Arcos Dorados (ARCO) - 2022 Q2 - Quarterly Report

Condensed Consolidated Financial Statements Consolidated Statements of Income (Loss) The company achieved a significant turnaround with a net income of $39.0 million in H1 2022, driven by a 45.5% increase in total revenues Key Income Statement Data (Six Months Ended June 30) | Metric | 2022 (in thousands USD) | 2021 (in thousands USD) | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenues | $1,678,576 | $1,153,812 | +45.5% | | Operating Income | $108,993 | $11,009 | +889.9% | | Net Income (Loss) attributable to Arcos Dorados | $38,984 | $(24,780) | Turnaround to Profit | | Diluted EPS | $0.19 | $(0.12) | Turnaround to Profit | Consolidated Statements of Comprehensive Income (Loss) The company's comprehensive income reversed from a loss to a gain, reaching $24.8 million for the first six months of 2022 Comprehensive Income (Loss) Summary (Six Months Ended June 30) | Metric | 2022 (in thousands USD) | 2021 (in thousands USD) | | :--- | :--- | :--- | | Net income (loss) | $39,204 | $(24,668) | | Total other comprehensive (loss) income | $(14,275) | $2,255 | | Comprehensive income (loss) attributable to Arcos Dorados | $24,795 | $(22,499) | Consolidated Balance Sheets The company's financial position remained stable with total assets increasing slightly to $2.40 billion and total equity at $214.2 million Key Balance Sheet Data | Metric | June 30, 2022 (in thousands USD) | Dec 31, 2021 (in thousands USD) | | :--- | :--- | :--- | | Total Current Assets | $541,823 | $540,116 | | Total Assets | $2,402,691 | $2,361,257 | | Total Current Liabilities | $628,108 | $617,863 | | Total Liabilities | $2,188,453 | $2,140,095 | | Total Equity | $214,238 | $221,162 | Condensed Consolidated Statements of Cash Flows Net cash from operating activities increased significantly to $121.9 million in H1 2022, reflecting improved profitability and stable cash reserves Cash Flow Summary (Six Months Ended June 30) | Metric | 2022 (in thousands USD) | 2021 (in thousands USD) | | :--- | :--- | :--- | | Net cash provided by operating activities | $121,900 | $34,555 | | Net cash used in investing activities | $(84,011) | $(44,548) | | Net cash (used in) provided by financing activities | $(25,574) | $13,008 | | Decrease in cash and cash equivalents | $(2,752) | $(4,122) | | Cash and cash equivalents at end of period | $276,078 | $161,867 | Consolidated Statement of Changes in Equity Total equity decreased to $214.2 million, as dividend payments and other comprehensive losses more than offset the period's net income - Key equity movements included a net income contribution of +$39.2 million, an other comprehensive loss of -$14.3 million, and dividend payments of -$31.6 million[17] Notes to the Condensed Consolidated Financial Statements Note 1. Organization and nature of business Arcos Dorados operates and franchises McDonald's restaurants in 20 Latin American and Caribbean territories under Master Franchise Agreements - The company's ability to operate is exclusively granted by McDonald's Corporation through Master Franchise Agreements (MFAs) which extend through August 2, 2027[25] - Operations are spread across twenty territories in Latin America and the Caribbean, including major markets like Brazil, Mexico, and Argentina[26] Note 3. Summary of significant accounting policies The company's accounting policies address highly inflationary economies like Venezuela and Argentina by remeasuring financials into US dollars - Due to high inflation, the financial statements for operations in Venezuela and Argentina are remeasured into US dollars, with gains and losses recognized in earnings[34] - No new accounting pronouncements issued or effective during the period had a material impact on the company's consolidated financial statements[35] Note 5. Long-term debt The company refinanced its debt by issuing $350 million in new 2029 Notes to repurchase existing notes, extending its maturity profile - In April 2022, the company's subsidiary ADBV issued $350 million in sustainability-linked Senior Notes due 2029 with an interest rate of 6.125%[55] - The proceeds from the 2029 Notes were primarily used to fund tender offers for the 2023 and 2027 Notes, effectively refinancing existing debt[58] Long-Term Debt Principal (in thousands USD) | Note Series | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | 2029 Notes | $350,000 | $0 | | 2027 Notes | $385,986 | $535,986 | | 2023 Notes | $19,524 | $201,763 | Note 6. Derivative instruments Arcos Dorados utilizes a variety of derivative instruments to manage foreign exchange and interest rate risks Fair Value of Derivative Instruments (June 30, 2022) | Type | Assets (in thousands USD) | Liabilities (in thousands USD) | | :--- | :--- | :--- | | Designated as Hedges | $89,559 | $(4,499) | | Not Designated as Hedges | $10,685 | $(27,864) | | Total | $100,244 | $(32,363) | - The company uses forward contracts to hedge foreign exchange risk on forecasted imports and cross-currency interest rate swaps to hedge variability of intercompany loan receivables and payables[64][68] Note 7. Share-based compensation Total share-based compensation expense was $2.95 million for H1 2022, primarily from the cash-settled Phantom RSU plan - Compensation expense recognized in H1 2022 was $97 thousand for the 2011 Equity Incentive Plan and $2.86 million for the Phantom RSU plan[95][103] - As of June 30, 2022, there were 64,895 outstanding Restricted Share Units and 2,820,517 outstanding Phantom RSUs[97][105] Note 8. Commitments and contingencies The company has significant commitments under its MFAs, including a $650 million investment plan, and was in compliance with all covenants - The company has a growth plan for 2022-2024 to open at least 200 new restaurants and modernize at least 400, with planned capital expenditures of approximately $650 million[111] - As of June 30, 2022, the company was in compliance with its key MFA financial covenants, with a Fixed Charge Coverage Ratio of 1.91 (>=1.50 required) and a Leverage Ratio of 3.43 (<=4.25 required)[112] Provision for Contingencies (June 30, 2022) | Contingency Type | Amount (in thousands USD) | | :--- | :--- | | Tax contingencies in Brazil | $21,828 | | Labor contingencies in Brazil | $14,152 | | Others | $11,217 | | Subtotal | $47,197 | | Judicial deposits | $(7,000) | | Net Provision | $40,197 | Note 9. Segment and geographic information The company's three geographic divisions—Brazil, NOLAD, and SLAD—all demonstrated strong revenue growth in H1 2022 - Effective October 1, 2021, the company reorganized its operations into three geographic divisions: Brazil, NOLAD, and SLAD[124] Revenues by Segment (Six Months Ended June 30) | Segment | 2022 (in thousands USD) | 2021 (in thousands USD) | | :--- | :--- | :--- | | Brazil | $670,048 | $428,990 | | NOLAD | $426,578 | $367,026 | | SLAD | $581,950 | $357,796 | | Total | $1,678,576 | $1,153,812 | Adjusted EBITDA by Segment (Six Months Ended June 30) | Segment | 2022 (in thousands USD) | 2021 (in thousands USD) | | :--- | :--- | :--- | | Brazil | $98,744 | $47,357 | | NOLAD | $44,660 | $32,874 | | SLAD | $63,253 | $20,690 | Note 10. Shareholders' equity The company approved a $0.15 per share cash dividend for 2022, while Accumulated Other Comprehensive Loss stood at $622.0 million - On March 15, 2022, the company approved a cash dividend of $0.15 per share, to be paid in four installments throughout 2022, with the first two payments totaling $16.8 million[140] Changes in Accumulated Other Comprehensive Loss (H1 2022) | Component | Balance at Dec 31, 2021 | Net Change in H1 2022 | Balance at June 30, 2022 | | :--- | :--- | :--- | :--- | | Foreign currency translation | $(625,071) | $(3,226) | $(628,297) | | Cash flow hedges | $17,840 | $(9,539) | $8,301 | | Securities available for sale | $0 | $(1,802) | $(1,802) | | Post-employment benefits | $(537) | $378 | $(159) | | Total (in thousands USD) | $(607,768) | $(14,189) | $(621,957) | Note 11. Earnings per share Earnings per share improved significantly to $0.19 for H1 2022, a turnaround from a loss of ($0.12) in the prior-year period EPS Calculation (Six Months Ended June 30) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net income (loss) attributable to Arcos Dorados (in thousands USD) | $38,984 | $(24,780) | | Weighted-average shares - Basic (in millions) | 210.5 | 210.3 | | Weighted-average shares - Diluted (in millions) | 210.7 | 210.5 | | Basic EPS | $0.19 | $(0.12) | | Diluted EPS | $0.19 | $(0.12) | Note 13. Disclosures about fair value of financial instruments The company's financial instruments, primarily derivatives, are measured at fair value using Level 2 observable market inputs - The company's derivative assets and liabilities are valued using Level 2 inputs, which include observable market parameters like interest rate yield curves and currency rates[165][169] - As of June 30, 2022, the fair value of the company's short and long-term debt was estimated at $689.5 million, compared to a carrying amount of $759.0 million[170]