Notes to the Condensed Consolidated
Financial Statements
For the six-month periods ended June 30,
2016 and 2015 (Unaudited)
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 limited liability company organized 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 a 99.999% equity interest in Arcos Dorados Cooperatieve
U.A., which has 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”). 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, Curacao,
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 and Venezuela. All restaurants are operated either by the Company’s subsidiaries or by
independent entrepreneurs under the terms of sub-franchisee agreements (franchisees).
|
2.
|
Basis of presentation and principles of consolidation
|
The accompanying condensed
consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United
States of America (“US GAAP”) for interim financial information 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”).
The accompanying condensed
consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. Certain information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been condensed or omitted for purposes of this presentation.
The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated annual financial
statements of the Company as of December 31, 2015.
The accompanying condensed
consolidated financial statements are unaudited and include, in the opinion of management, all adjustments, consisting only of
normal recurring adjustments, which are considered necessary for the fair presentation of the information in the consolidated financial
statements.
The Company’s
revenues are generally greater in the second half of the year. Although the impact on the Company’s results of operations
is relatively small, this impact is due to increased consumption of the Company’s products during the winter and summer holiday
seasons, affecting July and December, respectively (for the Southern hemisphere).
Operating results for
the six-month period ended June 30, 2016 are not necessarily indicative of results that may be expected for any future periods.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated
Financial Statements
For the six-month periods ended June 30,
2016 and 2015 (Unaudited)
Amounts in thousands of US dollars, except
for share data and as otherwise indicated
|
2.
|
Basis of presentation and principles of consolidation
(continued)
|
Reclassifications
Certain reclassifications
have been made from "Occupancy and other operating expenses" to "Payroll and employee benefits" in the Company’s
consolidated statements of income, totaling $22,029, to the prior year information to conform to the current year presentation,
for the six-month period ended June, 30, 2015.
According to the Accounting
Standard Update 2015-03, debt issuance cost related to a recognized debt liability is required to be presented in the consolidated
statements of balance sheet as a direct deduction from the corresponding debt liability rather than as an asset for the fiscal
year beginning after December 15, 2015. As a result, certain reclassifications have been made from "Miscellaneous", included
within "Non-current asset" amounting to $3,775 to "Current portion of long-term debt" and to "Long-term
debt, excluding current portion", included within "Liabilities" in the Company's consolidated balance sheet amounting
to $359 and $3,416, respectively.
|
3.
|
Summary of significant accounting policies
|
There have been no
material changes in the Company’s accounting policies disclosed in the notes to the consolidated annual financial statements
as of December 31, 2015.
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 translation
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 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 sheets date exchange rates, and revenues and expenses are translated at average rates prevailing
during the periods. Translation adjustments are included in the “Accumulated other comprehensive losses” component
of shareholders’ equity. The Company includes foreign currency exchange results related to monetary assets and liabilities
denominated in currencies other than its functional currencies in its income statement.
Effective January 1,
2010, Venezuela is considered to be highly inflationary, and as such, the financial statements of the Company’s Venezuelan
subsidiaries are remeasured as if their functional currencies were the reporting currency (US dollars). As a result, remeasurement
gains and losses are recognized in earnings rather than in the cumulative translation adjustment, component of “Accumulated
other comprehensive losses” within shareholders’ equity.
See Note 13 for additional
information pertaining to the Company’s Venezuelan operations, including currency restrictions and controls existing in the
country and a discussion of the exchange rate used for remeasurement purposes.
Recent accounting pronouncements
In May 2014, the FASB
issued guidance codified in Accounting Standards Codification (ASC) 606, “Revenue Recognition - Revenue from Contracts with
Customers,” which amends the guidance in former ASC 605, “Revenue Recognition,” and becomes effective beginning
January 1, 2017. In August 12, 2015, the FASB deferred the effective date to annual reporting periods beginning after December
15, 2017. The standard’s core principle is that a company must recognize revenue when it transfers promised goods or services
to customers, in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods
or services. The Company is currently evaluating the impact of the provisions of ASC 606.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated
Financial Statements
For the six-month periods ended June 30,
2016 and 2015 (Unaudited)
Amounts in thousands of US dollars, except
for share data and as otherwise indicated
|
3.
|
Summary of significant accounting policies (continued)
|
Recent accounting pronouncements (continued)
In February 2016, new
guidance about leases was issued. The new standard (ASC 842) supersede the lease requirements of ASC 840. The objective of the
new guidance is to establish the principles that lessees and lessors shall apply to report useful information to users of financial
statements about the amount, timing, and uncertainty of cash flows arising from a lease. This standard is effective for annual
periods beginning after December 15, 2018, including interim periods. The Company is currently evaluating the impact of the provisions
of ASC 842.
No other new accounting
pronouncement issued or effective during the period had or is expected to have a material impact on the Company’s consolidated
financial statements.
Short-term debt consists
of the following:
|
|
As of
|
|
|
|
|
June 30, 2016
|
|
As of
|
|
|
(Unaudited)
|
|
December 31, 2015
|
Bank overdrafts
|
|
$
|
9
|
|
|
$
|
—
|
|
Revolving credit facilities (i)
|
|
—
|
|
|
2,500
|
|
|
|
$
|
9
|
|
|
$
|
2,500
|
|
(i)
Revolving credit
facilities
The Company entered
into revolving credit facilities in order to borrow money from time to time to cover its working capital needs and for other general
corporate purposes.
On July 30, 2015, ADBV
renewed its committed revolving credit facility with Bank of America, N.A. (BOFA), as lender, for up to $50 million maturing on
August 3, 2016. As of March 16, 2016, the agreement was amended to change the aggregate commitment amount from $50 million to $25
million. Each loan made to ADBV under this agreement will bear interest at an annual rate equal to LIBOR plus 2.75%. Interest on
each loan will be payable on the date of any prepayment, at maturity and on a quarterly basis, beginning with the date that is
three calendar months following the date the loan is made.
In addition, on August
31, 2015, effective as from October 1, 2015, ADBV entered into a revolving credit facility with JPMorgan Chase Bank, N.A, as a
lender, for up to $25 million maturing on October 1, 2016. Each loan made to ADBV under this agreement will bear interest at an
annual rate equal to LIBOR plus 2.25%. Interest on each loan will be payable at maturity and on a quarterly basis, beginning with
the date that is three calendar months following the date the loan is made.
The obligations of
ADBV under the revolving credit facilities are jointly and severally guaranteed by certain of the Company’s subsidiaries
on an unconditional basis. Furthermore, the agreements include customary covenants including, among others, restrictions on the
ability of ADBV, 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; and (vii) permit the consolidated net indebtedness to EBITDA ratio to
be greater than 3.5 to 1 on the last day of any fiscal quarter of the borrower. The revolving credit facilities provide 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 facilities and/or to declare all sums outstanding under the loan documents immediately due and payable.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated
Financial Statements
For the six-month periods ended June 30,
2016 and 2015 (Unaudited)
Amounts in thousands of US dollars, except
for share data and as otherwise indicated
|
4.
|
Short-term debt (continued)
|
(i)
Revolving credit
facilities (continued)
As mentioned in Note
5, on March 29, 2016, the Company has entered into a secured loan agreement through its Brazilian subsidiary, which is secured
by certain credit and debit card receivables derived from certain restaurants operated by the subsidiary. As the assumption of
liens mentioned in point (i) above, is restricted under the revolving credit facilities, on March 16, 2016, the lenders waived
the Company for any event of default that may occur pursuant these agreements solely in connection with this transaction.
As of June 30, 2016,
the ratio mentioned in point (vii) above was 2.11 and thus the Company is currently in compliance with the ratio requirement under
both revolving credit facilities.
Long-term debt consists
of the following:
|
|
As of
|
|
|
|
|
June 30, 2016
|
|
As of
|
|
|
(Unaudited)
|
|
December 31, 2015
|
2023 Notes
|
|
$
|
387,774
|
|
|
$
|
466,075
|
|
2016 Notes
|
|
62,594
|
|
|
158,428
|
|
Secured loan agreement
|
|
163,569
|
|
|
—
|
|
Capital lease obligations
|
|
5,425
|
|
|
5,599
|
|
Other long-term borrowings
|
|
26,101
|
|
|
22,465
|
|
Total
|
|
645,463
|
|
|
652,567
|
|
Current portion of long-term debt
|
|
64,907
|
|
|
161,240
|
|
Long-term debt, excluding current portion
|
|
$
|
580,556
|
|
|
$
|
491,327
|
|
2023 and 2016 Notes
The
following table presents information related to the 2023 and 2016 Notes:
|
|
|
|
|
|
Principal as of
|
|
|
Annual interest rate
|
|
Currency
|
|
June 30, 2016 (Unaudited)
|
December 31, 2015
|
Maturity
|
2023 Notes
|
6.625
|
%
|
|
USD
|
|
$
|
393,767
|
|
$
|
473,767
|
|
September 27, 2023
|
2016 Notes
|
10.25
|
%
|
|
BRL
|
|
62,556
|
|
158,544
|
|
July 13, 2016
|
|
|
Interest Expense
(i)
|
|
DFC Amortization (i)
|
|
Accretion of Premium
and
Amortization of Discount (i)
|
|
|
|
2016
(Unaudited)
|
|
2015
(Unaudited)
|
|
2016
(Unaudited)
|
|
2015
(Unaudited)
|
|
2016
(Unaudited)
|
|
2015
(Unaudited)
|
|
2023 Notes
|
|
$
|
15,487
|
|
|
$
|
15,694
|
|
|
$
|
760
|
|
|
$
|
219
|
|
|
$
|
939
|
|
|
$
|
256
|
|
2016 Notes
|
|
|
6,240
|
|
|
|
11,404
|
|
|
|
383
|
|
|
|
386
|
|
|
|
(224
|
)
|
|
|
(272
|
)
|
(i) These charges are
included within "Net interest expense" in the consolidated statements of income.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated
Financial Statements
For the six-month periods ended June 30,
2016 and 2015 (Unaudited)
Amounts in thousands of US dollars, except
for share data and as otherwise indicated
|
5.
|
Long-term debt (continued)
|
2023 and 2016 Notes
(continued)
On September 27, 2013,
the Company issued senior notes, 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 gross proceeds from the cash issuance of 2023 Notes amounting
to $378,409 were partially used to finance the purchase of 2019 Notes and to repay certain of the Company’s short-term debt.
The 2019 Notes, were canceled during 2013, when the Company launched a tender and exchange offer pursuant to which it offered to
exchange any and all of the outstanding 2019 Notes for 2023 Notes and to purchase any and all of the outstanding 2019 Notes for
cash.
The Company recorded
the portion of 2023 Notes issued in exchange for cash at the original price of 100.909%. The portion of 2023 Notes issued as consideration
for the partial exchange of 2019 Notes was recorded at the carrying value of the 2019 Notes since there were no substantive modifications
to the terms of the debts according to ASC 470-50-40. The net discount amounting to $5,420 (comprised of a discount of $8,829 related
to the non-cash issuance, partially offset by $3,409 of a premium related to the cash issuance) is being accreted over the term
of the 2023 Notes and recognized as a higher interest expense. 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.
On July 13, 2011, the
Company issued Brazilian reais notes due in 2016 (the "2016 Notes"). Periodic payments of principal are not required
and interest is paid semi-annually beginning on January 13, 2012. The Company incurred $3,699 of financing costs related to these
issuances, which were capitalized as deferred financing costs and are being amortized over the life of the notes.
The 2023 and 2016 Notes
(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 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. 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 2023 and 2016 Notes to be due
and payable immediately.
The Notes are listed
on the Luxembourg Stock Exchange and trade on the Euro MTF Market.
During November 2015,
the Company redeemed 6.97% or Brazilian Reais (BRL) 47,039 of the outstanding principal amount of its 2016 Notes at a redemption
price equal to 93.75% (equivalent to $11,710) plus accrued and unpaid interest. Additionally, on January 29, 2016, the Company
redeemed 0.19% or BRL 1,180 of the outstanding principal amount at a redemption price equal to 97.75% (equivalent to $288) plus
accrued and unpaid interest.
Furthermore, on April
8, 2016, the Company launched a cash tender offer for any and all of its outstanding 2016 Notes, at a redemption price equal to
97%, which expired on May 5, 2016. The holders who tendered their 2016 Notes prior to April 21, 2016, received a redemption price
equal to 100%. As a consequence of this transaction, the Company redeemed 67.93% or BRL 425,790 of the outstanding principal (equivalent
to $119,903) 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.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated
Financial Statements
For the six-month periods ended June 30,
2016 and 2015 (Unaudited)
Amounts in thousands of US dollars, except
for share data and as otherwise indicated
|
5.
|
Long-term debt (continued)
|
2023 and 2016 Notes
(continued)
Finally, on July 13,
2016, the Company settled the remaining 2016 Notes. Refer to Note 14 for more details.
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 16.89% 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.
Secured loan agreement
On March 29, 2016,
the Company’s Brazilian subsidiary signed a $167,262 Secured Loan Agreement (the "Loan") with five off-shore lenders
namely: Citibank N.A., Itaú BBA International plc, Santander (Brasil) S.A., Cayman Islands Branch, Bank of America N.A.
and JP Morgan Chase Bank, N.A. Each loan under the agreement bears interest at the following annual interest rates:
Lender
|
|
Annual Interest Rate
|
Citibank N.A.
|
|
3M LIBOR + 2.439%
|
Itaú BBA International plc
|
|
5.26%
|
Banco Santander (Brasil) S.A., Cayman Islands Branch
|
|
4.7863%
|
Bank of America N.A.
|
|
3M LIBOR + 4.00%
|
JP Morgan Chase Bank, N.A.
|
|
3M LIBOR + 3.92%
|
In order to fully convert
each loan of the agreement into BRL, the Brazilian subsidiary entered into five cross-currency interest rate swap agreements with
the local subsidiaries of the same lenders. Consequently, the loans were fully converted into BRL amounting to BRL613,850. Refer
to Note 6 for more details.
Considering the cross
currency interest rate swap agreements, the final interest rate of the Loan is the Interbank Market reference interest rate (known
in Brazil as “CDI”) plus 4.50% per year. Interest payments will be made quarterly, beginning June 2016 and principal
payments will be made semi-annually, beginning September 2017.
The Company incurred
$ 3,243 of financing costs related to this issuance, which were capitalized as DFC.
The following table
presents information related to the Secured loan agreement:
|
Interest Expense (i) (ii)
|
|
|
|
DFC Amortization (ii)
|
|
|
2016
(Unaudited)
|
|
|
|
2015
(Unaudited)
|
|
|
|
2016
(Unaudited)
|
|
|
|
2015
(Unaudited)
|
|
$
|
2,152
|
|
|
$
|
—
|
|
|
$
|
308
|
|
|
$
|
—
|
|
|
(i)
|
This charge does not include the effect of the cross-currency interest rate swap agreements mentioned
in Note 6, amounting to a loss of $5,748. Including this effect the total interest cost amounts to $7,900.
|
|
(ii)
|
These charges are included within "Net interest expense" in the consolidated statement of income.
|
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated
Financial Statements
For the six-month periods ended June 30,
2016 and 2015 (Unaudited)
Amounts in thousands of US dollars, except
for share data and as otherwise indicated
|
5.
|
Long-term debt (continued)
|
Secured loan agreement
(continued)
The Loan matures on
March 30, 2020 and periodic payments of principal are required: 10% of principal in September 2017, 15% in March and September
2018, and 20% in March and September 2019 and in March 2020. Prepayments are allowed without penalty.
The Loan is fully and
unconditionally guaranteed on a senior secured basis by certain subsidiaries and is secured by certain credit and debit card receivables
arising from sales in certain Brazilian restaurants operated by the Brazilian subsidiary. The Loan ranks at least
pari passu
in right of payment with all other unsubordinated and unsecured indebtedness of the borrower and the guarantors.
The Loan proceeds were
used primarily to repay the 2016 Notes mentioned above.
The Loan agreement
includes customary covenants including, among others, restrictions on the ability of the Company and certain subsidiaries to (i)
pay dividends; (ii) create liens; (iii) sell certain real estate assets; (iv) enter into sale and lease-back transactions; (v)
pay interest or principal on intercompany loans; and (vi) consolidate, merge or transfer assets. These covenants are subject to
important qualifications and exceptions.
Under the Loan, the
Company must maintain (i) a Consolidated Net Indebtedness to EBITDA ratio (as defined therein) lower than (a) 3.5 to 1 as of the
last day of the fiscal quarter ended March 31 and June 30, 2016, (b) 3.25 to 1 as of the last day of the fiscal quarter ended September
30, 2016 and (c) 3.0 to 1 as of the last day of the fiscal quarter ended December 31, 2016 and thereafter; and (ii) an EBITDA to
Consolidated Interest Expense ratio (as defined therein) greater than 2.5 to 1 as of the last day of any fiscal quarter. The Brazilian
subsidiary must maintain an Adjusted Net Indebtedness to EBITDA ratio lower than 2.0 to 1 as of the last day of any fiscal quarter.
The calculation of Adjusted Net Indebtedness of the Brazilian subsidiary shall exclude any intercompany indebtedness.
As of June 30, 2016,
the Company was in compliance with the ratio requirements; Consolidated Net Indebtedness to EBITDA ratio and EBITDA to consolidated
Interest Expense ratio were 2.41 and 3.12, respectively; and, the net indebtedness to EBITDA ratio of the Brazilian subsidiary
was 0.84.
The Loan also provides
for customary events of default, which, if any of them occur, would permit or require the principal and interest on all of the
outstanding amount to be due and payable immediately.
|
6.
|
Derivative instruments
|
Derivatives not designated as hedging
instruments
Total equity return swap
On August 13, 2012,
the Company entered into a total equity return swap agreement with Goldman Sachs International (GSI) in order to minimize earning
volatility related to a long-term incentive plan to reward employees implemented by ADBV in 2008, fully vested in March 2015. The
agreement was renewed twice and as from the amendment signed on September 23, 2014, the Company was required to make a collateral
deposit, which returned to the Company with the maturity of the agreement on September 12, 2015. During the third quarter of 2015,
the Company paid $9,681 as settlement of the agreement.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated
Financial Statements
For the six-month periods ended June 30,
2016 and 2015 (Unaudited)
Amounts in thousands of US dollars, except
for share data and as otherwise indicated
|
6.
|
Derivative instruments (continued)
|
Total equity return swap (continued)
The Company did not
designate this swap as a hedge under ASC 815. Therefore, the agreement was carried at fair market value in the consolidated balance
sheets with changes reported in earnings, within "General and administrative expenses". The interest portion was recorded
within “Net interest expense” in the Company’s consolidated statement of income. See additional disclosures below
for further information about this swap agreement.
Derivatives designated as hedging
instruments
Forward contracts
The Company has entered
into various forward contracts in a few territories in order to hedge a portion of the foreign exchange risk associated with forecasted
imports of goods. The effect of the hedges result 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 June 30, 2016, the Company has forward contracts outstanding with a notional
amount of $20,592 that mature during 2016.
The Company made net
collections totaling $2,369, and $2,263 during the six-month periods ended June 30, 2016 and 2015, respectively, as a result of
the net settlements of these derivatives. See additional disclosures below for further information about these forward contracts.
Cross-currency interest
rate swaps
On November 7, 2013,
the Company entered into a cross-currency interest rate swap agreement with JPMorgan Chase Bank, N.A., to hedge all the variability
in a portion (53.08%) of the principal and interest collections of its BRL intercompany loan receivable with ADBV, which was amended
on November 13, 2015 and June 24, 2016. All the terms of the swap agreement match the terms of the BRL intercompany loan receivable. Pursuant
to this agreement, the Company receives interests at a fixed rate of 4.38% over a notional amount of 30.7 million (47.3 million
at the inception and 28.3 million before the last amendment) of US dollars and pays interest at a fixed rate of 13% over a notional
amount of R$108 million on March 31 and September 30 of each year. This agreement matures on September 29, 2023 with exchange
of principal.
As a result of the
last amendment, the Company paid $3,011 in June 2016. According to ASC 815-30-40, the amount deferred in accumulated other comprehensive
income until the date of the last amendments that equals to a loss of $2,336, will be reclassified to the income statement as the
originally hedged cash flows affects income statement.
On March 29, 2016,
the Company entered into five cross-currency interest rate swap agreements in order to fully hedge the principal and interest cash
flows of the Secured Loan Agreement described in Note 5, into BRL. The agreements were signed with the Brazilian subsidiaries of
the banks participating in the secured loan. All the terms of the cross-currency interest rate swap agreements match the terms
of the secured loan agreement. Pursuant to these agreements, the Company receives interest in US dollar at an interest rate equal
to the one it has to pay to the off-shore lenders over a notional amount of $167,3 million and pays interest in BRL at CDI plus
4.50% per year, over a notional amount of BRL 613,9 million quarterly, beginning June 2016.
The Company paid $7,701
and $1,178 of net interest during the six-month periods ended June 30, 2016 and 2015, respectively, related to these agreements.
See additional disclosures
below for further information about these swap agreements.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated
Financial Statements
For the six-month periods ended June 30,
2016 and 2015 (Unaudited)
Amounts in thousands of US dollars, except
for share data and as otherwise indicated
|
6.
|
Derivative instruments (continued)
|
Additional disclosures
The following table
presents the fair values of derivative instruments included in the consolidated balance sheets as of June 30, 2016 and December 31,
2015:
|
|
Asset (Liability) Derivatives
|
|
|
|
|
Fair Value
|
|
|
|
|
As of
|
|
|
Type of Derivative
|
|
Balance Sheets Location
|
|
June 30, 2016
|
|
As of
|
|
|
(Unaudited)
|
|
December 31, 2015
|
Derivatives designated as hedging instruments under ASC 815 Derivatives and Hedging
|
|
|
|
|
|
|
Forward contracts
|
|
Other receivables
|
|
$
|
—
|
|
|
$
|
454
|
|
|
|
Accrued payroll and other liabilities
|
|
(1,022
|
)
|
|
—
|
|
Cross-currency interest rate swaps (i)
|
|
Derivative instruments
|
|
(41,308
|
)
|
|
4,615
|
|
Total derivative instruments
|
|
|
|
$
|
(42,330
|
)
|
|
$
|
5,069
|
|
|
(i)
|
At June 30, 2016, disclosed in the consolidated balance sheet as follows: $22,556 as a current
liability and $18,752 as a non-current liability. At December 31, 2015, disclosed in the consolidated balance sheet as follows:
$6,741 as a non-current asset and $2,126 as a current liability.
|
The following tables
present the pretax amounts affecting income and other comprehensive income for the six-month periods ended June 30, 2016 and 2015
for each type of derivative relationship:
Derivatives in Cash Flow
Hedging Relationships
|
|
Gain (Loss) Recognized in Accumulated OCI on Derivative (Effective Portion)
|
|
(Gain) Loss Reclassified from Accumulated OCI into Income (Effective Portion) (i)
|
|
Gain (Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing and Ineffective Portion)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Forward contracts
|
|
$
|
893
|
|
|
$
|
1,600
|
|
|
$
|
(2,369
|
)
|
|
$
|
(2,263
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Cross-currency interest rate swaps
|
|
(56,635
|
)
|
|
6,684
|
|
|
32,937
|
|
|
(4,848
|
)
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
(55,742
|
)
|
|
$
|
8,284
|
|
|
$
|
30,568
|
|
|
$
|
(7,111
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
(i)
|
The gain recognized in income related to forward contracts was recorded as an adjustment to food
and paper. The loss recognized in income, for the six-month period ended June 30, 2016, related to the cross-currency interest
rate swaps is presented in the consolidated income statement as follows: a loss of $25,663 as an adjustment to foreign currency
exchange results ($22,222 related to Secured loan agreement) and a loss of $7,274 as an adjustment to net interest expense ($5,748
related to Secured loan agreement). The net gain recognized in income, for the six-month period ended June 30, 2015, related to
the cross-currency interest rate swaps is presented in the consolidated income statement as follows: a gain of $5,833 as an adjustment
to foreign currency exchange results and a loss of $985 as an adjustment to net interest expense.
|
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated
Financial Statements
For the six-month periods ended June 30,
2016 and 2015 (Unaudited)
Amounts in thousands of US dollars, except
for share data and as otherwise indicated
|
6.
|
Derivative instruments (continued)
|
Additional disclosures
(continued)
Derivatives Not Designated as Hedging
Instruments
|
|
Location of Loss Recognized in Income
|
|
Loss Recognized in Income on Derivative instruments
|
|
2016
|
|
2015
|
Total equity return swap
|
|
General and administrative expenses
|
|
$
|
—
|
|
|
$
|
(153
|
)
|
|
|
Net interest expense
|
|
—
|
|
|
(337
|
)
|
Others
|
|
Loss from derivative instruments
|
|
(30
|
)
|
|
(125
|
)
|
Total
|
|
|
|
$
|
(30
|
)
|
|
$
|
(615
|
)
|
|
7.
|
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.
The Company made a
special grant of stock options and restricted share units in 2011 in connection with its initial public offering, which are totally
vested. The Company also made recurring grants of stock options and restricted share units in each of the fiscal years from 2011
to 2016 (for fiscal years 2016 and 2015 only restricted share units). Both types of 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. For all grants,
each stock option granted represents the right to acquire a Class A share at its grant-date fair market value, while each restricted
share unit represents the right to receive a Class A share when vested. 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 date of grant. On June 28, 2016, 1,117,380 stock options were converted
to a liability award maintaining the original conditions of the 2011 Plan.
The Company utilizes
a Black-Scholes option-pricing model to estimate the value of stock options at the grant date. The value of restricted shares units
is based on the quoted market price of the Company’s class A shares at the grant date.
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 in the
amount of $1,602 and $668 during the six-month periods ended June 30, 2016 and 2015, respectively, of which $nil and a gain of
$508 relates to the special awards granted in connection with the initial public offering. Stock-based compensation expense is
included within “General and administrative expenses” in the consolidated statements of income.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated
Financial Statements
For the six-month periods ended June 30,
2016 and 2015 (Unaudited)
Amounts in thousands of US dollars, except
for share data and as otherwise indicated
|
7.
|
Share-based compensation (continued)
|
Stock Options
The following table
summarizes the activity of stock options during the six-month period ended June 30, 2016:
|
|
Units
|
|
Weighted-average strike price
|
|
Weighted-average grant-date fair value
|
Outstanding at December 31, 2015
|
|
2,025,894
|
|
|
21.03
|
|
|
5.87
|
|
Forfeitures
|
|
(80,734
|
)
|
|
10.30
|
|
|
2.68
|
|
Expired (i)
|
|
(51,305
|
)
|
|
14.05
|
|
|
4.02
|
|
Modification (ii)
|
|
(1,117,380
|
)
|
|
19.07
|
|
|
5.30
|
|
Outstanding at June 30, 2016
|
|
776,475
|
|
|
15.55
|
|
|
4.46
|
|
Exercisable at June 30, 2016
|
|
584,103
|
|
|
16.99
|
|
|
4.88
|
|
(i) As of June 30, 2016,
Additional paid-in capital included $206 related to expired stock options.
(ii) Correspond to stock
options converted to a liability award. The employees affected by this modification were 104. There were not incremental compensation
costs resulting from the modification. As of June 30, 2016, the accumulated Additional paid-in capital related to these units as
from the grant date amounts to $5,812. The accrued liability is remeasured on a monthly basis until settlement. As of June 30,
2016, it amounts to $9 and is disclosed within "Accrued payroll and other liabilities" in the Company’s consolidated
balance sheet. The following table provides a summary of the outstanding and exercisable units related to the modification:
|
|
Units
|
|
Weighted-average strike price
|
|
Weighted-average grant-date fair value
|
Outstanding at June 30, 2016
|
|
1,117,380
|
|
|
19.07
|
|
|
0.55
|
|
Exercisable at June 30, 2016
|
|
1,016,947
|
|
|
19.53
|
|
|
0.52
|
|
The following table
provides a summary of outstanding stock options at June 30, 2016:
|
|
Vested (i)
|
|
Non-vested (ii)
|
|
Total
|
Number of units outstanding
|
|
584,103
|
|
|
192,372
|
|
|
776,475
|
|
Weighted-average grant-date fair market value per unit
|
|
4.88
|
|
|
3.18
|
|
|
4.46
|
|
Total grant-date fair value
|
|
2,852
|
|
|
612
|
|
|
3,464
|
|
Weighted-average accumulated percentage of service
|
|
100
|
|
|
69.7
|
|
|
94.6
|
|
Stock-based compensation recognized in Additional paid-in capital
|
|
2,852
|
|
|
427
|
|
|
3,279
|
|
Compensation expense not yet recognized (iii)
|
|
-
|
|
185
|
|
|
185
|
|
|
(i)
|
Related to exercisable awards.
|
|
(ii)
|
Related to awards that will vest between fiscal years 2016 and 2019.
|
|
(iii)
|
Expected to be recognized in a weighted-average period of 2.2 years.
|
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated
Financial Statements
For the six-month periods ended June 30,
2016 and 2015 (Unaudited)
Amounts in thousands of US dollars, except
for share data and as otherwise indicated
|
7.
|
Share-based compensation (continued)
|
Restricted Share Units
The following table
summarizes the activity of restricted share units during the six-month period ended June 30, 2016:
|
|
Units
|
|
Weighted-average grant-date fair value
|
Outstanding at December 31, 2015
|
|
1,230,210
|
|
|
7.96
|
|
2016 annual grant
|
|
865,291
|
|
|
4.70
|
|
Partial vesting of 2011 grant
|
|
(27,075
|
)
|
|
21.20
|
|
Partial vesting of 2012 grant
|
|
(24,653
|
)
|
|
14.35
|
|
Partial vesting of 2013 grant
|
|
(26,054
|
)
|
|
14.31
|
|
Partial vesting of 2014 grant (i)
|
|
(94,546
|
)
|
|
8.58
|
|
Forfeitures
|
|
(42,310
|
)
|
|
8.09
|
|
Outstanding at June 30, 2016
|
|
1,880,863
|
|
|
6.07
|
|
Exercisable at June 30, 2016
|
|
—
|
|
|
—
|
|
|
(i)
|
The Company issued 93,253 Class A shares in connection with this partial vesting. Therefore, accumulated
recorded compensation expense totaling $800 was reclassified from “Additional paid-in capital” to “Common Stock”
upon issuance. As of June 30, 2016, there were 1,293 Class A shares pending of issuance in connection with this partial vesting.
|
The resulting value
of restricted share units granted during fiscal year 2016 was $4,067.
The following table
provides a summary of outstanding restricted share units at June 30, 2016:
Number of units outstanding (i)
|
1,880,863
|
|
Weighted-average grant-date fair market value per unit
|
6.07
|
|
Total grant-date fair value
|
11,408
|
|
Weighted-average accumulated percentage of service
|
32.8%
|
Stock-based compensation recognized in Additional paid-in capital
|
3,746
|
|
Compensation expense not yet recognized (ii)
|
7,662
|
|
|
(i)
|
Related to awards that will vest between fiscal years 2017 and 2021.
|
|
(ii)
|
Expected to be recognized in a weighted-average period of 4.3 years.
|
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated
Financial Statements
For the six-month periods ended June 30,
2016 and 2015 (Unaudited)
Amounts in thousands of US dollars, except
for share data and as otherwise indicated
|
8.
|
Commitments and contingencies
|
Commitments
The MFAs require the Company and its MF
subsidiaries, among other obligations:
|
(i)
|
to pay monthly royalties commencing at a rate of approximately 5% of gross sales of the restaurants,
substantially consistent with market;
|
|
(ii)
|
to agree with McDonald’s on a restaurant opening plan and a reinvestment plan for each three-year
period and pay an initial franchise fee for each new restaurant opened;
|
|
(iii)
|
to commit to funding a specified Strategic Marketing Plan;
|
|
(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.
|
On August 10, 2015,
the Company reached an agreement with McDonald’s Corporation to amend the opening plan mentioned in point (ii) above, from
250 to 150 new restaurant openings for the three-year period commenced on January 1, 2014, mainly in order to adjust this plan
to the current economic realities of the region. Under this agreement, the Company is also committed to execute at least 140 reimages
over the three-year period and to maintain the three-year reinvestment plan of at least $180 million.
The Company was not
in compliance with the leverage ratio mentioned in point (v) above for the three-month periods ended March 31 and June 30, 2016.
The ratios were as follows:
|
|
June 30, 2016
|
|
March 31, 2016
|
|
Leverage Ratio
|
|
4.40
|
|
|
4.80
|
|
|
|
|
|
|
|
|
Fixed Charge Coverage Ratio
|
|
1.64
|
|
|
1.67
|
|
|
On March 17 and August
1, 2016, McDonald’s Corporation granted the Company limited waivers through and including March 31 and June 30, 2016, during
which time, the Company is not required to comply with the financial ratios set forth in the MFA. After June 30, 2016, if the Company
remains non-compliant with the financial requirements and is unable to obtain an extension of the waiver or to comply with the
original 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. Notwithstanding the foregoing, the Company does
not expect any material adverse effect to its business, results of operations, financial condition or cash flows as a result of
this situation.
In addition, the Company
maintains standby letters of credit with an aggregate drawing amount of $80 million in favor of McDonald’s Corporation as
collateral for the obligations assumed under the MFAs. The 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.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated
Financial Statements
For the six-month periods ended June 30,
2016 and 2015 (Unaudited)
Amounts in thousands of US dollars, except
for share data and as otherwise indicated
|
8.
|
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 June 30, 2016, the Company maintains a provision for contingencies, net of judicial deposits,
amounting to $23,865 ($20,578 at December 31, 2015). As of June 30, 2016 and December 31, 2015, the net amount of
$23,865 and $20,578 is disclosed as follows: $496 and $512 as a current liability and $23,369 and $20,066 as a non-current liability,
respectively. The breakdown of the provision for contingencies is as follows:
|
|
As of
|
|
|
|
|
June 30, 2016
|
|
As of
|
|
|
(Unaudited)
|
|
December 31, 2015
|
Tax contingencies in Brazil
|
|
$
|
8,796
|
|
|
$
|
5,118
|
|
Labor contingencies in Brazil
|
|
9,802
|
|
|
7,013
|
|
Others
|
|
15,289
|
|
|
13,947
|
|
Subtotal
|
|
33,887
|
|
|
26,078
|
|
Judicial deposits
|
|
(10,022
|
)
|
|
(5,500
|
)
|
Provision for contingencies
|
|
$
|
23,865
|
|
|
$
|
20,578
|
|
As of June 30,
2016, there are certain matters related to the interpretation of tax and labor 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 $69 million and $96 million.
Additionally, there
is a lawsuit filed by several Puerto Rican franchisees against McDonald’s Corporation and certain subsidiaries purchased
by the Company during the acquisition of the LatAm business (“the Puerto Rican franchisees lawsuit”). The claim seeks
declaratory judgment and damages in the aggregate amount of $66.7 million plus plaintiffs’ attorney fees. At the end of 2014
the plaintiffs finalized their presentation of evidence whereas the Company has not started yet. The Company believes that a final
negative resolution has a low probability of occurrence.
During 2014, another
franchisee filed a complaint (“the related Puerto Rican franchisee lawsuit”) against the Company and McDonald’s
USA, LLC (a wholly owned subsidiary of McDonald’s Corporation), asserting a very similar claim to the one filed in the Puerto
Rican franchisees lawsuit. The claim seeks declaratory judgment and damages in the amount of $30 million plus plaintiffs’
attorney fees. Although this case is in its early stages, the Company believes that a final negative resolution has a low probability
of occurrence, since its close resemblance to the Puerto Rican franchisees lawsuit.
Furthermore, the Puerto
Rico Owner Operator’s Association (“PROA”), an association integrated by the Company’s franchisees that
meets periodically to coordinate the development of promotional and marketing campaigns (an association that at the time of the
claim was formed solely by franchisees that are plaintiffs in the Puerto Rican franchisees lawsuit), filed a third party complaint
and counterclaim (“the PROA claim”) against the Company and other third party defendants, in the amount of $31 million.
Although certain negative resolution occurred in that lawsuit at the preliminary and first instance stage, no provision has been
recorded because the Company believes that a final negative resolution has a low probability of occurrence.
Pursuant to Section
9.3 of the Stock Purchase Agreement, McDonald’s Corporation indemnifies the Company for certain Brazilian claims as well
as for specific and limited claims arising from the Puerto Rican franchisees lawsuit. Pursuant to the MFA, the Company indemnifies
McDonald’s for the related Puerto Rican franchisee lawsuit and the PROA claim.
At June 30, 2016,
the non-current portion of the provision for contingencies includes $4,380 ($3,452 at December 31, 2015) related to Brazilian
claims that are covered by the indemnification agreement. As a result, the Company has recorded a non-current asset in respect
of McDonald’s Corporation’s indemnity in the consolidated balance sheet.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated
Financial Statements
For the six-month periods ended June 30,
2016 and 2015 (Unaudited)
Amounts in thousands of US dollars, except
for share data and as otherwise indicated
|
9.
|
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, geographical 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 and its operations are divided into
four geographical divisions, which are as follows: Brazil; 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;
the North Latin America division (“NOLAD”), consisting of Costa Rica, Mexico and Panama; and the South Latin America
division (“SLAD”), consisting of Argentina, Chile, Ecuador, Peru and Uruguay. The accounting policies of the segments
are the same as those used in the preparation of the consolidated financial statements.
As from January 1,
2016, the Company made changes in the allocation of certain expenses previously included in the corporate segment to the operating
divisions in order to align the financial statement presentation with the revised allocation used by the Company's management as
from that date. In accordance with ASC 280, Segment Reporting, the Company has restated its comparative segment information based
on the new allocation of expenses.
The following table
presents information about profit or loss and assets for each reportable segment:
|
|
For the six-month periods ended
|
|
|
June 30,
|
|
|
2016
|
|
2015
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Revenues:
|
|
|
|
|
Brazil
|
|
$
|
598,028
|
|
|
$
|
716,774
|
|
Caribbean division
|
|
196,286
|
|
|
196,708
|
|
NOLAD
|
|
173,460
|
|
|
177,766
|
|
SLAD
|
|
378,041
|
|
|
442,811
|
|
Total revenues
|
|
$
|
1,345,815
|
|
|
$
|
1,534,059
|
|
Adjusted EBITDA:
|
|
|
|
|
Brazil
|
|
$
|
65,795
|
|
|
$
|
74,425
|
|
Caribbean division
|
|
3,917
|
|
|
(3,133
|
)
|
NOLAD
|
|
15,465
|
|
|
12,479
|
|
SLAD
|
|
32,084
|
|
|
44,029
|
|
Total reportable segments
|
|
117,261
|
|
|
127,800
|
|
Corporate and others (i)
|
|
(28,250
|
)
|
|
(44,893
|
)
|
Total adjusted EBITDA
|
|
$
|
89,011
|
|
|
$
|
82,907
|
|
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated
Financial Statements
For the six-month periods ended June 30,
2016 and 2015 (Unaudited)
Amounts in thousands of US dollars, except
for share data and as otherwise indicated
|
9.
|
Segment and geographic information (continued)
|
|
|
For the six-month periods ended
|
|
|
June 30,
|
|
|
2016
|
|
2015
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Adjusted EBITDA reconciliation:
|
|
|
|
|
Total adjusted EBITDA
|
|
$
|
89,011
|
|
|
$
|
82,907
|
|
|
|
|
|
|
Plus (Less) items excluded from computation that affect operating income:
|
|
|
|
|
Depreciation and amortization
|
|
(49,590
|
)
|
|
(55,860
|
)
|
Gains from sale or insurance recovery of property and equipment
|
|
49,072
|
|
|
1,263
|
|
Write-offs of property and equipment
|
|
(2,344
|
)
|
|
(2,163
|
)
|
Stock-based compensation related to the special awards in connection with the initial public offering under the 2011 Plan
|
|
—
|
|
|
508
|
|
Impairment of long-lived assets
|
|
—
|
|
|
(7,804
|
)
|
ADBV Long-Term Incentive Plan incremental compensation from modification
|
|
(223
|
)
|
|
440
|
|
Operating income
|
|
85,926
|
|
|
19,291
|
|
|
|
|
|
|
Less:
|
|
|
|
|
Net interest expense
|
|
(35,037
|
)
|
|
(33,197
|
)
|
Loss from derivative instruments
|
|
(30
|
)
|
|
(125
|
)
|
Foreign currency exchange results
|
|
32,206
|
|
|
(20,012
|
)
|
Other non-operating expenses, net
|
|
(766
|
)
|
|
(164
|
)
|
Income tax (expense) benefit
|
|
(22,729
|
)
|
|
13,057
|
|
Net income attributable to non-controlling interests
|
|
(77
|
)
|
|
(110
|
)
|
Net income (loss) attributable to Arcos Dorados Holdings Inc.
|
|
$
|
59,493
|
|
|
$
|
(21,260
|
)
|
|
|
For the six-month periods ended
|
|
|
June 30,
|
|
|
2016
|
|
2015
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Depreciation and amortization:
|
|
|
|
|
Brazil
|
|
$
|
20,793
|
|
|
$
|
26,541
|
|
Caribbean division
|
|
17,509
|
|
|
14,414
|
|
NOLAD
|
|
11,367
|
|
|
13,035
|
|
SLAD
|
|
7,256
|
|
|
9,680
|
|
Total reportable segments
|
|
56,925
|
|
|
63,670
|
|
Corporate and others (i)
|
|
2,481
|
|
|
4,282
|
|
Purchase price allocation (ii)
|
|
(9,816
|
)
|
|
(12,092
|
)
|
Total depreciation and amortization
|
|
$
|
49,590
|
|
|
$
|
55,860
|
|
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated
Financial Statements
For the six-month periods ended June 30,
2016 and 2015 (Unaudited)
Amounts in thousands of US dollars, except
for share data and as otherwise indicated
|
9.
|
Segment and geographic information (continued)
|
|
|
For the six-month periods ended
|
|
|
June 30,
|
|
|
2016
|
|
2015
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Property and equipment expenditures:
|
|
|
|
|
Brazil
|
|
$
|
10,484
|
|
|
$
|
16,456
|
|
Caribbean division
|
|
4,690
|
|
|
3,164
|
|
NOLAD
|
|
2,747
|
|
|
4,525
|
|
SLAD
|
|
9,811
|
|
|
8,944
|
|
Total reportable segments
|
|
27,732
|
|
|
33,089
|
|
Corporate and others (i)
|
|
135
|
|
|
1,030
|
|
Total property and equipment expenditures
|
|
$
|
27,867
|
|
|
$
|
34,119
|
|
|
|
As of
|
|
|
June 30,
|
|
|
|
|
2016
|
|
December 31,
|
|
|
(Unaudited)
|
|
2015
|
Total assets:
|
|
|
|
|
Brazil
|
|
$
|
785,947
|
|
|
$
|
612,074
|
|
Caribbean division
|
|
357,872
|
|
|
382,022
|
|
NOLAD
|
|
278,725
|
|
|
308,632
|
|
SLAD
|
|
225,298
|
|
|
242,081
|
|
Total reportable segments
|
|
1,647,842
|
|
|
1,544,809
|
|
Corporate and others (i)
|
|
21,400
|
|
|
36,946
|
|
Purchase price allocation (ii)
|
|
(175,685
|
)
|
|
(178,553
|
)
|
Total assets
|
|
$
|
1,493,557
|
|
|
$
|
1,403,202
|
|
|
(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 June 30, 2016, corporate assets primarily include corporate cash and cash equivalents and a collateral deposit.
As of December 31, 2015, corporate assets also included derivative instruments.
|
|
(ii)
|
Relates to the purchase price allocation adjustment made at corporate level, which reduces the
total assets and the corresponding depreciation and amortization.
|
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 $865,782 and $833,357 at June 30, 2016 and December 31, 2015, respectively. All of
the Company’s long-lived assets are related to foreign operations.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated
Financial Statements
For the six-month periods ended June 30,
2016 and 2015 (Unaudited)
Amounts in thousands of US dollars, except
for share data and as otherwise indicated
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,
2015, the Company had 210,538,896 shares issued and outstanding with no par value, consisting of 130,538,896 Class A shares and
80,000,000 Class B shares.
During the six-month
period ended June 30, 2016, the Company issued 171,035 Class A shares in connection with the partial vesting of restricted share
units under the 2011 Equity Incentive Plan. Therefore, at June 30, 2016 the Company had 210,709,931 shares issued and outstanding
with no par value, consisting of 130,709,931 Class A shares and 80,000,000 Class B shares.
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.
During fiscal year
2015 and for the six-month period ended June 30, 2016, the Company did not declare a dividend distribution to its shareholders,
with respect to its results of operations for fiscal year 2014 and 2015, respectively. During fiscal year 2014, the Company declared
dividend distributions totaling $50,036. The last installment of that distribution was paid during the six-month period ended June
30, 2015 amounting to $12,509.
Accumulated Other Comprehensive Losses
The following table
sets forth information with respect to the components of “Accumulated other comprehensive losses” as of June 30,
2016 and their related activity during the six-month period then ended:
|
|
Foreign currency translation
|
|
Unrealized results on cash flow hedges
|
|
Defined benefit pension plan (i)
|
|
Total Accumulated other comprehensive income (loss)
|
Balances at December 31, 2015
|
|
$
|
(431,190
|
)
|
|
$
|
7,876
|
|
|
$
|
(949
|
)
|
|
$
|
(424,263
|
)
|
Other comprehensive gain (loss) before reclassifications (Unaudited)
|
|
14,940
|
|
|
(55,742
|
)
|
|
—
|
|
|
(40,802
|
)
|
Net gain reclassified from accumulated other comprehensive loss to consolidated statement of income (Unaudited)
|
|
—
|
|
|
30,568
|
|
|
224
|
|
|
30,792
|
|
Net current-period other comprehensive income (loss) (Unaudited)
|
|
14,940
|
|
|
(25,174
|
)
|
|
224
|
|
|
(10,010
|
)
|
Balances at June 30, 2016 (Unaudited)
|
|
$
|
(416,250
|
)
|
|
$
|
(17,298
|
)
|
|
$
|
(725
|
)
|
|
$
|
(434,273
|
)
|
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated
Financial Statements
For the six-month periods ended June 30,
2016 and 2015 (Unaudited)
Amounts in thousands of US dollars, except
for share data and as otherwise indicated
|
10.
|
Shareholders’ equity (continued)
|
Accumulated Other Comprehensive Losses
(continued)
The following table
sets forth information with respect to the components of “Accumulated other comprehensive losses” as of June 30,
2015 and their related activity during the six-month period then ended:
|
|
Foreign currency translation
|
|
Unrealized results on cash flow hedges
|
|
Defined benefit pension plan (i)
|
|
Total Accumulated other comprehensive income (loss)
|
Balances at December 31, 2014
|
|
$
|
(302,889
|
)
|
|
$
|
1,598
|
|
|
$
|
(1,176
|
)
|
|
$
|
(302,467
|
)
|
Other comprehensive (loss) gain before reclassifications (Unaudited)
|
|
(54,135
|
)
|
|
8,284
|
|
|
—
|
|
|
(45,851
|
)
|
Net (gain) loss reclassified from accumulated other comprehensive loss to consolidated statement of income (Unaudited)
|
|
—
|
|
|
(7,111
|
)
|
|
220
|
|
|
(6,891
|
)
|
Net current-period other comprehensive (loss) income (Unaudited)
|
|
(54,135
|
)
|
|
1,173
|
|
|
220
|
|
|
(52,742
|
)
|
Balances at June 30, 2015 (Unaudited)
|
|
$
|
(357,024
|
)
|
|
$
|
2,771
|
|
|
$
|
(956
|
)
|
|
$
|
(355,209
|
)
|
(i) 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. Annually, 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.
|
11.
|
Earnings (loss) per share
|
The Company is required
to present basic earnings per share and diluted earnings per share in accordance with ASC Topic 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.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated
Financial Statements
For the six-month periods ended June 30,
2016 and 2015 (Unaudited)
Amounts in thousands of US dollars, except
for share data and as otherwise indicated
|
11.
|
Earnings (loss) per share (continued)
|
The following table
sets forth the computation of basic and diluted net income loss per common share attributable to Arcos Dorados Holdings Inc. for
all periods presented:
|
|
For the six-month periods ended
|
|
|
June 30,
|
|
|
2016
|
|
2015
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Net income (loss) attributable to Arcos Dorados Holdings Inc. available to common shareholders
|
|
$
|
59,493
|
|
|
$
|
(21,260
|
)
|
Weighted-average number of common shares outstanding - Basic
|
|
210,582,170
|
|
|
210,332,347
|
|
Incremental shares from assumed exercise of stock options (a)
|
|
—
|
|
|
—
|
|
Incremental shares from vesting of restricted stock units
|
|
53,715
|
|
|
161,471
|
|
Weighted-average number of common shares outstanding - Diluted
|
|
210,635,885
|
|
|
210,493,818
|
|
|
|
|
|
|
Basic net income (loss) per common share attributable to Arcos Dorados Holdings Inc.
|
|
$
|
0.28
|
|
|
$
|
(0.10
|
)
|
Diluted net income (loss) per common share attributable to Arcos Dorados Holdings Inc.
|
|
$
|
0.28
|
|
|
$
|
(0.10
|
)
|
(a) Options to purchase
shares of common stock were outstanding during the six-month periods ended June 30, 2016 and 2015. See Note 7 for details. These
options were not included in the computation of diluted earnings per share because their inclusion would have been anti-dilutive.
|
12.
|
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, Mexico, Venezuela, Uruguay and Peru (the “Axionlog Business”).
Pursuant to this agreement Axionlog provides the Company distribution inventory, storage and transportation services in the countries
in which it operates. On November 9, 2011, the Company entered into a revolving loan agreement as a creditor with Axionlog Distribution
B.V., a holding company of the Axionlog Business, for a total amount of $12 million at an interest rate of LIBOR plus 6%, in line
interest rates prevailing in the market at the time of the agreement. Notwithstanding the fact that the loan maturity date was
November 7, 2016, the parties decided to terminate the agreement early as of May 27, 2016. As a result, the Company collected the
outstanding principal amount of $1,800.
The following table
summarizes the outstanding balances between the Company and the Axionlog Business as of June 30, 2016 and December 31,
2015:
|
|
As of
|
|
|
June 30,
|
|
|
|
|
2016
|
|
December 31,
|
|
|
(Unaudited)
|
|
2015
|
Accounts and notes receivable, net
|
|
$
|
—
|
|
|
$
|
1,854
|
|
Other receivables
|
|
1,595
|
|
|
2,266
|
|
Prepaid expenses and other current assets
|
|
3,734
|
|
|
—
|
|
Miscellaneous
|
|
3,676
|
|
|
1,729
|
|
Accounts payable
|
|
6,931
|
|
|
5,110
|
|
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated
Financial Statements
For the six-month periods ended June 30,
2016 and 2015 (Unaudited)
Amounts in thousands of US dollars, except
for share data and as otherwise indicated
|
12.
|
Related party transactions (continued)
|
The following table
summarizes the transactions between the Company and the Axionlog Business for the six-month periods ended June 30, 2016 and 2015:
|
|
For the six-month periods ended
|
|
|
June 30,
|
|
|
2016
|
|
2015
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Food and paper (i)
|
|
$
|
(76,341
|
)
|
|
$
|
(82,972
|
)
|
Occupancy and other operating expenses
|
|
(1,816
|
)
|
|
(1,451
|
)
|
Net interest income
|
|
31
|
|
|
390
|
|
|
(i)
|
Includes $18,391 of distribution fees and $57,950 of suppliers purchases managed through the Axionlog
Business for the six-month period ended June 30, 2016; and, $20,580 and $62,392, respectively, for the six-month period ended June
30, 2015.
|
As of June 30,
2016, the Company had other receivables and accounts payable with Lacoop, A.C. and Lacoop II, S.C. totaling $259 and $609, respectively.
|
13
.
|
Venezuelan operations
|
The Company conducts
business in Venezuela where currency restrictions exist, limiting the Company’s ability to immediately access cash through
repatriations at the government’s official exchange rate. The Company’s access to Venezuelan Bolívares (VEF)
held by its Venezuelan subsidiaries remains available for use within this jurisdiction and is not restricted. The official exchange
rate is established by the Central Bank of Venezuela and the Venezuelan Ministry of Finance and the acquisition of foreign currency
at the official exchange rate by Venezuelan companies to pay foreign debt or dividends is subject to a registration and approval
process by the relevant Venezuelan authorities. Since these restrictions are in place, the Company has not been able to access
the official exchange rate to pay dividends and has been limited in its ability to pay royalties at the official exchange rate.
Revenues and operating
loss of the Venezuelan operations were $25,213 and $10,871, respectively, for the six-month period ended June 30, 2016; and $19,223
and $21,977, respectively, for the six-month period ended June 30, 2015.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated
Financial Statements
For the six-month periods ended June 30,
2016 and 2015 (Unaudited)
Amounts in thousands of US dollars, except
for share data and as otherwise indicated
|
13.
|
Venezuelan operations (continued)
|
Since February 2013,
the Venezuelan government has announced several changes in the currency exchange regulations. As a consequence, the Company reassessed
the exchange rate used for remeasurement purposes as follows:
|
|
|
|
|
|
Effects of exchange rate change
|
Period
|
|
Exchange rate System applied
|
|
Exchange rate at System date
change
(VEF per
US dollar)
|
|
Write down of inventories (i)
|
|
Impairment of long-lived assets (i)
|
|
Foreign currency exchange loss (ii)
|
From January 1, 2013 to February 7, 2013
|
|
SITME
|
|
5.30
|
|
|
—
|
|
|
—
|
|
|
—
|
|
From February 8, 2013 to February 28, 2014
|
|
Official exchange rate
|
|
6.30
|
|
|
—
|
|
|
—
|
|
|
15,379
|
|
From March 1, 2014 to May 31, 2014
|
|
SICAD
|
|
11.80
|
|
|
7,611
|
|
|
—
|
|
|
19,697
|
|
From June 1, 2014 to February 28, 2015
|
|
SICAD II
|
|
49.98
|
|
|
9,937
|
|
|
45,186
|
|
|
38,963
|
|
From March 1, 2015 to March 9, 2016
|
|
SIMADI
|
|
177.00
|
|
|
3,250
|
|
|
7,804
|
|
|
8,046
|
|
From March 10, 2016 up to date
|
|
DICOM
|
|
215.34
|
|
|
401
|
|
|
—
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
Presented within Other operating income (expenses), net
|
|
(ii)
|
Presented within Foreign currency exchange results
|
Effective from March
10, 2016, a new Exchange Agreement was issued that set forth the new rules that govern foreign exchange transactions carried out
by public and private entities and individuals in Venezuela. Hereafter, the SICAD and SIMADI systems were eliminated and a dual
exchange system was created: (i) the protected rate called DIPRO, with an initial exchange rate of 10 VEF per US dollar, and (ii)
the supplementary floating market rate called DICOM, with an initial exchange rate of 215.34 VEF per US dollar. As a result of
the announcement, the Company reassessed the exchange rate used for remeasurement purposes with no material impacts within “other
operating income (expense), net” or “Foreign exchange results”.
As of June 30, 2016,
the DIPRO exchange rate settled at 10 VEF per US dollar and DICOM exchange rate settled at 628.34 VEF per US dollar.
As of June 30, 2016,
the Company’s local currency denominated net monetary position, which would be subject to remeasurement in the event of further
changes in the DICOM rate was $0.4 million (including $1.2 million of cash and cash equivalents). Venezuela’s non-monetary
assets were $47.7 million at June 30, 2016 and included approximately $39.4 million of fixed assets and advances to suppliers.
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. Although these regulations caused a delay in the
pricing plan, the Company was able to increase prices during the six-month period ended June 30, 2016.
The Company’s
Venezuelan operations, and the Company’s ability to repatriate its earnings, continue to be negatively affected by these
difficult conditions and would be further negatively affected by additional devaluations or the imposition of additional or more
stringent controls on foreign currency exchange, pricing, payments, profits or imports or other governmental actions or continued
or increased labor unrest. The Company continues to closely monitor developments in this dynamic environment, to assess evolving
business risks and actively manage its operations in Venezuela.
Arcos Dorados Holdings Inc.
Notes to the Condensed Consolidated
Financial Statements
For the six-month periods ended June 30,
2016 and 2015 (Unaudited)
Amounts in thousands of US dollars, except
for share data and as otherwise indicated
On July 13, 2016, the
Company paid all the outstanding principal of its 2016 Notes equal to BRL 200,991 (equivalent to $60,965) and paid accrued and
unpaid interest equal to BRL 10,301 (equivalent to $3,124) related to the Notes.
As mentioned in Note
1, as of July 20, 2016, the Company exercised its option to extend the MFA in French Guyana, Guadeloupe and Martinique.
On August 1, 2016, the
Company renewed the revolving credit facility with Bank of America, N.A. described in Note 4, for up to $25 million maturing on
August 3, 2017. Under the new agreement, each loan made to ADBV will bear interest at an annual rate equal to LIBOR plus 2.50%.
Furthermore, the Company will be required to comply with a consolidated net indebtedness to EBITDA ratio lower than (a) 3.25 to
1 as of the last day of the fiscal quarter ended September 30, 2016 and (b) 3.0 to 1 as of the last day of the fiscal quarter ended
December 31, 2016 and thereafter.
On August 1, 2016, as
mentioned in Note 8, McDonald’s Corporation granted the Company an extension of the limited waiver, through and including
June 30, 2016, during which time the Company will not be required to comply with the financial ratios set forth in the MFA.