore, the margin
for franchised restaurants is primarily comprised of rental income net of occupancy expenses (depreciation for owned property and equipment
and/or rental expense for leased properties).
F-34
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
15. Franchise
arrangements (continued)
At
December 31, 2021 and 2020, net property and equipment under franchise arrangements totaled $88,568 and $92,354, respectively (including
land for $22,784 and $24,661, respectively).
Revenues
from franchised restaurants for fiscal years 2021, 2020 and 2019 consisted of:
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Rent (i) | $ | 115,418 | $ | 89,123 | $ | 145,860 | ||||||||||||||
| Initial fees (ii) | 321 | 203 | 287 | |||||||||||||||||
| Royalty fees (iii) | 295 | 275 | 643 | |||||||||||||||||
| Total | $ | 116,034 | $ | 89,601 | $ | 146,790 | ||||||||||||||
(i)Includes
rental income of own buildings and subleases. As of December 31, 2021 and 2020 the subleases rental income amounted to $96,756 and
$74,723, respectively.
(ii)Presented
net of initial fees owed to McDonald’s Corporation for $739, $493 and $1,456 in 2021, 2020 and 2019, respectively.
(iii)Presented
net of royalties fees owed to McDonald’s Corporation for $46,476, $36,554 and $57,709 in 2021, 2020 and 2019, respectively. As a
consequence of the negative impacts of the spread of COVID-19 in the operations, McDonald’s granted a deferral of all the royalties
payments due to sales in March, April, May, June and July 2020, settled during the first half of 2021.
At
December 31, 2021, future minimum rent payments due to the Company under existing franchised agreements are:
| Owned sites | Leased sites | Total | ||||||||||||||||||
| 2022 | $ | 4,916 | $ | 49,991 | $ | 54,907 | ||||||||||||||
| 2023 | 4,568 | 42,581 | 47,149 | |||||||||||||||||
| 2024 | 4,501 | 37,631 | 42,132 | |||||||||||||||||
| 2025 | 4,514 | 34,201 | 38,715 | |||||||||||||||||
| 2026 | 4,553 | 29,731 | 34,284 | |||||||||||||||||
| Thereafter | 37,524 | 127,471 | 164,995 | |||||||||||||||||
| Total | $ | 60,576 | $ | 321,606 | $ | 382,182 | ||||||||||||||
16. Income
taxes
The
Company’s operations are conducted by its foreign subsidiaries in Latin America and the Caribbean. The foreign subsidiaries are
incorporated under the laws of their respective countries and as such the Company is taxed in such foreign countries.
F-35
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
16. Income
taxes (continued)
Statutory
tax rates in the countries in which the Company operates for fiscal years 2021, 2020 and 2019 were as follows:
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Puerto Rico | 18.5% | 18.5% | 18.5% | |||||||||||||||||
| Curacao | 22.0% | 22.0% | 22.0% | |||||||||||||||||
| USVI | 22.5% | 22.5% | 22.5% | |||||||||||||||||
| Aruba, Ecuador, Panama, Uruguay and Netherlands | 25.0% | 25.0% | 25.0% | |||||||||||||||||
| Chile | 27.0% | 27.0% | 27.0% | |||||||||||||||||
| Martinique, French Guyana and Guadeloupe | 22.5% | 28.0% | 31.0% | |||||||||||||||||
| Peru | 29.5% | 29.5% | 29.5% | |||||||||||||||||
| Trinidad and Tobago | 30.0% | 30.0% | 25.0% | |||||||||||||||||
| Costa Rica and Mexico | 30.0% | 30.0% | 30.0% | |||||||||||||||||
| Colombia | 31.0% | 32.0% | 33.0% | |||||||||||||||||
| Brazil and Venezuela | 34.0% | 34.0% | 34.0% | |||||||||||||||||
| Argentina | 35.0% | 30.0% | 30.0% | |||||||||||||||||
Income
tax expense for fiscal years 2021, 2020 and 2019 consisted of the following:
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Current income tax expense | $ | 47,999 | $ | 17,061 | $ | 46,811 | ||||||||||||||
| Deferred income tax (income) expense | (16,066) | 471 | (7,974) | |||||||||||||||||
| Income tax expense | $ | 31,933 | $ | 17,532 | $ | 38,837 | ||||||||||||||
Income
tax expense for fiscal years 2021, 2020 and 2019, differed from the amounts computed by applying the Company’s weighted-average
statutory income tax rate to pre-tax income (loss) as a result of the following:
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Pre-tax income (loss) | $ | 77,786 | $ | (131,854) | $ | 118,953 | ||||||||||||||
| Weighted-average statutory income tax rate (i) | 41.4 | % | 22.9 | % | 36.6 | % | ||||||||||||||
| Income tax expense (benefit) at weighted-average statutory tax rate on pre-tax income (loss) | 32,230 | (30,226) | 43,488 | |||||||||||||||||
|
Permanent
differences: |
||||||||||||||||||||
| Change in valuation allowance (ii) | (26,865) | 2,958 | (24,864) | |||||||||||||||||
| Expiration and changes in tax loss carryforwards | 144 | 13,820 | 17,799 | |||||||||||||||||
| Venezuelan remeasurement and inflationary impacts (iii) | 577 | 1,682 | 1,743 | |||||||||||||||||
| Non-taxable income and non-deductible expenses | 19,655 | 19,565 | 7,545 | |||||||||||||||||
| Tax benefits | (152) | (1,701) | (9,667) | |||||||||||||||||
| Income taxes withholdings on intercompany transactions (iv) | 6,572 | 6,515 | 5,005 | |||||||||||||||||
| Differences including exchange rate, inflation adjustment and filing differences | (6,985) | (789) | (5,291) | |||||||||||||||||
| Alternative Taxes | 1,461 | 2,054 | 658 | |||||||||||||||||
| Others (v) | 5,296 | 3,654 | 2,421 | |||||||||||||||||
| Income tax expense | $ | 31,933 | $ | 17,532 | $ | 38,837 | ||||||||||||||
F-36
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
16. Income
taxes (continued)
(i)Weighted-average
statutory income tax rate is calculated based on the aggregated amount of the income before taxes by country multiplied by the prevailing
statutory income tax rate, divided by the consolidated income before taxes.
(ii)Comprises
net changes in valuation allowances for the year, mainly related to net operating losses.
(iii)Comprises
changes in valuation allowance during 2021, 2020 and 2019 for $9,723, $43,249 and $983, respectively.
(iv)Comprises
income tax withheld on the payment of interest on intercompany loans.
(v)Mainly
comprises income tax effects over intercompany transactions which are eliminated for consolidation purposes.
The
tax effects of temporary differences and carryforwards that comprise significant portions of deferred tax assets and liabilities as of
December 31, 2021 and 2020 are presented below:
| 2021 | 2020 | |||||||||||||
| Tax loss carryforwards (i) | $ | 140,106 | $ | 186,781 | ||||||||||
| Purchase price allocation adjustment | 11,305 | 12,247 | ||||||||||||
| Property and equipment, tax inflation | 39,691 | 38,205 | ||||||||||||
|
Tax Inflation
adjustment |
(6,671) | (7,125) | ||||||||||||
| Other accrued payroll and other liabilities | 25,340 | 29,622 | ||||||||||||
| Share-based compensation | 1,623 | 1,719 | ||||||||||||
|
Provision for
contingencies, bad debts and obsolescence |
9,557 | 4,621 | ||||||||||||
| Other deferred tax assets (ii) | 91,974 | 75,121 | ||||||||||||
| Other deferred tax liabilities (iii) | (55,253) | (47,593) | ||||||||||||
| Property and equipment - difference in depreciation rates | (10,801) | (7,902) | ||||||||||||
| Valuation allowance (iv) | (186,239) | (235,196) | ||||||||||||
| Net deferred tax asset | $ | 60,632 | $ | 50,500 | ||||||||||
(i)As
of December 31, 2021, the Company and its subsidiaries have accumulated net operating losses amounting to $495,782. The Company has
net operating losses amounting to $164,301, expiring between 2022 and 2026. In addition, the Company has net operating losses amounting
to $88,005 expiring after 2026 and net operating losses amounting to $243,476 that do not expire. Changes in tax loss carryforwards for
the year relate to uses of NOLs.
(ii)Other
deferred tax assets reflect the net tax effects of temporary differences between the carrying amounts of assets for financial reporting
purposes (accounting base) and the amounts used for income tax purposes (tax base). For the fiscal year ended December 31, 2021,
this item includes: difference in depreciation of leases (related to differences between ASC842 and local tax regulation) for $63,526
in Brazil and provision for regular expenses for $13,055 in Brazil, Colombia, Mexico and Panama. For the fiscal year ended December 31,
2020 this item includes: difference in depreciation of leases (related to differences between ASC842 and local tax regulation) for
$51,772 in Brazil and provision for regular expenses for $10,098, in Brazil, Colombia and Argentina.
(iii)Primarily
related to leases contracts (related to differences between ASC842 and local tax regulation).
(iv)In
assessing the realization of deferred income tax assets, the Company considers whether it is more likely than not that some portion or
all of the deferred income tax assets will not be realized.
The
total amount of $60,632 for the year ended December 31, 2021, is presented in the consolidated balance sheet as non-current asset and
non-current liability amounting to $67,802 and $7,170, respectively.
F-37
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
16. Income
taxes (continued)
The total amount of $50,500 for the year ended December 31, 2020, is presented in the consolidated balance sheet as non-current asset
and non-current liability amounting to $55,567 and $5,067, respectively.
Deferred
income taxes have not been recorded for temporary differences related to investments in certain foreign subsidiaries. These temporary
differences, comprise undistributed earnings considered permanently invested in subsidiaries amounted to
$210,825 at
December 31, 2021. Determination of the deferred income tax liability on these unremitted earnings is not practicable because such
liability, if any, is dependent on circumstances existing if and when remittance occurs.
As
of December 31, 2021, and 2020, the Company has not identified unrecognized tax benefits that would favorably affect the effective tax
rate if resolved in the Company’s favor.
The
Company account for uncertain tax positions by determining the minimum recognition threshold that a tax position
is required to meet before being recognized in the financial statements. This determination requires the use of significant judgment in
evaluating the tax positions and assessing the timing and amounts of deductible and taxable items. The Company is regularly under audit
in multiple tax jurisdictions and is currently under examination in several jurisdictions. The Company is generally no longer subject
to income tax examinations by tax authorities for years prior to 2015.
As
of December 31, 2021, there are certain matters related to the interpretation of income tax laws which could be challenged by tax authorities
in an amount of $177 million, related to assessments for the fiscal years 2009 to 2016. No formal claim has been made for fiscal years
within the statute of limitation by Tax authorities in any of the mentioned matters, however those years are still subject to audit and
claims may be asserted in the future.
It
is reasonably possible that, as a result of audit progression within the next 12 months, there may be new information that causes the
Company to reassess the tax positions because the outcome of tax audits cannot be predicted with certainty. While the Company cannot estimate
the impact that new information may have on their unrecognized tax benefit balance, it believes that the liabilities recorded are appropriate
and adequate as determined under ASC 740.
17. Share-based
compensation
2011
Equity Incentive Plan
In
March 2011, the Company adopted its Equity Incentive Plan, or 2011 Plan, to attract and retain the most highly qualified and capable professionals
and to promote the success of its business. This Plan is being used to reward certain employees for the success of the Company’s
business through an annual award program. The 2011 Plan permits grants of awards relating to class A shares, including awards in the form
of shares (also referred to as stock), options, restricted shares, restricted share units, share appreciation rights, performance awards
and other share-based awards as will be determined by the Company’s Board of Directors. The maximum number of shares that may be
issued under the 2011 Plan is 2.5% of the Company’s total outstanding class A and class B shares immediately following its initial
public offering 2011.
The
Company made recurring grants of stock options in each of the fiscal years from 2011 to 2014. These grants vest as follows: 40% on
the second anniversary of the date of grant and 20% on each of the following three anniversaries. Each stock option granted represents
the right to acquire a Class A share at its grant-date fair market value. The exercise right for the stock options is cumulative and,
once such right becomes exercisable, it may be exercised in whole or in part during quarterly window periods until the date of termination,
which occurs at the seventh anniversary of the grant date. As of December 31, 2021, all stock options previously granted were expired.
The Company utilizes a Black-Scholes option-pricing model to estimate the value of stock options at the grant date.
The
Company made recurring grants of restricted share units in each of the fiscal years from 2011 to 2019. Each restricted share unit represents
the right to receive a Class A share when vested. From 2011 to 2018, these recurring annual awards vest as follows: 40% on the second
anniversary of the date of grant and 20% on each of the following three anniversaries. The 2019 award vested on May 10, 2020. However,
in the event of death, disability or retirement of the employee, any unvested portion of the annual award will be fully vested. The value
of restricted shares units is based on the quoted market price of the Company’s class A shares at the grant date.
F-38
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
17. Share-based
compensation (continued)
2011
Equity Incentive Plan (continued)
The
Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period for each separately
vesting portion of the award as if the award was, in substance, multiple awards. The Company recognized stock-based compensation expense
related to this award in the amount of $327, $1,564 and $1,884 during fiscal years 2021, 2020 and 2019, respectively. Stock-based compensation
expense is included within “General and administrative expenses” in the consolidated statements of income.
Restricted
Share Units
The
following table summarizes the activity of restricted share units during fiscal years 2021, 2020 and 2019:
| Units | Weighted-average grant-date fair value | ||||||||||||||||
| Outstanding at December 31, 2018 | 1,605,049 | 7.41 | |||||||||||||||
| 2019 annual grant | 35,000 | 8.00 | |||||||||||||||
| Partial vesting of 2014 grant | (38,222) | 8.58 | |||||||||||||||
| Partial vesting of 2015 grant | (115,634) | 6.33 | |||||||||||||||
| Partial vesting of 2016 grant | (134,501) | 4.70 | |||||||||||||||
| Partial vesting of 2017 grant | (174,232) | 9.20 | |||||||||||||||
| Forfeitures | (239,621) | 7.74 | |||||||||||||||
| Outstanding at December 31, 2019 | 937,839 | 7.50 | |||||||||||||||
| Partial vesting of 2015 grants | (101,928) | 6.33 | |||||||||||||||
| Partial vesting of 2016 grants | (114,045) | 4.70 | |||||||||||||||
| Partial vesting of 2017 grants | (67,606) | 9.20 | |||||||||||||||
| Partial vesting of 2018 grants | (163,695) | 8.50 | |||||||||||||||
| Vesting of 2019 grant | (35,000) | 8.00 | |||||||||||||||
| Forfeitures | (4,367) | 7.75 | |||||||||||||||
| Outstanding at December 31, 2020 | 451,198 | 7.80 | |||||||||||||||
| Partial vesting of 2016 grants | (110,213) | 4.70 | |||||||||||||||
| Partial vesting of 2017 grants | (62,742) | 9.20 | |||||||||||||||
| Partial vesting of 2018 grants | (79,673) | 8.50 | |||||||||||||||
| Forfeitures | (11,774) | 8.69 | |||||||||||||||
| Outstanding at December 31, 2021 | 186,796 | 8.70 | |||||||||||||||
| Exercisable at December 31, 2021 | — | — | |||||||||||||||
The
total fair value of restricted share units vested during 2021, 2020 and 2019 was $1773,
$3,475 and $3,295, respectively. As of December 31, 2021 the Company issued 251,623
Class A shares. Therefore, accumulated recorded compensation expense totaling
$1,766 was
reclassified from “Additional paid-in capital” to “Common Stock” upon issuance. As of December 31, 2021,
there were 17,242
Class A shares,
amounting to $120
pending of issuance in connection with previous partial vesting.
F-39
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
17. Share-based
compensation (continued)
2011
Equity Incentive Plan (continued)
Restricted
Share Units (continued)
The
following table provides a summary of outstanding restricted share units at December 31, 2021:
| Number of units outstanding (i) | 186,796 | ||||
| Weighted-average grant-date fair market value per unit | 8.70 | ||||
| Total grant-date fair value | 1,625 | ||||
| Weighted-average accumulated percentage of service | 85.29 | % | |||
| Stock-based compensation recognized in Additional paid-in capital | 1,386 | ||||
| Compensation expense not yet recognized (ii) | 239 | ||||
(i)Related
to awards that will vest between fiscal years 2022 and 2023.
(ii)Expected
to be recognized in a weighted-average period of 0.3 years.
Phantom
RSU Award
In
May 2019, the Company implemented a new long-term incentive plan (called Phantom RSU Award) to reward employees giving them the opportunity
to share the success of the Company in the creation of value for its shareholders. In accordance with this plan, the Company granted units
(called “Phantom RSU”) to certain employees, pursuant to which they are entitled to receive, when vested, a cash payment equal
to the closing price of one Class A share on the respective day in which this benefit is due and the corresponding dividends per-share
(if any) formally declared and paid during the service period. However, in the event of death, disability or retirement of the employee,
any unvested portion of the annual award will be fully vested.
During
2019, the Company granted awards with different vesting periods: 465,202 units which vest over a requisite service period of five
years as follows: 40% at the second anniversary of the date of grant and 20% at each of the following three years and 1,207,455 units
which vest 100% at the fifth anniversary from the date of grant.
During
2020, the Company granted 65,440 units that vested 100% at May 2021.
During
2021, the Company granted awards with different vesting periods: 874,294 units which vest 100% at the third anniversary from the grant
date; and 44,093 units which vest 100% at April 2022.
The
Company recognizes compensation expense related to these benefits on a straight-line basis over the requisite service period. As a consequence,
when the award includes multiple vesting periods, it is considered as multiple awards.
The
total compensation expense as of December 31, 2021, 2020 and 2019, amounts to $3,452, $1,232 and $2,102 respectively, which has been
recorded under “General and administrative expenses” within the consolidated statement of income. The accrued liability is
remeasured at the end of each reporting period until settlement.
F-40
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
17. Share-based
compensation (continued)
Phantom
RSU Award (continued)
The
following table summarizes the activity under the plan as of December 31, 2021:
| Units | ||||||||||||||||||||||||||
| Grant 2019 | 1,672,657 | |||||||||||||||||||||||||
| Forfeitures | (10,837) | |||||||||||||||||||||||||
| Outstanding at December 31, 2019 | 1,661,820 | |||||||||||||||||||||||||
| Grant 2020 | 65,440 | |||||||||||||||||||||||||
| Partial vesting and settlement of 2019 Grant (i) | (5,162) | |||||||||||||||||||||||||
| Forfeitures | (31,614) | |||||||||||||||||||||||||
| Outstanding at December 31, 2020 | 1,690,484 | |||||||||||||||||||||||||
| Grant 2021 | 918,387 | |||||||||||||||||||||||||
| Partial vesting and settlement of 2019 Grant (ii) | (173,916) | |||||||||||||||||||||||||
| Vesting of 2020 grant (iii) | (65,440) | |||||||||||||||||||||||||
| Forfeitures | (329,027) | |||||||||||||||||||||||||
| Outstanding at December 31, 2021 | 2,040,488 | |||||||||||||||||||||||||
(i)
Amounting to $18
(ii)
Amounting to $1.104
(iii)
Amounting to $416
| Total Non-vested (i) | ||||||||||||||||||||||||||
| Number of units outstanding | 2,040,488 | |||||||||||||||||||||||||
| Current share price | 5.83 | |||||||||||||||||||||||||
| Total fair value of the plan | 11,896 | |||||||||||||||||||||||||
| Weighted-average accumulated percentage of service | 44.12 | % | ||||||||||||||||||||||||
| Accrued liability (ii) | 5,248 | |||||||||||||||||||||||||
| Compensation expense not yet recognized (iii) | 6,648 | |||||||||||||||||||||||||
(i)Related
to awards that will vest between April 2022 and May 2024.
(ii)Presented
within “Accrued payroll and other liabilities” in the Company’s current and non-current liabilities balance sheet.
(iii)Expected
to be recognized in a weighted-average period of 2.31 years.
The
Company recognized $75, $(244) and $(422) of related income tax benefit/(expense) for the share-based
compensation
plans during
fiscal years 2021, 2020 and 2019, respectively.
F-41
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
18. Commitments
and contingencies
Commitments
The
MFAs require the Company and its MF subsidiaries, among other obligations:
(i)to
agree with McDonald’s Corporation on a restaurant opening plan and a reinvestment plan for each three-year period or such other
commitment or period that McDonald’s may approve; and pay an initial franchise fee for each new restaurant opened;
(ii)to
pay monthly royalties commencing at a rate of approximately 5% of gross sales of the restaurants, during the first 10 years. This percentage
increases to 6% and 7% for the subsequent two five-year periods of the agreement. Nevertheless, at times, McDonald’s Corporation
has supported Company´s investment plans by agreeing to provide an incentive (the “growth support”), which result or
is expected to result in a lower royalty rate.
(iii)to
commit to funding a specified Strategic Marketing Plan; that includes the expenditure of 5% of the Company´s gross sales on Advertising
and Promotion activities.
(iv)to
own (or lease) directly or indirectly, the fee simple interest in all real property on which any franchised restaurant is located;
and
(v)to
maintain a minimum fixed charge coverage ratio (as defined therein) at least equal to 1.50 as well as a maximum leverage ratio (as defined
therein) of 4.25.
If
the Company would not be in compliance with these commitments under the MFA, it could be in material breach. A breach of the MFA would
give McDonald’s Corporation certain rights, including the ability to acquire all or portions of the business.
As
a consequence of the negative impacts of the spread of COVID-19 on the Company’s operations, during 2020, McDonald’s Corporation
granted the Company a deferral of all the royalty payments due related to sales from March to July 2020 (settled during the first half
of 2021); a reduction in the advertising and promotion spending requirements from 5% to 4% for the annual period 2020 and the withdrawal
of the previously agreed growth and investment plan. Due to the dynamic environment, in 2021 the Company agreed with McDonald’s
Corporation on a growth and investment plan for only one year and received a growth support that resulted in a consolidated effective
royalty rate of 5.2% of sales of 2021.
On
January 10, 2022, the Company reached an agreement with McDonald’s Corporation on a new growth and investment plan for next years.
McDonald’s Corporation has agreed to continue providing the Company with growth support under certain terms and conditions.
To
support its future growth, the Company plans to open at least 200 new restaurants and to modernize at least 400 restaurants, with capital
expenditures of approximately $650 million from 2022 to 2024. In addition, McDonald’s Corporation agreed to continue providing growth
support which is expected to result in an effective royalty rate of about 5.6% of sales in 2022 and 6.0% of sales in 2023 and 2024.
F-42
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
18. Commitments
and contingencies (continued)
Commitments
(continued)
For
the period ended December 31, 2021, the Company was
in compliance with the ratio requirements mentioned in point (v) above. However, during some periods of 2021 ratios were not in compliance.
McDonald’s Corporation granted the Company limited waivers from June 30, 2020 through and including December 31, 2021, during which
time the Company was not required to comply with the financial ratios set forth in the MFA. The ratios for the periods mentioned, were
as follows:
| Fixed Charge Coverage Ratio | Leverage Ratio | ||||||||||||||||
| March 31, 2021 | 0.93 | 7.85 | |||||||||||||||
| June 30, 2021 | 1.40 | 5.50 | |||||||||||||||
| September 30, 2021 | 1.65 | 4.46 | |||||||||||||||
| December 31, 2021 | 1.89 | 3.94 | |||||||||||||||
In
addition, the Company maintains standby letters of credit in favor of McDonald’s Corporation as collateral for the obligations assumed
under the MFAs, for a total aggregate drawing amount of $80 million. These letters of credit can be drawn if certain events occur, including
the failure to pay royalties. No amounts have been drawn at the date of issuance of these financial statements. The following table presents
information related to the standby letters of credit:
| Bank | Currency | Amount | |||||||||||||||
| Itaú | $ | 15,000 | |||||||||||||||
| Credit Suisse (i) | $ | 45,000 | |||||||||||||||
| JPMorgan (i) | $ | 20,000 | |||||||||||||||
(i)
Maintained through its wholly-owned subsidiary ADBV.
These
letters of credit contain a limited number of customary affirmative and negative covenants, including a maximum indebtedness to EBITDA
ratio, as follows:
|
Bank |
Ratio |
Required Maximum Ratio |
As
of December 31, 2021 | |||||||||||||||||
|
Itaú |
Net indebtedness
to EBITDA |
4.5 |
1.35 | |||||||||||||||||
|
Credit Suisse
(i) |
Indebtedness
to EBITDA |
4.0 |
1.42 | |||||||||||||||||
|
JPMorgan (i) |
Indebtedness
to EBITDA |
4.5 |
1.42 | |||||||||||||||||
(i)
Maintained through its wholly-owned subsidiary ADBV.
As
of December 31, 2021 all the ratios were in compliance.
F-43
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
18. Commitments
and contingencies (continued)
Provision
for contingencies
The
Company has certain contingent liabilities with respect to existing or potential claims, lawsuits and other proceedings, including those
involving labor, tax and other matters. At December 31, 2021 and 2020, the Company maintains a provision for contingencies, net of judicial
deposits, amounting to $34,086 and $26,948, respectively, presented as follow: $2,140 and $2,024 as a current liability and $31,946
and $24,924 as a non-current liability, respectively. The breakdown of the provision for contingencies is as follows:
| Description | Balance at beginning of period | Accruals, net | Settlements | Reclassifications and increase of judicial deposits | Translation | Balance at end of period | ||||||||||||||||||||||||||||||||
| Year ended December 31, 2021: | ||||||||||||||||||||||||||||||||||||||
| Tax contingencies in Brazil (i) | $ | 10,662 | $ | 7,472 | $ | — | $ | (517) | $ | (975) | $ | 16,642 | ||||||||||||||||||||||||||
| Labor contingencies in Brazil (ii) | 14,514 | 11,319 | (12,080) | 522 | (1,005) | 13,270 | ||||||||||||||||||||||||||||||||
| Other (iii) | 9,907 | 3,764 | (1,708) | (136) | (1,061) | 10,766 | ||||||||||||||||||||||||||||||||
| Subtotal | 35,083 | 22,555 | (13,788) | (131) | (3,041) | 40,678 | ||||||||||||||||||||||||||||||||
| Judicial deposits (iv) | (8,135) | — | — | 1,030 | 513 | (6,592) | ||||||||||||||||||||||||||||||||
| Provision for contingencies | $ | 26,948 | $ | 22,555 | $ | (13,788) | $ | 899 | $ | (2,528) | $ | 34,086 | ||||||||||||||||||||||||||
| Year ended December 31, 2020: | ||||||||||||||||||||||||||||||||||||||
| Tax contingencies in Brazil (i) | $ | 10,595 | $ | 2,040 | $ | — | $ | 435 | $ | (2,408) | $ | 10,662 | ||||||||||||||||||||||||||
| Labor contingencies in Brazil (ii) | 16,839 | 12,087 | (10,499) | — | (3,913) | 14,514 | ||||||||||||||||||||||||||||||||
| Other (iii) | 11,404 | 1,203 | (1,421) | — | (1,279) | 9,907 | ||||||||||||||||||||||||||||||||
| Subtotal | 38,838 | 15,330 | (11,920) | 435 | (7,600) | 35,083 | ||||||||||||||||||||||||||||||||
| Judicial deposits (iv) | (12,680) | — | — | 1,626 | 2,919 | (8,135) | ||||||||||||||||||||||||||||||||
| Provision for contingencies | $ | 26,158 | $ | 15,330 | $ | (11,920) | $ | 2,061 | $ | (4,681) | $ | 26,948 | ||||||||||||||||||||||||||
| Year ended December 31, 2019: | ||||||||||||||||||||||||||||||||||||||
| Tax contingencies in Brazil (i) | $ | 9,497 | $ | 1,455 | $ | — | $ | — | $ | (357) | $ | 10,595 | ||||||||||||||||||||||||||
| Labor contingencies in Brazil (ii) | 21,108 | 12,916 | (16,068) | — | (1,117) | 16,839 | ||||||||||||||||||||||||||||||||
| Other (iii) | 11,462 | 3,070 | (1,700) | — | (1,428) | 11,404 | ||||||||||||||||||||||||||||||||
| Subtotal | 42,067 | 17,441 | (17,768) | — | (2,902) | 38,838 | ||||||||||||||||||||||||||||||||
| Judicial deposits (iv) | (13,558) | — | — | 354 | 524 | (12,680) | ||||||||||||||||||||||||||||||||
| Provision for contingencies | $ | 28,509 | $ | 17,441 | $ | (17,768) | $ | 354 | $ | (2,378) | $ | 26,158 | ||||||||||||||||||||||||||
(i)In
2021, it includes mainly INSS and CIDE. In 2020 and 2019, it includes mainly CIDE.
(ii)It
primarily relates to dismissals in the normal course of business.
(iii)It
relates to tax and labor contingencies in other countries and civil contingencies in all the countries.
(iv)It
primarily relates to judicial deposits the Company was required to make in connection with the proceedings in Brazil.
As
of December 31, 2021, there are certain matters related to the interpretation of tax, labor and civil laws for which there is a possibility
that a loss may have been incurred in accordance with ASC 450-20-50-4 within a range of $240 million and $271 million.
Pursuant
to Section 9.3 of the Stock Purchase Agreement, McDonald’s Corporation indemnifies the Company for certain Brazilian claim. At December
31, 2021, the provision for contingencies includes $1,188 ($1,259 at December 31, 2020), related to this claim. As a result, the
Company has recorded a non-current asset in respect of McDonald’s Corporation’s indemnity within “Miscellaneous”
in the consolidated balance sheet.
F-44
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
19. Disclosures
about fair value of financial instruments
As
defined in ASC 820 Fair Value Measurement and Disclosures, fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The transaction is based
on a hypothetical transaction in the principal or most advantageous market considered from the perspective of the market participant that
holds the asset or owes the liability. The valuation techniques that can be used under this guidance are the market approach, income approach
or cost approach. The market approach uses prices and other information for market transactions involving identical or comparable assets
or liabilities, such as matrix pricing. The income approach uses valuation techniques to convert future amounts to a single discounted
present amount based on current market conditions about those future amounts, such as present value techniques, option pricing models
(e.g. Black-Scholes model) and binomial models (e.g. Monte-Carlo model). The cost approach is based on current replacement cost to replace
an asset.
The
Company utilizes market data or assumptions that market participants who are independent, knowledgeable and willing and able to transact
would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique.
These inputs can be readily observable, market corroborated or generally unobservable. The Company attempts to utilize valuation techniques
that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company is able to classify fair value balances
based on the observance of those inputs. The guidance establishes a formal fair value hierarchy based on the inputs used to measure fair
value. The hierarchy gives the highest priority to level 1 measurements and the lowest priority to level 3 measurements, and accordingly,
level 1 measurement should be used whenever possible.
The
three levels of the fair value hierarchy as defined by the guidance are as follows:
Level
1: Valuations
utilizing quoted, unadjusted prices for identical assets or liabilities in active markets that the Company has the ability to access.
This is the most reliable evidence of fair value and does not require a significant degree of judgment. Examples include exchange-traded
derivatives and listed equities that are actively traded.
Level
2: Valuations
utilizing quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are
observable, either directly or indirectly for substantially the full term of the asset or liability.
Financial
instruments that are valued using models or other valuation methodologies are included. Models used should primarily be industry-standard
models that consider various assumptions and economic measures, such as interest rates, yield curves, time value, volatilities, contract
terms, current market prices, credit risk or other market-corroborated inputs. Examples include most over-the-counter derivatives (non-exchange
traded), physical commodities, most structured notes and municipal and corporate bonds.
Level
3: Valuations
utilizing significant unobservable inputs provides the least objective evidence of fair value and requires a significant degree of judgment.
Inputs may be used with internally developed methodologies and should reflect an entity’s assumptions using the best information
available about the assumptions that market participants would use in pricing an asset or liability. Examples include certain corporate
loans, real-estate and private equity investments and long-dated or complex over-the-counter derivatives.
Depending
on the particular asset or liability, input availability can vary depending on factors such as product type, longevity of a product in
the market and other particular transaction conditions. In some cases, certain inputs used to measure fair value may be categorized into
different levels of the fair value hierarchy. For disclosure purposes under this guidance, the lowest level that contains significant
inputs used in valuation should be chosen. Pursuant to ASC 820-10-50, the Company has classified its assets and liabilities into these
levels depending upon the data relied on to determine the fair values. The fair values of the Company’s derivatives are valued based
upon quotes obtained from counterparties to the agreements and are designated as Level 2.
F-45
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
19. Disclosures
about fair value of financial instruments (continued)
The
following fair value hierarchy table presents information about the Company’s assets and liabilities measured at fair value on a
recurring basis as of December 31, 2021 and 2020:
| Quoted
Prices in Active Markets For Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Balance
as of December 31, |
Balance
as of December 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash equivalents | $ | 198,811 | $ | 106,856 | $ | — | $ | — | $ | — | $ | — | $ | 198,811 | $ | 106,856 | ||||||||||||||||||||||||||||||||||
| Derivatives | — | — | 121,031 | 122,603 | — | — | 121,031 | 122,603 | ||||||||||||||||||||||||||||||||||||||||||
| Total Assets | $ | 198,811 | $ | 106,856 | $ | 121,031 | $ | 122,603 | $ | — | $ | — | $ | 319,842 | $ | 229,459 | ||||||||||||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivatives | $ | — | — | 22,977 | $ | 20,525 | $ | — | $ | — | 22,977 | 20,525 | ||||||||||||||||||||||||||||||||||||||
| Total Liabilities | $ | — | $ | — | $ | 22,977 | $ | 20,525 | $ | — | $ | — | $ | 22,977 | $ | 20,525 | ||||||||||||||||||||||||||||||||||
The
derivative contracts were valued using various pricing models or discounted cash flow analyses that incorporate observable market parameters,
such as interest rate yield curves, option volatilities and currency rates that were observable for substantially the full term of the
derivative contracts.
Certain
financial assets and liabilities not measured at fair value
At
December 31, 2021, the fair value of the Company’s long-term debt was estimated at $774,821, compared to a carrying amount of $755,341.
This fair value was estimated using various pricing models or discounted cash flow analysis that incorporated quoted market prices, and
is similar to Level 2 within the valuation hierarchy. The carrying amount for notes receivable approximates fair value.
Non-financial
assets and liabilities measured at fair value on a nonrecurring basis
Certain
assets and liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at
fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment).
At December 31, 2021, no material fair value adjustments or fair value measurements were required for non-financial assets or liabilities,
except for those required in connection with the impairment of long-lived assets and goodwill. Refer to Note 3 for more details, including
inputs and valuation techniques used to measure fair value of these non-financial assets.
20. Certain
risks and concentrations
The
Company’s financial instruments that are exposed to concentration of credit risk primarily consist of cash and cash equivalents
and accounts and notes receivable. Cash and cash equivalents are deposited with various creditworthy financial institutions, and therefore
the Company believes it is not exposed to any significant credit risk related to cash and cash equivalents. Concentrations of credit risk
with respect to accounts and notes receivable are generally limited due to the large number of franchisees comprising the Company’s
franchise base.
All
the Company’s operations are concentrated in Latin America and the Caribbean. As a result, the Company’s financial condition
and results of operations depend, to a significant extent, on macroeconomic and political conditions prevailing in the region. See Note
22 for additional information pertaining to the Company’s Venezuelan operations.
In addition,
during 2020 the Company was affected by the spread of COVID-19 along the region. See Note 1 for additional information.
F-46
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
21. Segment
and geographic information
The
Company is required to report information about operating segments in annual financial statements and interim financial reports issued
to shareholders in accordance with ASC 280. Operating segments are components of a company about which separate financial information
is available that is regularly evaluated by the chief operating decision maker(s) in deciding how to allocate resources and assess performance.
ASC 280 also requires disclosures about the Company’s products and services, geographic areas and major customers.
As
discussed in Note 1, the Company through its wholly-owned and majority-owned subsidiaries operates and franchises McDonald’s restaurants
in the food service industry. The Company has determined that its reportable segments are those that are based on the Company’s
method of internal reporting. The Company manages its business as distinct geographic segments. As of September 30, 2021, its operations
were divided into four geographic divisions, which were as follows: (i) Brazil; (ii) the Caribbean division, consisting of Aruba,
Curacao, Colombia, French Guyana, Guadeloupe, Martinique, Puerto Rico, Trinidad and Tobago, the U.S. Virgin Islands of St. Croix and St.
Thomas and Venezuela; (iii) the North Latin America division (“NOLAD”), consisting of Costa Rica, Mexico and Panama;
and (iv) the South Latin America division (“SLAD”), consisting of Argentina, Chile, Ecuador, Peru and Uruguay. Effective October
1, 2021, the Company made certain changes in its internal management structure in order to gain operational agility. As a consequence,
the Company reorganized its operation into three geographic divisions, as follows: (i) Brazil, (ii) the North Latin American division,
or “NOLAD,” which is now comprised of Costa Rica, Mexico, Panama, Puerto Rico, Martinique, Guadeloupe, French Guyana and the
U.S. Virgin Islands of St. Croix and St. Thomas and (iii) the South Latin American division, or “SLAD,” which is now comprised
of Argentina, Chile, Ecuador, Peru, Uruguay, Colombia, Venezuela, Trinidad and Tobago, Aruba and Curacao. The accounting policies of the
segments are the same as those described in Note 3.
The
following table presents information about profit or loss and assets for each reportable segment:
| For the fiscal years ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Brazil | $ | 1,002,781 | $ | 862,748 | $ | 1,385,566 | ||||||||||||||
| NOLAD | 780,866 | 584,646 | 676,382 | |||||||||||||||||
| SLAD | 876,294 | 536,825 | 897,129 | |||||||||||||||||
| Total revenues | $ | 2,659,941 | $ | 1,984,219 | $ | 2,959,077 | ||||||||||||||
| Adjusted EBITDA: | ||||||||||||||||||||
| Brazil | $ | 175,603 | $ | 76,155 | $ | 227,844 | ||||||||||||||
| NOLAD | 85,323 | 41,496 | 64,059 | |||||||||||||||||
| SLAD | 77,573 | 830 | 63,043 | |||||||||||||||||
| Total reportable segments | 338,499 | 118,481 | 354,946 | |||||||||||||||||
| Corporate and others (i) | (66,741) | (50,370) | (63,171) | |||||||||||||||||
| Total adjusted EBITDA | $ | 271,758 | $ | 68,111 | $ | 291,775 | ||||||||||||||
F-47
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
21. Segment
and geographic information (continued)
| For the fiscal years ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Adjusted EBITDA reconciliation: | ||||||||||||||||||||
| Total Adjusted EBITDA | $ | 271,758 | $ | 68,111 | $ | 291,775 | ||||||||||||||
| (Less) Plus items excluded from computation that affect operating income (loss): | ||||||||||||||||||||
| Depreciation and amortization | (120,394) | (126,853) | (123,218) | |||||||||||||||||
|
Gains from sale,
insurance recovery and contribution in equity method investment of property and equipment |
4,876 | 4,210 | 5,175 | |||||||||||||||||
| Write-offs of property and equipment | (3,094) | (4,501) | (4,733) | |||||||||||||||||
| Impairment of long-lived assets | (1,573) | (6,636) | (8,790) | |||||||||||||||||
| Impairment of goodwill | — | (1,085) | (273) | |||||||||||||||||
| Reorganization and optimization plan expenses | (12,054) | — | — | |||||||||||||||||
| Operating income (loss) | 139,519 | (66,754) | 159,936 | |||||||||||||||||
| (Less) Plus: | ||||||||||||||||||||
| Net interest expense | (49,546) | (59,068) | (52,079) | |||||||||||||||||
| (Loss) gain from derivative instruments | (5,183) | (2,297) | 439 | |||||||||||||||||
| Gain from securities | — | 25,676 | — | |||||||||||||||||
| Foreign currency exchange results | (9,189) | (31,707) | 12,754 | |||||||||||||||||
| Other non-operating income (expenses), net | 2,185 | 2,296 | (2,097) | |||||||||||||||||
| Income tax expense | (31,933) | (17,532) | (38,837) | |||||||||||||||||
| Net income attributable to non-controlling interests | (367) | (65) | (220) | |||||||||||||||||
| Net income (loss) attributable to Arcos Dorados Holdings Inc. | $ | 45,486 | $ | (149,451) | $ | 79,896 | ||||||||||||||
| For the fiscal years ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Depreciation and amortization: | ||||||||||||||||||||
| Brazil | $ | 54,883 | $ | 59,466 | $ | 63,467 | ||||||||||||||
| NOLAD | 34,810 | 35,812 | 31,192 | |||||||||||||||||
| SLAD | 26,188 | 27,459 | 29,424 | |||||||||||||||||
| Total reportable segments | 115,881 | 122,737 | 124,083 | |||||||||||||||||
| Corporate and others (i) | 5,372 | 5,288 | 4,894 | |||||||||||||||||
| Purchase price allocation (ii) | (859) | (1,172) | (5,759) | |||||||||||||||||
| Total depreciation and amortization | $ | 120,394 | $ | 126,853 | $ | 123,218 | ||||||||||||||
| Property and equipment expenditures: | ||||||||||||||||||||
| Brazil | $ | 50,217 | $ | 39,127 | $ | 146,322 | ||||||||||||||
| NOLAD | 23,800 | 17,250 | 42,892 | |||||||||||||||||
| SLAD | 40,640 | 29,934 | 75,984 | |||||||||||||||||
| Others | 342 | — | 37 | |||||||||||||||||
| Total property and equipment expenditures | $ | 114,999 | $ | 86,311 | $ | 265,235 | ||||||||||||||
F-48
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
21. Segment
and geographic information (continued)
| As of December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Total assets: | ||||||||||||||
| Brazil | $ | 1,083,700 | $ | 1,102,009 | ||||||||||
| NOLAD | 679,682 | 691,534 | ||||||||||||
| SLAD | 566,208 | 513,966 | ||||||||||||
| Total reportable segments | 2,329,590 | 2,307,509 | ||||||||||||
| Corporate and others (i) | 134,020 | 95,802 | ||||||||||||
| Purchase price allocation (ii) | (102,353) | (109,357) | ||||||||||||
| Total assets | $ | 2,361,257 | $ | 2,293,954 | ||||||||||
(i)Primarily
relates to corporate general and administrative expenses, corporate supply chain operations in Uruguay, and related assets. Corporate
general and administrative expenses consist of corporate office support costs in areas such as facilities, finance, human resources, information
technology, legal, marketing, restaurant operations, supply chain and training. As of December 31,2021 and 2020, corporate assets primarily
include cash and cash equivalents, derivatives and lease right of use.
(ii)Relates
to the purchase price allocation adjustment made at corporate level, which reduces the accounting value of our long-lived assets (excluding
Lease right of use) and goodwill and the corresponding depreciation and amortization. As of December 31,2021 and 2020 primarily related
with the reduction of goodwill.
The
Company’s revenues are derived from two sources: sales by Company-operated restaurants and revenues from restaurants operated
by franchisees. All of the Company’s revenues are derived from foreign operations.
Long-lived
assets consisting of property and equipment totaled $743,533 and $796,532 at December 31, 2021 and 2020, respectively. All of the Company’s
long-lived assets are related to foreign operations.
22. Venezuelan
operations
The
Company conducts business in Venezuela where currency restrictions have been in place for several years under different currency exchange
regulations. Although during 2019, the Central Bank of Venezuela loosen those restrictions by permitting financial institution to participate
as intermediaries in foreign currency operations, the Company’s ability to immediately access cash through repatriations continues
to be limited.
Revenues
and operating loss of the Venezuelan operations were $8,337 and $(4,239), respectively, for fiscal year 2021; $4,494 and $(7,712),
respectively, for fiscal year 2020; and $10,184 and $(8,240), respectively, for fiscal year 2019.
As
of December 31, 2021, the Company did not have a material monetary position, which would be subject to remeasurement in the event
of further changes in the exchange rate. In addition, Venezuela’s non-monetary assets were $10.1 million (mainly fixed assets).
In
addition to exchange controls, the Venezuelan market is subject to price controls. The Venezuelan government issued a regulation establishing
a maximum profit margin for companies and maximum prices for certain goods and services. However, the Company was able to increase prices
during the fiscal year ended December 31, 2021.
During
August 2021, the Government announced the removal of six zeros from the Sovereign Bolivar (VES), effective October 1, 2021.
The
Company’s Venezuelan operations, continue to be impacted by country’s macroeconomic volatility, including the ongoing highly
inflationary environment.
Additionally, the operations would be further affected by more stringent
F-49
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
22. Venezuelan
operations (continued)
controls
on foreign currency exchange, pricing, payments, profits or imports; the continued migration or the high level of unemployment. The
Company continues to closely monitor developments in this dynamic environment, to assess evolving business risks and actively manage its
operations in Venezuela.
23. Shareholders’
equity
Authorized
capital
The
Company is authorized to issue a maximum of 500,000,000 shares, consisting of 420,000,000 Class A shares and 80,000,000 Class B shares
of no par value each.
Issued
and outstanding capital
At
December 31, 2018, the Company had 205,232,247 shares issued and outstanding with no par value, consisting of 125,232,247 class A
shares and 80,000,000 class B shares.
During
fiscal years 2021, 2020 and 2019, the Company issued 251,623, 472,130 and 470,558 Class A shares, respectively, in connection with the
partial vesting of restricted share units under the 2011 Equity Incentive Plan.
On
May 22, 2018, the Board of Directors approved the adoption of a share repurchase program, pursuant to which the Company may repurchase
from time to time, along one year, up to $60,000 of issued and outstanding Class A shares of no par value of the Company.
As
of February 15, 2019, the Company purchased 7,993,602 shares amounting to $60,000 and the program concluded. The shares reacquired were
recorded at cost within “Common stock in treasury” in the Consolidated Statement of Changes in Equity.
On
August 12, 2020, the Company used 2,723,614 of treasury shares to satisfy a distribution of class A shares to the Company's shareholders
and on June 30, 2021, the Company used 2,960,926 of treasury shares to satisfy a distribution of class A shares to the Company’s
shareholders.
As
of December 31, 2021, 2020 and 2019 the Company had 210,478,322; 207,265,773 and 204,070,029 outstanding shares, consisting of 130,478,322;
127,265,773 and 124,070,029 Class A shares, respectively, and 80,000,000 for Class B shares for each year.
Rights,
privileges and obligations
Holders
of Class A shares are entitled to one vote per share and holders of Class B shares are entitled to five votes per share. Except with respect
to voting, the rights, privileges and obligations of the Class A shares and Class B shares are pari
passu in all
respects, including with respect to dividends and rights upon liquidation of the Company.
Distribution
of dividends
The
Company can only make distributions to the extent that immediately following the distribution, its assets exceed its liabilities and the
Company is able to pay its debts as they become due.
On
June 30, 2021, the Company approved a distribution of class A shares to the Company’s Class A and Class B shareholders, which shares
were distributed on July 23, 2021. The Company distributed one share for every seventy shares held by its shareholders and paid cash in
lieu of fractional shares. Therefore, the Company distributed 2,960,926 repurchased shares and paid $21 for fractional shares.
F-50
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
23. Shareholders’
equity (continued)
Accumulated
other comprehensive income (loss)
The
following table sets forth information with respect to the components of “Accumulated other comprehensive income (loss)” as
of December 31, 2021 and their related activity during the three-years in the period then ended:
|
Foreign
currency translation |
Cash
flow hedges |
Post-employment benefits (i) | Total Accumulated other comprehensive loss | |||||||||||||||||||||||
| Balances at December 31, 2018 | $ | (499,277) | $ | (1,640) | $ | (1,349) | $ | (502,266) | ||||||||||||||||||
| Other comprehensive loss before reclassifications | (12,168) | (5,185) | (55) | (17,408) | ||||||||||||||||||||||
| Net loss reclassified from accumulated other comprehensive income to net income | — | 85 | 864 | 949 | ||||||||||||||||||||||
| Adoption of ASU 2017-12 | — | (780) | — | (780) | ||||||||||||||||||||||
| Net current-period other comprehensive (loss) income | (12,168) | (5,880) | 809 | (17,239) | ||||||||||||||||||||||
| Balances at December 31, 2019 | (511,445) | (7,520) | (540) | (519,505) | ||||||||||||||||||||||
| Other comprehensive (loss) income before reclassifications | (76,359) | 54,287 | (195) | (22,267) | ||||||||||||||||||||||
| Net (income) loss reclassified from accumulated other comprehensive loss to net loss | — | (43,324) | 236 | (43,088) | ||||||||||||||||||||||
| Net current-period other comprehensive (loss) income | (76,359) | 10,963 | 41 | (65,355) | ||||||||||||||||||||||
| Balances at December 31, 2020 | (587,804) | 3,443 | (499) | (584,860) | ||||||||||||||||||||||
| Other comprehensive (loss) income before reclassifications | (37,267) | 19,698 | (190) | (17,759) | ||||||||||||||||||||||
| Net (income) loss reclassified from accumulated other comprehensive losses to net income | — | (5,301) | 152 | (5,149) | ||||||||||||||||||||||
| Net current-period other comprehensive (loss) income | (37,267) | 14,397 | (38) | (22,908) | ||||||||||||||||||||||
| Balances at December 31, 2021 | $ | (625,071) | $ | 17,840 | $ | (537) | $ | (607,768) | ||||||||||||||||||
(i)Mainly
related to a post-employment benefit in Venezuela established by the Organic Law of Labor and Workers (known as “LOTTT”, its
Spanish acronym) in 2012. This benefit provides a payment of 30 days of salary per year of employment tenure based on the last wage earned
to all workers who leave the job for any reason. The term of service to calculate the post-employment payment of active workers run retroactively
since June 19, 1997. The Company obtains an actuarial valuation to measure the post-employment benefit obligation, using the projected
unit credit actuarial method and measures this benefit in accordance with ASC 715-30, similar to pension benefit.
F-51
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
24. Earnings
per share
The
Company is required to present basic earnings per share and diluted earnings per share in accordance with ASC 260. Earnings per share
are based on the weighted average number of shares outstanding during the period after consideration of the dilutive effect, if any, for
common stock equivalents, including stock options and restricted share units. Basic earnings per common share are computed by dividing
net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted
earnings per common share are computed by dividing net income by the weighted average number of shares of common stock outstanding and
dilutive securities outstanding during the period under the treasury method.
The
following table sets forth the computation of basic and diluted net income per common share attributable to Arcos Dorados Holdings Inc.
for all years presented:
| For the fiscal years ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Net income (loss) attributable to Arcos Dorados Holdings Inc. available to common shareholders | $ | 45,486 | $ | (149,451) | $ | 79,896 | ||||||||||||||
| Weighted-average number of common shares outstanding - Basic (i) | 210,386,761 | 208,378,442 | 206,964,903 | |||||||||||||||||
| Incremental shares from vesting of restricted share units | 154,802 | 287,965 | 664,375 | |||||||||||||||||
| Weighted-average number of common shares outstanding - Diluted | 210,541,563 | 208,666,407 | 207,629,278 | |||||||||||||||||
| Basic net income (loss) per common share attributable to Arcos Dorados Holdings Inc. | $ | 0.22 | $ | (0.72) | $ | 0.39 | ||||||||||||||
| Diluted net income (loss) per common share attributable to Arcos Dorados Holdings Inc. | $ | 0.22 | $ | (0.72) | $ | 0.38 | ||||||||||||||
(i)
Stock dividends and its retroactively are included within the weighted-average number of common shares.
25. Related
party transactions
The
Company has entered into a master commercial agreement on arm’s length terms with Axionlog, a company under common control that
operates the distribution centers in Argentina, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay, Venezuela, French Guyana, Guadeloupe,
Martinique, Aruba and Curacao (the “Axionlog Business”). Pursuant to this agreement Axionlog provides the Company distribution
inventory, storage and transportation services in the countries in which it operates.
The
following table summarizes the outstanding balances between the Company and the Axionlog Business as of December 31, 2021 and 2020:
| As of December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Accounts and notes receivable, net | $ | 365 | $ | 272 | ||||||||||
| Other receivables | 3,377 | 2,392 | ||||||||||||
| Miscellaneous | 3,448 | 3,665 | ||||||||||||
| Accounts payable | (10,873) | (6,378) | ||||||||||||
F-52
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
25. Related
party transactions (continued)
The
following table summarizes the transactions between the Company and the Axionlog Business for the fiscal years ended December 31, 2021,
2020 and 2019:
| Fiscal years ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Food and paper (i) | $ | (187,959) | $ | (124,416) | $ | (188,276) | ||||||||||||||
| Occupancy and other operating expenses | (5,108) | (3,667) | (7,252) | |||||||||||||||||
(i)Includes
$40,227 of distribution fees and $147,732 of suppliers purchases managed through the Axionlog Business for the fiscal year ended December
31, 2021;
$24,302 and $100,114,
respectively, for the fiscal year ended December 31, 2020; and $38,658 and $149,618, respectively, for the fiscal year ended December 31,
2019.
The
following table summarizes the outstanding balances between the Company and its equity method investments as of December 31, 2021 and
2020:
| 2021 | 2020 | |||||||||||||||||||||||||
| Lacoop, A.C | Lacoop II, S.C | Saile (i) | Lacoop, A.C | Lacoop II, S.C | Saile (i) | |||||||||||||||||||||
| Other receivables | $ | — | $ | 1,190 | $ | 731 | $ | — | $ | 1,761 | — | |||||||||||||||
| Accounts payable | — | (810) | — | — | (508) | — | ||||||||||||||||||||
(i)
Operadora de Franquicias Saile S.A.P.I. de C.V.
F-53
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial Statements
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
26. Valuation
and qualifying accounts
The
following table presents the information required by Rule 12-09 of Regulation S-X regarding valuation and qualifying accounts for each
of the periods presented:
| Description | Balance at beginning of period | Additions (i) | Deductions (ii) | Translation | Balance at end of period | |||||||||||||||||||||||||||
| Year ended December 31, 2021: | ||||||||||||||||||||||||||||||||
| Deducted from assets accounts: | ||||||||||||||||||||||||||||||||
| Allowance for doubtful accounts (iii) | $ | 943 | $ | 814 | $ | (787) | $ | (96) | $ | 874 | ||||||||||||||||||||||
| Valuation allowance on deferred tax assets | 235,196 | 2,403 | (38,992) | (12,368) | 186,239 | |||||||||||||||||||||||||||
| Reported as liabilities: | ||||||||||||||||||||||||||||||||
| Provision for contingencies | 26,948 | 23,454 | (13,788) | (2,528) | 34,086 | |||||||||||||||||||||||||||
| Total | $ | 263,087 | $ | 26,671 | $ | (53,567) | $ | (14,992) | $ | 221,199 | ||||||||||||||||||||||
| Year ended December 31, 2020: | ||||||||||||||||||||||||||||||||
| Deducted from assets accounts: | ||||||||||||||||||||||||||||||||
| Allowance for doubtful accounts (iii) | $ | 23,076 | $ | 937 | $ | (22,929) | $ | (141) | $ | 943 | ||||||||||||||||||||||
| Valuation allowance on deferred tax assets | 194,426 | 65,077 | (18,870) | (5,437) | 235,196 | |||||||||||||||||||||||||||
| Reported as liabilities: | ||||||||||||||||||||||||||||||||
| Provision for contingencies | 26,158 | 17,391 | (11,920) | (4,681) | 26,948 | |||||||||||||||||||||||||||
| Total | $ | 243,660 | $ | 83,405 | $ | (53,719) | $ | (10,259) | $ | 263,087 | ||||||||||||||||||||||
| Year ended December 31, 2019: | ||||||||||||||||||||||||||||||||
| Deducted from assets accounts: | ||||||||||||||||||||||||||||||||
| Allowance for doubtful accounts (iii) | $ | 25,539 | $ | 8,524 | $ | (10,892) | $ | (95) | $ | 23,076 | ||||||||||||||||||||||
| Valuation allowance on deferred tax assets | 219,920 | 2,375 | (26,252) | (1,617) | 194,426 | |||||||||||||||||||||||||||
| Reported as liabilities: | ||||||||||||||||||||||||||||||||
| Provision for contingencies | 28,509 | 17,795 | (17,768) | (2,378) | 26,158 | |||||||||||||||||||||||||||
| Total | $ | 273,968 | $ | 28,694 | $ | (54,912) | $ | (4,090) | $ | 243,660 | ||||||||||||||||||||||
(i)Additions
in valuation allowance on deferred tax assets are charged to income tax expense.
Additions
in provision for contingencies are explained as follows:
Fiscal
years 2021, 2020 and 2019 – Relate to the accrual of $22,555, $15,330 and $17,441, respectively, and a reclassification of $899
and $2,061, during fiscal years 2021 and 2020, respectively. See Note 18 for details.
(ii)Deductions
in valuation allowance on deferred tax assets are charged to income tax expense.
Deductions
in provision for contingencies are explained as follows:
Corresponds
to the settlements amounting to $13,788;
$11,920 and $17,768 during fiscal years 2021, 2020 and 2019, respectively. as discussed in Note 18.
Deductions
in allowance for doubtful accounts during fiscal years 2020 and 2019 mainly relate to reductions in the accrual and the write-off of some
receivables from franchisees in Puerto Rico as a consequence of the confidential settlement agreements reached in December 2020 and March
2021 with Puerto Rican franchisees. For details see note 18.
F-54
Arcos
Dorados Holdings Inc.
Notes
to the Consolidated Financial
As
of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021
Amounts
in thousands of US dollars, except for share data and as otherwise indicated
26. Valuation
and qualifying accounts (continued)
(iii)Presented
in the consolidated balance sheet as follow:
$542 and $585
at December 31, 2021 and 2020, respectively, within Accounts and notes receivable, net and
$332 and $358
at December 31, 2021 and 2020, respectively, within Other receivables.
27. Subsequent
events
On
January 10, 2022, the Company reached an agreement with McDonald’s Corporation on a new growth and investment plan for next years.
McDonald’s Corporation has agreed to continue providing the Company with growth support under certain terms and conditions. See
Note 18 for additional information.
Furthermore,
on March 15, 2022, the Company approved a dividend distribution to all Class A and Class B shareholders of $0.15 per share to be paid
in four installments, as follows: $0.04 per share in March 31, June 30 and September 30, 2022, respectively and $0.03 per share in
December 30, 2022.
F-55