PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

A. Directors and Senior Management

Not applicable.

B. Advisers

Not applicable.

C. Auditors

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

A. Offer Statistics

Not applicable.

B. Method and Expected Timetable

Not applicable.

ITEM 3. KEY INFORMATION

A. Selected Financial Data

The selected balance sheet data as of December 31, ~~2019~~2020 and ~~2018~~2019 and the income statement data for the years ended December 31, 2020, 2019 ~~2018~~ and ~~2017~~2018 of Arcos Dorados Holdings Inc. are derived from the consolidated financial statements included elsewhere in this annual report, which have been audited by Pistrelli, Henry Martin y Asociados S.R.L., member firm of Ernst & Young Global. The selected balance sheet data as of December 31, 2018, 2017 ~~2016~~ and ~~2015~~2016 and the income statement data for the years ended December 31, ~~2016~~2017 and ~~2015~~2016 of Arcos Dorados Holdings Inc. are derived from consolidated financial statements audited by Pistrelli, Henry Martin y Asociados S.R.L., which are not included herein.

Our operating segments are composed of four geographic regions of operation: (i) the South Latin American division, or “SLAD,” which is comprised of Argentina, Chile, Ecuador, Peru and Uruguay, (ii) the Caribbean division which is comprised of Aruba, Colombia, Curaçao, French Guiana, Guadeloupe, Martinique, Puerto Rico, Trinidad and Tobago, the U.S. Virgin Islands of St. Croix and St. Thomas and Venezuela (iii) Brazil and (iv) the North Latin American division, or “NOLAD,” which is comprised of Costa Rica, Mexico and Panama.

We were incorporated on December 9, 2010 as a direct, wholly-owned subsidiary of Arcos Dorados Limited, the prior holding company for the Arcos Dorados business. On December 13, 2010, Arcos Dorados Limited effected a downstream merger into and with us, with us as the surviving entity. The merger was accounted for as a reorganization of entities under common control in a manner similar to a pooling of interest and the consolidated financial statements reflect the historical consolidated operations of Arcos Dorados Limited as if the reorganization structure had existed since Arcos Dorados Limited was incorporated in July 2006. We did not commence operations until the Acquisition on August 3, 2007.

We ~~maintain our books and records in U.S. dollars and~~ prepare our ~~consolidated~~ financial statements in accordance with accounting principles and standards generally accepted in the United States, or U.S. ~~GAAP.~~GAAP, and elect to report in U.S. dollars. This financial information should be read in conjunction with “Presentation of Financial and Other Information,” “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements, including the notes thereto, included elsewhere in this annual report.

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	For the Years Ended December 31,
	2020		2019		2018		2017		2016
	(in thousands of U.S. dollars, except for per share data)
(Loss) Income Statement Data:
Sales by Company-operated restaurants	$	1,894,618	$	2,812,287	$	2,932,609	$	3,162,256	$	2,803,334
Revenues from franchised restaurants	89,601		146,790		148,962		157,269		125,296
Total revenues	1,984,219		2,959,077		3,081,571		3,319,525		2,928,630
Company-operated restaurant expenses:
Food and paper	(677,087)		(1,007,584)		(1,030,499)		(1,110,240)		(1,012,976)
Payroll and employee benefits	(413,074)		(567,653)		(607,793)		(683,954)		(607,082)
Occupancy and other operating expenses	(624,154)		(799,633)		(803,539)		(842,519)		(752,428)
Royalty fees	(110,957)		(155,388)		(157,886)		(163,954)		(142,777)
Franchised restaurants—occupancy expenses	(43,512)		(61,278)		(67,927)		(69,836)		(55,098)
General and administrative expenses	(171,382)		(212,515)		(229,324)		(244,664)		(221,075)
Other operating (expenses) income, net	(10,807)		4,910		(61,145)		68,577		41,386
Total operating costs and expenses	(2,050,973)		(2,799,141)		(2,958,113)		(3,046,590)		(2,750,050)
Operating (loss) income	(66,754)		159,936		123,458		272,935		178,580
Net interest expense	(59,068)		(52,079)		(52,868)		(68,357)		(66,880)
(Loss) gain from derivative instruments	(2,297)		439		(565)		(7,065)		(3,065)
Gain from securities	25,676			–		–		–		–
Foreign currency exchange results	(31,707)		12,754		14,874		(14,265)		32,354
Other non-operating income (expenses), net	2,296		(2,097)		270		(435)		(2,360)
(Loss) Income before income taxes	(131,854)		118,953		85,169		182,813		138,629
Income tax expense	(17,532)		(38,837)		(48,136)		(53,314)		(59,641)
Net (loss) income	(149,386)		80,116		37,033		129,499		78,988
Less: Net income attributable to non-controlling interests	(65)		(220)		(186)		(333)		(178)
Net (loss) income attributable to Arcos Dorados Holdings Inc.	(149,451)		79,896		36,847		129,166		78,810
(Loss) Earnings per share:
Basic net (loss) income per common share attributable to Arcos Dorados	$	(0.73)	$	0.39	$	0.18	$	0.61	$	0.37
Diluted net (loss) income per common share attributable to Arcos Dorados	$	(0.73)	$	0.39	$	0.18	$	0.61	$	0.37

For the Years Ended December 31,
2019 2018 2017 2016 2015
(in thousands of U.S. dollars, except for per share data)
Income Statement Data:
Sales by Company-operated restaurants $ 2,812,287 $ 2,932,609 $ 3,162,256 $ 2,803,334 $ 2,930,379
Revenues from franchised restaurants 146,790 148,962 157,269 125,296 122,361
Total revenues 2,959,077 3,081,571 3,319,525 2,928,630 3,052,740
Company-operated restaurant expenses:
Food and paper (1,007,584) (1,030,499) (1,110,240) (1,012,976) (1,037,487)
Payroll and employee benefits (567,653) (607,793) (683,954) (607,082) (660,773)
Occupancy and other operating (799,633) (803,539) (842,519) (752,428) (793,622)
Royalty fees (155,388) (157,886) (163,954) (142,777) (149,089)
Franchised restaurants—occupancy expenses (61,278) (67,927) (69,836) (55,098) (54,242)
General and administrative expenses (212,515) (229,324) (244,664) (221,075) (270,680)
Other operating income (expenses), net 4,910 (61,145) 68,577 41,386 6,560
Total operating costs and expenses (2,799,141) (2,958,113) (3,046,590) (2,750,050) (2,959,333)
Operating income 159,936 123,458 272,935 178,580 93,407
Net interest expense (52,079) (52,868) (68,357) (66,880) (64,407)
Gain (loss) from derivative instruments 439 (565) (7,065) (3,065) (2,894)
Foreign currency exchange results 12,754 14,874 (14,265) 32,354 (54,032)
Other non-operating (expenses) income, net (2,097) 270 (435) (2,360) (627)
Income (loss) before income taxes 118,953 85,169 182,813 138,629 (28,553)
Income tax expense (38,837) (48,136) (53,314) (59,641) (22,816)
Net income (loss) 80,116 37,033 129,499 78,988 (51,369)
Less: Net income attributable to non-controlling interests (220) (186) (333) (178) (264)
Net income (loss) attributable to Arcos Dorados Holdings Inc. 79,896 36,847 129,166 78,810 (51,633)
Earnings (Loss) per share:
Basic net income (loss) per common share attributable to Arcos Dorados $ 0.39 $ 0.18 $ 0.61 $ 0.37 $ (0.25)
Diluted net income (loss) per common share attributable to Arcos Dorados $ 0.39 $ 0.18 $ 0.61 $ 0.37 $ (0.25)

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	As of December 31,
	2020		2019		2018		2017		2016
	(in thousands of U.S. dollars, except for share data)
Balance Sheet Data:
Cash and cash equivalent	$	165,989	$	121,880	$	197,282	$	308,491	$	194,803
Total current assets	415,531		405,368		464,562		653,037		445,190
Property and equipment, net	796,532		960,986		856,192		890,736		847,966
Total non-current assets	1,878,423		2,152,317		1,113,477		1,150,706		1,059,863
Total assets	2,293,954		2,557,685		1,578,039		1,803,743		1,505,053
Accounts payable	209,535		259,577		242,455		303,452		217,914
Short-term debt and current portion of long-term debt	3,129		16,529		4,192		4,359		28,099
Total current liabilities	503,471		595,447		493,312		605,583		548,308
Long-term debt, excluding current portion	773,445		623,575		626,424		629,142		551,580
Total non-current liabilities	1,592,467		1,540,672		691,968		702,018		605,169
Total liabilities	2,095,938		2,136,119		1,185,280		1,307,601		1,153,477
Total common stock	519,518		516,119		512,760		509,647		506,884
Total equity	198,016		421,566		392,759		496,142		351,576
Total liabilities and equity	2,293,954		2,557,685		1,578,039		1,803,743		1,505,053
Shares outstanding	207,265,773		204,070,029		205,232,247		211,072,508		210,711,224

As of December 31,
2019 2018 2017 2016 2015
(in thousands of U.S. dollars, except for share data)
Balance Sheet Data:
Cash and cash equivalent $ 121,880 $ 197,282 $ 308,491 $ 194,803 $ 112,519
Total current assets 405,368 464,562 653,037 445,190 378,996
Property and equipment, net 960,986 856,192 890,736 847,966 833,357
Total non-current assets 2,152,317 1,113,477 1,150,706 1,059,863 1,024,206
Total assets 2,557,685 1,578,039 1,803,743 1,505,053 1,403,202
Accounts payable 259,577 242,455 303,452 217,914 187,685
Short-term debt and current portion of long-term debt 16,529 4,192 4,359 28,099 163,740
Total current liabilities 595,447 493,312 605,583 548,308 577,314
Long-term debt, excluding current portion 623,575 626,424 629,142 551,580 491,327
Total non-current liabilities 1,540,672 691,968 702,018 605,169 538,998
Total liabilities 2,136,119 1,185,280 1,307,601 1,153,477 1,116,312
Total common stock 516,119 512,760 509,647 506,884 504,772
Total equity 421,566 392,759 496,142 351,576 286,890
Total liabilities and equity 2,557,685 1,578,039 1,803,743 1,505,053 1,403,202
Shares outstanding 204,070,029 205,232,247 211,072,508 210,711,224 210,538,896

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	For the Years Ended December 31,
	2020			2019			2018			2017			2016
	(in thousands of U.S. dollars, except percentages)
Other Data:
Total Revenues
Brazil	$	862,748		$	1,385,566		$	1,345,453		$	1,496,573		$	1,333,237
Caribbean division(1)		381,090			399,251		483,743			474,822			409,671
NOLAD		311,887			431,266		406,848			386,874			363,965
SLAD		428,494			742,994		845,527			961,256			821,757
Total	1,984,219			2,959,077			3,081,571			3,319,525			2,928,630
Operating (Loss) Income
Brazil	$	16,121		$	164,342		$	159,511		$	160,608		$	122,636
Caribbean division(1)	4,494			(1,100)			(49,567)			1,538			(12,392)
NOLAD	(16,680)			16,539			7,726			99,152			45,145
SLAD	(16,626)			42,410			53,777			71,718			66,359
Corporate and others and purchase price allocation	(54,063)			(62,255)			(47,989)			(60,081)			(43,168)
Total	(66,754)			159,936			123,458			272,935			178,580
Operating Margin(2)
Brazil	1.9		%	11.9		%	11.9		%	10.7		%	9.2		%
Caribbean division(1)	1.2			(0.3)			(10.2)			0.3			(3.0)
NOLAD	(5.3)			3.8			1.9			25.6			12.4
SLAD	(3.9)			5.7			6.4			7.5			8.1
Total	(3.4)			5.4			4.0			8.2			6.1
Adjusted EBITDA(3)
Brazil	$	76,155		$	227,844		$	218,391		$	218,172		$	168,076
Caribbean division(1)	28,847			24,955			(8,281)			40,844			18,049
NOLAD	10,207			39,027			32,313			33,717			36,288
SLAD	3,272			63,120			73,670			87,083			76,327
Corporate and others	(50,370)			(63,171)			(58,096)			(74,879)			(60,295)
Total	68,111			291,775			257,997			304,937			238,445
Adjusted EBITDA Margin(4)
Brazil	8.8		%	16.4		%	16.2		%	14.6		%	12.6		%
Caribbean division(1)	7.6			6.2			(1.7)			8.6			4.4
NOLAD	3.3			9.0			7.9			8.7			10.0
SLAD	0.8			8.5			8.7			9.1			9.3
Total	3.4			9.9			8.4			9.2			8.1
Other Financial Data:
Working capital(5)		(87,940)			(190,079)			(28,750)			47,454			(103,118)
Capital expenditures(6)	90,144			267,893			197,041			175,636			92,282
Cash Dividends declared per common share	$	0.05		$	0.11		$	0.10		$	—		$	—
Stock Dividends declared per every 75 common shares		1.00			—			—			—			—

For the Years Ended December 31,
2019 2018 2017 2016 2015
(in thousands of U.S. dollars, except percentages)
Other Data:
Total Revenues
Brazil $ 1,385,566 $ 1,345,453 $ 1,496,573
$ 1,333,237
$ 1,361,989

Caribbean division(1) 399,251 483,743 474,822 409,671 398,144
NOLAD 431,266 406,848 386,874 363,965 367,364
SLAD 742,994 845,527 961,256 821,757 925,243
Total 2,959,077 3,081,571 3,319,525 2,928,630 3,052,740
Operating Income
Brazil $ 164,342 $ 159,511 $ 160,608
$ 122,636
$ 116,820

Caribbean division(1) (1,100) (49,567) 1,538 (12,392) (40,102)
NOLAD 16,539 7,726 99,152 45,145 8,710
SLAD 42,410 53,777 71,718 66,359 78,022
Corporate and others and purchase price allocation (62,255) (47,989) (60,081) (43,168) (70,043)
Total 159,936 123,458 272,935 178,580 93,407
Operating Margin(2)
Brazil 11.9 % 11.9 % 10.7 % 9.2 % 8.6 %
Caribbean division(1) (0.3) (10.2) 0.3 (3.0) (10.1)
NOLAD 3.8 1.9 25.6 12.4 2.4
SLAD 5.7 6.4 7.5 8.1 8.4
Total 5.4 4.0 8.2 6.1 3.1
Adjusted EBITDA(3)
Brazil $ 227,844 $ 218,391 $ 218,172
$ 168,076
$ 174,102

Caribbean division(1) 24,955 (8,281) 40,844 18,049 2,059
NOLAD 39,027 32,313 33,717 36,288 31,424
SLAD 63,120 73,670 87,083 76,327 100,718
Corporate and others (63,171) (58,096) (74,879) (60,295) (78,132)
Total 291,775 257,997 304,937 238,445 230,171
Adjusted EBITDA Margin(4)
Brazil 16.4 % 16.2 % 14.6 % 12.6 % 12.8 %
Caribbean division(1) 6.2 (1.7) 8.6 4.4 0.5
NOLAD 9.0 7.9 8.7 10.0 8.6
SLAD 8.5 8.7 9.1 9.3 10.9
Total 9.9 8.4 9.2 8.1 7.5
Other Financial Data:
Working capital(5) (190,079) $ (28,750) $ 47,454
$ (103,118)
$ (198,318)

Capital expenditures(6) 267,893 197,041 175,636 92,282 92,055
Dividends declared per common share $ 0.11 $ 0.10 $ —
$ —
$ —

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	As of December 31,
	2020	2019	2018	2017	2016
Number of systemwide restaurants	2,236	2,293	2,223	2,188	2,156
Brazil	1,020	1,023	968	929	902
Caribbean division	318	336	337	350	353
NOLAD	507	530	524	519	517
SLAD	391	404	394	390	384
Number of Company-operated restaurants	1,576	1,580	1,540	1,546	1,553
Brazil	610	612	584	579	584
Caribbean division	269	251	251	263	266
NOLAD	353	364	362	363	365
SLAD	344	353	343	341	338
Number of franchised restaurants	660	713	683	642	603
Brazil	410	411	384	350	318
Caribbean division	49	85	86	87	87
NOLAD	154	166	162	156	152
SLAD	47	51	51	49	46

As of December 31,
2019 2018 2017 2016 2015
Number of systemwide restaurants 2,293 2,223 2,188 2,156 2,141
Brazil 1,023 968 929 902 883
Caribbean division 336 337 350 353 356
NOLAD 530 524 519 517 518
SLAD 404 394 390 384 384
Number of Company-operated restaurants 1,580 1,540 1,546 1,553 1,588
Brazil 612 584 579 584 615
Caribbean division 251 251 263 266 267
NOLAD 364 362 363 365 364
SLAD 353 343 341 338 342
Number of franchised restaurants 713 683 642 603 553
Brazil 411 384 350 318 268
Caribbean division 85 86 87 87 89
NOLAD 166 162 156 152 154
SLAD 51 51 49 46 42


~~(1)~~	Currency devaluations in Venezuela have had a significant effect on our income statements and have impacted the comparability of our income statements. See “Item 5. Operating and Financial Review and Prospects-A. Operating Results-Foreign Currency Translation-Venezuela.”


~~(2)~~	~~Operating margin is operating income divided by total revenues, expressed as a percentage.~~

~~(3)~~

Adjusted EBITDA is a measure of our performance that is reviewed by our management. Adjusted EBITDA does not have a standardized meaning and, accordingly, our definition of Adjusted EBITDA may not be comparable to Adjusted EBITDA as used by other companies. Total Adjusted EBITDA is a non-GAAP measure. For our definition of Adjusted EBITDA, see “Item 5. Operating and Financial Review and Prospects-A. Operating Results-Key Business Measures.”


~~(4)~~	~~Adjusted EBITDA margin is Adjusted EBITDA divided by total revenues, expressed as a percentage.~~


~~(5)~~	~~Working capital equals current assets minus current liabilities.~~


~~(6)~~	~~Includes property and equipment expenditures and purchase of restaurant businesses paid at the acquisition date.~~

(1)Currency devaluations in Venezuela have had a significant effect on our income statements and have impacted the comparability of our income statements. See “Item 5. Operating and Financial Review and Prospects-A. Operating Results-Foreign Currency Translation-Venezuela.”

(2)Operating margin is operating income divided by total revenues, expressed as a percentage.

(3)Adjusted EBITDA is a measure of our performance that is reviewed by our management. Adjusted EBITDA does not have a standardized meaning and, accordingly, our definition of Adjusted EBITDA may not be comparable to Adjusted EBITDA as used by other companies. Total Adjusted EBITDA is a non-GAAP measure. For our definition of Adjusted EBITDA, see “Item 5. Operating and Financial Review and Prospects-A. Operating Results-Key Business Measures.”

(4)Adjusted EBITDA margin is Adjusted EBITDA divided by total revenues, expressed as a percentage.

(5)Working capital equals current assets minus current liabilities.

(6)Includes property and equipment expenditures and purchase of restaurant businesses paid at the acquisition date.

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Presented below is the reconciliation between net income and Adjusted EBITDA on a consolidated basis:


Consolidated Adjusted EBITDA Reconciliation	For the Years Ended December 31,
	2020		2019		2018		2017		2016
	(in thousands of U.S. dollars)
Net (loss) income attributable to Arcos Dorados Holdings Inc.	$	(149,451)	$	79,896	$	36,847	$	129,166	$	78,810
Plus (Less):
Net interest expense	59,068		52,079		52,868		68,357		66,880
Loss (gain) from derivative instruments	2,297		(439)		565		7,065		3,065
(Gain) from securities	(25,676)		—		—		—		—
Foreign currency exchange results	31,707		(12,754)		(14,874)		14,265		(32,354)
Other non-operating (income) expenses, net	(2,296)		2,097		(270)		435		2,360
Income tax expense	17,532		38,837		48,136		53,314		59,641
Net income attributable to non-controlling interests	65		220		186		333		178
Operating (loss) income	(66,754)		159,936		123,458		272,935		178,580
Plus (Less):
Items excluded from computation that affect operating income:
Depreciation and amortization	126,853		123,218		105,800		99,382		92,969
Gains from sale or insurance recovery of property and equipment	(4,210)		(5,175)		(4,973)		(95,081)		(57,244)
Write-offs of property and equipment	4,501		4,733		4,167		8,528		5,776
Impairment of long-lived assets	6,636		8,790		18,950		17,564		7,697
Impairment of goodwill	1085		273		167		200		5,045
Reorganization and optimization plan	—		—		11,003		—		5,341
2008 Long-Term Incentive Plan incremental compensation from modification	—		—		(575)		1,409		281
Adjusted EBITDA	68,111		291,775		257,997		304,937		238,445

For the Years Ended December 31,

Consolidated Adjusted EBITDA Reconciliation
2019 2018 2017 2016 2015
(in thousands of U.S. dollars)
Net income (loss) attributable to Arcos Dorados Holdings Inc. $ 79,896
$ 36,847
$ 129,166
$ 78,810
$ (51,633)
Plus (Less):
Net interest expense 52,079 52,868 68,357 66,880 64,407
(Gain) loss from derivative instruments (439) 565 7,065 3,065 2,894
Foreign currency exchange results (12,754) (14,874) 14,265 (32,354) 54,032
Other non-operating expenses (income), net 2,097 (270) 435 2,360 627
Income tax expense 38,837 48,136 53,314 59,641 22,816
Net income attributable to non-controlling interests 220 186 333 178 264
Operating income 159,936 123,458 272,935 178,580 93,407
Plus (Less):
Items excluded from computation that affect operating income:
Depreciation and amortization 123,218 105,800 99,382 92,969 110,715
Gains from sale or insurance recovery of property and equipment

(5,175) (4,973) (95,081) (57,244) (12,308)
Write-offs of property and equipment 4,733 4,167 8,528 5,776 6,038
Impairment of long-lived assets 8,790 18,950 17,564 7,697 12,343
Impairment of goodwill 273 167 200 5,045 679
Stock-based compensation related to the special awards in connection with the initial public offering under the 2011 Plan — — — �� — 210
Reorganization and optimization plan — 11,003 — 5,341 18,346
2008 Long-Term Incentive Plan incremental compensation from modification — (575) 1,409 281 741
Adjusted EBITDA 291,775 257,997 304,937 238,445 230,171

Exchange Rates and Exchange Controls

In ~~2019, 66.7%~~2020, 69.2% of our total revenues were derived from our restaurants in Brazil, Argentina, Mexico and ~~Mexico.~~Puerto Rico. While we ~~maintain our books and records~~elect to report figures in U.S. dollars, our revenues are conducted in the local currency of the territories in which we operate, and as such may be affected by changes in the local exchange rate to the U.S. dollar. The exchange rates discussed in this section have been obtained from each country’s central bank. However, in most cases, for consolidation purposes, we use a foreign currency to U.S. dollar exchange rate provided by Bloomberg that differs slightly from that reported by the aforementioned central banks.

Brazil

Exchange Rates

The Brazilian real ~~depreciated 47.0%~~appreciated 19.4% against the U.S. ~~dollar in 2015, and appreciated 19.4%~~Dollar in 2016, 1.7% in 2017, depreciated 19% in 2018, depreciated 25.5% in 2019, depreciated 29% in 2020 and depreciated ~~18.3%~~8.5% in the first quarter of ~~2020.~~2021. As of April ~~24, 2020,~~23, 2021, the exchange rate for the purchase of U.S. dollars ~~as reported by the Central Bank of Brazil~~ was R$~~5.65~~5.48 per U.S. dollar.

Exchange Controls

Brazilian Resolution 3,568 establishes that, without prejudice to the duty of identifying customers, operations of foreign currency purchase or sale up to $3,000 or its equivalent in other currencies are not required to submit documentation relating

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to legal transactions underlying these foreign exchange operations. According to Resolution 3,568, the Central Bank of Brazil may define simplified forms to record operations of foreign currency purchases and sales of up to $3,000 or its equivalent in other currencies.

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The Brazilian Monetary Council may issue further regulations in relation to foreign exchange transactions, as well as on payments and transfers of Brazilian currency between Brazilian residents and non-residents (such transfers being commonly known as the international transfer of reais), including those made through so-called non-resident accounts.

Brazilian law also imposes a tax on foreign exchange transactions, or “IOF/Exchange,” on the conversion of reais into foreign currency and on the conversion of foreign currency into reais. As of October 7, 2014, the general IOF/Exchange rate applicable to almost all foreign currency exchange transactions was increased from zero to 0.38%, although other rates may apply in particular operations, such as the below transactions which are currently not taxed:

•inflow related to transactions carried out in the Brazilian financial and capital markets, including investments in our common shares by investors which register their investment under Resolution No. 4,373;

•outflow related to the return of the investment mentioned under the first bulleted item above; and

•outflow related to the payment of dividends and interest on shareholders’ equity in connection with the investment mentioned under the first bulleted item above.

Notwithstanding these rates of the IOF/Exchange, in force as of the date hereof, the Minister of Finance is legally entitled to increase the rate of the IOF/Exchange to a maximum of 25% of the amount of the currency exchange transaction, but only on a prospective basis.

Although the Central Bank of Brazil has intervened occasionally to control movements in the foreign exchange rates, the exchange market may continue to be volatile as a result of capital movements or other factors, and, therefore, the Brazilian real may substantially decline or appreciate in value in relation to the U.S. dollar in the future.

Brazilian law further provides that whenever there is a significant imbalance in Brazil’s balance of payments or reasons to foresee such a significant imbalance, the Brazilian government may, and has done so in the past, impose temporary restrictions on the remittance of funds to foreign investors of the proceeds of their investments in Brazil. The likelihood that the Brazilian government would impose such restricting measures may be affected by the extent of Brazil’s foreign currency reserves, the availability of foreign currency in the foreign exchange markets on the date a payment is due, the size of Brazil’s debt service burden relative to the economy as a whole and other factors. We cannot assure you that the Central Bank will not modify its policies or that the Brazilian government will not institute restrictions or delays on cross-border remittances in respect of securities issued in the international capital markets.

Argentina

Exchange Rates

The Argentine peso depreciated ~~51.7%~~21.9% against the U.S. Dollar ~~in 2015, 21.9%~~ in 2016, 17.7% in 2017, 49.7% in 2018, 58.8% in 2019, 40.5% in 2020 and ~~depreciated 7.7%~~9.3% in the first quarter of ~~2020.~~2021. As of April ~~24, 2020,~~23, 2021, the exchange rate for the purchase of U.S. dollars ~~as reported by the Central Bank of Argentina~~ was ARS$~~66.43~~93.12 per U.S. dollar.

Exchange Controls

During 2001 and 2002, Argentina went through a period of severe political, economic and social crisis. Among other consequences, the crisis resulted in Argentina defaulting on its foreign debt obligations and the introduction of numerous changes in economic policies, including currency controls that tightened restrictions on capital flows, exchange controls, an official U.S. dollar exchange and transfer restrictions that substantially limited the ability of companies to retain foreign currency or make payments abroad. ~~These~~Although these foreign exchange controls were eased in a series of measures introduced by former President Mauricio Macri’s administration starting in December ~~2015.~~

~~For instance, on May 19, 2017,~~2015, his administration also reinstated the ~~Central Bank of Argentina issued Communication “A” 6244, effective as of July 1, 2017, which structurally modified the~~main exchange ~~regulations~~controls, starting in ~~force, establishing a new foreign exchange regime that significantly eased the access to the exchange market (“MLC,”~~ ~~Mercado Libre de Cambios). This regime was in force until~~ September 1, 2019.

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On September 1, 2019, with the purpose of strengthening the normal functioning of the economy, fostering a prudent administration of the exchange market, reducing the volatility of financial variables and containing the impact of the variations of financial flows on the real economy, the Argentine government issued Decree No. 609/2019 whereby foreign exchange controls were reinstated. The decree: (i) reinstated, originally until December 31, 2019, exporters’ obligation to repatriate and settle for Argentine pesos (through the ~~MLC)~~foreign exchange market or the “MLC”, per its acronym in Spanish) the proceeds from exports of goods and services on the terms and conditions set forth by the Central Bank of Argentina’s implementing regulations; and (ii) authorized the Central Bank of Argentina to (a) regulate access to the foreign exchange market for the purchase of foreign currency and outward remittances; and (b) set forth regulations to avoid practices and transactions aimed to circumvent, through the use of securities and other instruments, the measures adopted through the decree. On the same date, the Central Bank of Argentina issued Communication “A” 6770, which was subsequently amended and supplemented by further

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Central Bank of Argentina communications. As a consequence of ~~the reimposition of~~these exchange controls, the spread between the official exchange rate and other exchange rates resulting implicitly from certain capital market operations usually effected to obtain U.S. dollars has broadened significantly, reaching a value of approximately ~~72%~~64% above the official exchange rate as of April ~~27, 2020.~~23, 2021.

At present, foreign exchange regulations have been (i) extended indefinitely, and (ii) consolidated in a single set of regulation, Communication “A” 6844, as subsequently amended and supplemented from time to time by Central Bank of Argentina’s ~~Communications, including without limitation Communications “A” 6862, 6869, 6882 and 6915 of the Central Bank of Argentina~~communications (jointly, the “Argentine FX Regulations”). Below is a description of the main exchange control measures implemented through the aforementioned regulations:

Specific provisions for inward remittances

Obligation to repatriate and settle in Argentine pesos the proceeds from exports of services

Section 2.2 of the Argentine FX Regulations imposes on exporters the obligation to repatriate, and settle in the MLC, the proceeds from ~~exports of~~ services rendered to non-residents within 5 business days following payment thereof.

Sale of non-financial non-produced assets

Pursuant to section 2.3 of the Argentine FX Regulations, the proceeds in foreign currency of the sale to non-residents of non-financial non-produced assets must be repatriated and settled in Argentine pesos in the MLC within 5 business days following either the perception of funds in the country or abroad, or their accreditation in foreign accounts.

External financial indebtedness

Pursuant to section 2.4 of the Argentine FX Regulations, the new regulations have reinstated the requirement to repatriate, and settle in Argentine pesos through the MLC, the proceeds of new financial indebtedness disbursed from and after September 1, 2019 as a condition for accessing the MLC to make debt service payments thereunder. The reporting of the debt under the reporting regime established by Communication “A” 6401 (as amended and restated from time to time, the “External Assets and Liabilities Reporting Regime”) is also a condition to access the MLC to repay ~~debt services.~~

~~Additionally, section 3.3~~external financial indebtedness. However, per Communication “A” 7106, debtors of principal of foreign external financial indebtedness scheduled to be due between October 15, 2020 and March 31, 2021 were limited to access the MLC for up to 40% of the ~~Argentine FX Regulations states~~principal owed during such period (this period was subsequently extended to December 31, 2021 by Communication “A” 7230). Hence, these new regulations impose a requirement on debtors to restructure the remaining 60% of principal owed during such period (or obtain new financing), but allows the access to the MLC for all interest under such payments. These regulations are subject to certain characteristics and thresholds but generally apply to external financial indebtedness. Debtors of external financial indebtedness subject to these regulations are required to submit to a refinancing plan evidencing compliance with this regulation.

Specific Provisions Regarding Access to the MLC

Payment of principal under external financial indebtedness to non-resident affiliates

Access to the MLC for payments of principal under debts with non-resident affiliates will be subject to the Central Bank of Argentina’s prior approval until June 30, 2021.

Payment of imports of goods

Communication “A” 7030 of the Central Bank of Argentina sets forth that, for the purposes of accessing the MLC to pay imports of goods or the principal amount of debts arising from the import of goods, the Central Bank of Argentina’s prior approval will be required ~~to access~~until June 30, 2021, unless certain requirements are met, namely:

a) the ~~MLC for~~entity has received an affidavit from the ~~prepayment~~client stating that the total amount of ~~debts for~~payments associated with its imports of goods ~~and services.~~

~~Specific Provisions Regarding Access~~processed through the MLC during 2020, including the payment for which approval is sought, does not exceed in more than US$1,000,000 the amount by which the importer would have access to the ~~Exchange Market~~

~~Residents are authorized to access~~exchange market when computing: (i) the ~~MLC for the payment of import~~imports of goods ~~in accordance with section 10.1~~registered on behalf of the ~~Argentine FX Regulations. This regulation sets forth different requirements depending on whether it relates to~~relevant in the ~~payment~~system for tracking payments of imports of goods ~~with customs clearance or~~(SEPAIMPO) and that were registered between January 1, 2020 and the day prior to accessing the MLC, (ii) plus the amount of payments made under other exceptions, (ii) minus the amount pending to be paid in Argentina, related to payments of ~~import of goods~~imports with pending customs ~~clearance. Moreover~~registration made between September 1, 2019 and December 31, 2019;

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b) in the case of a “deferred payment” or “demand payment” of imports ~~and import payments monitoring system (SEPAIMPO) has~~corresponding to goods that have been ~~reinstated, setting forth rules governing such monitoring process~~shipped as of July 1, 2020 or that, having been shipped previously, have not arrived in the country before that date; and ~~exceptions thereof. Importers will need to appoint~~

c) it is a ~~financial entity~~payment associated with an operation not included in ~~charge of monitoring compliance with the aforementioned obligations.~~

Likewise, the local importer must designate a local financial entity to act as a monitoring bank, which will be responsible for verifying compliance with the applicable regulations, including, among others, the liquidation of import financing and the entry of imported goods.

~~Prior authorization by the Central Bank of Argentina is required for access~~section b) above, to the ~~MLC for payments~~extent that it is intended to be used towards the cancellation of ~~overdue or due to payment debts~~a commercial debt for imports of goods with ~~related companies abroad when it exceeds~~an export credit agency or a foreign financial entity or that was guaranteed by either of such entities.

Prior to authorizing payments for imports of goods, the ~~equivalent~~intervening financial entity must, in addition to requesting the client’s affidavit, verify that such statement is compatible with the existing data in the relevant online Central Bank of ~~U$S 2 million per month per resident customer, as stated by section 10.3.2.5 of the Argentine FX Regulations.~~

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It should be noted that all outstanding debts as of August 31, 2019, either those whose maturity had operated prior to such date or those that did not have a stipulated expiration date, are considered to be overdue or due to payment debts.Argentina’s databases.

Payment of services provided by non-residents

Pursuant to section 3.2 of the Argentine FX Regulations, residents may access the MLC for payment of services ~~provided~~rendered by non-residents (except to affiliates), as long as it is verified that the operation has been declared, if applicable, in the last overdue presentation of the External Assets and Liabilities Reporting.

Access to the MLC for the prepayment of debts for services requires prior authorization by the Central Bank of Argentina.

~~Repayment of principal and interest of imports of goods and services~~

Access to the foreign exchange market for the repayment of principal and interest of imports of goods and services is granted, provided that the operation has been declared, if applicable, in the last overdue presentation of the External Assets and Liabilities Reporting Regime.

~~Access to the MLC for the prepayment of debts for imports of goods and services shall require prior authorization by the Central Bank of Argentina.~~

Other Specific Provisions

Additional requirements on outflows through the MLC

For certain outflows of funds made through the MLC (i.e., payments of imports and other purchases of goods abroad; payment of services rendered by non-residents; remittances of profits and dividends; payment of principal and interest on external indebtedness; payments of interest on debts for the import of goods and services, among others), the intervening exchange institution shall obtain the Central Bank of Argentina’s prior approval before processing the transaction, unless the customer files an affidavit before such bank stating that, at the moment of accessing the MLC:

a) (i) all its foreign currency holdings are held in bank accounts within local financial institutions, and (ii) the customer has no external liquid assets available as of the date of access to the MLC in an amount higher than the equivalent to US$100,000 (or a higher amount, provided some requirements are met). Communication “A” 7030 provides a merely illustrative list of liquid external assets including, among others, holdings of foreign currency bills and coins, holdings of coined gold or gold bars for good delivery, demand deposits with financial institutions abroad and other investments that allow for immediate availability of foreign currency (including, for example, investments in external government securities, funds held in investment accounts with investment managers abroad, crypto-currency, funds in payment service providers’ accounts, among others); and

b) the customer commits to transfer and settle through the MLC within a term of 5 business days upon being made available, (i) any funds received from the collection of loans granted to third parties, (ii) the collection of time deposits, or (iii) the sale of any asset; provided that the loan had been granted, the time deposit had been made, and the asset had been purchased, in each case, after May 28, 2020.

Access to the MLC by non-residents

In accordance with section 3.12 of the Argentine FX Regulations, prior approval by the Central Bank of Argentina will be required for access to the foreign exchange market by non-residents for the purchase of foreign currency, except for the following operations: (a) International organizations and institutions that perform functions of official export credit agencies, (b) diplomatic representations and consular and diplomatic personnel accredited in the country for transfers made in the exercise of their functions, (c) Representatives in the country of Courts, Authorities or Offices, Special Missions, Commissions or Bilateral Bodies established by Treaties or International Agreements, inof which ~~the Argentine Republic~~Argentina is part, to the extent that transfers are made in the exercise of their functions, (d) foreign transfers in the name of individuals who are beneficiaries of retirement and / or pensions paid by the ANSES, for up to the amount paid by said agency in the calendar month and to the extent that the transfer is made to a bank account owned by the beneficiary in your registered country of residence, ~~and~~ (e) purchase of foreign currency (in cash) by non-resident individuals for tourism and travel expenses, up to a maximum amount of U$S100 dollars, to the extent the financial entity can verify that the client has settled an amount equal or higher than the sum to be purchased within 90 days prior to the ~~operation.~~operation, and (f) transfers to offshore bank accounts by individuals that are beneficiaries of pensions granted by the national government pursuant to Laws No. 24,043, 24,411 and 25,914, as supplemented.

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Exchanges and arbitrage. Transactions involving securities

Pursuant to section 4.2 of the Argentine FX Regulations, entities are allowed to carry out exchange and arbitrage operations with their clients in the following cases: (i) such operation is not subject to the settlement obligation in the MLC; (ii) an individual transfers funds from their local accounts (which are already held in foreign ~~currency~~currency) to its own bank accounts ~~abroad,~~outside Argentina, (iii) when foreign currency transfers by local central collective deposit securities for funds received in foreign currency for capital services and income from National Treasury securities, (iv) arbitration operations not originated in foreign transfers provided that such funds are debited from an account in foreign currency of the client in a local entity, and (v) may be carried out without the need to obtain prior Central Bank of Argentina approval, provided that if structured as separate transactions, these would have access to the MLC without the need of an authorization by the Central Bank of Argentina.

Securities-related Operations

~~As per section 4.5~~Pursuant to General Resolution No. 878/2020 of the Argentine ~~FX Regulations, if an individual purchases securities through payment~~Securities Commission (CNV, per its acronym in foreign currency, the same must have been held by the client for at least 5 business days since the settlement of the transaction before their subsequent sale or transfer to another depositary. This minimum holding period shall not apply if the sale of the securities is carried out in the same jurisdiction and the settlement of the transactions is made in the same foreign currency. In all cases, the client shall be obligated to submit a sworn statement expressing that the funds shall not be used for the secondary purchaseSpanish), sales of securities ~~within the following 5 business days.~~

Moreover, when a mere transfer of foreign currency deposited in a local account of a resident individual to a foreign account of the same individual is done, a sworn statement must be submitted expressing that there has not been any sale of securities with ~~local~~ settlement in foreign currency ~~within~~and in a foreign jurisdiction may be carried out, provided that a minimum holding period of 3 business days is observed from the ~~last 5~~date such securities are credited with the relevant depositary. With respect to sales of securities with settlement in foreign currency carried out locally, the minimum holding period will be of 1 business ~~days.~~day to be counted from the date on which such securities were credited with the relevant depositary. These minimum holding periods shall not be applicable in the case of purchases of securities with settlement in foreign currency.

In addition, transfers of securities acquired from foreign depositaries with settlement in Argentine pesos will be processed subject to the compliance with a minimum holding period of 3 business days counted from the crediting thereof with the depositary, unless such crediting results from a primary placement of securities issued by the National Treasury or refers to shares and/or Argentine deposit certificates (CEDEARs) traded on markets regulated by the CNV. Brokers and trading agents must verify compliance with the aforementioned minimum holding period of the securities.

With respect to incoming transfers, General Resolution No. 878/2020 of the CNV provided that securities transferred by foreign depositaries and credited with a central depositary may not be allocated to the settlement of transactions in foreign currency and in a foreign jurisdiction until 3 business days after such crediting into sub-account(s) in the local custodian. If such securities are allocated to the settlement of transactions in foreign currency and in local jurisdiction, the minimum holding period will be 1 business day after such crediting into sub-account(s) in the local custodian.

Foreign Exchange Criminal Regime

Any operation that does not comply with the provisions of the foreign exchange regulations is subject to compliance with the Foreign Exchange Criminal Regime.

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Notwithstanding the above mentioned measures adopted by the current administration, the Central Bank of Argentina and the federal government in the future may impose additional exchange controls that may further impact our ability to transfer funds abroad and may prevent or delay payments that our Argentine subsidiaries are required to make outside Argentina.

Mexico

Exchange Rates

The Mexican peso ~~depreciated 0.27% against the U.S. dollar in 2018,~~ appreciated 4.26% in 2019, depreciated 5.2% in 2020 and depreciated ~~24.8%~~2.6% in the first quarter of ~~2020.~~2021. As of April ~~24, 2020,~~23, 2021, the free-market exchange rate for the purchase of U.S. dollars ~~as reported by the Central Bank of Mexico in the Federal Official Gazette as the rate of payment of obligations denominated in non-Mexican currency payable in Mexico~~ was ~~Ps.24.58~~Ps.19.83 per U.S. dollar.

Exchange Controls

For the last few years, the Mexican government has maintained a policy of non-intervention in the foreign exchange markets, other than conducting periodic auctions for the purchase of U.S. dollars, and has not had in effect any exchange controls (although these controls have existed and have been in effect in the past). We cannot assure you that the Mexican government will maintain its current policies with regard to the Mexican peso or that the Mexican peso will not further depreciate or appreciate significantly in the future.

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

Our business, financial condition and results of operations could be materially and adversely affected if any of the risks described below occur. As a result, the market price of our class A shares could decline, and you could lose all or part of your investment. This annual report also contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements.” Our actual results could differ materially and adversely from those anticipated in these forward-looking statements as a result of certain factors, including the risks facing our company or investments in Latin America and the Caribbean described below and elsewhere in this annual report.

~~Certain~~

Summary of Risk Factors ~~Relating~~

An investment in our Company is subject to a number of risks, including risks related to our business, results of operations and Financial Conditions, risks related to our liquidity and indebtedness and risks related to our industry. The following summarizes some, but not all, of these risks. Please carefully consider all of the information discussed in “Item 3. Key Information—D. Risk Factors” in this annual report for a more thorough description of these and other risks.

Risks Related to Our Business and Operations

•The spread of COVID-19 has materially and adversely affected our business, results of operations and cash flows, and may continue to do so.

•Our rights to operate and franchise McDonald’s-branded restaurants are dependent on the MFAs, the expiration of which would adversely affect our business, results of operations, financial condition and prospects.

•Our business depends on our relationship with McDonald’s and changes in this relationship may adversely affect our business, results of operations and financial condition.

•McDonald’s has the right to acquire all or portions of our business upon the occurrence of certain events and, in the case of a material breach of the MFAs, may acquire our non-public shares or our interests in one or more Territories at 80% of their fair market value.

•The failure to successfully manage our future growth may adversely affect our results of operations.

•We depend on oral agreements with third-party suppliers and distributors for the provision of products that are necessary for our operations.

•Our financial condition and results of operations depend, to a certain extent, on the financial condition of our franchisees and their ability to fulfill their obligations under their franchise agreements.

•We do not have full operational control over the businesses of our franchisees.

•Ownership and leasing of a broad portfolio of real estate exposes us to potential losses and liabilities.

•The success of our business is dependent on the effectiveness of our marketing strategy.

•The inability to attract and retain qualified personnel may affect our growth and results of operations.

•The resignation, termination, permanent incapacity or death of our Executive Chairman could adversely affect our business, results of operations, financial condition and prospects.

•Labor shortages or increased labor costs could harm our results of operations.

•A failure by McDonald’s to protect its intellectual property rights, including its brand image, could harm our results of operations.

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Risks Related to Our Results of Operations and Financial Condition

•We use non-committed lines of credit to partially finance our working capital needs.

•Covenants and events of default in the agreements governing our outstanding indebtedness could limit our ability to undertake certain types of transactions and adversely affect our liquidity.

•Inflation and government measures to curb inflation may adversely affect the economies in the countries where we operate, our business and results of operations.

•Exchange rate fluctuations against the U.S. dollar in the countries in which we operate have negatively affected, and could continue to negatively affect, our results of operations.

•Price controls and other similar regulations in certain countries have affected, and may in the future affect, our results of operations.

•We are subject to significant foreign currency exchange controls and currency devaluation in certain countries in which we operate.

Risks Related to Government Regulation

•If we fail to comply with, or if we become subject to, more onerous government regulations, our business could be adversely affected.

•We could be subject to expropriation or nationalization of our assets and government interference with our business in certain countries in which we operate.

•Non-compliance with anti-terrorism and anti-corruption regulations could harm our reputation and have an adverse effect on our business, results of operations and financial condition.

•Any tax increase or change in tax legislation may adversely affect our results of operations.

•Tax assessments in any of the jurisdictions in which we operate may negatively affect our business and results of operations.

•Litigation and other pressure tactics could expose our business to financial and reputational risk.

•Information technology system failures or interruptions or breaches of our network security may interrupt our operations, exposing us to increased operating costs and to litigation.

•Our insurance may not be sufficient to cover certain losses.

Risks Related to Our Industry

•The food services industry is intensely competitive and we may not be able to continue to compete successfully.

•Increases in commodity prices or other operating costs could harm our operating results.

•Demand for our products may decrease due to changes in consumer preferences or other factors.

•Our investments to enhance the customer experience, including through technology, may not generate the expected returns.

•Our business activity may be negatively affected by disruptions, catastrophic events or health pandemics.

•Restrictions on promotions and advertisements directed at families with children and regulations regarding the nutritional content of children’s meals may harm McDonald’s brand image and our results of operations.

•We are subject to increasingly strict data protection laws, which could increase our costs and adversely affect our business.

•Environmental laws and regulations may affect our business.

•We may be adversely affected by legal actions with respect to our business.

•Unfavorable publicity or a failure to respond effectively to adverse publicity, particularly on social media platforms, could harm our reputation and adversely impact our business and financial performance.

Risks Related to Our Business and Operations in Latin America and the Caribbean

•Our business is subject to the risks generally associated with international business operations.

•Developments and the perception of risk in other countries, especially emerging market countries, may adversely affect business, results, financial conditions and prospects.

•Changes in governmental policies in the Territories could adversely affect our business, results of operations, financial condition and prospects.

•Latin America has experienced, and may continue to experience, adverse economic conditions that have impacted, and may continue to impact, our business, financial condition and results of operations.

•Some of our customers depend on remittances from family members living overseas. Laws, regulations or events that limit such remittances or any changes to United States immigration policy may adversely affect our financial condition and results of operations.

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Risks Related to Our Class A Shares

•Mr. Woods Staton, our Executive Chairman, controls all matters submitted to a shareholder vote, which will limit your ability to influence corporate activities and may adversely affect the market price of our class A shares.

•Sales of substantial amounts of our class A shares in the public market, or the perception that these sales may occur, could cause the market price of our class A shares to decline.

•As a foreign private issuer, we are permitted to, and we will, rely on exemptions from certain NYSE corporate governance standards applicable to U.S. issuers, including the requirement that a majority of an issuer’s directors consist of independent directors. This may afford less protection to holders of our class A shares.

Risks Related to Investing in a British Virgin Islands Company

•We are a British Virgin Islands company and it may be difficult for you to obtain or enforce judgments against us or our executive officers and directors in the United States.

•You may have more difficulty protecting your interests than you would as a shareholder of a U.S. corporation.

•You may not be able to participate in future equity offerings, and you may not receive any value for rights that we may grant.

Risks Related to Our Business and Operations

The spread of COVID-19 has materially and adversely affected our business, results of operations and cash flows, and may continue to do so.

Since mid-March 2020, when the ~~continued~~COVID-19 virus began to spread ~~of COVID-19 has disrupted our~~in Latin America and the Caribbean, operations in all of our ~~markets. Several~~markets were significantly disrupted. Governments at the local, state and/or federal level in all countries in which we operate ~~have declared states of emergency and ordered their citizens to shelter in place in order~~implemented measures intended to stem the spread of COVID-19. AsIn order to comply with these government measures, some of our markets closed all restaurants for a period of time, especially from the ~~date~~end of ~~this annual report,~~March through the middle of April 2020. During that period, the peak percentage of fully-closed restaurants reached approximately 50% of our entire restaurant footprint. Beginning in ~~certain~~the middle of April 2020 and through the end of 2020, while following the operating hours and/or occupancy restrictions imposed by the governments in the markets ~~including Chile, Peru, Ecuador, Martinique, Guadeloupe, French Guiana~~in which we operate, we steadily began re-opening restaurants and ~~Curaçao, we have closed~~were able to resume operating at least one sales channel, such as drive-thru, delivery and/or take out, in nearly all of our restaurants, ~~in accordance with government orders~~as well as, the vast majority of our dessert centers. However, due to the ongoing and ~~restrictions. In other markets, such as Brazil, Argentina, Puerto Rico, Trinidad and Tobago and Colombia, we have taken steps to limit operations based on government guidelines or our assessment~~dynamic nature of the COVID-19 pandemic, additional periods of government-imposed operating ~~environment. These steps have included reducing hours of operation, closing dining rooms and only operating~~restrictions to slow the drive-thru and/or delivery segments. There has also been an increase in unemployment in several countries as businesses close, and we expect discretionary spending by consumers to decline accordingly. As a resultspread of the ~~foregoing, we have experienced a significant decline~~virus are being implemented in ~~sales at our restaurants since mid-March 2020,~~some markets and ~~expect to continue to see lower sales until such time as~~may impact additional markets in the ~~pandemic is brought under control and consumer behavior normalizes. We may also be forced to lower prices in response to lower demand for our products, or we may see~~future. In addition, although our supply chain has not been materially disrupted asby the pandemic to date, any resurgence of the pandemic in one or more markets may lead to disruptions in our supply chain, if our suppliers experience disruption of their operations ~~as a result of~~due to the pandemic.

In some markets, we have also experienced difficulties obtaining gloves, masks and other protective equipment required to operate our restaurants during a pandemic. In addition to reduced sales, we have experienced other losses, such as food spoilage as a result of restaurant closures.

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Moreover, our franchisees began having difficulty meeting rent payments to us during the month of April 2020. In certain markets, including Mexico and Panama, we deferred rent payments for our franchisees for 90 days. In other markets, we began renegotiating rental terms and may receive lower rental payments as a result of such negotiations. Our franchisees also owe us continuing franchise fees, which we in turn owe to McDonald's under the MFAs. We are responsible for paying any ongoing franchise fees to McDonald's regardless of whether our franchisees are able to pay us. McDonald's has agreed to defer all franchise fee payments, whether they are related to company-operated or franchisee-operated restaurants, for March, April, May and June 2020 sales until 2021. If we are unable to pay such franchise fees when they are due, or we have further difficulty meeting our obligations in coming months and are unable to obtain a similar deferral, we will be in default under the MFAs.

While we cannot predict the duration or scope of the COVID-19 pandemic, it has negatively impacted our business and such impact could be material to our financial results, conditions and outlook. Consequently, we are taking measuresorder to mitigate the ~~potential effects~~impact on our ~~Company from the pandemic by preserving~~business, results of operations, financial condition and outlook, we implemented several cash preservation measures including, but not limited to, reducing costs and ~~reducing our~~ expenses, ~~as well as~~limiting capital expenditures and renegotiating terms and conditions with ~~landlords~~lessors and other ~~suppliers.~~suppliers of goods and services. We expect to maintain these cash preservation measures until the operating environment normalizes. In addition, on July 6, 2020, we announced the Board of Directors’ decision to cancel the two remaining cash dividend installments that were to be paid in August and December 2020 and the Board of Directors’ communicated approval of a stock dividend, which was distributed in August 2020.

In addition, McDonald’s granted us a deferral of all royalty payments, due related to sales in March, April, May, June and July 2020 until the first half of 2021. Also, in connection with the COVID-19 pandemic, we ~~have~~ agreed with ~~McDonald's~~McDonald’s to reduce the advertising and promotion spending requirement from 5% to 4% of our gross sales for the full year ~~2020.~~

~~Regarding our liquidity, as of March 31,~~ 2020 (beginning on January 1, 2021 we had drawn $136 million of short-term indebtedness, including $35 million from our committed revolving credit facilities and expect to continue to draw on our available lines as needed and until the COVID-19 pandemic is brought under control. Any unavailability of such lines of credit may also negatively impact our liquidity. In addition, we are required to meet certain financial ratios under our revolving credit facilities. While we expect to be in compliance with such ratios in the first quarter of 2020, we likely will be unable to meet such ratios in subsequent quarters if current conditions persist or worsen and will need to seek an amendment to our facilities or waivers from our lenders. If we are unable to obtain waivers for such non-compliance, we will be in default under our lines of credit and revolving credit facilities. In such event, in the caseresumed spending 5% of our ~~revolving credit facilities, any amounts drawn under such facilities may be declared immediately due~~gross sales on advertising and ~~payable by~~promotion) and approved the ~~relevant lender. In the case~~withdrawal of the non-committed lines of credit, if we have previously drawn any amounts, then such amounts may be immediately due and payable to the relevant lender, subject to the terms of each non-committed line of credit.

As a result of this impact, beginning in the second quarter of 2020 we do not expect to meet certain quarterly financial ratios specified in the MFAs. Although we have requested a waiver from McDonald's for these commitments for all of 2020, we cannot guarantee that McDonald’s will grant us that waiver, or that we will be able to meet our quarterly financial ratios or obtain additional waivers in the future once the COVID-19 pandemic has been brought under control. In addition, we currently have certain letters of credit in place that guarantee our obligations under the MFAs. Although we do not have any amounts outstanding under them at this time, certain of our lenders may terminate these letters of credit if we do not meet certain ratios thereunder or if we are in default under our other indebtedness, among other reasons. Any termination of our letters of credit would also constitute a material breach of our obligations under the MFAs.

Moreover, the spread of COVID-19 has led to disruption and volatility in the financial markets, which is likely to increase our cost of capital and may make it more difficult for us to obtain additional financing. As a result of the foregoing, we have agreed with McDonald’s to withdraw our previously-approved 2020-2022 restaurant opening plan and reinvestment plan, ~~and we do not~~agreeing in place of this obligation to a plan for 2021 only. We expect to ~~finalize a revised 2020-2022~~discuss our 2022 restaurant opening plan ~~at least until~~and reinvestment plan with McDonald’s in the ~~COVID-19 outbreak is under control.~~second half of 2021. If we are unable to meet our commitments under a future plan and we are unable to reach an agreement on the revised terms offor the restaurant opening plan and reinvestment plan or are otherwise unable to obtain a waiver from McDonald’s, we will be in default under the terms of the MFAs. ~~Moreover, any increase~~As part of the approved plan for 2021, McDonald’s agreed to provide us with growth support, which is expected to result in a consolidated effective royalty rate of about 5.3% in 2021. Finally, McDonald’s granted us limited waivers from June 30, 2020 through and including December 31, 2021 as we were not in compliance with the MFAs’ requirement to maintain a minimum fixed charge coverage ratio equal to or greater than 1.50 and a maximum leverage ratio of 4.25. If the COVID-19 pandemic worsens, we may not be able to meet our quarterly financial ratios or obtain additional waivers in the ~~cost~~future.

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We currently have certain letters of credit in place in favor of McDonald’s that guarantee our obligations under the MFAs. The letters of credit were issued by Credit Suisse amounting to $45 million, Itaú Unibanco S.A. (Itaú) amounting to $15 million and JPMorgan amounting to $20 million. These letters of credit contain a limited number of customary affirmative and negative covenants, including a maximum indebtedness to EBITDA ratio of 4.0 for Credit Suisse and Itaú, and 4.5 for JPMorgan. We received waivers from our lenders for any event of default which may have occurred related to compliance with these financial ratio covenants in our letters of credit, which are measured at the end of each quarter, through and including the first quarter of 2021, for Itaú and JPMorgan, and December 31, 2021 for Credit Suisse. Although we do not have any amounts outstanding under these letters of credit at this time, certain of our lenders may terminate these letters of credit if we do not meet certain ratios thereunder in the future or if we are in default under our other indebtedness, among other reasons. If our lenders terminate our letters of credit, we would be in breach of our obligations under the MFAs, if we cannot replace the instrument or use cash as collateral.

Regarding our liquidity, at the beginning of the COVID-19 pandemic, we drew on our revolving credit facilities and short-term lines of credit to stabilize our cash flow and had to obtain waivers for our compliance with financial ratio covenants from our lenders for certain periods. As of December 31, 2020, we had zero balances drawn on our short-term credit lines and were in compliance with the financial ratio covenants under our current revolving credit facility. Should the COVID-19 pandemic worsen, we may need to draw on our available revolving credit facility and short-term credit lines in the future if we are unable to find alternative sources of funding.

Moreover, we benefited from some government measures enacted in Latin America and the Caribbean to help companies deal with the economic fallout of the COVID-19 pandemic, including modification of existing regulations to reduce workdays or tax costs, tax payment deferral 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 our consolidated statement of (loss) income. We meet all the terms and conditions required by the governments to maintain the benefits granted. Although as of December 31, 2020, some of the government measures remained in force, we cannot predict the extent or duration of current or forthcoming programs. The end of government support and a sustained growth of unemployment and under-employment will result in a decline in consumption that could negatively impact our ~~other capital expenditure projects in process in 2020.~~sales.

IfIn order to help our franchisees mitigate the negative impacts of the COVID-19 pandemic, ~~become other than temporary,~~ we ~~may~~deferred a portion of franchisee rent payments in the six markets in which we have franchised restaurants. In addition, our franchisees also ~~need~~benefitted from the deferral of royalty payments due, related to ~~consider it~~sales for March, April, May, June and July 2020, as ~~an indicator~~well as the reduction of ~~impairment~~the marketing and promotion spending requirement from 5% to 4% of their gross sales for the full year 2020, granted by McDonald’s.

Although vaccination has started in ~~future quarters, which could further~~the region, providing a foreseeable transition to normalcy, the COVID-19 virus is still spreading aggressively and continues to negatively impact our business and such impact could be material to our financial ~~condition.~~

~~The duration~~results, conditions and ~~scope~~outlook. If we do not achieve profitability, our business and our ability to repay our financial obligations will be adversely affected. Moreover, if volatility in the financial markets continues, our cost of ~~the COVID-19 outbreak cannot be predicted at this time,~~capital could increase and ~~we expect~~may make it more difficult for us to ~~continue to experience these significant disruptions until the outbreak is brought under control.~~

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obtain additional financing if needed.

Our rights to operate and franchise McDonald’s-branded restaurants are dependent on the MFAs, the expiration of which would adversely affect our business, results of operations, financial condition and prospects.

Our rights to operate and franchise McDonald’s-branded restaurants in the Territories, and therefore our ability to conduct our business, derive exclusively from the rights granted to us by McDonald’s in two MFAs through 2027. As a result, our ability to continue operating in our current capacity is dependent on the renewal of our contractual relationship with McDonald’s.

McDonald’s has the right, in its reasonable business judgment based on our satisfaction of certain criteria set forth in the MFAs, to grant us an option to extend the term of the MFAs with respect to all Territories for an additional period of 10 years after the expiration in 2027 of the initial term of the MFAs upon such terms as McDonald’s may determine. Pursuant to the MFAs, McDonald’s will determine whether to grant us the option to renew between August 2020 and August 2024. If McDonald’s grants us the option to renew and we elect to exercise the option, then we and McDonald’s will amend the MFAs to reflect the terms of such renewal option, as appropriate. We cannot assure you that McDonald’s will grant us an option to extend the term of the MFAs or that the terms of any renewal option will be acceptable to us, will be similar to those contained in the MFAs or will not be less favorable to us than those contained in the MFAs.

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If McDonald’s elects not to grant us the renewal option or we elect not to exercise the renewal option, we will have a three-year period in which to solicit offers for our business, which offers would be subject to McDonald’s approval. Upon the expiration of the MFAs, McDonald’s has the option to acquire all of our non-public shares and all of the equity interests of our wholly owned subsidiary Arcos Dourados Comercio de Alimentos ~~Ltda.~~S.A., the master franchisee of McDonald’s for Brazil, at their fair market value.

In the event McDonald’s does not exercise its option to acquire LatAm, LLC and Arcos Dourados Comercio de Alimentos ~~Ltda.~~S.A., the MFAs would expire and we would be required to cease operating McDonald’s-branded restaurants, identifying our business with McDonald’s and using any of McDonald’s intellectual property. Although we would retain our real estate and infrastructure, the MFAs prohibit us from engaging in certain competitive businesses, including Burger King, Subway, KFC or any other quick-service restaurant, or QSR, business, or duplicating the McDonald’s system at another restaurant or business during the two-year period following the expiration of the MFAs. As the McDonald’s brand and our relationship with McDonald’s are among our primary competitive strengths, the expiration of the MFAs for any of the reasons described above would materially and adversely affect our business, results of operations, financial condition and prospects.

Our business depends on our relationship with McDonald’s and changes in this relationship may adversely affect our business, results of operations and financial condition.

Our rights to operate and franchise McDonald’s-branded restaurants in the Territories, and therefore our ability to conduct our business, derive exclusively from the rights granted to us by McDonald’s in the MFAs. As a result, our revenues are dependent on the continued existence of our contractual relationship with McDonald’s.

Pursuant to the MFAs, McDonald’s has the ability to exercise substantial influence over the conduct of our business. For example, under the MFAs, we are not permitted to operate any other QSR chains, we must comply with McDonald’s high quality standards, we must own and operate at least 50% of all McDonald’s-branded restaurants in each of the Territories, we must maintain certain guarantees in favor of McDonald’s, including a standby letter of credit (or other similar financial guarantee acceptable to McDonald’s) in an amount of $80.0 million, to secure our payment obligations under the MFAs and related credit documents, we cannot incur debt above certain financial ratios, we cannot transfer the equity interests of our subsidiaries, any significant portion of their assets or certain of the real estate properties that we own without McDonald’s consent, and McDonald’s has the right to approve the appointment of our chief executive officer and chief operating officer. In addition, the MFAs require us to reinvest a significant amount of money, including through reimaging our existing restaurants, opening new restaurants and advertising, which plans McDonald’s has the right to approve. As a result of the business disruptions caused by COVID-19 ~~outbreak,~~pandemic, we ~~have~~ agreed with McDonald’s to withdraw our previously-approved 2020-2022 restaurant opening plan and reinvestment plan. On December 18, 2020, we reached an agreement with McDonald’s for new restaurant openings and reinvestment capital expenditures in 2021. We expect to discuss our 2022 restaurant opening plan and ~~we do not expect to finalize a revised 2020-2022~~reinvestment plan ~~at least until~~with McDonald’s in the ~~COVID-19 outbreak is under control.~~second half of 2021. Also in connection with the COVID-19 ~~outbreak, we have agreed with McDonald's~~pandemic, McDonald’s granted us a deferral of royalty payments due, related to ~~reduce~~our gross sales in March, April, May, June and July 2020, until 2021, as well as a reduction of the advertising and promotion spending requirement from 5% to 4% of our gross sales for the full year 2020. In addition to using our cash flow from operations, we may need to incur additional indebtedness in order to finance future commitments, which could adversely affect our financial condition. Moreover, we may not be able to obtain this additional indebtedness on favorable terms, or at all. Failure to comply with our future commitments could constitute a material breach of the MFAs and may lead to a termination by McDonald’s of the MFAs. McDonald’s Corporation had also previously agreed to provide growth support, which we planned to use to support our restaurant opening plan and reinvestment plan for the 2020-2022 period. Until we are able to finalize a revised 2020-2022 restaurant opening plan and reinvestment plan, we can make no assurances related to receiving growth support for 2020-2022.

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Notwithstanding the foregoing, McDonald’s has no obligation to fund our operations. In addition, McDonald’s does not guarantee any of our financial obligations, including trade payables or outstanding indebtedness, and has no obligation to do so.

If the terms of the MFAs excessively restrict our ability to operate our business or if we are unable to satisfy our restaurant opening and reinvestment commitments under the MFAs, our business, results of operations and financial condition would be materially and adversely affected.

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McDonald’s has the right to acquire all or portions of our business upon the occurrence of certain events and, in the case of a material breach of the MFAs, may acquire our non-public shares or our interests in one or more Territories at 80% of their fair market value.

Pursuant to the MFAs, McDonald’s has the right to acquire our non-public shares or our interests in one or more Territories upon the occurrence of certain events, including the death or permanent incapacity of our controlling shareholder or a material breach of the MFAs. In the event McDonald’s were to exercise its right to acquire all of our non-public shares, McDonald’s would become our controlling shareholder.

McDonald’s has the option to acquire all, but not less than all, of our non-public shares at 100% of their fair market value during the twelve-month period following the eighteen-month anniversary of the death or permanent incapacity of Mr. Woods Staton, our Executive Chairman and controlling shareholder. In addition, if there is a material breach that relates to one or more Territories in which there are at least 100 restaurants in operation, McDonald’s has the right either to acquire all of our non-public shares or our interests in our subsidiaries in such Territory or Territories. By contrast, if the initial material breach of the MFAs affects or is attributable to any of the Territories in which there are less than 100 restaurants in operation, McDonald’s only has the right to acquire the equity interests of any of our subsidiaries in the relevant Territory. For example, since we have more than 100 restaurants in Mexico, if a Mexican subsidiary were to materially breach the MFA, McDonald’s would have the right either to acquire our entire business throughout Latin America and the Caribbean or just our Mexican operations, whereas upon a similar breach by our Ecuadorean subsidiary, which has less than 100 restaurants in operation, McDonald’s would only have the right to acquire our interests in our operations in Ecuador.

McDonald’s was granted a perfected security interest in the equity interests of LatAm, LLC, Arcos Dourados Comercio de Alimentos ~~Ltda.~~S.A. and certain of their subsidiaries to protect this right. In the event this right is exercised as a result of a material breach of the MFAs, the amount to be paid by McDonald’s would be equal to 80% of the fair market value of the acquired equity interests. If McDonald’s exercises its right to acquire our interests in one or more Territories as a result of a material breach, our business, results of operations and financial condition would be materially and adversely affected. See “Item 10. Additional Information—C. Material Contracts—The MFAs—Termination” for more details about fair market value calculation.

The failure to successfully manage our future growth may adversely affect our results of operations.

Our business has grown significantly since the Acquisition, largely due to the opening of new restaurants in existing and new markets within the Territories, and also from an increase in comparable store sales. Our total number of restaurant locations has increased from 1,569 at the date of the Acquisition to ~~2,293~~2,236 restaurants as of December 31, ~~2019.~~2020.

Our growth is, to a certain extent, dependent on new restaurant openings and therefore may not be constant from period to period; it may accelerate or decelerate in response to certain factors. There are many obstacles to opening new restaurants, including determining the availability of desirable locations, securing reliable suppliers, hiring and training new personnel and negotiating acceptable lease terms, and, in times of adverse economic conditions, franchisees may be more reluctant to provide the investment required to open new restaurants. In addition, our growth in comparable store sales is dependent on continued economic growth in the countries in which we operate as well as our ability to continue to predict and satisfy changing consumer ~~preferences. In particular, we expect both new restaurant openings~~preferences and ~~growth in comparable store sales~~ to ~~be negatively affected~~manage through other external pressures, including global pandemics such as ~~a result of~~ the ~~novel~~ coronavirus (COVID-19) ~~outbreak.~~pandemic. See “—The spread of COVID-19 has materially and adversely affected our business, results of operations and cash flows, and may continue to do so.”

We plan our capital expenditures on an annual basis, taking into account historical information, regional economic trends, restaurant opening and reimaging plans, site availability and the investment requirements of the MFAs in order to maximize our returns on invested capital. The success of our investment plan may, however, be harmed by factors outside our control, such as changes in macroeconomic conditions, including as a result of the COVID-19 outbreak, changes in demand and construction difficulties that could jeopardize our investment returns and our future results and financial condition.

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We depend on oral agreements with third-party suppliers and distributors for the provision of products that are necessary for our operations.

Supply chain management is an important element of our success and a crucial factor in optimizing our profitability. We use McDonald’s centralized supply chain management model, which relies on approved third-party suppliers and distributors for goods, and we generally use several suppliers to satisfy our needs for goods. This system encompasses selecting and developing suppliers of core products—beef, chicken, buns, produce, cheese, dairy mixes, beverages and toppings—who are able to comply with McDonald’s high quality standards and establishing sustainable relationships with these suppliers.

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McDonald’s standards include cleanliness, product consistency and timeliness as well as commitments to follow internationally recognized manufacturing practices, to meet or exceed all local food regulations and to comply with our Hazard Analysis Critical Control Plan, a systematic approach to food safety that emphasizes protection within the processing facility, rather than detection, through analysis, inspection and follow-up.

Our 3538 largest suppliers account for approximately ~~78%~~75% of our purchases excluding Venezuela. Very few of our suppliers have entered into written contracts with us as we only have pricing protocols with a vast majority of them. Our supplier approval process is thorough and lengthy in order to ensure compliance with McDonald’s high quality standards. We therefore tend to develop strong relationships with approved suppliers and, given our importance to them, have found that pricing protocols with them are generally enough to ensure a reliable supply of quality products. While we source our supplies from many approved suppliers in Latin America and the Caribbean, thereby reducing our dependence on any one supplier, the informal nature of the majority of our relationships with suppliers means that we may not be assured of long-term or reliable supplies of products from those suppliers.

In addition, certain supplies, such as beef, must often be locally sourced due to restrictions on their importation. In light of these restrictions, as well as the MFAs’ requirement to purchase certain core supplies from approved suppliers, we may not be able to quickly find alternate or additional supplies in the event a supplier is unable to meet our orders.

If our suppliers fail to provide us with products in a timely manner due to unanticipated demand, production or distribution problems, financial distress or shortages, if our suppliers decide to terminate their relationship with us or if McDonald’s determines that any product or service offered by an approved supplier is not in compliance with its standards and we are obligated to terminate our relationship with such supplier, we may have difficulty finding appropriate or compliant replacement suppliers. As a result, we may face inventory shortages that could negatively affect our operations.

Our financial condition and results of operations depend, to a certain extent, on the financial condition of our franchisees and their ability to fulfill their obligations under their franchise agreements.

As of December 31, ~~2019, 31.1%~~2020, 29.5% of our restaurants were franchised. Under our franchise agreements, we receive monthly payments which are, in most cases, the greater of a fixed rent or a certain percentage of the franchisee’s gross sales. Franchisees are independent operators with whom we have franchise agreements. We typically own or lease the real estate upon which franchisees’ restaurants are located and franchisees are required to follow our operating manual that specifies items such as menu choices, permitted advertising, equipment, food handling procedures, product quality and approved suppliers. Our operating results depend to a certain extent on the restaurant profitability and financial viability of our franchisees. The concurrent failure by a significant number of franchisees to meet their financial obligations to us could jeopardize our ability to meet our obligations. As a result of the COVID-19 pandemic, we expect ~~many~~some of our franchisees to have difficulty meeting their financial obligations to us. ~~We are also deferring~~As of the date hereof, franchisees have already resumed making rent payments ~~for 90 days~~to us in ~~certain of our markets and are in the process of renegotiating rental terms in other markets as a result~~almost all of the ~~pandemic.~~six markets where we have franchisees. See “—The spread of COVID-19 has materially and adversely affected our business, results of operations and cash flows, and may continue to do so.”

We are liable for our franchisees’ monthly payment of a continuing franchise fee to McDonald’s, which represents a percentage of those franchised restaurants’ gross sales. To the extent that our franchisees fail to pay this fee in full, we are responsible for any ~~shortfall.~~shortfall under the MFAs. As such, the concurrent failure by a significant number of franchisees to pay their continuing franchise fees could have a material adverse effect on our results of operations and financial condition.

~~Table~~ McDonald’s agreed to defer all franchise fee payments, whether they are related to company-operated or franchisee operated restaurants, for March, April, May, June and July 2020 sales until 2021. As of ~~Contents~~

the date hereof, we have paid the deferred franchise fee payments relative to March, April, May and June 2020. We expect to pay the deferred franchise fee relative to July 2020 in early May 2021. If we are unable to pay such franchise fees when they are due, or we have further difficulty meeting our obligations in the coming months and McDonald’s does not provide additional deferrals or waivers, we will be in default under the MFAs.

We do not have full operational control over the businesses of our franchisees.

We are dependent on franchisees to maintain McDonald’s quality, service and cleanliness standards, and their failure to do so could materially affect the McDonald’s brand and harm our future growth. Although we exercise significant influence over franchisees through the franchise agreements, franchisees have some flexibility in their operations, including the ability to set prices for our products in their restaurants, hire employees and select certain service providers. In addition, it is possible that some franchisees may not operate their restaurants in accordance with our quality, service, cleanliness, health or product standards. Although we take corrective measures if franchisees fail to maintain McDonald’s quality, service and cleanliness standards, we may not be able to identify and rectify problems with sufficient speed and, as a result, our image and operating results may be negatively affected.

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Ownership and leasing of a broad portfolio of real estate exposes us to potential losses and liabilities.

As of December 31, ~~2019,~~2020, we owned the land for ~~494~~489 of our ~~2,293~~2,236 restaurants and the buildings for all but 119 of our restaurants. The value of these assets could decrease or rental costs could increase due to changes in local demographics, the investment climate and increases in taxes.

The majority of our restaurant locations, or those operated by our franchisees, are subject to long-term leases. We may not be able to renew leases on acceptable terms or at all, in which case we would have to find new locations to lease or be forced to close the restaurants. If we are able to negotiate a new lease at an existing location, we may be subject to a rent increase. In addition, current restaurant locations may become unattractive due to changes in neighborhood demographics or economic conditions, which may result in reduced sales at these locations.

The success of our business is dependent on the effectiveness of our marketing strategy.

Market awareness is essential to our continued growth and financial success. Pursuant to the MFAs, we create, develop and coordinate marketing plans and promotional activities throughout the Territories, and franchisees contribute a percentage of their gross sales to our marketing plan. In addition, we are required under the MFAs to spend at least 5% of our sales on advertising and promotional activities in the majority of our markets. In connection with the COVID-19 outbreak, we have agreed with ~~McDonald's~~McDonald’s to reduce this spending requirement from 5% to 4% of our gross sales for the full year 2020. Beginning on January 1, 2021, we resumed spending 5% of our gross sales on advertising and promotion. Pursuant to the MFAs, McDonald’s has the right to review and approve our marketing plans in advance and may request that we cease using the materials or promotional activities at any time if McDonald’s determines that they are detrimental to its brand image. We also participate in global and regional marketing activities undertaken by McDonald’s and pay McDonald’s approximately ~~0.1%~~0.1% of our sales in order to fund such activities.

If our advertising programs are not effective, or if our competitors begin spending significantly more on advertising than we do, we may be unable to attract new customers or existing customers may not return to our restaurants and our operating results may be negatively affected.

~~We use non-committed lines of credit to partially finance our working capital needs.~~

We use non-committed lines of credit to partially finance our working capital needs. In response to the COVID-19 pandemic and related disruption in regional and global economic activity, as of March 31, 2020, we had drawn $101 million of short-term indebtedness from these lines of credit, and we expect to continue to draw on our available lines as needed and until the COVID-19 pandemic is brought under control. Given the nature of these lines of credit, they could be withdrawn and no longer be available to us, or their terms, including the interest rate, could change to make the terms no longer acceptable to us. The availability of these lines of credit depends on the level of liquidity in financial markets, which can vary based on events outside of our control, including financial or credit crises. Any inability to draw upon our non-committed lines of credit could have an adverse effect on our working capital, financial condition and results of operations.

~~Covenants and events of default in the agreements governing our outstanding indebtedness could limit our ability to undertake certain types of transactions and adversely affect our liquidity.~~

As of December 31, 2019, we had $595.8 million in total outstanding indebtedness, consisting of $626.8 million in long-term debt, $13.3 million in short-term debt and $(44.3) million related to the fair market value net of our outstanding derivative instruments. The agreements governing our outstanding indebtedness contain covenants and events of default that may limit our financial flexibility and ability to undertake certain types of transactions. For instance, we are subject to negative covenants that restrict some of our activities, including restrictions on:

~~creating liens;~~

~~paying dividends;~~

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~~maintaining certain leverage ratios;~~

~~entering into sale and lease-back transactions; and~~

~~consolidating, merging or transferring assets.~~

If we fail to satisfy the covenants set forth in these agreements or another event of default occurs under the agreements, our outstanding indebtedness under the agreements could become immediately due and payable. In addition, we are required to meet certain financial ratios under our line of credit and revolving credit facilities. While we expect to be in compliance with such ratios in the first quarter of 2020, we likely will be unable to meet such ratios in subsequent quarters if current conditions persist or worsen and will need to seek an amendment to our facilities or waivers from our lenders. If we are unable to obtain waivers for such non-compliance, we will be in default under our line of credit and revolving credit facilities. In the case of our revolving credit facilities, any amounts drawn under such facilities may be declared to be immediately due and payable by the relevant lender, who may also terminate its obligation to provide loans under such agreements. In the case of our non-committed line of credit, if we have previously drawn any amount, then such amounts may be immediately due and payable to the relevant lender, subject to the terms of each non-committed line of credit. If our outstanding indebtedness becomes immediately due and payable and we do not have sufficient cash on hand to pay all amounts due, we could be required to sell assets, to refinance all or a portion of our indebtedness or to obtain additional financing. Refinancing may not be possible and additional financing may not be available on commercially acceptable terms, or at all.

Uncertainty relating to the calculation of LIBOR and other reference rates and their potential discontinuance may materially adversely affect the value of our indebtedness and as a result our business, results of operations, financial condition and prospects.

As of December 31, 2019, we had $2.5 million outstanding indebtedness with third parties pursuant to our revolving credit facilities, which are tied to LIBOR. In recent years, national and international regulators and law enforcement agencies have conducted investigations into a number of rates or indices, such as LIBOR, which are deemed to be “reference rates.” Actions by such regulators and law enforcement agencies may result in changes to the manner in which certain reference rates are determined, their discontinuance, or the establishment of alternative reference rates. In particular, on July 27, 2017, the Chief Executive of the U.K. Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. Such announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Notwithstanding the foregoing, it appears highly likely that LIBOR will be discontinued or modified by 2021.

At this time, it is not possible to predict the effect that these developments, any discontinuance, modification or other reforms to LIBOR or any other reference rate, or the establishment of alternative reference rates may have on LIBOR, other benchmarks or floating rate debt securities, including the floating rate notes. Uncertainty as to the nature of such potential discontinuance, modification, alternative reference rates or other reforms may materially adversely affect the value of certain of our credit agreements that are tied to LIBOR. Furthermore, the use of alternative reference rates or other reforms could cause the interest rate calculated for such indebtedness to be materially different than expected. Any of the foregoing could have a material adverse effect on our business, results of operations, financial condition and prospects.

~~Our~~ inability to attract and retain qualified personnel may affect our growth and results of operations.

We have a strong management team with broad experience in human resources, product development, supply chain management, operations, finance, marketing, real estate development and training. Our growth plans place substantial demands on our management team, and future growth could increase those demands. In addition, pursuant to the MFAs, McDonald’s is entitled to approve the appointment of our chief executive officer and chief operating officer. Our ability to manage future growth will depend on the adequacy of our resources and our ability to continue to identify, attract and retain qualified personnel. Failure to do so could have a material adverse effect on our business, financial condition and results of operations.

Also, the success of our operations depends in part on our ability to attract and retain qualified regional and restaurant managers and general staff. If we are unable to recruit and retain our employees, or fail to motivate them to provide quality food and service, our image, operations and growth could be adversely affected.

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The resignation, termination, permanent incapacity or death of our Executive Chairman could adversely affect our business, results of operations, financial condition and prospects.

Due to Mr. Woods Staton’s unique experience and leadership capabilities, it would be difficult to find a suitable successor for him if he were to cease serving as Executive Chairman for any reason. In the event of Mr. Woods Staton’s death or permanent incapacity, pursuant to the MFA, McDonald’s has the right to acquire all of our non-public shares during the twelve-month period beginning on the eighteen-month anniversary of his death or incapacity.

In addition, in the event that we need to appoint a new CEO, pursuant to the MFA, we must submit to McDonald’s the name of such proposed successor for ~~McDonald’s~~ approval. If we and McDonald’s have not agreed upon a successor CEO after six months, McDonald’s may designate a temporary CEO in its sole discretion pending our submission of information relating to a further candidate and McDonald’s approval of that candidate. A delay in finding a suitable successor CEO could adversely affect our business, results of operations, financial condition and prospects.

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Labor shortages or increased labor costs could harm our results of operations.

Our operations depend in part on our ability to attract and retain qualified restaurant managers and crew. While the turnover rate varies significantly among categories of employees, due to the nature of our business we traditionally experience a high rate of turnover among our crew and we may not be able to replace departing crew with equally qualified or motivated staff.

As of December 31, ~~2019,~~2020, we had ~~80,855~~ 73,438 employees in our Company-operated restaurants and staff. Controlling labor costs is critical to our results of operations, and we closely monitor those costs. Some of our employees are paid minimum wages; any increases in minimum wages or changes to labor regulations in the Territories could increase our labor costs. For example, during ~~2019,~~2020, Venezuela implemented three increases in the minimum wage. In addition, in December 2019, the government of Argentina enacted a decree establishing that employees dismissed without cause in the following six months ~~are~~were entitled to double indemnification from employers in an effort to mitigate the impact of economic difficulties facing the country at the time and inhas since been amended to only apply on a case-by-case basis with a maximum amount of AR$500,000. In April 2020, amid the COVID-19 outbreak, the Argentine government prohibited dismissals with or without cause under the argument of force majeure or lack of/reduction of work not imputable to the employer until ~~June 30, 2020~~May 31, 2021 (after several extensions) (this last cause also applies for temporary suspensions). These or similar regulations, if adopted, may have an adverse impact on our results of operations. Competition for employees could also cause us to pay higher wages.

We are also impacted by the costs and other effects of compliance with regulations affecting our workforce. These regulations are increasingly focused on employment issues, including wage and hour, healthcare, employee safety and other employee benefits and workplace practices. Claims of non-compliance with these regulations could result in liability and expense to us. Our potential exposure to reputational and other harm regarding our workplace practices or conditions or those of our franchisees or suppliers, including those giving rise to claims of sexual harassment or discrimination (or perceptions thereof) could have a negative impact on consumer perceptions of us and our business. In 2019, two of our restaurant employees in Peru died in a workplace accident at one of our restaurants. This accident is under investigation by Peruvian authorities, and while we do not expect a material impact from this event, any future workplace accidents could have a material adverse effect on our business, financial condition and results of operations.

Some of our employees are represented by unions and are working under agreements that are subject to annual salary negotiations. We cannot guarantee the results of any such collective bargaining negotiations or whether any such negotiations will result in a work stoppage. In addition, employees may strike for reasons unrelated to our union arrangements. Any future work stoppage could, depending on the affected operations and the length of the work stoppage, have a material adverse effect on our financial position, results of operations or cash flows.

Additionally, the Company benefited from some government measures enacted in Latin America and the Caribbean to help companies deal with the economic fallout of the COVID-19 pandemic, including modification of existing regulations to reduce workdays or tax costs, tax payment deferral 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 consolidated statement of (loss) income. The Company meets all the terms and conditions required by the governments to maintain the benefits granted. Although as of December 31, 2020, some of the government measures continued in force, the Company cannot predict the extent or duration of current or forthcoming programs.

A failure by McDonald’s to protect its intellectual property rights, including its brand image, could harm our results of operations.

The profitability of our business depends in part on consumers’ perception of the strength of the McDonald’s brand. Under the terms of the MFAs, we are required to assist McDonald’s with protecting its intellectual property rights in the Territories. Nevertheless, any failure by McDonald’s to protect its proprietary rights in the Territories or elsewhere could harm its brand image, which could affect our competitive position and our results of operations.

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Under the MFAs, we may use, and grant rights to franchisees to use, McDonald’s intellectual property in connection with the development, operation, promotion, marketing and management of our restaurants. McDonald’s has reserved the right to use, or grant licenses to use, its intellectual property in Latin America and the Caribbean for all other purposes, including to sell, promote or license the sale of products using its intellectual property. If we or McDonald’s fail to identify unauthorized filings of McDonald’s trademarks and imitations thereof, and we or McDonald’s do not adequately protect McDonald’s trademarks and copyrights, the infringement of McDonald’s intellectual property rights by others may cause harm to McDonald’s brand image and decrease our sales.

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Risks Related to Our Results of Operations and Financial Condition

We use non-committed lines of credit to partially finance our working capital needs.

We use non-committed lines of credit to partially finance our working capital needs. In response to the COVID-19 pandemic and related disruption in regional and global economic activity, we drew on our available lines as needed, although our cash flow had stabilized by the second quarter of 2020, and we did not have any amounts outstanding under our credit lines as of December 31, 2020. Given the nature of these lines of credit, they could be withdrawn and no longer be available to us, or their terms, including the interest rate, could change to make the terms no longer acceptable to us. The availability of these lines of credit depends on the level of liquidity in financial markets, which can vary based on events outside of our control, including financial or credit crises. Any inability to draw upon our non-committed lines of credit could have an adverse effect on our working capital, financial condition and results of operations.

Covenants and events of default in the agreements governing our outstanding indebtedness could limit our ability to undertake certain types of transactions and adversely affect our liquidity.

As of December 31, 2020, we had $673.2 million in total outstanding indebtedness, consisting of $776.6 million in long-term debt net of $103.3 million related to the fair market value of our outstanding derivative instruments. The agreements governing our outstanding indebtedness contain covenants and events of default that may limit our financial flexibility and ability to undertake certain types of transactions. For instance, we are subject to negative covenants that restrict some of our activities, including restrictions on:

•creating liens;

•paying dividends;

•maintaining certain leverage ratios;

•entering into sale and lease-back transactions; and

•consolidating, merging or transferring assets.

If we fail to satisfy the covenants set forth in these agreements or another event of default occurs under the agreements, our outstanding indebtedness under the agreements could become immediately due and payable. In addition, we are required to meet certain financial ratios under our lines of credit and revolving credit facilities. We were not in compliance with our financial ratios during certain periods in 2020 and received waivers from our lenders. We repaid amounts outstanding under our revolving credit facility with BofA and our lines of credit and refinanced our revolving credit facility with JPMorgan during 2020, and we are currently in compliance with our ratios under our existing agreements. However, if we are unable to comply with such ratios or obtain waivers for non-compliance in the future, we will be in default under our line of credit and revolving credit facility. In the case of our revolving credit facility, any amounts drawn under such facility may be declared to be immediately due and payable by the relevant lender, who may also terminate its obligation to provide loans under such agreement if we are not in compliance with our ratios under the agreement. In the case of our non-committed lines of credit, if we have previously drawn any amount, then such amounts may be immediately due and payable to the relevant lender, subject to the terms of each non-committed line of credit. If our outstanding indebtedness becomes immediately due and payable and we do not have sufficient cash on hand to pay all amounts due, we could be required to sell assets, to refinance all or a portion of our indebtedness or to obtain additional financing. Refinancing may not be possible and additional financing may not be available on commercially acceptable terms, or at all.

Inflation and government measures to curb inflation may adversely affect the economies in the countries where we operate, our business and results of operations.

Many of the countries in which we operate, have experienced, or are currently experiencing, high rates of inflation. For example, as of July 1, 2018, Argentina is considered highly inflationary under U.S. GAAP. In addition, Venezuela has been considered highly inflationary under U.S. GAAP since 2010. Although inflation rates in many of the other countries in which we operate have been relatively low in the recent past, we cannot assure you that this trend will continue. The measures taken by the governments of these countries to control inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting the availability of credit and retarding economic growth. Inflation, measures to combat inflation and public speculation about possible additional actions have also contributed materially to economic uncertainty in many of these countries and to heightened volatility in their securities markets. Periods of higher inflation may also slow the growth rate of local economies that could lead to reduced demand for our core products and decreased sales. Inflation is also likely to increase some of our costs and expenses, which we may not be able to fully pass on to our customers or offset with other efficiencies, which could adversely affect our operating margins and operating income.

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Exchange rate fluctuations against the U.S. dollar in the countries in which we operate have negatively affected, and could continue to negatively affect, our results of operations.

We are exposed to exchange rate risk in relation to the US dollar. While substantially all of our income is denominated in the local currencies of the countries in which we operate, our supply chain management involves the importation of various products, and some of our imports, as well as some of our capital expenditures and a significant portion of our long-term debt, are denominated in U.S. dollars. As a result, the decrease in the value of the local currencies of the countries in which we operate as compared to the U.S. dollar has increased our costs, and any further decrease in the value of such currencies will further increase our costs. Although we maintain a hedging strategy to attempt to mitigate some of our exchange rate risk, our hedging strategy may not be successful or may not fully offset our losses relating to exchange rate fluctuations.

As a result, fluctuations in the value of the U.S. dollar with respect to the various currencies of the countries in which we operate or in U.S. dollar interest rates could adversely impact our net income, results of operations and financial condition.

Price controls and other similar regulations in certain countries have affected, and may in the future affect, our results of operations.

Certain countries in which we conduct operations have imposed, and may continue to impose, price controls that restrict our ability, and the ability of our franchisees, to adjust the prices of our products. For example, there are currently certain price control regulations in force in Argentina. Although the industry in which we operate is not yet subject to these regulations, it is not clear whether the current administration will apply or enforce price controls in the future on the industry in which we operate.

Moreover, the Venezuelan market is subject to a regulation establishing a maximum profit margin for companies and maximum prices for certain goods and services. Although we managed to navigate the negative impact of the price controls on our operations from 2013 through 2020, the existence of such laws and regulations continues to present a risk to our business. We continue to closely monitor developments in this dynamic environment. See “Item 4. Information on the Company—B. Business Overview—Regulation.”

The imposition and enforcement of these and similar restrictions in the future may place downward pressure on the prices at which our products are sold and may limit the growth of our revenue. We cannot assure you that existing price controls will not be enforced or become more stringent, or that new price controls will not be imposed in the future, or that any such controls may not have an adverse effect on our business. Our inability to control the prices of our products could have an adverse effect on our results of operations.

We are subject to significant foreign currency exchange controls and currency devaluation in certain countries in which we operate.

Certain Latin American economies have experienced shortages in foreign currency reserves and their respective governments have adopted restrictions on the ability to transfer funds out of the country and convert local currencies into U.S. dollars. This may increase our costs and limit our ability to convert local currency into U.S. dollars and transfer funds out of certain countries, including for the purchase of dollar-denominated inputs, the payment of dividends or the payment of interest or principal on our outstanding debt. In the event that any of our subsidiaries are unable to transfer funds to us due to currency restrictions, we are responsible for any resulting shortfall.

For example, in 2020, our subsidiaries in Argentina represented 10% of our total revenues. Although the exchange controls had been relaxed, since September 2019, the Argentine government has tightened restrictions on capital flows and imposed exchange controls and transfer restrictions, substantially limiting the ability of companies to retain foreign currency or make payments outside of Argentina. Furthermore, the Central Bank of Argentina implemented regulations requiring its prior approval for certain foreign exchange transactions otherwise authorized to be carried out under the applicable regulations, such as dividend payments or repayment of principal of inter-company loans as well as certain imports of goods. As a consequence of these exchange controls, the spread between the official exchange rate and other exchange rates resulting implicitly from certain securities transactions (usually effected to obtain U.S. dollars) has broadened significantly, reaching a value of approximately 64% above the official exchange rate as of April 23, 2021. The implementation of the above-mentioned measures could impact our ability to transfer funds outside of Argentina and may prevent or delay payments that our Argentine subsidiaries are required to make outside Argentina. As a result, if we are prohibited from transferring funds out of Argentina, or if we become subject to similar restrictions in other countries in which we operate, our results of operations and financial condition could be materially adversely affected.

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In addition, the continuing devaluation of the Argentine peso since the end of 2015 and the Venezuelan bolivar since 2010 has led to higher inflation levels, has significantly reduced competitiveness, real wages and consumption and has had a negative impact on businesses whose success is dependent on domestic market demand and supplies payable in foreign currency.

Further currency devaluations in any of the countries in which we operate could have a material adverse effect on our results of operations and financial condition. See “Item 3. Key Information—A. Selected Financial Data—Exchange Rates and Exchange Controls.”

Risks Related to Government Regulation

If we fail to comply with, or if we become subject to, more onerous government regulations, our business could be adversely affected.

We are subject to various federal, state, provincial and municipal laws and regulations in the countries in which we operate, including those related to the food services industry, health and safety standards, importation of goods and services, marketing and promotional activities, nutritional labeling, zoning and land use, environmental standards and consumer protection. We strive to abide by and maintain compliance with these laws and regulations. The imposition of new laws or regulations, including potential trade barriers, may increase our operating costs or impose restrictions on our operations, which could have an adverse impact on our financial condition.

For example, Argentine regulations require us to seek permission from the Argentine authorities prior to importing certain goods or make payments in foreign currency for the import of such goods. Although these regulations do not currently affect us, they may in the future prevent or delay the receipt of goods that we require for our operations, or increase the costs associated with obtaining those goods, and therefore have an adverse impact on our business, results of operations or financial condition. Additionally, in 2017, Venezuela enacted the Productive Foreign Investments Constitutional Act, which replaced the Foreign Investment Act of 2014. This law establishes the requirements and limitations for the transfer of dividends and repatriation of foreign investments. It also establishes a minimum investment sum to be registered with the Ministry of Popular Power with Foreign Investment, limits access to internal financing, modifies the criteria of foreign investments and creates a new penalty system for those who do not comply with the law.

Regulations governing the food services industry have become more restrictive. We cannot assure you that new and stricter standards will not be adopted or become applicable to us, or that stricter interpretations of existing laws and regulations will not occur. Any of these events may require us to spend additional funds to gain compliance with the new rules, if possible, and therefore increase our cost of operation.

We could be subject to expropriation or nationalization of our assets and government interference with our business in certain countries in which we operate.

We face a risk of expropriation or nationalization of our assets and government interference with our business in several of the countries in which we do business. These risks are particularly acute in Venezuela. The current Venezuelan government has promoted a model of increased state participation in the economy through welfare programs, exchange and price controls and the promotion of state-owned companies. We can provide no assurance that Company-operated or franchised restaurants will not be threatened with expropriation and that our operations will not be transformed into state-owned enterprises. In addition, the Venezuelan government may pass laws, rules or regulations which may directly or indirectly interfere with our ability to operate our business in Venezuela which could result in a material breach of the MFAs, in particular if we are unable to comply with McDonald’s operations system and standards. A material breach of the MFAs would trigger McDonald’s option to acquire our non-public shares or our interests in Venezuela. See “—Risks Related to Our Business and Operations—McDonald’s has the right to acquire all or portions of our business upon the occurrence of certain events and, in the case of a material breach of the MFAs, may acquire our non-public shares or our interests in one or more Territories at 80% of their fair market value.”

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Non-compliance with anti-terrorism and anti-corruption regulations could harm our reputation and have an adverse effect on our business, results of operations and financial condition.

We maintain policies and procedures that require our employees to comply with anti-corruption laws, including the Foreign Corrupt Practices Act of 1977 (the “FCPA”), and our corporate standards of ethical conduct. However, we cannot ensure that these policies and procedures will always protect us from intentional, reckless or negligent acts committed by our employees or agents. If we are not in compliance with the FCPA and other applicable anti-corruption laws, we may be subject to criminal and civil penalties and other remedial measures, which could have an adverse impact on our business, financial condition, and results of operations. Any investigation of any potential violations of the FCPA or other anti-corruption laws by U.S. or other governmental authorities could adversely impact our reputation, cause us to lose or become disqualified from bids, and lead to other adverse impacts on our business, financial condition and results of operations.

Any tax increase or change in tax legislation may adversely affect our results of operations.

Since we conduct our business in many countries in Latin America and the Caribbean, we are subject to the application of multiple tax laws and multinational tax conventions. Our effective tax rate therefore depends on these tax laws and multinational tax conventions, as well as on the effectiveness of our tax planning abilities. Our income tax position and effective tax rate are subject to uncertainty as our income tax position for each year depends on the profitability of Company-operated restaurants and on the profitability of franchised restaurants operated by our franchisees in tax jurisdictions that levy income tax at a broad range of rates. It is also dependent on changes in the valuation of deferred tax assets and liabilities, the impact of various accounting rules, changes to these rules and tax laws and examinations by various tax authorities. If our actual tax rate differs significantly from our estimated tax rate, this could have a material impact on our financial condition. In addition, any increase in the rates of taxes, such as income taxes, excise taxes, value added taxes, import and export duties, and tariff barriers or enhanced economic protectionism could negatively affect our business. Fiscal measures that target either QSRs or any of our products could also be taken.

We cannot assure you that any governmental authority in any country in which we operate will not increase taxes or impose new taxes on our operations or products in the future.

Tax assessments in any of the jurisdictions in which we operate may negatively affect our business and results of operations.

As part of the ordinary course of business, we are subject to inspections by federal, municipal and state tax authorities in Latin America. These inspections may generate tax assessments which, depending on their results, may have an adverse effect on our financial results. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.”

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Litigation and other pressure tactics could expose our business to financial and reputational risk.

Given that we conduct our business in many countries, we may be subject to multi-jurisdictional private and governmental lawsuits, including but not limited to lawsuits relating to labor and employment practices, taxes, trade and business practices, franchising, intellectual property, consumer, real property, landlord/tenant, environmental, advertising, nutrition and antitrust matters. In the past, QSR chains have been subject to class-action lawsuits claiming that their food products and promotional strategies have contributed to the obesity of some customers. We cannot guarantee that we will not be subject to these or similar types of lawsuits in the future. We may also be the target of pressure tactics such as strikes, boycotts and negative publicity from government officials, suppliers, distributors, employees, unions, special interest groups and customers that may negatively affect our reputation.

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Information technology system failures or interruptions or breaches of our network security may interrupt our operations, exposing us to increased operating costs and to litigation.

We rely heavily on our computer systems and network infrastructure across our operations including, but not limited to, point-of-sale processing at our restaurants. We implement security measures and controls that we believe provide reasonable assurance regarding our security posture. However, there remains the risk that our technology systems are vulnerable to damage, disability or failures due to physical theft, fire, power loss, telecommunications failure or other catastrophic events. If those systems were to fail or otherwise be unavailable, and we were unable to recover in a timely way, we could experience an interruption in our operations. Moreover, security breaches involving our systems may occur from time to time. These include internal and external security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Our information technology systems contain personal, financial and other information that is entrusted to us by our customers, our employees and other third parties, as well as financial, proprietary and other confidential information related to our business. For example, on September 20, 2019 a journalist gained access to sensitive employee and partner information in Brazil due to a misconfigured service system provided by one of Arcos’ service providers. Our IT team discovered and resolved the breach in a matter of hours in conjunction with the service provider and we engaged a well-known consultancy firm to help us perform an investigation of the breach and its ramifications. While our investigation determined that the impact of the breach was low, we cannot assure you that we will not experience similar security breaches in the future. ~~Moreover, our~~

Furthermore, we have experienced a rise in transactions through online digital channels for which we rely on third party operators or trusted certified payment gateways to handle sensitive financial transactions. Our increasing reliance on third party systems also ~~present~~presents the risks faced by the third party’s business, including the operational, security and credit risks of those parties. Moreover, there has also been an increase in number of registered customers for whom we store and process personal information to strengthen our relationship with customers. An actual or alleged security breach of our or their systems could result in disruptions, shutdowns, theft or unauthorized disclosure of personal, financial, proprietary or other confidential information. The occurrence of any of these incidents could result in reputational damage, adverse publicity, loss of consumer confidence, reduced sales and profits, complications in executing our growth initiatives and ~~criminal penalties or civil liabilities.~~regulatory and legal risk.

Our insurance may not be sufficient to cover certain losses.

We face the risk of loss or damage to our properties, machinery and inventories due to fire, theft and natural disasters such as earthquakes and floods. While our insurance policies cover some losses inwith respect ofto damage or loss of our properties, machinery and inventories, our insurance may not be sufficient to cover all such potential losses. For example, we suffered losses in connection with a truck drivers’ strike in Brazil in 2018, which disrupted our supply chain that were not covered by our insurance policies. ~~We also do not expect our insurance to cover~~Our losses due to lower sales as a result of the COVID-19 ~~pandemic.~~pandemic were also not covered. In the event that any losses exceed our insurance coverage or are not covered by our insurance policies, we will be liable for the excess. In addition, even if such losses are fully covered by our insurance policies, such fire, theft or natural disaster may cause disruptions or cessations in its operations ~~and~~that would adversely affect our financial condition and results of operations.

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~~Certain Factors Relating~~Risks Related to Our Industry

The food services industry is intensely competitive and we may not be able to continue to compete successfully.

Although competitive conditions in the QSR industry vary in each of the countries in which we conduct our operations, in general, we compete with many well-established restaurant companies on price, brand image, quality, sales promotions, new product development and restaurant locations. Since the restaurant industry has few barriers to entry, our competitors are diverse and range from national and international restaurant chains to individual, local restaurant operators. Our largest competitors include Burger King, Yum! Brands (which operates KFC restaurants, Taco Bell and Pizza Hut and Pizza Hut Express restaurants), Carl’s Junior and Subway. In Brazil, we also compete with Habib’s, a Brazilian QSR chain that focuses on Middle Eastern food, and Bob’s, a ~~primarily Brazilian~~primarily-Brazilian QSR chain that focuses on hamburger product offerings. We also face strong competition from new businesses targeting the same clients we serve, as well as from street vendors of limited product offerings, including hamburgers, hot dogs, pizzas and other local food items. We expect competition to increase as our competitors continue to expand their operations, introduce new products and market their brands.

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If any of our competitors offers products that are better priced or more appealing to the tastes of consumers, increases its number of restaurants, obtains more desirable restaurant locations, provides more attractive financial incentives to management personnel, franchisees or hourly employees or has more effective marketing initiatives than we do in any of the markets in which we operate, this could have a material adverse effect on our results of operations.

Increases in commodity prices or other operating costs could harm our operating results.

Food and paper costs represented ~~35.8%~~35.7% of our total sales by Company-operated restaurants in ~~2019,~~2020, and ~~21.5%~~21.4% of our food and paper raw materials cost is exposed to fluctuations in foreign exchange rates. We rely on, among other commodities, beef, chicken, produce, dairy mixes, beverages and toppings. The cost of food and supplies depends on several factors, including global supply and demand, new product offerings, weather conditions, fluctuations in energy costs and tax incentives, all of which makes us susceptible to substantial price and currency fluctuations and other increased operating costs. Our hedging strategies on the imported portion of our food and paper raw materials may not be successful in fully offsetting cost increases due to currency fluctuations. Furthermore, due to the competitive nature of the restaurant industry, we may be unable to pass increased operating costs on to our customers, which could have an adverse effect on our results of operations.

Demand for our products may decrease due to changes in consumer preferences or other factors.

Our competitive position depends on our continued ability to offer items that have a strong appeal to consumers. If consumer dining preferences change due to shifts in consumer demographics, dietary inclinations, trends in food sourcing or food preparation and our consumers begin to seek out alternative restaurant options, our financial results might be adversely affected. In addition, negative publicity surrounding our products could also materially affect our business and results of operations.

Our success in responding to consumer demands depends in part on our ability to anticipate consumer preferences and introduce new items to address these preferences in a timely fashion.

Our investments to enhance the customer experience, including through technology, may not generate the expected returns.

We are engaged in various efforts to improve our customers’ experience in our restaurants. In particular, in partnership with McDonald’s, we have invested in Experience of the Future (“EOTF”), which focuses on restaurant modernization and technology and digital engagement in order to transform the restaurant experience. As we ~~accelerate our pace of converting~~convert restaurants to EOTF, we are placing renewed emphasis on improving our service model and strengthening relationships with customers, in part through digital channels and loyalty initiatives and payment systems.

We have also started a digital transformation with the goal of increasing our engagement with our customers and using data in order to improve our decision-making. As a result of the COVID-19 pandemic, we have accelerated our digital transformation plans to better serve our customers. In order to accomplish this goal, we are making structural changes in our IT, including creating a “digital factory”, which we call ADvance, to facilitate collaboration across groups within Arcos Dorados and adopting agile methodologies and ~~principals~~principles to aid different groups in transforming products and services and the customer experience, or in otherwise achieving a specific business objective. We may not fully realize the intended benefits of these significant investments, or these initiatives may not be well executed, and therefore our business results may suffer.

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Our business activity may be negatively affected by disruptions, catastrophic events or health pandemics.

Unpredictable events beyond our control, including war, terrorist activities, political and social unrest and natural disasters, could disrupt our operations and those of our franchisees, suppliers or customers, have a negative effect on consumer spending or result in political or economic instability. These events could reduce demand for our products or make it difficult to ensure the regular supply of products through our distribution chain.

In addition, incidents of health pandemics, food-borne illnesses or food tampering could reduce sales in our restaurants. Widespread illnesses such as avian influenza, the H1N1 influenza virus, e-coli, bovine spongiform encephalopathy (or “mad cow” disease), hepatitis A or salmonella could cause customers to avoid meat or fish products. Furthermore, our reliance on third-party food suppliers and distributors increases the risk of food-borne illness incidents being caused by third-party food suppliers and distributors who operate outside of our control and/or multiple locations being affected rather than a single restaurant. In addition, recurrent events in our region related to Dengue, Yellow Fever and Zika viruses, as well as the COVID-19 outbreak in 2020, have resulted in heightened health concerns in the region, which could reduce the visits to our restaurants if these cases are not controlled.

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Food safety events involving McDonald’s outside of Latin America or other well-known QSR chains could negatively impact our business industry. Another extended issue in our region is the use of social media to post complaints against the QSR segment and the use of mobile phones to capture any deviation in our processes, products or facilities. Media reports of health pandemics, such as the COVID-19 outbreak, or food-borne illnesses found in the general public or in any QSR could dramatically affect restaurant sales in one or several countries in which we operate, or could force us to temporarily close an undetermined number of restaurants. As a restaurant company, we depend on consumer confidence in the quality and safety of our food. Any illness or death related to food that we serve could substantially harm our operations. While we maintain extremely high standards for the quality of our food products and dedicate substantial resources to ensure that these standards are met and well communicated publicly the spread of these illnesses is often beyond our control and we cannot assure you that new illnesses resistant to any precautions we may take will not develop in the future.

In addition, our industry has long been subject to the threat of food tampering by suppliers, employees or customers, such as the addition of foreign objects to the food that we sell. Reports, whether true or not, of injuries caused by food tampering have in the past negatively affected the reputations of QSR chains and could affect us in the future. Instances of food tampering, even those occurring solely at competitor restaurants, could, by causing negative publicity about the restaurant industry, adversely affect our sales on a local, regional, national or systemwide basis. A decrease in customer traffic as a result of public health concerns or negative publicity could materially affect our business, results of operations and financial condition.

Restrictions on promotions and advertisements directed at families with children and regulations regarding the nutritional content of children’s meals may harm McDonald’s brand image and our results of operations.

A significant portion of our business depends on our ability to make our product offerings appealing to families with children. Argentina, Brazil, Chile, Colombia, Mexico ~~Peru~~ and ~~Uruguay~~Peru are considering imposing, or have already imposed, restrictions that impact the ways in which we market our products, including proposals that would have the effect of restricting our ability to advertise directly to children through the use of toys and to sell toys in conjunction with food.

In June 2012, Chile passed a law banning the inclusion of toys in children’s meals with certain nutritional characteristics (Law Nº 20,606). This law came into effect on June 26, 2016. The ban in Chile also restricts advertisements to children under the age of 14. As a result of these laws, we modified our children’s meals in order to continue offering toys in them. However, we were subject to several audits by the Chilean authorities. Chilean Law Nº 20,869, which also came into effect on June 26, 2016, restricts advertisements on television and in movie theaters between 6:00 a.m. and 10:00 p.m. This law affects food products that exceed certain standards of nutritional quality set by the Chilean authorities. These restrictions on advertisements did not affect or have any impact on our sales. On June 26, 2019, strict standards of nutritional quality set by the Chilean authorities came into effect. As a result of modifications that we made to the contents of some of our products in adherence with these stricter standards, we were able to continue offering toys in children’s meals. However, the volume of Happy Meals sold in Chile has been declining since 2016.

~~Similar to Chile, in~~In 2013, Peru approved Law No. 30021, which, together with the corresponding Regulatory Decree approved in June 2017, restricts the advertising of processed food products and non-alcoholic beverages intended for children under 16. In addition, regulations establish that advertisements of food products and non-alcoholic beverages containing trans-fat and high levels of sodium, sugar and saturated fat must contain a warning stating that excessive consumption should be avoided. These regulations do not include food prepared on the spot at the request of a customer, and as a result, Arcos Dorados’ products are excluded from the scope of application of such law.

In Argentina, there is currently a draft bill in Congress (Draft bill for the promotion of healthy eating) aimed to provide consumers with complete and clear information about the nutritional contents of foods and drinks, and that would also regulate related advertisement activities. If the nutritional composition of the product exceeds certain sugar, salt, fat or calorie thresholds, this bill would require us to include a front-of-pack nutritional label or “warning seal” on several of our products. Additionally, many advertisement and sponsoring activities would be strictly forbidden in the case of products that hold one or more “warning seals”, such as: (i) conducting contests, games, promotions or cultural events; (iii) using cartoons or celebrities in advertisement; (iii) promoting online downloads; (iv) and offering or promising toys, games and prizes. Furthermore, marketing of “warning seal” products directed to children would be altogether forbidden. This draft bill has already been approved by the Senate on October 29, 2020 and there is a strong likelihood it will come into force in the short term.

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Since 2014, the Mexican Ministry of Health empowered the Federal Commission for Prevention of Sanitary Risks (Comisión Federal para la Protección contra Riesgos Sanitarios or COFEPRIS) to regulate advertising directed at families with children. On April 15, 2014, COFEPRIS issued certain regulations which establish the maximum contents of fat, sodium and sugars that every meal advertised to children on television and in cinemas may contain. In February of 2015, COFEPRIS ordered us to stop advertising Happy Meals on television until we disclosed all the nutritional information for Happy Meals to COFEPRIS. We provided this information to COFEPRIS, but we have not yet received any legal authorization to advertise Happy Meals either during the general times when children may be watching television or during any programming geared towards children. In 2019, we obtained the approval to advertise the McNuggets + water + kids fries + apple puree combination at any time. However, since then, we have decided to discontinue the apple puree and replace it with yogurt and we no longer have an approved combination. We have developed a Happy Meals with chicken nuggets that complies with COFEPRIS’ nutritional requirements and will begin a pilot advertising program that complies with the advertising requirements in select areas of Mexico. However, generally, we are prohibited from advertising Happy Meals from 2:30 p.m. to 7:30 p.m., Monday through Friday, and from 7:00 a.m. to 7:00 p.m. on Saturday and Sunday.requirements.

In Brazil, the Federal Prosecutor’s Office filed suit in 2009 seeking to enjoin various QSRs, including us, from including toys in our children’s meals. The Lower Federal Court in São Paulo ruled that the lawsuit was without merit. The Prosecutor’s Office filed an appeal against this decision, which will be adjudicated by the Regional Federal Court in São Paulo. As of the date of this annual report, this appeal is still pending and the outcome remains uncertain. In addition, the number of proposed laws seeking to restrict the sale of toys with meals increased significantly in Brazil at the federal, state and municipal levels. In April 2013, a consumer protection agency in Brazil fined us $1.6 million for a 2010 advertising campaign relating to our offering of meals with toys from the motion picture Avatar. We filed a lawsuit seeking to annul the fine. The lower court ruled there was no basis for the penalty, which was upheld by the appellate court. The consumer protection agency filed a special appeal against this decision, which is pending final decision. Although similar fines relating to our current and previous advertising campaigns involving the sale of toys may be possible in the future, as of the date of this annual report, we are unaware of any other such fines, and in 2018, our subsidiaries in Brazil and Mexico joined the International Food and Beverage Alliance that regulates advertising for kids to help ensure our ongoing compliance with advertising restrictions.

On July 28, 2014, Colombia enacted Decree 975 of 2014, which sets forth certain directives regarding advertising directed at children. These directives include, (i) limiting any insinuation that the food and beverage being advertised is a substitute for any of the principal daily meals; (ii) any advertising directed at children or adolescents, during certain times of the day when children and adolescents are more likely to be consuming such advertising, must include disclosure that the advertisement is not part of the actual program; and (iii) requiring parental approval for any advertisement through a child/adolescent digital platform that requests any download or purchase.

Certain jurisdictions in the United States are also considering curtailing or have curtailed food retailers’ ability to sell meals to children including free toys if these meals do not meet certain nutritional criteria.

In Argentina, there are currently several bills in Congress aimed at restricting advertising of high-calorie or processed food and beverages and promoting healthy food/nutrition habits, which are being discussed. Although as of the date of this annual report there are currently no federal regulations in force, some of these bills might be enacted in the short term. In addition, at the local level, the Province of Santa Fe and the City of Buenos Aires have enacted local regulations, imposing certain restrictions on the advertisement of high-calorie or processed foods and beverages targeting underage consumers.

Although we have introduced changes in our Happy Meals in order to offer more balanced and ~~healthy~~healthier options to our customers and in many cases been able to mitigate the impact of these types of laws and regulations on our sales, we may not be able to do so in the future and the imposition of similar or stricter laws and regulations in the future in the Territories may have a negative impact on our results of operations. In general, regulatory developments that adversely impact our ability to promote and advertise our business and communicate effectively with our target customers, including restrictions on the use of licensed characters, may have a negative impact on our results of operations.

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We are subject to increasingly strict data protection laws, which could increase our costs and adversely affect our business.

~~On August 2018, Brazil approved~~We are subject to increasingly strict data protection laws in the markets in which we operate. For example, we are subject to the Brazilian General Data Protection Law (“Lei Geral de Proteção de ~~Dados~~”Dados” or “LGPD”), federal law 13,709/~~2018. Very similar to the European Union General Data Protection Regulation (“GDPR”), the LGDP~~2018, which became effective in September 2020. The LGPD significantly improves Brazil’s existing legal framework by regulating the use of personal data by the private and public sectors. The concept of “data processing” is broad and includes the collection, storage, transfer, deletion and other activities related to personal ~~data; penalties include warnings, single and daily fines, blocking and elimination of the~~data. All companies that offer services or have operations involving personal data ~~at stake. By the time of its enforcement , Arcos Dourados Comercio de Alimentos Ltda. will need~~handling in Brazil are required to ~~ensure that personal data processing is grounded on at least one legal basis provided for in~~comply with the LGPD rules and ~~will need to~~ adopt administrative and technical security measures to protect personal data. Administrative sanctions under the LGPD, which will be applicable starting in August 2021 by the newly-formed National Data Protection Authority (“ANPD”), include warnings, single and daily fines, and elimination of personal data at stake. The ~~implementation of these and~~LGDP is very similar ~~laws and regulations~~to the European Union General Data Protection Regulation (“GDPR”), which we are subject to in certain French territories where we operate in the ~~other countries~~Caribbean.

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Similarly, Argentina, Uruguay, Peru and Colombia have established data protection laws that largely follow the same framework. In Argentina, Law No. 25,326 (the “Data Protection Law”) is also very similar to the GDPR and requires companies that process personal data to register with Agency of Access to Public Information (“AAPI”), prescribes the instances in which ~~we operate~~data may ~~increase our operation costs, which could~~be processed based on the law, requires that individuals be notified prior to their personal data being processed, among other security measures. Under the Data Protection Law, the AAPI has the power to impose pecuniary and non-pecuniary sanctions on companies that fail to comply with the law. Like Argentina and Brazil, Uruguay also has in place data protection laws similar to the GDPR that they have been strengthening in recent years, including by extending the scope of data protection regulation to data collected and treated abroad when it is related to the offering of products and services in Uruguay and requiring appointment of a ~~material adverse effect on our business. Another example~~compliance office for data protection when a large amount of data is being processed. In Colombia, Law 1581 also requires companies to have in place data protection measures and yearly disclosure of such measures and database of providers, clients and employees with the Superintendency of Industry and Commerce.

In Peru, ~~where~~companies are required to comply with the Personal Data Protection Law (Law No. 29733) was approved in 2011; and the Supreme Decree No. 003-2013-JUS, Regulation of the Personal Data Protection Law, in 2013. All companies are required to comply with these regulations since May 2015. This legal framework, which similarly regulates the use of personal data, which is defined as any operation that allows the recompilation, registration, organization, conservation, elaboration, modification, suppression, transference, or any other operation that facilitates access, correlation or interconnection of personal data. Failure to comply is punishable with economic fines by the Personal Data Protection Authority. In November 2019, Peru approved the Directorial Resolution No. 80-2019-JUS/DGTAIPD, Practical Guide to Comply with the “Obligation to ~~Inform.~~Inform,” ~~This is a general guideline to facilitate compliance with the obligation~~which obligates companies to inform the various owners of personal data of the processing of their personal data and provides information about the obligation and various exceptions to it. Furthermore, in January 2020, Peru approved the Directorial Resolution N° 02-2020-JUS/DGTAIPD, Directive of the Personal Data Processing through Video Surveillance System, which establishes new obligations and prohibitions in any place where video surveillance is conducted. Compliance with these data protection laws and others in the markets in which we operate could result in increased costs and adversely affect our business.

Environmental laws and regulations may affect our business.

We are subject to various environmental laws and regulations. These laws and regulations govern, among other things, discharges of pollutants into the air and water and the presence, handling, release and disposal of, and exposure to, hazardous substances ~~single use plastics~~ and ~~recycling.~~waste, such as common or non-hazardous waste and used vegetable oils, among others, in addition to requiring us to obtain permits and authorizations for various activities. These laws and regulations provide for significant fines and penalties for noncompliance. Third parties may also assert personal injury, property damage or other claims against owners or operators of properties associated with release of, or actual or alleged exposure to, hazardous substances at, on or from our properties.

Liability from environmental conditions relating to prior, existing or future restaurants or restaurant sites, including franchised restaurant sites, may have a material adverse effect on us. Moreover, the adoption of new or more stringent environmental laws or regulations could result in a material environmental liability to us.

In addition, beginning in 2018, Latin America experienced a wave of regulatory attempts to eliminate plastic bags and single use plastic products in the region. In many countries, new laws and regulations, especially in relation to the use of plastic bags, plastic straws, have already been approved and in many cases will carry stiff penalties for violations. We have addressed this issue in our business by removing ~~all~~ the plastic straws in nearly all of our markets and instead using alternative products. Additionally, in most of the markets we removed plastic ~~tops~~lids from products used in our business and changed the salad containers in Argentina ~~for carton containers.~~and other markets to cardboard containers, which led to a significant reduction in single use plastic in our operation within the last three years. We will need to find suitable alternatives before these new laws and regulations become effective. Regulations tend to be replicated across countries, and we are seeing an increase in related activity, both nationally and locally, in Brazil, Mexico, Colombia, Argentina, Ecuador, Chile and Peru, among other territories. We may need to quickly replace other plastic products that we continue to use should additional laws and regulations be put in place. These alternatives may be more expensive than the plastic products we currently use, which may increase our costs and have a material adverse effect on our business.

We may be adversely affected by legal actions with respect to our business.

We could be adversely affected by legal actions and claims brought by consumers or regulatory authorities in relation to the quality of our products and eventual health problems or other consequences caused by our products or by any of their ingredients. We could also be affected by legal actions and claims brought against us for products made in a jurisdiction outside the jurisdictions where we are operating. An array of legal actions, claims or damaging publicity may affect our reputation as well as have a material adverse effect on our revenues and businesses. ~~See “Item 8. Financial Information —A. Consolidated Statements and Other Information—Legal Proceedings.”~~

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Unfavorable publicity or a failure to respond effectively to adverse publicity, particularly on social media platforms, could harm our reputation and adversely impact our business and financial performance.

The good reputation of our brand is a key factor in the success of our business. Actual or alleged incidents at any of our restaurants could result in harmful publicity. Moreover, we have seen a significant increase in the use of our delivery options as a result of the COVID-19 pandemic. Any actual or perceived ~~delay in~~issue with the delivery of orders could also result in harmful publicity. Even incidents occurring at restaurants operated by our competitors or in the supply chain generally could result in negative publicity that could harm the restaurant industry and thus, indirectly, our brand. In particular, in recent years, there has been a marked increase in the use of social media platforms and similar devices which give individuals access to a broad audience of consumers and other interested persons. Many social media platforms immediately publish the content their participants’ posts, often without filters or checks on accuracy of the content posted. A variety of risks are associated with the dissemination of this information online, including the improper disclosure of proprietary information, negative comments about our company, exposure of personally identifiable information, fraud or outdated information. The inappropriate use of social media platforms by our customers, employees or other individuals could increase our costs, lead to litigation or result in negative publicity that could damage our reputation. In addition, we are often affected by negative news about McDonald’s Corporation published in the media and picked up by Latin America outlets, as it can lead to the incorrect assumption by the public that it relates to Arcos Dorados or McDonald’s brand in our region. If we are unable to quickly and effectively respond to negative reports, comments or posts in the media and social media platforms, we may suffer damage to our reputation or loss of consumer confidence in our products, which could adversely affect our business, results of operations, cash flows and financial condition, as well as require resources to rebuild our reputation.

~~Certain Factors Relating~~Risks Related to Our Business and Operations in Latin America and the Caribbean

Our business is subject to the risks generally associated with international business operations.

We engage in business activities throughout Latin America and the Caribbean. In ~~2019, 72.3%~~2020, 69.2% of our revenues were derived from Brazil, Argentina, ~~Mexico~~Puerto Rico and ~~Chile.~~Mexico. As a result, our business is and will continue to be subject to the risks generally associated with international business operations, including:

•governmental regulations applicable to food services operations;

•changes in social, political and economic conditions;

•transportation delays;

•power, water and other utility shutdowns or shortages;

•limitations on foreign investment;

•restrictions on currency convertibility and volatility of foreign exchange markets;

•inflation;

•import-export quotas and restrictions on importation;

•changes in local labor conditions;

•changes in tax and other laws and regulations;

•expropriation and nationalization of our assets in a particular jurisdiction; and

•restrictions on repatriation of dividends or profits.

Some of the Territories have been subject to social and political instability in the past, and interruptions in operations could occur in the future. See also “—Developments and the perception of risk in other countries, especially emerging market countries, may adversely affect business, results, financial conditions and prospects.”

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Developments and the perception of risk in other countries, especially emerging market countries, may adversely affect business, results, financial conditions and prospects.

Arcos Dorados’ growth and profitability depend on political stability and economic activity in Latin America and the Caribbean, especially in emerging market countries. Recent political unrest and social strife could affect developments and perception of risk in this region. For example, in 2019, political and social unrest in Latin American countries, including Ecuador, Chile, Bolivia and Colombia sparked political demonstrations and, in some instances, violence. In October 2019, presidential elections were held in Bolivia, Uruguay and Argentina. Controversial outcomes in Bolivia and Uruguay led to violent protests and claims of fraudulent elections in Bolivia and a runoff election in Uruguay.

~~Similarly, Chile experienced political unrest and social strife, including a wave of~~ In addition, in 2020, several countries saw protests ~~and riots, beginning on October 18, 2019, sparked by an increase in~~relating to the ~~subway fare~~handling of the Santiago Metro and widened to reflect anger over living costs and inequality. The unrest in Chile and associated civil protests caused political and economic instability and led to damage of property and other vandalism. Six of our restaurants in Chile were closed due to significant damages causedCOVID-19 pandemic by fire and a seventh suffered minor damages but remains closed because the shopping center where it is located has not re-opened. Although our insurance will cover all of the physical damage and our direct losses as a result of the restaurant closures, there are certain losses that may not be recoverable, such as losses suffered from adjusted business hours to ensure the safety of our staff and other travel and safety measures.

As a result of this political and social turmoil there was a decrease in demand at our restaurants in certain regions and certain of our restaurants experienced physical damage in Chile as a result of the civil protests. While this damage did not have a material adverse effect on our business, any further turmoil could have such an effect on the business. Accordingly, the political unrest and social strife, including waves of protests, civil demonstrations and riots could have a significant impact on us. We cannot assure you that future developments affecting the political and social situation, including economic or political instability, in this region will not adversely affect our business, results of operations, financial condition and prospects.their respective governments.

Changes in governmental policies in the Territories could adversely affect our business, results of operations, financial condition and prospects.

Governments throughout Latin America and the Caribbean have exercised, and continue to exercise, significant influence over the economies of their respective countries. Accordingly, the governmental actions, political developments, regulatory and legal changes or administrative practices in the Territories concerning the economy in general and the food services industry in particular could have a significant impact on us. We cannot assure you that changes in the governmental policies of the Territories will not adversely affect our business, results of operations, financial condition and prospects.

Latin America has experienced, and may continue to experience, adverse economic conditions that have impacted, and may continue to impact, our business, financial condition and results of operations.

The success of our business is dependent on discretionary consumer spending, which is influenced by general economic conditions, consumer confidence and the availability of discretionary income in the countries in which we operate. Latin American countries have historically experienced uneven periods of economic growth, recessions, periods of high inflation and economic instability. In 2019, ~~the~~ economic growth ~~rates of the economies of~~in many Latin American countries slowed, ~~and~~with some ~~entered recessions, and we~~entering recessions. We expect economic conditions to ~~see further slowdowns~~remain challenging in ~~2020~~2021 as a result of ~~COVID-19.~~COVID-19, although most economies are expected to rebound from the economic contractions of 2020. Any prolonged economic downturn could result in a decline in discretionary consumer spending. This may reduce the number of consumers who are willing and able to dine in our restaurants, or consumers may make more value-driven and price-sensitive purchasing choices, eschewing our core menu items for our entry-level food options. We may also be unable to sufficiently increase prices of our menu items to offset cost pressures, which may negatively affect our financial condition.

In addition, a prolonged economic downturn may lead to higher interest rates, significant changes in the rate of inflation or an inability to access capital on acceptable terms. Our suppliers and service providers could experience cash flow problems, credit defaults or other financial hardships. If our franchisees cannot adequately access the financial resources required to open new restaurants, this could have a material effect on our growth strategy.

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~~Many~~Some of our customers depend on remittances from family members living overseas. Laws, regulations or events that limit such remittances or any changes to United States immigration policy may adversely affect our financial condition and results of operations.

Many of the jurisdictions in which we operate depend on remittances as a source of revenue. Many of our customers rely on remittances from family members living overseas as a primary or secondary source of income. Any law, regulation or event that restricts, taxes or prevents those remittances may adversely affect these customers’ discretionary spending and demand for our products, ~~and our customers’ ability to repay their consumer loans,~~ which in turn may adversely affect our financial condition and results of operations. In particular, President Trump’s administration has in the past mentioned the possibility of taxing remittances to Mexico. We cannot assure you that the Trump administration will not implement taxing of remittances to Mexico or the other countries in which we operate. The implementation of any such measure may have a material adverse effect on our financial condition and results of operations.

~~Inflation and government measures to curb inflation may adversely affect the economies in the countries where we operate, our business and results of operations.~~

Many of the countries in which we operate, have experienced, or are currently experiencing, high rates of inflation. For example, as of July 1, 2018, Argentina is considered highly inflationary under U.S. GAAP. In addition, Venezuela has been considered hyperinflationary under U.S. GAAP since 2010. Although inflation rates in many of the other countries in which we operate have been relatively low in the recent past, we cannot assure you that this trend will continue. The measures taken by the governments of these countries to control inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting the availability of credit and retarding economic growth. Inflation, measures to combat inflation and public speculation about possible additional actions have also contributed materially to economic uncertainty in many of these countries and to heightened volatility in their securities markets. Periods of higher inflation may also slow the growth rate of local economies that could lead to reduced demand for our core products and decreased sales. Inflation is also likely to increase some of our costs and expenses, which we may not be able to fully pass on to our customers, which could adversely affect our operating margins and operating income.

~~Exchange rate fluctuations against the U.S. dollar in the countries in which we operate have negatively affected, and could continue to negatively affect, our results of operations.~~

We are exposed to exchange rate risk in relation to the United States dollar. While substantially all of our income is denominated in the local currencies of the countries in which we operate, our supply chain management involves the importation of various products, and some of our imports, as well as some of our capital expenditures and a significant portion of our long-term debt, are denominated in U.S. dollars. As a result, the decrease in the value of the local currencies of the countries in which we operate as compared to the U.S. dollar has increased our costs, and any further decrease in the value of such currencies will further increase our costs. Although we maintain a hedging strategy to attempt to mitigate some of our exchange rate risk, our hedging strategy may not be successful or may not fully offset our losses relating to exchange rate fluctuations.

~~Price controls and other similar regulations in certain countries have affected, and may in the future affect, our results of operations.~~

Moreover, the Venezuelan market is subject to a regulation establishing a maximum profit margin for companies and maximum prices for certain goods and services. Although we managed to navigate the negative impact of the price controls on our operations from 2013 through 2019, the existence of such laws and regulations continues to present a risk to our business. We continue to closely monitor developments in this dynamic environment. See “Item 4. Information on the Company—B. Business Overview—Regulation.”

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~~We are subject to significant foreign currency exchange controls and currency devaluation in certain countries in which we operate.~~

For example, in 2019, our subsidiaries in Argentina represented 13.2% of our total revenues. Since September 2019, the current Argentine government has tightened restrictions on capital flows and imposed exchange controls and transfer restrictions, substantially limiting the ability of companies to retain foreign currency or make payments outside of Argentina. Furthermore, the Central Bank of Argentina implemented regulations requiring its prior approval for certain foreign exchange transactions otherwise authorized to be carried out under the applicable regulations, such as dividend payments or repayment of principal of inter-company loans as well as the import of goods. As a consequence of the reimposition of exchange controls, the spread between the official exchange rate and other exchange rates resulting implicitly from certain capital market operations usually effected to obtain U.S. dollars has broadened significantly, reaching a value of approximately 72% above the official exchange rate as of April 27, 2020. The implementation of the above-mentioned measures could impact our ability to transfer funds outside of Argentina and may prevent or delay payments that our Argentine subsidiaries are required to make outside Argentina. As a result, if we are prohibited from transferring funds out of Argentina, or if we become subject to similar restrictions in other countries in which we operate, our results of operations and financial condition could be materially adversely affected.

~~In addition, the continuing devaluation of the Argentine~~ ~~peso~~ ~~since the end of 2015 and the Venezuelan~~ ~~bolivar~~ since 2010 has led to higher inflation levels, has significantly reduced competitiveness, real wages and consumption and has had a negative impact on businesses whose success is dependent on domestic market demand and supplies payable in foreign currency.

~~If we fail to comply with, or if we become subject to, more onerous government regulations, our business could be adversely affected.~~

We are subject to various federal, state and municipal laws and regulations in the countries in which we operate, including those related to the food services industry, health and safety standards, importation of goods and services, marketing and promotional activities, nutritional labeling, zoning and land use, environmental standards and consumer protection. We strive to abide by and maintain compliance with these laws and regulations. The imposition of new laws or regulations, including potential trade barriers, may increase our operating costs or impose restrictions on our operations, which could have an adverse impact on our financial condition.

For example, Argentine regulations require us to seek permission from the Argentine authorities prior to importing certain goods. Although these regulations do not currently affect us, they may in the future prevent or delay the receipt of goods that we require for our operations, or increase the costs associated with obtaining those goods, and therefore have an adverse impact on our business, results of operations or financial condition. Additionally, in 2017, Venezuela enacted the Productive Foreign Investments Constitutional Act, which replaced the Foreign Investment Act of 2014. This law establishes the requirements and limitations for the transfer of dividends and repatriation of foreign investments. It also establishes a minimum investment sum to be registered with the Ministry of Popular Power with Foreign Investment, limits access to internal financing, modifies the criteria of foreign investments and creates a new penalty system for those who do not comply with the law.

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~~We could be subject to expropriation or nationalization of our assets and government interference with our business in certain countries in which we operate.~~

We face a risk of expropriation or nationalization of our assets and government interference with our business in several of the countries in which we do business. These risks are particularly acute in Venezuela. The current Venezuelan government has promoted a model of increased state participation in the economy through welfare programs, exchange and price controls and the promotion of state-owned companies. We can provide no assurance that Company-operated or franchised restaurants will not be threatened with expropriation and that our operations will not be transformed into state-owned enterprises. In addition, the Venezuelan government may pass laws, rules or regulations which may directly or indirectly interfere with our ability to operate our business in Venezuela which could result in a material breach of the MFAs, in particular if we are unable to comply with McDonald’s operations system and standards. A material breach of the MFAs would trigger McDonald’s option to acquire our non-public shares or our interests in Venezuela. See “—Certain Factors Relating to Our Business—McDonald’s has the right to acquire all or portions of our business upon the occurrence of certain events and, in the case of a material breach of the MFAs, may acquire our non-public shares or our interests in one or more Territories at 80% of their fair market value.”

~~Certain Factors Relating~~Risks Related to Our Class A Shares

Mr. Woods Staton, our Executive Chairman, controls all matters submitted to a shareholder vote, which will limit your ability to influence corporate activities and may adversely affect the market price of our class A shares.

Mr. Woods Staton, our Executive Chairman, owns or controls common stock representing ~~39.61%~~38.6% and ~~76.49%~~75.9%, respectively, of our economic and voting interests. As a result, Mr. Woods Staton is and will be able to strongly influence or effectively control the election of our directors, determine the outcome of substantially all actions requiring shareholder approval and shape our corporate and management policies. The MFAs’ requirement that Mr. Woods Staton at all times hold at least 51% of our voting interests likely will have the effect of preventing a change in control of us and discouraging others from making tender offers for our shares, which could prevent shareholders from receiving a premium for their shares. Moreover, this concentration of share ownership may make it difficult for shareholders to replace management and may adversely affect the trading price for our class A shares because investors often perceive disadvantages in owning shares in companies with controlling shareholders. This concentration of control could be disadvantageous to other shareholders with interests different from those of Mr. Woods Staton and the trading price of our class A shares could be adversely affected. See “Item 7. Major Shareholders and Related Party Transactions―A. Major ~~Shareholders”~~Shareholders�� for a more detailed description of our share ownership.

Furthermore, the MFAs contemplate instances where McDonald’s could be entitled to purchase the shares of Arcos Dorados Holdings Inc. held by Mr. Woods Staton. However, our publicly held class A shares will not be similarly subject to acquisition by McDonald’s.

Sales of substantial amounts of our class A shares in the public market, or the perception that these sales may occur, could cause the market price of our class A shares to decline.

Sales of substantial amounts of our class A shares in the public market, or the perception that these sales may occur, could cause the market price of our ~~Class~~class A shares to decline. This could also impair our ability to raise additional capital through the sale of our equity securities. Under our articles of association, we are authorized to issue up to 420,000,000 class A shares, of which ~~124,070,029~~127,265,773 class A shares were outstanding as of December 31, ~~2019~~2020 and ~~7,993,602~~5,269,988 class A shares were held in treasury. We cannot predict the size of future issuances of our shares or the effect, if any, that future sales and issuances of shares would have on the market price of our class A shares.

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As a foreign private issuer, we are permitted to, and we will, rely on exemptions from certain NYSE corporate governance standards applicable to U.S. issuers, including the requirement that a majority of an issuer’s directors consist of independent directors. This may afford less protection to holders of our Class A shares.

Section 303A of the New York Stock Exchange, or NYSE, Listed Company Manual requires listed companies to have, among other things, a majority of their board members be independent, and to have independent director oversight of executive compensation, nomination of directors and corporate governance matters. As a foreign private issuer, however, we are permitted to, and we will, follow home country practice in lieu of the above requirements. British Virgin Islands law, the law of our country of incorporation, does not require a majority of our board to consist of independent directors or the implementation of a nominating and corporate governance committee, and our board thus may not include, or may include fewer, independent directors than would be required if we were subject to these NYSE requirements. Since a majority of our board of directors may not consist of independent directors as long as we rely on the foreign private issuer exemption to these NYSE requirements, our board’s approach may, therefore, be different from that of a board with a majority of independent directors, and as a result, the management oversight of our Company may be more limited than if we were subject to these NYSE requirements.

~~Certain~~ Risks ~~Relating~~Related to Investing in a British Virgin Islands Company

We are a British Virgin Islands company and it may be difficult for you to obtain or enforce judgments against us or our executive officers and directors in the United States.

We are incorporated under the laws of the British Virgin Islands. Most of our assets are located outside the United States. Furthermore, most of our directors and officers reside outside the United States, and most of their assets are located outside the United States. As a result, you may find it difficult to effect service of process within the United States upon these persons or to enforce outside the United States judgments obtained against us or these persons in U.S. courts, including judgments in actions predicated upon the civil liability provisions of the U.S. federal securities laws. Likewise, it may also be difficult for

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you to enforce in U.S. courts judgments obtained against us or these persons in courts located in jurisdictions outside the United States, including actions predicated upon the civil liability provisions of the U.S. federal securities laws. It may also be difficult for an investor to bring an action against us or these persons in a British Virgin Islands court predicated upon the civil liability provisions of the U.S. federal securities laws.

As there is no treaty in force on the reciprocal recognition and enforcement of judgments in civil and commercial matters between the United States and the British Virgin Islands, courts in the British Virgin Islands will not automatically recognize and enforce a final judgment rendered by a U.S. court.

Any final and conclusive monetary judgment obtained against us in U.S. courts, for a definite sum, may be treated by the courts of the British Virgin Islands as a cause of action in itself so that no retrial of the issue would be necessary, provided that in respect of the U.S. judgment:

•the U.S. court issuing the judgment had jurisdiction in the matter and we either submitted to such jurisdiction or were resident or carrying on business within such jurisdiction and were duly served with process;

•the judgment given by the U.S. court was not in respect of penalties, taxes, fines or similar fiscal or revenue obligations of ours;

•in obtaining judgment there was no fraud on the part of the person in whose favor judgment was given or on the part of the court;

•recognition or enforcement of the judgment in the British Virgin Islands would not be contrary to public policy; and

•the proceedings pursuant to which judgment was obtained were not contrary to public policy.

Under our articles of association, we indemnify and hold our directors harmless against all claims and suits brought against them, subject to limited exceptions.

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You may have more difficulty protecting your interests than you would as a shareholder of a U.S. corporation.

Our affairs are governed by the provisions of our memorandum of association and articles of association, as amended and restated from time to time, and by the provisions of applicable British Virgin Islands law. The rights of our shareholders and the responsibilities of our directors and officers under the British Virgin Islands law are different from those applicable to a corporation incorporated in the United States. There may be less publicly available information about us than is regularly published by or about U.S. issuers. Also, the British Virgin Islands regulations governing the securities of British Virgin Islands companies may not be as extensive as those in effect in the United States, and the British Virgin Islands law and regulations in respect of corporate governance matters may not be as protective of minority shareholders as state corporation laws in the United States. Therefore, you may have more difficulty protecting your interests in connection with actions taken by our directors and officers or our principal shareholders than you would as a shareholder of a corporation incorporated in the United States.

You may not be able to participate in future equity offerings, and you may not receive any value for rights that we may grant.

Under our memorandum and articles of association, existing shareholders are entitled to preemptive subscription rights in the event of capital increases. However, our articles of association also provide that such preemptive subscription rights do not apply to certain issuances of securities by us, including (i) pursuant to any employee compensation plans; (ii) as consideration for (a) any merger, consolidation or purchase of assets or (b) recapitalization or reorganization; (iii) in connection with a pro rata division of shares or dividend in specie or distribution; or (iv) in a bona fide public offering that has been registered with the SEC.

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ITEM 4. INFORMATION ON THE COMPANY

A. History and Development of the Company

Overview

We were incorporated as Arcos Dorados Holdings Inc. on December 9, 2010 under the laws of the British Virgin Islands as a direct, wholly owned subsidiary of Arcos Dorados Limited, the prior holding company for the Arcos Dorados business. On December 13, 2010, Arcos Dorados Limited effected a downstream merger into and with us, with us as the surviving entity. Following the merger, we replaced Arcos Dorados Limited in the corporate structure and replicated its governance structure.

We are a British Virgin Islands company incorporated with limited liability and our affairs are governed by the provisions of our memorandum and articles of association, as amended and restated from time to time, and by the provisions of applicable British Virgin Islands law, including the BVI Business Companies Act, 2004, or the BVI Act. Our company number in the British Virgin Islands is 1619553. As provided in sub-regulation 4.1 of our memorandum of association, subject to British Virgin Islands law, we have full capacity to carry on or undertake any business or activity, do any act or enter into any transaction and, for such purposes, full rights, powers and privileges.

Our principal executive offices are located at Dr. Luis Bonavita 1294, Office 501, WTC Free Zone, Montevideo, Uruguay (CP 11300). Our telephone number at this address is +598 2626-3000. Our registered office in the British Virgin Islands is Maples Corporate Services (BVI) Limited, Kingston Chambers, P.O. Box 173, Road Town, Tortola, British Virgin Islands.

The SEC maintains an internet website that contains reports, proxy, information statements and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov. Our website address is www.arcosdorados.com. The information contained on, or that can be accessed through, our website is not part of, and is not incorporated into, this annual report.

Important Events

The Acquisition

McDonald’s Corporation has a longstanding history in Latin America and the Caribbean, dating to the opening of its first restaurant in Puerto Rico in 1967. Since then, McDonald’s expanded its presence across the region as consumer markets and opportunities arose, opening its first stores in Brazil in 1979, in Mexico and Venezuela in 1985 and in Argentina in 1986.

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We commenced operations on August 3, 2007, as a result of the Acquisition of McDonald’s LatAm business. Woods Staton, our Executive Chairman and controlling shareholder, was the joint venture partner of McDonald’s Corporation in Argentina for over 20 years prior to the Acquisition and also served as President of McDonald’s South Latin American division from 2004 until the Acquisition. Our senior management team includes executives who had previously worked in McDonald’s LatAm business or with Mr. Woods Staton.

We hold our McDonald’s franchise rights pursuant to the MFA for all of the Territories except Brazil, executed on August 3, 2007, as amended and restated on November 10, 2008 and as further amended on August 31, 2010, June 3, 2011 and March 17, 2016, entered into by us, LatAm, LLC (the “Master Franchisee”), our former wholly owned subsidiary Arcos Dorados Coöperatieve U.A., Arcos Dorados B.V., certain subsidiaries of the Master Franchisee, Los Laureles, Ltd. and McDonald’s. On March 21, 2018, Arcos Dorados Group B.V. (together with Arcos Dorados B.V. and us, the “Owner Entities”) replaced Arcos Dorados Coöperatieve U.A. as party to the MFA. On August 3, 2007, our subsidiary Arcos Dourados Comercio de Alimentos ~~Ltda.~~S.A., or the Brazilian Master Franchisee, and McDonald’s entered into the separate, but substantially identical, Brazilian MFA, which was amended and restated on November 10, 2008. Arcos Dourados Comercio de Alimentos S.A., formerly a limited liability company, changed its legal constitution and became a closely-held company (“Sociedade por Ações Fechada” or “S.A.”) as of November 23, 2020, subject to certain publication and reporting requirements, including with respect to all acts or decisions made by its shareholders or its board of directors that impact or could impact third parties. See “Item 10. Additional Information―C. Material Contracts―The MFAs.”

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The Axionlog Split-off

We used to own and operate some of the distribution centers in the Territories, which operations and related properties we refer to as Axionlog (formerly known as Axis). As of the date of the split-off, Axionlog operated in Argentina, Chile, Mexico and Venezuela, and its main third-party customers were Sodexho, Eurest, Sadia, WalMart, Carrefour, Subway and Dairy Queen. We effected a split-off of Axionlog to our existing shareholders in March 2011. For additional information about the split-off of Axionlog, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Axionlog Split-off.”

Capital Expenditures and Divestitures

Under the MFAs, we are required to agree with McDonald’s on a restaurant opening plan and a reinvestment plan for each three-year period during the term of the MFAs. The restaurant opening plan specifies the number and type of new restaurants to be opened in the Territories during the applicable three-year period, while the reinvestment plan specifies the amount we must spend reimaging or upgrading restaurants in the Territories during the applicable three-year period. Prior to the expiration of the then-applicable three-year period we must agree with McDonald’s on a subsequent restaurant opening plan and reinvestment plan. In the event that we are unable to reach an agreement on subsequent plans prior to the expiration of the then-existing plan, the MFAs provide for an automatic increase of 20% in the required amount of reinvestments as compared to the then-existing reinvestment plan and a number of new restaurants no less than 210 multiplied by a factor that increases each period during the subsequent three-year restaurant opening plan. We may also propose, subject to McDonald’s prior written consent, amendments to any restaurant opening plan and/or reinvestment plan to adapt to changes in economic or political conditions.

As a result of the business disruptions caused by COVID-19 ~~outbreak,~~pandemic, we have agreed with McDonald’s to withdraw our previously-approved 2020-2022 restaurant opening plan and reinvestment plan. Our actual restaurant openings and reinvestment capital expenditures in 2020 were approved by McDonald’s. Additionally, on December 18, 2020, we reached an agreement with McDonald’s for new restaurant openings and reinvestment capital expenditures for 2021 only. We expect to discuss our 2022 restaurant opening plan and ~~we do not expect to finalize a revised 2020-2022~~reinvestment plan ~~at least until~~with McDonald’s in the ~~COVID-19 outbreak is under control.~~second half of 2021. If we are unable to meet our commitments under a future plan and we are unable to reach an agreement on revised terms of the restaurant opening plan and reinvestment plan or are otherwise unable to obtain a waiver from McDonald’s, we will be in default under the terms of the MFAs. See “Item 3. Key Information—D. Risk Factors—~~Certain Factors Relating~~Risks Related to Our ~~Business—~~Business and Operations—The spread of COVID-19 has materially and adversely affected our business, results of operations and cash flows, and may continue to do so.”

As a result of our previous restaurant opening plan and reinvestment plan, property ~~property~~ and equipment expenditures were $86.3 million, $265.2 million and $197.0 million in 2020, 2019 and ~~$174.8 million in 2019,~~ 2018 respectively. In 2020, we opened 9 restaurants, reimaged 38 existing restaurants, and ~~2017 respectively.~~opened 121 Dessert Centers. In 2019, we opened 90 restaurants, reimaged 271 existing restaurants, opened 6 McCafé locations and 296 Dessert Centers. In 2018, we opened 70 restaurants, reimaged 173 existing restaurants, opened 6 McCafé locations and 375 Dessert Centers. In ~~2017, we opened 50 restaurants, reimaged 124 existing restaurants~~2020, 2019 and ~~opened 2 McCafé locations and 223 Dessert Centers. In 2019,~~ 2018, ~~and 2017,~~ we closed 66, 20 35 and 1835 restaurants, respectively.

In addition, outflows related to purchases of restaurant businesses paid at acquisition date totaled ~~$2.7 in 2019 and $0.9~~$3.8 million in ~~2017.~~2020 and $2.7 million in 2019. We had no such outflows in 2018.

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Proceeds from the sale of property and equipment and sales of restaurant businesses, including related advances, totaled ~~$8.2~~$0.8 million,$8.2 million and $13.0 million in 2020, 2019 and ~~$72.4 million in 2019,~~ 2018, ~~and 2017,~~ respectively.

~~Prior to the inception~~

Table of the COVID-19 pandemic, we planned to open at least 285 to 300 new restaurants and invest approximately $1.0 billion in total capital expenditures, which includes reinvestment capital expenditures, from 2020 through 2022. Due to the COVID-19 outbreak, as of the date of this annual report, we have withdrawn this plan and do not expect to finalize a revised plan for 2020 to 2022 at least until the COVID-19 outbreak has been brought under control. See “Item 3. Key Information—D. Risk Factors—Certain Factors Relating to Our Business—The spread of COVID-19 has materially and adversely affected our business, results of operations and cash flows, and may continue to do so.”Contents

In March 2015, we announced a plan to monetize certain real estate assets in our portfolio that are either non-core or operating assets where the value significantly exceeds the operating potential of the asset, through which we received over $170 million from the sale of these properties. The main goal of the redevelopment initiative was to reduce debt levels. We have concluded with this plan.

B. Business Overview

Overview

We are the world’s largest independent McDonald’s franchisee in terms of systemwide sales and number of restaurants, according to McDonald’s, representing ~~3.99%~~2.8% of McDonald’s global sales in ~~2019.~~2020. We have the exclusive right to own, operate and grant franchises of McDonald’s restaurants in 20 countries and territories in Latin America and the Caribbean, including Argentina, Aruba, Brazil, Chile, Colombia, Costa Rica, Curaçao, Ecuador, French Guiana, Guadeloupe, Martinique, Mexico, Panama, Peru, Puerto Rico, Trinidad and Tobago, Uruguay, the U.S. Virgin Islands of St. Croix and St. Thomas, and Venezuela, which we refer to collectively as the Territories. As of December 31, ~~2019,~~2020, we operated or franchised ~~2,293~~2,236 McDonald’s-branded restaurants, which represented ~~6.35%~~6.0% of McDonald’s total franchised restaurants worldwide. In ~~2019~~2020 and ~~2018,~~2019, we accrued ~~$155.4~~$111.0 million and ~~$157.9~~$155.4 million, respectively, in royalties to McDonald’s (not including royalties accrued on behalf of our franchisees).

We operate in the QSR sub-segment of the fast food segment of the Latin American and Caribbean food service industry. In Latin America and the Caribbean, the fast food segment has benefited from the region’s increasing modernization, as people in more densely populated areas adopt lifestyles that increasingly seek convenience, speed and value.

We commenced operations on August 3, 2007, as a result of the Acquisition. We operate McDonald’s-branded restaurants under two different operating formats, Company-operated restaurants and franchised restaurants. As of December 31, ~~2019,~~2020, of our ~~2,293~~2,236 McDonald’s-branded restaurants in the Territories, ~~1,580~~1,576 (or ~~68.9%~~70.5%) were Company-operated restaurants and ~~713~~660 (or ~~31.1%~~29.5%) were franchised restaurants. We generate revenues primarily from two sources: sales by Company-operated restaurants and revenues from franchised restaurants. Revenues from franchised restaurants primarily consist of rental income, which is generally based on the greater of a flat fee or a percentage of sales reported by franchised restaurants. We own the land for ~~494~~489 of our restaurants (totaling approximately 1.1 million square meters) and the buildings for all but 11 of our restaurants.

Our business has grown significantly in the last three years: we have increased our presence in existing and new markets in the Territories by opening a net total of 70 restaurants (90 total restaurants opened, including 65 Company-operated and 25 franchised, while 20 closed), 6 McCafé locations and 296 Dessert Centers (see “—Our Operations—McCafé Locations and Dessert Centers”).

As of December 31, ~~2019, 44.6%~~2020, 45.6% of our restaurants were located in Brazil, ~~17.6%~~17.5% in SLAD, ~~23.1%~~22.7% in NOLAD and ~~14.7%~~14.2% in the Caribbean division. We believe our diversified market presence reduces our dependence on any one market and helps stabilize the impact of individual countries’ economic cycles on our revenues. We focus on our customers by managing operations at the local level, including marketing campaigns and special offers, menu management and monitoring customer

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satisfaction, while leveraging our size by conducting administrative and strategic functions at the divisional or corporate level, as appropriate.

The following table presents a breakdown of total revenues by division:


	For the Years Ended December 31,
	2020		2019		2018		2017		2016
	(in thousands of U.S. dollars)
Total Revenues
Brazil	$	862,748	$	1,385,566	$	1,345,453	$	1,496,573	$	1,333,237
Caribbean division(1)	381,090		399,251		483,743		474,822		409,671
NOLAD	311,887		431,266		406,848		386,874		363,965
SLAD	428,494		742,994		845,527		961,256		821,757
Total	1,984,219		2,959,077		3,081,571		3,319,525		2,928,630

For the Years Ended December 31,
2019 2018 2017 2016 2015
(in thousands of U.S. dollars)
Total Revenues
Brazil $ 1,385,566 $ 1,345,453 $ 1,496,573 $ 1,333,237 $ 1,361,989
Caribbean division(1) 399,251 483,743 474,822 409,671 398,144
NOLAD 431,266 406,848 386,874 363,965 367,364
SLAD 742,994 845,527 961,256 821,757 925,243
Total 2,959,077 3,081,571 3,319,525 2,928,630 3,052,740


~~(1)~~	Currency devaluations in Venezuela have had a significant effect on our income statements and have impacted the comparability of our income statements. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Foreign Currency Translation—Venezuela.”

(1)Currency devaluations in Venezuela have had a significant effect on our income statements and have impacted the comparability of our income statements. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Foreign Currency Translation—Venezuela.”

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Our Operations

Company-Operated and Franchised Restaurants

We operate our McDonald’s-branded restaurants under two basic structures: (i) Company-operated restaurants operated by us and (ii) franchised restaurants operated by franchisees. Under both operating alternatives, the real estate location may either be owned or leased by us.

We own, fully manage and operate Company-operated restaurants and retain any operating profits generated by such restaurants, after paying operating expenses and the franchise and other fees owed to McDonald’s under the MFAs. In Company-operated restaurants, we assume the capital expenditures for the building and equipment of the restaurant and, if we own the real estate location, for the land as well.

In contrast to Company-operated restaurants, franchised restaurants are operated and managed by the franchisee with technical and operational support from us as master franchisee, including training programs, operations manuals, access to our supply and distribution network and marketing assistance. Under our conventional franchise arrangements, franchisees provide a portion of the capital required by initially investing in the equipment, signs, seating and decor of their restaurants, and by reinvesting in the business over time. We are required by the MFAs to own the real estate or to secure long-term leases for franchised restaurant sites. We subsequently lease or sublease the property to franchisees. This arrangement allows for long-term occupancy of the property and assists in the alignment of our franchisees’ interests with our own.

In exchange for the lease and services, franchisees pay a monthly rent to us, generally based on the greater of a fixed rent or a certain percentage of gross sales. In addition to this monthly rent, we collect the monthly continuing franchise fee, which generally is 5% of the U.S. dollar equivalent of the restaurant’s gross sales, and pay these fees to McDonald’s pursuant to the MFAs. However, if a franchisee fails to pay its monthly continuing franchise fee, we remain liable for payment in full of these fees to McDonald’s. Pursuant to the MFAs, franchisees pay an initial franchise fee in connection with the opening of a new franchised restaurant and a transfer fee upon transfer of a franchised restaurant, both of which are subsequently shared by McDonald’s and us. See “Item 10. Additional Information—C. Material Contracts—The MFAs—Franchise Fees.”

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The chart below illustrates the economics for Company-operated restaurants and franchised restaurants in the case of owned and leased real estate:

Source: Arcos Dorados

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In addition, we are the majority stakeholder in two joint ventures that collectively own 15 restaurants in Argentina and Chile. We have also granted developmental licenses to 119 restaurants. Pursuant to the developmental licenses, the developmental licensees own or lease the land on and building in which the restaurant is located and pay a franchise fee to us in addition to the continuing franchise fee due to McDonald’s. All of our joint ventures and developmental licenses were in existence at the time of the Acquisition.

Restaurant Categories

We classify our restaurants into one of four categories: (i) freestanding, (ii) food court, (iii) in-store and (iv) mall stores. Freestanding restaurants are the largest type of restaurant, have ample indoor seating and include a drive-thru area and parking lot. Food court restaurants are located in malls and consist primarily of a front counter and kitchen and do not have their own seating area. In-store restaurants are part of a larger building, but they do not have a drive-thru area or a parking lot. Mall stores are located in malls like food court restaurants, but have their own seating areas. As of December 31, ~~2019, 1,083~~2020, 1071 (or ~~47.3%~~47.9%) of our restaurants (not including non-traditional satellite stores) were freestanding, ~~594~~578 (or ~~25.9%~~25.8%) were food courts, ~~294~~276 (or ~~12.8%~~12.3%) were in-stores and ~~320~~309 (or ~~14.0%~~13.8%) were mall stores. These percentages vary by country, and may shift as opportunities in malls and more densely populated areas become available in some of the Territories.

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Below are examples of each of our restaurant categories:




Freestanding			In-store


Mall Store			Food Court

Source: Arcos Dorados

Returns on investment in each type of restaurant vary significantly due to the different capital expenditures required and their different sales potential; mall stores generally provide the highest return on investment while freestanding restaurants generally provide the lowest. Moreover, returns vary significantly on a country-by-country basis.

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Reimaging

An important component of our development plan is the reimaging of existing restaurants. As of December 31, ~~2019,~~2020, we had completed the reimaging of ~~1,018~~1,056 of the 1,569 restaurants we purchased in the Acquisition, an increase of ~~177~~38 restaurants as compared to December 31, ~~2018.~~2019. Our restaurants that have undergone reimaging during the past three years have experienced an additional increase in sales per restaurant over the comparable sales growth experienced by restaurants which have not been reimaged in the same period. Both we and McDonald’s are committed to maintaining an image for our restaurants that creates a contemporary dining experience. Over the last few years, we have invested substantially in the reimaging of our restaurants, and we, pursuant to the MFAs, have committed to a significant reimaging plan. See “Item 10. Additional Information—C. Material Contracts.”

Objectives of the reimaging include elevating the customer’s perception of McDonald’s and creating a more sophisticated and highly aspirational environment. We have developed systemwide guidelines for the interior and exterior design of reimaged restaurants. When carrying out a reimaging project, we try to minimize the impact on the operations and sales of the restaurants, for instance, when possible, by keeping the restaurants open and operating during the renovations and working in specific areas of the location at particular times.

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Below are images of the exterior of a few of our restaurants that have benefited from reimaging:

Source: Arcos Dorados

McCafé Locations and Dessert Centers

Our brand extension efforts focus on the development of additional McCafé locations and Dessert Centers. McCafé locations are stylish, separate areas within restaurants where customers can purchase a variety of customizable beverages, including lattes, cappuccinos, mochas, hot and iced premium coffees and hot chocolate. McCafé locations have been very successful in creating a different customer experience, optimizing the use of our restaurants at all hours of operation and providing a higher profit margin than our regular restaurant operations. We believe the primary benefit of McCafé locations is that they attract new customers by increasing the variety of our product offerings and improving our image.

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McCafé locations have been a key factor in adding value to our customers’ experience and represented ~~9.3%~~7.3% of the total transactions and ~~5.6%~~3.9% of total sales of the restaurants in which they were located in 2019. As of December 31, ~~2019,~~2020, there were ~~258~~243 McCafé locations in the Territories, of which ~~17.1%~~16.5% were operated by franchisees. Argentina and Brazil, with 8177 locations, each, have the greatest number of McCafé locations. The first McCafé in Latin America was opened in Argentina in 1999. Pursuant to the MFAs, we have the right to add McCafé locations to the premises of our restaurants.

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Below are images of the interior of two of our McCafé locations:

Dessert Center - Ice Cube

Source: Arcos Dorados

In addition to McCafé locations, Dessert Centers have been a very successful brand extension. Dessert Centers operate separately from existing restaurants, but depend on them for supplies and operational support. For example, a mall store restaurant can provide support for several Dessert Centers located in different locations throughout the same mall. Our Dessert Centers are conveniently located to attract customers, thereby serving as important transaction generators and providing an effective method of extending our ~~band~~brand presence to non-traditional areas. At Dessert Centers, customers can purchase a variety of dessert items, including the McFlurry and soft-serve ice cream. Dessert Centers require low capital expenditures and provide returns on investment and operating margins that are significantly higher than our regular restaurant operations. As such, we believe they are an important driver in increasing our market penetration.

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Dessert Centers represented ~~43%~~37.6% of our transactions and ~~14.7%~~12.2% of our total sales in ~~2019.~~2020. As of December 31, ~~2019,~~2020, there were ~~3,326~~3,314 Dessert Centers in the Territories. Dessert Centers are highly successful in Brazil, where we have ~~2,000~~2,012 locations. The first Dessert Center was created in Brazil in 1979.

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The following maps set forth our McCafé locations and Dessert Centers in each of the Territories as of December 31, ~~2019:~~

2020:



Network of McCafé Locations			Network of Dessert Centers
~~258~~243 total McCafé locations			~~3,326~~3,314 total Dessert Centers

Source: Arcos Dorados

The McDonald’s Brand

Interbrand, a brand consulting firm, ranked McDonald’s ninth among the top twenty global brands in ~~2019.~~2020. In addition, we believe that in Latin America and the Caribbean, the McDonald’s brand benefits from an aspirational cachet as a “destination” restaurant with a reputation for safe, fresh and good-tasting food in an attractive setting. McDonald’s strong brand equity stems from the dedicated execution of its brand promise and its ability to associate with the local community where it operates. McDonald’s sets the standard in the restaurant industry worldwide for brand stewardship and marketing leadership.

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Product Offerings

A crucial part of delivering the brand to clients depends on our product offerings, or more specifically, our menu strategy and management. The key objective of our menu strategy is the development and offering of quality food choices that attract customers to our restaurants on a regular basis. The elements we utilize to achieve this goal include offering McDonald’s core menu, our product innovation initiatives and our focus on food safety.

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Our menus feature three tiers of products: (i) affordable entry-level options, such as our Combo del Día (Combo of the Day), McTrio 3x3 in Mexico and Almuerzo Colombiano (Colombian Lunches) in Colombia, (ii) core menu options, such as the Big Mac, Happy Meal and Quarter Pounder, and (iii) premium options, such as Big Tasty and Signature Collection or Picanha hamburgers, chicken sandwiches and salads or wraps for those clients that want low calorie options. These platforms can be based on the type of products, such as beef, chicken, salads or desserts, or on the type of customer targeted, such as the children’s menu. We have offered a new menu with fewer calories and less sugar and sodium in the majority of our Territories since 2011. Since 2013, we have offered dairy products, ~~fresh~~ fruits or vegetables with our Happy Meals in all of the Territories except Venezuela. In November 2019, we joined McDonald’s Corporation in its mission to serve foods that are a win-win for families, providing delicious and nutritious food that appeal to both kids and parents. In the markets in which we operate, we are offering a Happy Meal menu that complies with the following criteria: less than 600 calories, less than 30% of calories from total fat, less than 10% of calories from saturated fat, less than 650 mg sodium, less than 10% of calories from added sugar, no artificial flavors and no added colors from artificial sources and balanced fruit and vegetable content. Arcos Dorados’ new nutritional policy was publicly endorsed by major health and nutrition bodies of various countries, such as Inter-American Society of Cardiology, the Brazilian Association of Nutrition (ABRAN), the Argentine Cardiology Foundation, the Peruvian Nutrition Society (SOPENUT), and the Uruguayan Association of Dietitians and Nutritionists.

Our core menu is the most important element of our menu strategy and includes well-recognized food choices that have global customer acceptance and are what customers repeatedly order at McDonald’s-branded restaurants worldwide. ~~During 2019, we evolved the Happy Meal Menu making significant reductions in fat, sodium and added sugars, making it more nutritious in all of our markets.~~ We ~~also~~ made extensions of our core products, such as Double Big Mac, Gran Big Mac, Big Mac Bacon and, ~~Triple Quarter Pounder with Cheese in Brazil,~~ Quarter Pounder with Bacon, Lettuce and Tomato in ~~Argentina~~many countries and the ~~McNuggetear~~Triple Quarter Pounder with Cheese in Uruguay, which is being offered for a period of time. We have also introduced different sauces for the McNuggets with McNuggetear in ~~Mexico.~~Colombia.

Product Development

~~We have been very innovative in~~During 2020 we focused our ~~product development in Latin America and~~menu on our core items, simplifying the ~~Caribbean.~~ lower sales products to reduce complexity on our kitchens.

In key countries, our understanding of the local market has enabled us to successfully introduce new items to appeal to local tastes and to provide our customers with additional food options. Our chicken-based offerings include bone-in chicken in markets such as Colombia, Peru, Panama and Costa Rica. ~~We also offer Signature Collection hamburgers with innovative flavors and premium offerings, such as Club House, Bacon Smoke House, Mushroom Deluxe, Egg and Bacon, Crispy Onion Barbecue.~~ Also, we carefully monitor the sales of our products and are able to quickly modify them if necessary. For instance, ~~although~~during the COVID-19 pandemic the sales of our desserts initially declined so we ~~always offer the~~introduced new McFlurry combinations to share at home in which customers are able to make their own McDonald’s desserts such as cones. In addition, we have launched a new dessert ~~product, we include in this product platform a promotional topping~~called “Croccantella”, that is ~~offered for a limited period of time, followed by~~ a new ~~promotional~~and exclusive topping ~~to maintain the sales momentum (for example, Oreo, Ovomaltine, Hershey’s, Milka and Kit Kat). In August 2019, we also updated~~for all our ~~Happy Meal menus to include more fruits and vegetables and reduce fat, sodium and added sugars. See “—Social Initiatives and Charitable Activities—Nutrition and Well-Being.”~~ice creams in Argentina.

In 2011, we began the rollout of Made For You, or MFY, a new kitchen operating platform that allows us to improve the quality and freshness of our products, provide faster service and diversify our offerings. MFY’s implementation is funded by cutting waste and productivity gains. As of the end of 2018, we had implemented MFY in all of the territories in which we operate.

We work closely with McDonald’s to develop new product offerings and McDonald’s considers our recommendations regarding regional tastes and preferences and works with us to accommodate such tastes and preferences. We continue to benefit from McDonald’s product development efforts following the Acquisition and have access to a library of products developed globally for the McDonald’s system. In addition, we continue to benefit from the Hamburger Universities in the United States and Brazil and the ~~food studio~~experimental kitchen located in Brazil that aims to develop locally relevant products for the region. The Hamburger Universities and the food studio models have been McDonald’s main global source of people and product development. The Hamburger Universities provide restaurant managers, mid-managers and owner/operators with training on best practices in different aspects of the business, like restaurant and people management, sales and accounting, while emphasizing consistent restaurant operations procedures, service, quality and cleanliness.

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Product and Pricing Strategy

Value perceptions change significantly between markets and even between areas within a single market. In order to adjust pricing to meet customers’ expectations in each market, we have developed local expertise aimed at understanding the dynamics of the local marketplace and the characteristics of its customers. We also examine trends in the pricing of raw materials, packaging, product-related operating costs as well as individual item sales volumes to fully understand profitability by item. In addition, we use international consultants with particular experience in this area to understand marketplace dynamics and consumer characteristics. These insights feed into the local markets’ menu, promotional and pricing strategy as well as the marketing plan that is disseminated to both Company-operated and franchised restaurants. Restaurants may then adjust pricing and/or item offerings as they choose in an attempt to optimize sales, profitability and local preferences. This cycle is part of an overall revenue management philosophy and is part of our business management practices utilized throughout the region.

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Advertisement & Promotion

We believe that sales in the QSR sub-segment can be significantly affected by the frequency and quality of our advertising and promotional programs. In particular, we benefit from the strength of McDonald’s global resources, including its global alliances with some of the largest multinational conglomerates and sponsorship of sporting events such as the FIFA World Cup and participation in various movie promotions, which provides us with important advertising and promotion opportunities.

We promote the McDonald’s brand and our products by advertising in all of the Territories. We create, develop and coordinate marketing plans and promotional activities throughout the Territories; however, pursuant to the MFAs, McDonald’s reserves the right to review and approve any advertising materials and related promotional activities and may request that we cease using the materials or promotional activities at any time if McDonald’s determines that they are detrimental to its brand image. We are required under the MFAs to spend at least 5% of our gross sales, and our franchisees generally are required to pay us a certain percentage of their gross sales for the portion of advertising expenditures related to their restaurants, on advertisement and promotion activities. The only exception to this policy is in Mexico, where both we and our franchisees contribute funds to a cooperative that is responsible for advertisement and promotion activities for Mexico. In connection with the COVID-19 outbreak, ~~we have agreed with McDonald's to reduce~~McDonald’s granted us a reduction of the advertising and promotion spending requirement from 5% to 4% of our gross sales for the full year 2020. Beginning on January 1, 2021, we resumed spending 5% of our gross sales on advertising and promotion.

Our advertisement and promotion activities are guided by our overall marketing plan, which identifies the key strategic platforms that we aim to leverage to drive sales. The advertisement and promotion program is formulated based on the amount of advertisement and promotion support needed for each strategic platform for the year. Our key strategic platforms include menu relevance, by introducing premium products and extending core product lines, convenience and strengthening the kids and family experience. In terms of pricing, we understand that our customers seek great-tasting food at affordable prices and that their perception of value while at the restaurant is a significant factor in determining overall satisfaction and frequency of visits. Other initiatives included the “books or toys” campaign in all our markets in Latin America, through which we sold more than 1820 million books since 2013 and which aims to encourage children’s creativity. In 2020 we focused our efforts on communicating the hygiene and safety procedures we follow through our McProtegidos Program in all our restaurants across all markets. We also ~~continued~~celebrated our ~~premium platform~~Core Products with product line extensions and through a Happy Week promotion. We strengthened sales channels like McDelivery with special offers and repositioned the drive- thru sales channel in order to adapt to the new mobility trends. In addition, we successfully rebuilt our family business with the introduction of family bundles like the Family Box. All advertised Happy Meal bundles in the markets in which we ~~offered~~operate comply with McDonald’s Corporation’s Global Marketing to Children Policy, including its Global Happy Meal Nutrition Criteria.

To unlock further growth, Arcos Dorados has committed to win the digital race in Latin America. We have created a dedicated department that is working under agile methodologies to accelerate our digital offerings. We are doubling down in our digital marketing capabilities to acquire, activate and engage customers through personalization. We continue to evolve our Mobile App which is one of the leading in the QSR industry with over 50 Million downloads and 4+ star ratings. Additionally, we are developing new ~~premium dishes,~~digital solutions to respond to customer trends such as mobile order & pickup.

Through our digital platform, Arcos Dorados will offer customers the ~~Bacon Smoke House, Mushroom Deluxe, Egg~~personal, fast and ~~Bacon, Crispy Onion Barbecue, Picanha~~easy experiences they love and ~~McVeggie preparations~~provide them with many reasons to keep coming back.

Table of ~~our Signature Collection burgers.~~Contents

Through the execution of these initiatives, we work to enhance the McDonald’s experience for customers throughout the Territories, and increase our sales and customer counts. We aim to position ourselves as a “forever young” brand by delivering a youthfully energetic, distinctly casual, personally engaging and delightful dining/brand experience.

Regional Operations

The Company is divided into four geographical divisions: Brazil, the Caribbean division, NOLAD and SLAD. Except for Brazil, the divisions are subsequently divided into sub-groups comprised of individual Territories. The presidents of the divisions report directly to our chief operating officer.

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The following map sets forth the number of our restaurants in each of our operating divisions as of December 31, ~~2019:~~2020:

Source: Arcos Dorados

We remain close to customers by managing operations at the local level, including implementing recruiting centers, conducting marketing campaigns and promotions, monitoring consumer perception and managing menu offerings. We conduct administrative and strategic activities at either the divisional level or at our headquarters, as appropriate. In addition, we have designed standardized crew recruiting manuals and have implemented an online communication platform for crew and managers. These centralized operations help us maintain consistent procedures, quality control and brand management across all of our markets.

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Set forth below is a summary of our restaurant portfolio as of December 31, ~~2019.~~2020.


	Ownership					Store Type(1)						Real Property(2)
Portfolio by Division	Company-Operated	Joint Venture	Franchised	Developmental License	Total	Freestanding	Food Court	In-Store	Mall Store	Dessert Centers	McCafé Locations	Owned	Leased
Brazil	610	0	410	0	1,020	462	348	91	119	2,012	77	108	912
Caribbean Division	269	0	49	0	318	220	20	31	47	324	31	128	190
NOLAD	353	0	145	9	507	265	135	49	57	588	13	156	342
SLAD	329	15	47	0	391	124	75	105	86	390	122	97	294
Total	1,561	15	651	9	2,236	1,071	578	276	309	3,314	243	489	1,738

Ownership
Store Type⁽¹⁾
Real Property⁽²⁾
Portfolio by Division Company-Operated Joint Venture Franchised Developmental License Total Freestanding Food Court In-Store Mall Store Dessert Centers McCafé Locations Owned Leased
Brazil 612 0 411 0 1,023 462 350 92 119 2,000 81 108 915
Caribbean Division 251 0 84 1 336 224 21 36 55 311 36 128 207
NOLAD 364 0 156 10 530 273 146 51 59 626 13 160 360
SLAD 338 15 51 0 404 124 77 115 87 389 128 98 306
Total
1,565 15 702 11 2,293 1,083 594 294 320 3,326 258 494 1,788


~~(1)~~	~~Non-traditional satellite restaurants are not included in these figures.~~


~~(2)~~	(1) Non-traditional satellite restaurants are not included in these figures. (2) Developmental licenses and mobile stores are not included in these figures.

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Brazil

Brazil is our largest division in terms of restaurants, with ~~1,023~~1,020 restaurants as of December 31, ~~2019~~2020 and ~~$1,385.6~~$862.7 million in revenues in ~~2019,~~2020, representing ~~44.6%~~45.6% and ~~46.8%~~43.5% of our total restaurants and revenues, respectively. Our operations in Brazil are based in ~~Sao~~São Paulo and McDonald’s has been present in Brazil since opening its first restaurant in Rio de Janeiro in 1979.

Caribbean Division

The Caribbean division includes eleven territories with ~~336~~ 318 restaurants as of December 31, ~~2019~~2020 and ~~$399.3~~$381 million in revenues in ~~2019,~~2020, representing ~~14.7%~~14.2% and ~~13.5%~~19.2% of our total restaurants and revenues, respectively. Its primary market in terms of number of restaurants is Venezuela, representing 35.7% of the Caribbean division’s restaurants. Venezuela is our fourth-largest market in terms of restaurants. McDonald’s has been present in Venezuela since opening its first restaurant in Caracas in 1985. In terms of revenues, however, our primary market in this region is Puerto Rico, accounting for ~~35.7%~~46.3% of the Caribbean division’s revenues. Although Venezuela is its primary market in terms of number of restaurants, Puerto Rico represents 30.2% of the Caribbean division’s restaurants.

NOLAD

NOLAD includes three countries with ~~530~~507 restaurants as of December 31, ~~2019~~2020 and ~~$431.3~~$311.9 million in revenues in ~~2019,~~2020, representing ~~23.1%~~22.7% and ~~14.6%~~15.7% of our total restaurants and revenues, respectively. Its primary market is Mexico, where the division’s management is based. McDonald’s has been present in Mexico since opening its first restaurant in Mexico City in 1985. Mexico represents ~~73.0%~~72.4% of NOLAD’s restaurants and ~~45.8%~~43.2% of NOLAD’s revenues, and Mexico is our second-largest market in terms of restaurants.

SLAD

SLAD includes five countries with ~~404~~391 restaurants as of December 31, ~~2019~~2020 and ~~$743.0~~$428.5 million in revenues in ~~2019,~~2020, representing ~~17.6%~~17.5% and ~~25.1%~~21.6% of our total restaurants and revenues, respectively. Its primary market is Argentina, where the division’s management is based. McDonald’s has been present in Argentina since opening its first restaurant in Buenos Aires in 1986. As of December 31, ~~2019,~~2020, Argentina represented ~~57.2%~~56.3% of SLAD’s restaurants and ~~52.7%~~46.2% of SLAD’s revenues in ~~2019.~~2020. Argentina is our third-largest market in terms of restaurants.

Seasonality

Our sales and revenues are generally greater in the second half of the year than in the first half. Although the impact on our results of operations is relatively small, this impact is due to increased consumption of our products during the winter and summer holiday seasons, affecting July and December, respectively.

Supply and Distribution

Supply chain management is an important element of our success and a crucial factor in optimizing our profitability. Currently, we have an integrated and centralized supply chain management system that focuses on (i) the highest possible quality and food safety, (ii) competitive market pricing that is predictable and sustainable over time, and (iii) leveraging of local, regional and global sourcing strategies to obtain a competitive advantage. This system consists of the selection and development of suppliers that are able to comply with McDonald’s high quality standards and the establishment of the appropriate type of relationships with these suppliers. These standards, which are based on the highest industry standards, such as International Organization for Standardization (ISO) standards, British Retail Consortium (BRC) standards and

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others, include cleanliness, product consistency and timeliness, meeting or exceeding all local food regulations and compliance with ~~our~~ Hazard Analysis Critical Control Plan, or HACCP, a systematic approach to food safety that emphasizes protection within the processing facility, rather than detection, through analysis, inspection and follow-up. Due to our supply chain management and high quality standards, we believe our products have a competitive advantage because they have many attributes that make them appealing to our customers. For instance, our McNuggets are made of 100% white meat; our frying oil is 100% free of trans fatty acids; the dairy mix for our sundaes and the McFlurry undergo aseptic processes to rid them of bacteria; our vegetables are washed and sanitized; and our hamburger patties are made with 100% beef and do not contain additives.

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Pursuant to the MFAs, we purchase core products and services, such as beef, chicken, buns, produce, cheese and dairy mixes, ~~and toppings,~~ from approved suppliers and distributors who satisfy the above requirements. If McDonald’s determines that any product or service offered by an approved supplier is not in compliance with its standards, it may terminate the supplier’s approved status. Beyond the purchase of core products and services, we have no restrictions on which suppliers or distributors we may use. We have largely continued the supply relationships that McDonald’s had established prior to the Acquisition, and we develop relationships with new suppliers in accordance with McDonald’s product and supplier protocols, including the following: Supplier Quality Management System, (SQMS), Social Workplace Accountability (SWA), Distributor Quality Management Program (DQMP), Animal Health and Welfare (AHW) or Packaging Quality Management Systems (PQMS).

Since the process to become an approved supplier is lengthy, expensive and requires proof of compliance with McDonald’s high quality standards, we have found that oral agreements with our approved suppliers generally are sufficient to ensure a reliable supply of quality food products, and we have developed long-term relationships with many of our suppliers. In addition, we enter into written agreements with most of our suppliers regarding the cost of such goods, which can be based on pricing protocols, formula costing, benchmarking or open bidding, as appropriate. Our 3538 largest suppliers account for approximately ~~78%~~75% of our supplies excluding Venezuela, and no single supplier or group of related suppliers account for more than ~~15%~~10% of our total food and paper costs. Among our main suppliers are JBS S.A, McCain Foods Limited, The Coca-Cola Company, HAVI Group L.P.~~, JBS S.A.~~, Reyes Holdings L.L.C., BRF S.A., ~~The Coca-Cola Company, Campo del Tesoro~~Marfrig Global Foods S/A, Savencia Fromage & Dairy, Axionlog B.V, Schreiber Foods Inc., Arytza S.A., ~~Polenghi Industrias Alimenticias Ltda.~~American Beef S.A., Tyson Foods, BRF S.A., Bimbo S.A., ~~Arytza S.A., Dohler S.A, Axionlog B.V, Eco Axial S.A., Frima S.A., AB Brasil Industria e Comercio de Alimentos LTDA, Tyson Foods, Golden State Foods,~~ Kerry Group plc., ~~Schreiber Foods Inc., Griffith Foods Worldwide Inc., Granja Tres Arroyos SRL, Panifresh~~Frima S.A., ~~Lactalis, Brasilgrafica S.A., Sergesa, Lacteos de Poblet S.A, Bemis Company Inc., Fortunato Mangravita SA, Terbium Industrial S.A. de C.V., Bunge Limited,~~ J F C & Natural Salads Distribuidora de Produtos Hortifrutigranjeiros Ltda, Golden State Foods, Bemis Company Inc., Panifresh S.A., Bunge Limited, Lactalis, Brasilgrafica S.A., Griffith Foods Worldwide Inc., Sergesa, Impresora Delta S.A., Fortunato Mangravita SA, Empresas Carozzi S.A., IBD Foods LLC, Central de Empaques S.A., AB Brasil Industria e Comercio de Alimentos LTDA, Frigorifico del Oriente S.A., Terbium Industrial S.A. de C.V., 2 F Alimentos LTDA, ~~Trenier Grafica E Industria De Artefatos De Papel Ltda, Marfrig Global Foods S/A e Industrial~~Lacteos de Poblet S.A. and ~~American Beef S.A.~~Granja Tres Arroyos SRL.

Our integrated supply chain management optimizes value as we work with suppliers to develop pricing protocols, inventory, planning and product quality. As of December 31, ~~2019,~~2020, approximately ~~21.5%~~21.4% of the food and paper products used in our restaurants were exposed to fluctuations in foreign exchange rates. This percentage varies among the Territories; for example, ~~31.7%~~36.7% of the products consumed in Mexico are exposed to fluctuations in foreign exchange rates, while ~~13.8%~~14.7% and ~~49.3%~~58.8% of the products consumed in Brazil and Colombia, respectively, are exposed. This includes the toys distributed in our restaurants, which are imported from China. Certain supplies, such as beef, must often be locally sourced in ~~2019~~2020 due to restrictions on their importation. Combined with the MFAs’ requirement to purchase certain core supplies from approved suppliers, although we maintain contingency plans to back up restaurant supplies, we may not be able to quickly find alternate or additional supplies in the event a supplier is unable to meet our orders. See “Item 3. Key Information—D. Risk Factors—~~Certain Factors Relating~~Risks Related to Our ~~Business—~~Business and Operations—We depend on oral agreements with third-party suppliers and distributors for the provision of products that are necessary for our operations.” The suppliers send almost all of their products to distribution centers that are in charge of transportation, warehousing, financial administration, demand and inventory planning and customer service. The distribution centers interact directly with our Company-operated and franchised restaurants.

Until March 16, 2011, we owned and operated some of the distribution centers in the Territories, which operations and related properties we refer to as Axionlog (formerly known as Axis). See “—A. History and Development of the Company—Important Events—The Axionlog Split-off.” In 2011, we entered into a master commercial agreement with Axionlog on arm’s-length terms pursuant to which Axionlog provides us with distribution inventory, storage (dry, frozen and chilled) and transportation services in Argentina, Chile, Colombia, Mexico, Uruguay, Peru, Venezuela and Ecuador. On January 2021, Axionlog initiated providing logistics and transportation services in Martinique, French Guyana and Guadeloupe. For additional information about our transactions with Axionlog, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Axionlog Split-off.”

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Supply Chain Management and Quality Assurance

All products that we sell meet McDonald’s specifications, including new products and promotions. We work with our suppliers to implement key standards testing at each stage of our supply chain, including raw materials, processing and distribution. With respect to raw materials, we verify that produce suppliers undergo verification audits. All protein suppliers also undergo Animal Welfare Policy, “mad cow” disease (beef suppliers) and HACCP audits. At the processing stage, we implement a supplier quality management system that encourages continuous improvement in each key product category. We conduct seminars annually with ~~all~~ key suppliers on topics such as standards calibration, product sensory evaluation and best practices, and all suppliers are audited annually by a third party for compliance with ~~McDonalds’s~~McDonald’s SQMS. As members of the Global Food Safety Initiative (GFSI), we encourage our suppliers to adopt any norm under the umbrella of GFSI that is recognized globally. We measure compliance through visits to processing plants, supplier summits, regularly scheduled audits and sensory testing for core products that is achieved through a combination of product, equipment and operational procedures. At the distribution stage, we have implemented the Distribution Quality Management Program, which includes a shelf-life management system, strict temperature controls for receiving and storage of food products, a sophisticated stock recovery program and a quality inspection ~~program.~~program when food items are received. In 2017, we complemented our audit process with the implementation of unannounced ~~checks~~GMP (Good Manufacturing Practices) audits at the facilities of high-risk suppliers.

Our quality testing extends to restaurant operations. The Quality Program that includes Across The Counter Quality (ATCQ), Behind The Counter Quality (BTCQ) and Field Service Support is designed for restaurant improvement and food safety verification processes that allow us to track the implementation of changes in restaurant operations, new products, procedures and equipment. Moreover, in

In 2017 we introduced a Food Safety Restaurants audit, which is an audit of our vendors run by a third-party contractor. We participate in the restaurant operations improvement process designed by McDonald’s, under which Company-operated and franchised restaurants are visited at least three times in any 12-month cycle to identify system opportunities to continuously improve our operations. Visits are conducted by our operation consultants, who assess restaurants based on food quality, service and cleanliness. We also participate in the worldwide mystery shopper program designed by McDonald’s, where all restaurants are visited twice a month by a third-party vendor who provides us with feedback from a customer perspective. This feedback, called customer satisfaction opportunity reports, is sent to a centralized monitoring system that evaluates key operations indicators. Our multidisciplinary teams, which include members of our Supply Chain and Marketing and Operations teams, work to improve quality and efficiency at the restaurant level throughout the Territories.

Our Competition

We compete with international, national, regional and local retailers of food products. We compete on the basis of price, convenience, service, menu variety and product quality. Our competition in the broadest perspective includes restaurants, quick-service eating establishments, pizza parlors, coffee shops, street vendors, ice cream vendors, convenience food stores, delicatessens and supermarkets.

Our Customers

We aim to provide our customers with safe, fresh and good-tasting food at a good value and a favorable dining experience in the family friendly environment demanded by our target demographic of young adults and families with children. Based on data from the United Nations Economic Commission for Latin America and the Caribbean, the Territories represented a market of approximately ~~550~~555 million people in ~~2019—~~2020—equivalent to the combined population of the United States, Germany, France and the United Kingdom—of which approximately 23.1% are under 14 years old and 39.2% are under 25 years old. As a business focused on young adults in the 14 to 35 age range and families with children, our operations have benefited, and we expect to continue to benefit, from our Territories’ population size, age profile when compared to more developed markets and improving socio-economic conditions.

The McDonald’s brand in Latin America is positioned as an aspirational experience and a destination for our guests. In order to maintain that brand positioning, we have implemented several initiatives focused on providing our guests with a differentiated customer experience. EOTF provides an innovative experience with a noticeable change in the areas of service, hospitality, and atmosphere in the restaurant. We will evolve to an integrated vision, based on 5 fundamental pillars to transversally deliver the expected experience for our guest: atmosphere, people, family, menu and technology.

Despite ongoing risks generally associated with international business operations, the confluence of favorable factors throughout many of the Territories, including growth in our target demographic markets, offer an opportunity of profitable growth and the ability to serve an ever-increasing number of customers.

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Regulation

We are subject to various multi-jurisdictional federal, regional and local laws in the countries in which we operate affecting the operation of our business, as are our franchisees and suppliers. Each restaurant is subject to licensing and regulation by a number of governmental authorities, which include zoning, health, safety, sanitation, tax, operating, environmental, building and fire agencies in the jurisdiction in which the restaurant is located. Difficulties in obtaining, or the failure to obtain, required licenses or approvals can delay or prevent the opening of a new restaurant in a particular area. Restaurant operations are also subject to federal and local laws governing matters such as wages, working conditions and overtime. We are also subject to tariffs and regulations on imported commodities and equipment and laws regulating foreign investment.

Substantive laws that regulate the franchisor/franchisee relationship presently exist in several of the countries in which we operate, including Brazil. These laws often limit, among other things, the duration and scope of non-competition provisions, the ability of a franchisor to terminate or refuse to renew a franchise and the ability of a franchisor to designate sources of supply and regulate franchise sales communications.

For example, in September 2014, Argentina passed: (i) Law No. 26,991, the “Regulation on Production and Consumption Relationships Act,” which reformed a 1974 Act (Law on Supply of Goods and Services); and (ii) Law No. 26,992, the “Creation of the Observatory of Prices and Availability of Inputs, Goods and Services Act.”

The Regulation on Production and Consumption Relationships Act empowers the Secretary of Commerce to, among other things: (i) establish profit margins and set price levels (setting maximum, minimum and benchmark prices); (ii) issue regulations on commerce, intermediation, distribution or production of goods and services; (iii) impose the continuance of production, industrialization, commercialization, transport, distribution or rendering of services or impose the production of goods; (iv) set subsidies; (v) request any kind of documentation and correspondence related to commercial activities or the management of the businesses and impose the publication of prices and availability of goods and services and seize such documentation for up to 30 working days; (vi) impose registration and recordkeeping requirements; and (vii) impose licensing regimes for commercial activities. In addition, the Secretary of Commerce is entitled to impose certain penalties for failure to comply with the Regulation on Production and Consumption Relationships Act, including fines, temporary closure of businesses, seizure of goods and products and loss of fiscal benefits.

The Creation of the Observatory of Prices and Availability of Inputs, Goods and Services Act created a technical agency under the Secretary of Commerce (the Observatory of Prices and Availability of Inputs, Goods and Services) to control and systematize prices. The Argentine government has not enforced the aforementioned regulations since 2015 and neither this agency nor those regulations has had an adverse impact on us. As of the date of this annual report, we are not aware of any measures carried out implementing the ~~abovementioned~~above mentioned regulations in Argentina. However, a new administration took office in Argentina in December 2019. Therefore, we cannot assure you that such regulations will not be enforced and impact our business and results of operations in the future.

Similarly, in Venezuela, the Fair Price Act has been in force since 2013, which seeks to lower high inflation by controlling prices and costs in the chain of production. The Fair Price Act generally sets forth a profit cap of 30% on the cost structure of goods and services, thus reducing management’s ability to freely determine final prices. According to regulations passed under the Fair Price Act, to determine a final and fair price, management must observe and consider all of the costs of production, including (i) acquisition costs of raw materials, the determination of which must comply with existing regulations on transfer pricing (i.e., price, freight, primary storage, non-recoverable taxes and other costs directly attributable to the acquisition of raw materials), (ii) labor costs, and (iii) indirect costs of production.

The Fair Price Act also empowers the National Agency for the Defense of Socio-economic Rights to implement provisions and regulations on “fair pricing” and to oversee and audit businesses in Venezuela. Breaches of the Fair Price Act can result in criminal charges against merchants or business people. See “Item 3. Key Information—D. Risk Factors—~~Certain Factors Relating~~Risks Related to ~~Latin America~~Our Results of Operations and ~~the Caribbean—~~Financial Condition—Price controls and other similar regulations in certain countries have affected and may continue to affect our results of operations.” Although we managed to navigate the negative impact of the price controls on our operations from 2013 through ~~2019,~~2020, the existence of such laws and regulations continues to present a risk to our business. We continue to closely monitor developments in this dynamic environment.

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We are also subject to labor laws applicable in the countries in which we operate. The adoption of new or more stringent labor laws or regulations could result in a material liability to us. ~~For example, during 2019,~~During 2020, Venezuela implemented three increases in the minimum ~~wage and the United States Virgin Islands approved the final wage increase in a three-stage increase started in 2015.~~wage. In addition, in Argentina, certain proposed bills have attempted to implement overtime payments for weekends and mandatory employee profit-sharing, although none of those have been enacted by Congress. In Argentina there have also been enacted laws and decrees that stated: (i) severance duplications (with a recent cap of AR$500,000) in case of dismissal without cause, that will be in force until December 2021; and (ii) prohibition of dismissals without cause and dismissals due to force majeure or lack of work, that will be in force until April 2021 as a result of the COVID-19 pandemic. See “Item 3. Key Information—D. Risk Factors—~~Certain Factors Relating~~Risks Related to Our ~~Business—~~Business and Operations—Labor shortages or increased labor costs could harm our results of operations.”

In September 2014, Argentina enacted Law No. 26,993 (the “Prior Conciliation Service in Consumer Relations”). The Prior Conciliation Service in Consumer Relations is an administrative dispute resolution service within the Argentine Ministry of Production, by which consumers may freely submit their claims, with the purpose of reaching a settlement enforceable before the courts in case of noncompliance before a mediator within 30 days from the filing of the relevant claim. Consumers may only carry out proceedings before this administrative entity when the claims do not exceed a value equivalent to 55 times the minimum wage. Pursuant to Law No. 26,993, companies that are summoned to, but do not appear before, the Prior Conciliation Service in Consumer Relations may be subject to a fine equivalent to one minimum wage.

In addition, we may become subject to legislation or regulation seeking to regulate high-fat and/or high-sodium foods, particularly in ~~Argentina,~~ Brazil ~~Chile~~ and ~~Uruguay.~~Chile. Moreover, restrictions on advertising by food retailers and QSRs have been proposed or adopted in Argentina, Brazil, Chile, Colombia, Mexico ~~Peru~~ and ~~Uruguay,~~Peru, including proposals to restrict our ability to sell toys in conjunction with food. Certain jurisdictions in the United States are considering curtailing or have curtailed McDonald’s ability to sell children’s meals including free toys if these meals do not meet certain nutritional criteria. Similar restrictions, if imposed in the Latin American countries where we do business, may have a negative impact on our results of operations. We will comply with any laws or regulations that may be enacted, and we can provide no assurance of the effect that any possible future laws and regulations will have on our operating results. See “Item 3. Key Information—D. Risk Factors—~~Certain Factors Relating~~Risks Related to Our Industry—Restrictions on promotions and advertisements directed at families with children and regulations regarding the nutritional content of children’s meals may harm McDonald’s brand image and our results of operations.”

Environmental Issues

To the best of our knowledge, there are currently no international, federal, state or local environmental laws, rules or regulations that we expect will materially affect our results of operations or our position with respect to our competitors. However, we can provide no assurance of the effect that any possible future environmental laws will have on our operating results.

For example, in 2019, there was increased attention on single-use plastic products, such as plastic straws, and various countries and big cities in Puerto Rico, Uruguay, Argentina, Peru and Brazil, among other countries, began implementing regulations prohibiting or restricting the use of certain plastic products. The implementation of these and similar laws and regulations may increase our supply costs if we are required to change the types of disposable products that we use in our restaurants, which could have a material effect on our business. See “Item 3. Key Information—D. Risk Factors—Certain Factors Relating to Our Industry—Environmental laws and regulations may affect our business.”

Insurance

We maintain insurance policies in accordance with the requirements of the MFAs and as appropriate beyond those requirements, to the extent we believe additional coverage is necessary. Our insurance policies include commercial general liability, workers compensation, “all risk” property and business interruption insurance, among others. See “Item 10. Additional Information—C. Material Contracts—The MFAs—Insurance.”

Social Initiatives and Charitable Activities

The well-being of the communities where we operate is of considerable importance to us and we are engaged in a wide range of programs focused on positively impacting those communities. In addition to the support we give to Ronald McDonald House Charities, both currently and historically, we ~~expanded~~continue expanding our ~~social~~ reach ~~in 2018~~ to the areas of Youth ~~Employment~~Opportunity and Sustainable Development and ~~have~~further strengthened our efforts in these areas in ~~2019~~2020 to reinforce our position as a socially responsible company.

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Our social initiatives and charitable activities are ~~often aligned with McDonald’s Scale~~embedded into our Recipe for ~~Good,~~the Future, which consolidates our social and environmental impact strategy and has five key pillars: youth opportunity, climate change, packaging and recycling, sustainable ~~beef~~sourcing and commitment to families. ~~We seek~~The goal of Recipe for the Future is to ~~embody these~~align our efforts and follow a uniform agenda to fulfill the pillars ~~through our~~ ~~Receta del Futuro. The following paragraphs summarize some~~ of our ~~principal programs and contributions in these areas.~~impact strategy.

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Youth Employment

Youth unemployment is one of the most critical issues facing countries in Latin America. Through our Youth ~~Employment~~Opportunity initiative, we promote social mobility by providing employment opportunities to young people in Latin America that help them develop valuable customer service and leadership skills that can be applied to a wide range of career paths in the future. We are implementing this initiative through strategic alliances and by leveraging our ~~trajectory~~track record and experience in this field. We are also developing projects for labor participation that include technical training and programs to support the employment of people with disabilities, as well as financial literacy for our employees. For instance, we partnered with the Ministries of Labor of Mexico, Argentina, Costa Rica, Puerto Rico and Ecuador to promote employment participation of certain minority groups and provided financial training through online education platforms that foster the development of such life skills.

We increased our focus on Youth ~~Employment~~Opportunity because it has been one of the most significant problems facing Latin American countries in recent years. According to the ~~Interamerican~~Inter-American Development Bank (“IDB”), 40% of the working-age population in the region is young, between the ages of 15 adand 29 years old. The unemployment onrate of this particular age bracket is 20%., more than double the unemployment level of the general population and more than three times that of adults. Informality in the youth job sector in our region is ~~amongst~~among the largest in the world, reaching ~~almost~~more than 60% according to the International Labour ~~Organization’s~~Organization (“ILO”), and we play a significant role in helping to ~~fix~~address this ~~problem.~~issue. Being one of the largest youth employers in Latin America and the Caribbean, over ~~80%~~ 68% of our ~~new hires during 2019~~employees in 2020 were young adults between the ages of 16 to 24.

Arcos Dorados also engaged in the “future of work” discussion through our “CREATON” initiative, where more than 500 young people, along with governments, unions, research bodies and companies, all came together to reflect and co-curate a comprehensive vision for the future of the workplace. The results were collected and combined into a book published in Argentina titled “Creatones. Protagonistas de la experiencia que vendra.”

Another initiative is Empleo con Apoyo, which aims to provide employment opportunities to youth with disabilities, encouraging the development of their skills and raise awareness with respect to the needs of individuals with disabilities. During ~~2019,~~2020, more than ~~3,000~~1,816 employees were part of this program. In addition and related to Empleo con Apoyo, in 2018 we received the Global Recognition Award from the United Nations for our exemplary employment practices for disabled people in the State of ~~Sao~~São Paulo, Brazil. We maintain these practices in several of our markets through alliances with local organizations, such as the one with DISCAR in Argentina, which offers formal job opportunities to people with disabilities. In 2019, we were invited to present our work in the ILO “Decent Jobs for Youth” conference held in Rome. Arcos Dorados was the only company in our sector from Latin America invited to participate, which we believe is a testament and a recognition of the efforts we are making in helping this group of young people move forward with their lives as productive citizens. ~~We also work with Liceo Impulso in Uruguay to provide education to young people with disabilities.~~ In Ecuador, we also make contributions to ~~Fundacion~~Fundación Coanil and Fundación el ~~Triangulo~~Triángulo in order to support their local work in promoting employment opportunities for people with disabilities.

In addition, in April 2012, we became one of the founders and partners of the New Employment Opportunities (NEO) Program developed by the Inter-American Development Bank and the International Youth Foundation, which promotes the employability of the region’s youth. One of our most important soft skills training programs is Creating Your Future, a program supported by the Ministry of Education in Argentina that provides opportunities for skills development for our employees. This program was implemented with Kuepa, an organization dedicated to providing professional and soft skills training in Latin America, and the Global Fairness Initiative, an international non-profit organization focused on economic development. Additionally, we have continued to strengthen our partnerships with other organizations that focus on soft skills training, such as the Forge Foundation (including its branches in Argentina, Mexico, Uruguay, Peru and Mexico), Aldeas SOS, ~~and Movimiento Nueva Generación,~~ Instituto Ayrton Senna (Brazil), and Junior Achievement, ~~Americas,~~ among others. In ~~2019,~~2020, we donated over ~~$5.0~~$5 million in connection with Gran ~~Dia~~Día and McHappy Day. Those funds were transferred to non-governmental organizations that support the development of soft skills and the employability skills of young people across the region as well as supporting the local chapters of ~~the~~ Ronald McDonald ~~Foundation.~~

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~~In addition, in partnership with the JPMorgan Chase Foundation and IOS (Institute of Social Opportunities) in Brazil, we signed an alliance to develop a certified academic program in IT,~~ ~~Talentos del Futuro. Approximately 100 young people from our crew graduated from the program after studying to acquire technical knowledge in programming, networks and system languages.~~House Charities.

In Puerto Rico, we’ve signed a collaboration agreement with ~~“Jovenes de Puerto Rico en riesgo,”~~“PECES”, a nongovernmental organization that focuses on early detection of young people at risk and then develops specific support programs that monitor their progress, through coaching sessions, job readiness training and life skills. In ~~2019,~~2020, we provided support to more than ~~1,000~~250 young women and men in the market.

~~Our partnership with Digital House, a leading digital development institution in~~In Argentina, ~~allowed us to offer scholarships to young people interested in developing those skills, gaining significant brand exposure.~~

~~Fundacion~~the Fundación Si ~~in Argentina~~ builds and operates student houses for low income young people that don’t have access to universities in their local communities. Through our alliance with them, more than ~~400~~500 students were able to continue with their studies.

Instituto Ayrton Senna in Brazil is a renowned NGO working to improve education at all levels. Our strong partnership allowed Arcos Dorados to reach more than 250,000 young students in their last year of public education, through the program called “socio-emotional ~~conversations”~~conversations.”

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~~We also participate in programs in~~In Argentina, Mexico, Panama and ~~Colombia, including the~~ ~~Jovenes Construyendo el Futuro~~ ~~program in Mexico, which helps teach life skills such as financial planning to young people, and the~~ ~~40,000 Employees~~ ~~initiative in Colombia, which has created a consortium of companies with the goal of providing job opportunities to 40,000 people. We also~~Costa Rica we have an alliance with ~~Movimiento Nueva Generacion~~Junior Achievement. Through Junior Achievement’s different programs, young adults learn skills and gain an understanding of the legal requirements for creating their own enterprise. They also participate in a typical working day side by side with a professional volunteer. Along with Junior Achievement we developed a volunteer program in which our staff can accompany the participants in different areas such as: mentor for creating their companies andinspirational conversations about their future among others.

We implemented PTS (Passport to Success) Explorer in Mexico and Panama, ~~through which~~in alliance with International Youth Foundation and McDonald’s Corporation. This program helps young adults develop soft and social skills, competencies for leadership and team work among other skills. In Mexico, this program is implemented in the most important public high schools CONALEP in 30 states. Through Fundación Apoyo a la Juventud, PTS Explorer is linked to the academic curriculum of the 12th grade in CONALEP. In Panama, in an alliance with the Ministry of Education (MEDUCA) and the Council of the Private Sector for Educational Assistance (COSPAE), we ~~support community centers for~~are implementing this program in order to reach more than 5,000 young ~~people in Panama.~~adults.

Community

In ~~2019,~~2020, we executed our yearly Gran ~~Dia~~Día and McHappy Day campaigns, which ~~seeks~~seek to broaden the social impact of Arcos Dorados. Through ~~this campaign,~~these campaigns, funds raised through the sale of Big Macs were donated to local organizations supporting youth employment and the Ronald McDonald House Charities. We raised more than ~~$5.0 million.~~$5 million in 2020.

We primarily contribute to the communities in which we operate through the Ronald McDonald House Charities, which is dedicated to creating, finding and supporting programs that directly improve the health and well-being of children by providing “a home away from home” to children undergoing medical treatment in hospitals and their families. As of December 31, ~~2019,~~2020, there were 61 62 Ronald McDonald House Charities programs in 13 countries in Latin America and the Caribbean, including 2627 Ronald McDonald Houses, 33 Ronald McDonald Family Rooms and 2 Ronald McDonald Mobile Care ~~Mobiles,~~units, which were built to deliver pediatric care services to remote locations.

As a result of the COVID-19 pandemic, some of our restaurants were temporally closed and a significant portion of our products stored in distribution centers were at risk of expiring. We donated more than 500 tons of food to the local communities through Banco de Alimentos. We also donated more than 500,000 meals to different health institutions, first responders and health professionals through our Big Thank You program, which was executed in all of our markets.

Additionally, we developed different programs as part of the Happy Little House strategy to serve as allies to parents seeking to keep their children entertained and learning while they are quarantining at home due to the COVID-19 pandemic.

Diversity and Inclusion

Diversity, equality and inclusion is a priority for Arcos Dorados, as we understand that a culture of inclusion and appreciation for all employees, creates a stronger and more effective workforce.

In January 2018, Arcos Dorados formed a Diversity and Inclusion Committee aimed at promoting and fostering an inclusive culture in which gender, race, culture, sexual orientation or gender identity, religion, class or political belief, is valued and viewed as a competitive advantage that allows the company to consider and include new perspectives and backgrounds. Since 2018, the committee has worked toward improving employees’ sense of belonging in the workplace and building a more connected workforce, as we believe this creates an environment where employees work more efficiently and effectively. We believe our diversity and inclusion practices have generated improvements in business results, innovation, and decision-making, among others.

In 2020, the Committee focused on four specific areas:

•Women’s Network: our committee helped establish a women’s network, whose membership includes women at all levels of the company, from crew at the restaurant level to executives at the level of the management board. The women’s network provides a platform to elevate ideas and opinions to help create a more inclusive and safe working environment. Our committee also connects with the Women’s Network to offer seminars, video gatherings, and talk shows using our corporate Hamburger University platform. Additionally, our committee works to liaise with management to convey the ideas and issues that affect women in the workplace. Our committee is focused on advocating for equal opportunities that allow women to reach their highest potential within the company. Arcos Dorados already employs a majority of women in its workforce, with 57% of its workforce comprised of women,

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and we are committed to increasing the participation of women in more senior roles and positions. In addition to our internal initiatives, in 2020 we increased the number of agreements and alliances signed with non-governmental organizations, international government bodies such as the United Nations and national governments in the region to guarantee equal opportunities to jobs and promotions.

•Gender Identity and Sexual Orientation Diversity (LGBTQI+): our committee helped form a network of employees from all professional levels and areas in the company to promote LGBTQI+ issues and foster a culture of respect, inclusion and professional growth, with zero tolerance for discrimination.

•Intergenerational Diversity: our committee has focused on the creation of a less top-down hierarchical work environment, in accordance with the agile methodology, where collaborative learning and innovative culture are nurtured horizontally. The majority of our workforce is between the ages of 18 and 24 years old, and our goal is to better understand and connect with younger generations and leverage their insights and skills, especially in the area of technology.

•Health and Wellness: our committee is focused on initiatives to promote health and wellness and assisting employees who are feeling stressed, particularly as a result of the challenges of the COVID-19 pandemic. To that end, we have focused on providing mental and physical support, conducted a series of educational and training programs, as well as streamed video gym and exercise classes through our corporate Hamburger University network.

•People with Disabilities: Arcos Dorados helps lead the effort in Latin America to include people with disabilities in the workforce. We have agreements in different countries, such as Argentina and Brazil, with NGOs that specialize in recruiting and training individuals with disabilities. We have increased the number of employees with disabilities and have been committed to promoting inclusion and providing training and promotions.

Nutrition and Well-Being

As part of our commitment to offering nutritious and ~~high quality~~high-quality products to our customers, we are dedicated to actively promoting a balanced lifestyle. This includes providing reliable, accessible information to guide ~~educated~~informed nutritional decisions. We were the first restaurant chain in Latin America to provide full nutritional and calorie information about our menu on our websites in every country. ~~In 2014~~All of our products’ nutritional information is on McDonald’s owned websites and mobile apps. With respect to Happy Meal menus, since 2019, we ~~added~~have had a nutritional calculator on our ~~websites~~website to complement nutritional transparency with a personalized tool to enable our customers to make ~~the right nutritional~~informed choices about their food options. We also publish our complete list of ingredients for ~~their lifestyle.~~Happy Meal menus. In addition, in 2017, we developed our Receta ~~para el~~del Futuro, which focuses, among other goals, on offering balanced meals that meet certain criteria regarding saturated fat, added sugar and ~~sodium.~~sodium content. We also updated our Happy Meal menus in all of our markets between 2018 and 2019 by including more fruits and vegetables and reducing fat, sodium and added sugars. It now contains less than 600 calories in total and is comprised of the four basic food ~~group~~groups (fruits and vegetables, whole grains, lean proteins and dairy products), offering enhanced nutritional value for children.

We eliminated artificial color and flavors from our core and Happy Meal products and replaced them with natural ingredients. Despite the changes to our menu, we maintain our high standards of quality, including the use of 100% beef in our hamburgers and selected potatoes for our McFries.

As of August 2019, Happy Meal offerings in all of our markets complied with the nutritional criteria set by the ~~Scale For Good program’s standards. Several associations supported these~~Global McDonald’s Happy Meal Nutrition Criteria. We presented important changes in our famous Happy Meal, such as the reduction of sodium, calories and fat, and included an option for fruit juice without added sugar to help promote the consumption of recommended food groups. These changes were endorsed by groups such as the Interamerican Society of Cardiology, the Brazilian Association of Nutrition, the ~~Cardiologic~~Argentine Foundation of ~~Argentina,~~Cardiology, the Peruvian Society of Nutrition and the Uruguayan Association of Dieticians and Nutritionists. We continue with our responsible marketing practice complying with the

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Global Happy Meal Goals.

From a safety and quality perspective, we only use products that have passed strict quality and hygiene controls throughout the production chain, inside our restaurants and up to the moment they are served to our customers. These products are sourced from our approved supplier network for all McDonald’s restaurants. We ~~seek to adhere~~follow to the strictest food safety standards in the industry, closely monitoring and ~~we pay special attention~~enforcing adherence to ~~the enforcement of~~ those standards. All of our restaurants are audited on a yearly basis by a ~~third party~~third-party entity. In order to ensure the quality and safety of our products, we have also implemented a supplier audit program, held by an independent audit firm, which includes Supplier Workplace Accountability (SWA), Supplier Quality Management System (SQMS) and Packaging Supplier Quality Management System Paper (PQMS).

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As part of our commitment to safeguarding the well-being of Arcos Dorados employees, guests and third-party operators, we continue to reinforce our product and service safety program called McProtegidos, or McSafe, which establishes a guide that combines strict hygiene, cleanliness and sanitation protocols that have characterized our brand throughout the COVID-19 pandemic. In addition to reinforcing existing safety measures, such as requiring that our employees wash their hands at least every half hour and sanitize their hands every fifteen minutes, we implemented the use of personal protective equipment, such as masks and gloves, and ask our employees to maintain a safe distance with others while working. We placed communication materials in all areas of our restaurants to help employees and guests learn about our safety protocols and delivery procedures for drive-thru and takeout. Furthermore, hand sanitizer is made available at the entrance of our restaurants and other locations throughout the restaurants. Acrylic barriers have been installed in the drive-thru, front counter and delivery areas of our restaurants. We also ~~run~~encourage our customers to use contactless payment methods, such as credit cards. For McDelivery, we have designed specific safety procedures to help maintain a two meter separation between delivery drivers. For guests who enter our restaurants to place orders, floors have been marked to help them maintain a 1.5 meter separation from other customers while waiting in line to order. Additionally, we use double bags and triple sealing to ensure isolation of food for McDelivery and sanitize bags that transport food supplies to our restaurants. Arcos Dorados will continue to follow and implement all recommendations from local health authorities.

Prior to the ~~so called “Puertas Abiertas~~”pandemic, we established a “Puertas Abiertas” (“Open Doors”) program in the region, in which ~~customers~~guests and key stakeholders ~~are~~were invited to visit our kitchens and other parts of our behind-the-counter operations. This program ~~is aimed at~~promotes greater transparency and has hosted over 1315 million customers across the region since ~~2015 when~~its creation in 2015. In 2020, due to the COVID-19 pandemic, the program was ~~created. In 2019,~~transformed into virtual tours with approximately ~~2.3~~1 million customers ~~visited~~virtually visiting our ~~kitchens.~~

~~We also participate in several educational, sports~~kitchens and ~~well-being programs throughout Latin America and~~verifying the ~~Caribbean, promoting our brand and encouraging our employees and customers to participate.~~implementation of the McProtegidos program.

Sustainable Development

~~We strive~~As much as possible, Arcos Dorados seeks to ~~be an~~carefully identify, control and minimize the environmental ~~steward dedicated to conserving natural resources and minimizing waste. We~~impact generated by its operation. Environmental management must permeate the entire supply chain, which is why we work with suppliers who have ~~developed sustainability initiatives~~shared values, ensuring they comply with ~~a focus on sustainable supplies, energy and water efficiency.~~ best practices, endorsed or recognized under international seals.

To ~~carry out~~implement these initiatives, we have developed strategic partnerships with prestigious organizations such as the World Wildlife Fund (“WWF”), the Nature Conservancy, the Rainforest Alliance the Forest Stewardship Council (“FSC”) and the Marine Stewardship ~~Council. For~~Council (MSC).

In 2020, Arcos Dorados joined the ~~eleventh~~Earth Hour for the 12th consecutive year, ~~together with~~a worldwide initiative of the WWF, ~~all~~to raise the global population’s awareness and participation in environmental conservation and climate change prevention. All our restaurants ~~in our 20 markets have participated in Earth Hour by switching off~~and offices turn their external lights ~~and canopies.~~off for 60 minutes on this day.

~~As part of our~~ ~~Receta del Futuro~~ ~~platform, we have focused on several initiatives relating to climate change, packaging and recycling and sustainable food sourcing in recent years.~~

~~Climate Change~~

We are following McDonald’s commitment to reduce greenhouse gas (“GHG”) emissions from 2015 levels by 36% in our restaurants and offices. In addition, we are also committed to reducing GHG emissions from 2015 levels by 31% in our supply chain processes. In order to achieve ~~these~~ reductions in our environmental impact at the restaurant level, ~~we’re~~we are taking specific actions, such as our ~~Programa~~ Natal program, which is aimed at conserving and reducing our water consumption, especially in regions with limited access to water. ~~The program has been implemented in~~In 2020, more than ~~500~~330 restaurants ~~as of December 31, 2019.~~participated in the program throughout Latin America and the Caribbean. In ~~2019,~~2020, we saved and reused more than 90 million liters of water through ~~Programa Natal.~~ our Natal program.

Climate Change

We ~~have also deployed LED lighting~~are following McDonald’s Science Based Target commitment to reduce greenhouse gas (“GHG”) emissions by 2030 from 2015 levels. The commitment targets a 36% reduction in ~~all~~ our restaurants and offices and a 31% reduction across our supply chain. Arcos Dorados has conducted its first GHG emissions inventory to monitor and measure its carbon footprint, in accordance with internationally recognized standards and methodologies. The total GHG emissions, Scope 1 & 2 for 2019 were ~~able~~187,185 tons on a CO2-equivalent basis (37% of direct emissions and 63% of indirect emissions).

Arcos Dorados is aware of the impact its supply chain has on the sustainability of its business, and this is a priority for us. As a company, we are fully committed to the environment and to reducing the impact of our operation by means of our Recipe for the Future platform. For this reason, we actively work to identify, reduce and mitigate the social and environmental impacts, together with our ~~electricity consumption by more than 150,000,000 KWH. In our offices, we have eliminated single use hot and cold cups and replaced traditional printer paper with sugar-based paper.~~suppliers, encouraging best practices in each stage of the supply chain. We ~~are also participating~~participated in the Carbon Disclosure Program ~~pursuant to which we respond to questionnaires relating to water usage, deforestation and climate change and are ranked based on our contribution to each issue. Workshops were conducted~~(CDP) Supply Chain Program as a member in ~~our major markets, along with our key suppliers. In 2018,~~2020 for the fourth consecutive year. Arcos Dorados ~~was recognized as~~plays a leading role among the ~~company with~~members of CDP Latin America, achieving the highest response rates from our suppliers in disclosing their environmental impacts through the CDP questionnaires. In 2020, Arcos Dorados achieved a 99% response rate from our suppliers who were asked to respond to three questionnaires: climate change, forests and water security. Our own 2020 CDP scores are as follows: for the Forest Program, C in ~~Latin America.~~cattle products, D in soy products

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and C in timber products; C for the Climate Change Program; and C for the Water Security Program. In 2020, our suppliers have had a total emission reduction in the last year of close to 20.4 million tons of CO2-equivalent, which is equivalent to taking 640,000 cars off the road for one year.

We are also focused on reducing our GHG emissions through supplier-focused initiatives. To that end, more than 50% of supplier initiatives to reduce GHG emissions are focused on energy efficiency in production processes and energy efficiency in buildings. Our supplier initiatives also focus on water conservation, of these 67% focus on water efficiency in operations.

Packaging and Recycling

Our goal is to guarantee that 100% of our packaging comes from renewable, recycled or certified sources by 2025. Also, by 2025, we seek to offer recycling in all our restaurants. We understand that recycling infrastructure, regulations and consumer behaviors vary city to city and country to country, but we plan to be part of the solution and help influence powerful change.

Our strategy focuses on prioritizing certain processes: eliminating or minimizing the use of packaging through design innovation; recovering and recycling where possible; and aiming to close the loop by using more recycled materials, including recycled plastic, in our packaging and restaurants, which in turn helps to drive global demand for recycled materials. In 2020, we partnered with UBQ Materials, an Israeli company that has patented a technology, that converts household waste into a climate positive, bio-based thermoplastic, to replace plastic trays in 30 restaurants in Brazil. We plan to extend this ~~sense,~~partnership to all our restaurants in ~~certain~~Brazil.

Arcos Dorados is strongly committed to reducing the use of plastic. To improve capture rates and reduce the impact on the environment as a result of plastic waste, Arcos Dorados has developed a series of initiatives over the last few years. Arcos Dorados’ work to tackle plastic pollution began in 2018, with the “Straws on Demand” program through which restaurants stopped offering straws in nearly all markets and only provided straws upon customer request. To date, we have eliminated plastic straws in almost every market. Additionally, we streamlined a series of initiatives. The main actions contributing to this reduction are:

•Straw only upon customer request, with the additional removal of lids from hot and cold drinks served in restaurants and replacement of plastic cups in some markets.

•Cutlery redesign (the spoon delivered with desserts redesigned to reduce plastic per unit by 40%) or replacement with fiber-based material.

•Plastic salad bowls and breakfast containers which were replaced with a 100% biodegradable cardboard box.

As a result of these processes, we are ~~members~~happy to report that:

•In 2018, we removed 245 tons of ~~CEMPRE (Compromiso Empresarial para el Reciclaje), a group comprised of leading companies~~single use plastic from ~~different industries such as Coca Cola, Nestle, Unilever and Natura, that is dedicated to working on environmental issues in Latin America. The company is also an active member of CEADS (Consejo Empresario Argentino para el Desarrollo Sustentable), as well as similar organizations in other countries.~~our restaurants.

•In 2019, we removed 1,103 tons of single use plastic from our restaurants.

•In 2020, we removed 1,468 tons of single use plastic from our restaurants.

During this 3-year period, we have removed almost 40% of the total single use plastic from our restaurants. We ~~took a leadership position~~will continue to move forward in ~~2018 when~~becoming part of the solution and making sure these plastic items never return to our restaurants.

When it comes to fiber materials, it is important to ensure our fiber suppliers support deforestation-free supply chains. As an interim goal for 2025, we ~~proactively started~~are focused on fiber-based packaging and committed to ~~provide plastic straws only when requested by customers, rather than automatically providing them. By~~source 100% of primary fiber-based guest packaging from chain of custody certified or third-party verified recycled sources where no deforestation occurs. At the end of 2019, we had eliminated more than 200 tons of plastic from our supply chain, just by taking this important step. We continue eliminating packaging through innovation, shifting to materials from 100% renewable, recycled or other certified sources. Well ahead of schedule, 100%2020, 92% of our ~~packaging comes from certifiable sources, a process followed by the Forest Stewardship Council and similar organizations.~~

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~~In all our restaurants, we recycle used cooking oil, which is being reused according~~fiber volume met this goal. With respect to local regulations in a series of different ways. For example, in Mexico, we have recycled more than 150,000 liters of used cooking oil, which was then used to manufacture biodiesel, and in Ecuador, we recycled more than 72,000 liters of used cooking oil for other uses.

In Brazil, as well as other markets, we are partnering with several organizations that are focused on creating employment and economic development opportunities through the recycling and selling of recycled materials in the open market. Through these alliances, we seek to provide a solution to multiple problems while creating opportunities for disadvantaged communities at the same time.

More than 600 restaurants in the region have already implemented our Programa de Desarrollo Sustentable, which we developed with the objective of increasing awareness of climate change in our customer base as well as employees. Through this program, we provide education, waste sorting bins, United Nation’s SDG’s materials, community opportunities, beach cleaning programs and composting classes.

We have also signed a unique collaboration agreement with UBQ, an Israeli company specializing in materials and innovation. Through this alliance, we are innovating and taking leadership by producing restaurant items, such as trays, with organic waste, thereby reducing waste and the environmental impactfacility-level certification, 98% of our ~~restaurants. We~~suppliers are ~~also partnering with Tetra Pack in order to manufacture restaurant furniture with recycled Tetra Pack containers, such as McCafe tabletops and newspaper stands.~~certified either FSC or PEFC.

Reverse logistics is another component of our recycling program. We are leveraging our logistics ~~provider structure~~providers to recover cardboard from our restaurants, which is then recycled and reused in generating new packaging. The solution is being tested in several markets. In 2020, we recovered more than 45 tons of cardboard in Colombia, which were used again in our value chain, providing us with opportunities to recycle and reduce waste.

We also use reverse logistics for our used oil recycling program. We recycle used cooking oil in all our restaurants, which is then reused according to local regulations. For instance, in 2020, more than 2,000 tons of used cooking oil were recycled for further use, including as biodiesel.

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The Arcos Dorados Programa de Desarrollo Sustentable is in its second year of implementation. In 2020 we reached more than 1,000 participating restaurants throughout Latin America and the Caribbean. The program monitors the environmental performance of the restaurants with respect to responsible consumption of natural resources, such as water and energy, waste segregation and aims to raise awareness for sustainable development among our employees and customers. Our goal is to transform our restaurants into centers of education for sustainable development for the community.

Sustainable ~~Beef~~ and Responsible Sourcing of Materials

We work hard to continuously improve how we source our ingredients in a way that allows people, animals and the planet to thrive. ~~We’re focusing~~

Arcos Dorados has supported sustainable food production and forest conservation efforts for years. Deforestation is one of the greatest threats facing our ~~efforts~~environment today, and we have been committed to do our part to support various local and global initiatives. In 1989, we joined McDonald’s on its Amazon beef policy and Brazilian soy moratorium, and renewed our commitment in October 2011, when McDonald’s signed a global moratorium against harvesting soy from the Amazon region. On a more local level, we have also been focused on the raw materials that we purchase, such as beef, ~~coffee, fish,~~chicken (including soy in feed), palm oil, coffee and ~~chicken.~~fiber used in customer packaging, to develop strategies where we can have the greatest positive environmental impact. We are aligned with McDonald assessment to establish priority geographies, based on WWF’s Living Forests Report 2015.

Over the last decade, Arcos Dorados has partnered with coffee suppliers to help advance coffee sustainability. We ~~strive~~source coffee from suppliers that meet internationally certified sustainability standards. By the end of 2020, all of our coffee suppliers reached our approved sustainable source certifications. More than 80% of all the coffee served in our restaurants located in Argentina, Brazil, Chile, Uruguay, Costa Rica, Mexico, Colombia and Ecuador is now Rainforest Alliance certified.

In the markets where we sell fish products, the Marine Stewardship Council helps to identify ways to protect long term fish production and improve the marine ecosystem. Our suppliers are responsible for maintaining sustainably raised fish stocks, minimizing the impact of fishing and conserving the environment. In the markets where we sell fish products, the MSC certified 100% of our fish products.

While we don’t use palm oil in our cooking processes, we work with our suppliers to guarantee that they use oil certified under the Roundtable on Sustainable Palm Oil (RSPO) standards. Additionally, we ask our chicken suppliers to source their chicken feed from low-deforestation regions or comply with certification requirements if it is sourced from countries where there are protected biomes, such as Brazil, Argentina and Paraguay.

In August 2016, we sourced the first certified, sustainably-produced beef in Latin America from the Novo Campo Project, which complies with the standards of the Brazilian Roundtable for Sustainable Beef (GTPS - Grupo de Trabalho de Pecuaria Sustentavel). We were the first restaurant in the QSR industry in Brazil to purchase beef from production cycles that meet global principles and criteria established by the Global Roundtable for Sustainable Beef (GRSB).

As one of the largest buyers of beef in the region, we are serious about our responsibility to help lead the industry toward more sustainable production practices. Our goal is to eliminate deforestation from our global supply chain by 2030. To that end, we comply with the “McDonald’s Deforestation-Free Beef Procurement Policy”, as the standard for purchasing beef in Brazil and Argentina, which allows us to ensure our direct beef supplies are traced and externally verified by Agrotools, a Brazilian ag-tech company and certified B-corp that provides advanced monitoring technology. Furthermore, we engage suppliers that have strong standards of animal welfare and ~~that~~ meet McDonald’s standards and policies. ~~We have committed~~In 2014, we announced our plan to ~~ensuring that all~~work with our pork ~~used in our restaurants will be sourced by producers that can demonstrate~~suppliers to submit documented plans to ~~promote~~limit the use of gestation crates for sows with plans for alternative group ~~housing for their pigs.~~housing. We are actively working with our pork suppliers, producers and other stakeholders to strengthen this commitment and transition ~~over time~~ to this ~~standard. The~~standard, including in our largest market Brazil.

In addition, we lead roundtables in Brazil and Argentina to identify livestock production solutions to reduce the impact of beef production and help make this process more environmentally sound, socially responsible and economically viable. We strive to use our positions in certain organizations, like the GTPS in Brazil and the Argentine Roundtable For Sustainable Beef (MACS), to help promote sustainable livestock and lead cross-cutting and technical discussions focused on topics such as the review of the Sustainable Livestock Indicators Guide within the scope of the GTPS in Brazil and the creation of sustainable beef indicators for Argentina. Both organizations were part of the Global Roundtable for Sustainable Beef (GRSB) and consist of representatives from different segments of the beef supply chain. We believe that we must support all stakeholders in the supply chain to achieve transformational change.

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In 2016, we announced our commitment to source cage-free eggs throughout Latin America by 2025. In 2019, Brazil announced that it would begin purchasing cage-free eggs. Since then, the initiative has been treated as a priority inside and outside the Company, as we not only seek to expand and strengthen our operations, but also constantly influence our network of suppliers in Latin America and the Caribbean to seek more sustainable and responsible solutions. Some of our partners, such as Marfrig, BRF, Aryzta and Bimbo, have already publicly committed to purchasing cage-free eggs in Brazil.

Furthermore, the responsible use of antibiotics is important for animal health, as well as to ensure the future effectiveness of antimicrobial medicines. In March 2015, we announced that we ~~will~~would only source from suppliers who can guarantee that their ~~animals~~animals: (i) are raised without growth-stimulating antibiotics; (ii) have only received antibiotics to cure or prevent disease under veterinary supervision; (iii) are only ~~administered~~given antibiotics approved for veterinary use; and (iv) are raised in environments that encourage healthy animal welfare and husbandry conditions to help reduce the need for antibiotic use. We are continuously working with our suppliers and producers to achieve this goal for the responsible use of antibiotics. Based on the premise that our customers deserve high quality products originating from healthy animals, together with McDonald’s, we have been pioneers in prioritizing animal welfare. We have a specific committee for animal welfare issues, which acts under the guidelines of the Professional Animal Auditor Certification Organization (PAACO), an animal welfare organization.

~~Protecting the forests is~~

Sustainable Restaurants

Arcos Dorados has implemented a ~~top priority. In 2017, McDonald’s publicly announced~~sustainable construction policy for its ~~Commitment on Forests, which aims~~restaurants. This means all new projects include technologies and designs to eliminate deforestation from our supply chains and promote responsible forestry and production practices that benefit people, communities and the planet. This commitment includes the Amazon, the Cerrado and the Chaco, a province in Argentina. In October 2011, McDonald’s signed a global moratorium against harvesting soy from the Amazon region and has maintained this commitment every year since, including actively supporting the 2014 renewal of the Brazilian Soy Moratorium. In August 2016, we sourced the first sustainably-produced beef in Latin America from the Novo Campo Project, an initiative that complies with the standards of the Brazilian Roundtable for Sustainable Beef. With this initiative, we were the first restaurantdrive efficiency in the ~~QSR industry in Brazil to acquire the product from production cycles that meet global principles~~use of energy and criteria established by the Global Roundtable for Sustainable Beef. Among other criteria, this meets our commitments to end deforestation, not source products within Conservancy and/or Indian areas, ensure that child labor or slavery conditions do not occur and pass through a third-party verification audit regarding each of these commitments.

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~~Arcos Dorados is also an active member of several working groups and has a leadership position regarding the development of sustainable agricultural practices in the region.~~ Our teams work with farmers, environmental groups and governments to discover, test and scale methods that support decent farming livelihoods, while protecting resources for generations to come. In Brazil, we are active members of the~~Grupo de Trabalho de Pecuaria Sustentavel, a group that facilitates collaboration among industry leadings~~water, as well as NGOs and to find solutions that allow farmers to produce more meat in a less impactful way. Our work is focused on managing natural resources responsibly, respecting people and communities, caring for the welfare of animals, ensuring the safety and quality of beef and driving efficiency and innovation. In 2019, we doubled our purchases of sustainable beef in Brazil, while monitoring deforestation via satellite in collaboration with Agrotools and Proforest.

~~Arcos Dorados~~ has partnered with coffee roasters to help advance coffee sustainability over the last decade and we remain committed to further progress. We source coffee from suppliers that meet internationally certified sustainability standards. In 2019, more than 93% of all the coffee served in our restaurants was sourced from verifiable sustainable sources, while we continue to develop programs to reach 100% by 2020.

In the markets where we sell fish products, we partner with the Marine Stewardship Council to identify ways to protect long term fish production and improve the marine ecosystem. Our suppliers are responsible for maintaining sustainably produced fish stocks, minimizing the impact of fishing and conserving the environment.

High demand for palm oil has had an impact on natural forests which are being replaced by palm oil plantations. We are partnering with key stakeholders, growers, traders and food manufacturers to guarantee that all palm oil used in manufacturing processes is certified by the Roundtable on Sustainable Palm Oil. At the end of 2019, 100% of the palm oil used in our extensive supply chain was sustainably produced and verified.

~~Arcos Dorados is committed to ensuring a sustainable supply of chicken. We do this by sourcing from suppliers that reduce or eliminate~~ the use of ~~antibiotics~~recycled materials and incorporating features to ~~protect human health~~recycle waste.

Each type of restaurant has different sustainable initiatives, which are defined in Arcos Dorados sustainable design policy for restaurants, as ~~well as ensure animal welfare.~~ follows:

•Freestanding restaurant: 25 sustainable initiatives.

•In-store restaurant: 17 sustainable initiatives.

•Food court and mall restaurants: 9 sustainable initiatives.

In ~~addition, in October 2016, we announced that we would begin sourcing only cage free eggs in various countries, with the goal~~2020, Arcos Dorados implemented 79% of ~~having 100% of the eggs served at our~~these initiatives. As a result, restaurants ~~coming from cage free eggs~~are being designed and built to maximize energy efficiency and lower water usage by ~~2025. We started partially sourcing cage free eggs in Brazil as part of our commitment to a more sustainable chicken industry.~~

~~As of December 31, 2019, we had 4 LEED-certified restaurants~~including low-consumption equipment, climate-efficient architecture and 1 LEED-certified corporate university. Leadership in Energy & Environmental Design, or LEED-certified buildings are more environmentally responsible and resource-efficient buildings throughout their lifecycle. In December 2008, we opened the first LEED-certified restaurant in Latin America in Bertioga on the coast of São Paulo, Brazil. This restaurant received its LEED certification in September 2009, becoming the first McDonald’s restaurant in Latin America to receive such certification. In August 2010, we opened our second LEED-certified restaurant in Pilar, Argentina. In July 2011, we re-inaugurated the McDonald’s at Parque Hundido, in Mexico DF, as our third LEED-certified restaurant. In January 2013, we opened the fourth LEED-certified restaurant in Guaynabo, Puerto Rico, which obtained its LEED certification in November 2013. The McDonald’s University in São Paulo, Brazil, was remodeled and reopened in April 2011 as a LEED-certified building. This McDonald’s University, one of seven such units in the world, is the corporate education centersystems for ~~employees from all over Latin America and the Caribbean. Among the programs offered~~reusable water, while at the ~~McDonald’s University in São Paulo is an MBA in Strategies~~same time, improving accessibility for ~~Sustainable Development, the only educational program of its kind at this level in Latin America.~~

~~The know-how accumulated in the construction of these ecological buildings is being used for the development of new McDonald’s restaurants,~~our guests and employees. We also continue to work to improve processes, such as ~~our High Efficiency Restaurants, developed in Brazil in compliance with McDonald’s standards as required by the MFAs, at which efficiencies have been achieved by~~ implementing ~~sustainability measures for, among others, the reuse~~responsible use and recycling of ~~water~~natural resources, promoting waste sorting and separation and encouraging the use of ~~more~~ efficient lightning technics and using a more efficient architectural design with regard to the amount of equipment, kitchen and support areas. These architectural changes allow a reduction in carbon footprint associated to building process.air conditioning systems.

C. Organizational Structure

We conduct substantially all of our business through our indirect, wholly owned Dutch subsidiary Arcos Dorados B.V. Our controlling shareholder is Los Laureles Ltd., a British Virgin Islands company, which is beneficially owned by Mr. Woods Staton, our Executive Chairman. Under the MFAs, Los Laureles Ltd. is required to hold at all times at least 51% of our voting interests, which is accomplished through its ownership of 100% of the class B shares of Arcos Dorados Holdings Inc., each having five votes per share. Los Laureles Ltd. has established a voting trust with respect to the voting interests in us held by Los Laureles Ltd. Los Laureles Ltd. is the beneficiary of the voting trust. See “Item 7. Major Shareholders and

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Related Party Transactions—A. Major Shareholders—Los Laureles Ltd.” Arcos Dorados B.V. owns all the equity interests of LatAm, LLC, the master franchisee, and owns, directly or indirectly, all the equity interests of the subsidiaries operating our restaurants in the Territories.

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The following chart shows our corporate structure as of April ~~2020.~~2021.


~~(1)~~	Includes class A shares and class B shares beneficially owned by Mr. Woods Staton, our Executive Chairman. Los Laureles Ltd. is beneficially owned by Mr. Woods Staton. See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders—Los Laureles Ltd.”


~~(2)~~	~~Includes operating subsidiaries held directly and, in some cases, indirectly through certain intermediate subsidiaries.~~

(1) Includes class A shares and class B shares beneficially owned by Mr. Woods Staton, our Executive Chairman. Los Laureles Ltd. is beneficially owned by Mr. Woods Staton. See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders—Los Laureles Ltd.”

(2) Includes operating subsidiaries held directly and, in some cases, indirectly through certain intermediate subsidiaries.

Other than as described above, all of our significant subsidiaries are wholly owned by us, except Arcos Dorados Argentina S.A., of which Mr. Woods Staton owns 0.003%.

D. Property, Plants and Equipment

Property Operations

Our long-standing presence in Latin America and the Caribbean has allowed us to build a significant property portfolio with hard-to-replicate locations in key markets across the region that enhance our customers’ experience and ultimately support our brand and market position. As of December 31, ~~2019,~~2020, we owned the land for ~~494~~489 of our ~~2,293~~2,236 restaurants (totaling approximately 1.1 million square meters). We owned the buildings for all but 119 of our stand-alone restaurants, all of which are under developmental licenses, whereby the licensees own or lease the land on and buildings in which the restaurants are located. We lease the remaining real estate property where we operate. Accordingly, we are able to charge rent on the real estate that we own and lease to our franchisees. The rental payments generally are based on the greater of a flat fee or a percentage of sales reported by franchised restaurants. When we lease land, we match the term of our sublease to the term of the franchise. We may charge a higher rent to franchisees than that which we pay on our leases, therefore deriving additional rental income.

The selection, construction and maintenance of restaurant locations and other related real estate assets, which is a key element of our performance, is determined based on an evaluation of expected returns on investment and the most efficient allocation of our capital expenditures. In addition to our restaurant property, we have (i) corporate offices in Montevideo, Uruguay; Buenos Aires, Argentina; and ~~Sao~~São Paulo, Brazil; and regional offices in Mexico City, Mexico and Bogota, Colombia; (ii) distribution centers in the Caribbean; (iii) an industrial center called Food Town in ~~Sao~~São Paulo, Brazil, where our logistics operator is located; and (iv) training centers in ~~Sao~~São Paulo, Brazil and Buenos Aires, Argentina.

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ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A. Operating Results

The following discussion of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements as of December 31, ~~2019~~2020 and ~~2018~~2019 and for the years ended December 31, 2020, 2019 ~~2018~~ and ~~2017,~~2018, and the notes thereto, included elsewhere in this annual report, as well as the information presented under “Presentation of Financial and Other Information” and “Item 3. Key Information—A. Selected Financial Data.”

The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in “Forward-Looking Statements” and “Item 3. Key Information—D. Risk Factors.”

Segment Presentation

We divide our operations into four geographical divisions: Brazil; the Caribbean division, consisting of Aruba, Colombia, Curaçao, French Guiana, Guadeloupe, Martinique, Puerto Rico, Trinidad and Tobago, the U.S. Virgin Islands of St. Croix and St. Thomas and Venezuela; the North Latin American division, or NOLAD, consisting of Costa Rica, Mexico and Panama; and the South Latin American division, or SLAD, consisting of Argentina, Chile, Ecuador, Peru and Uruguay. As of December 31, ~~2019, 44.6%~~2020, 46% of our restaurants were located in Brazil, ~~17.6%~~23% in NOLAD, 17% in SLAD ~~23.1% in NOLAD~~ and ~~14.7%~~14% in the Caribbean division. We focus on our customers by managing operations at the local level, including marketing campaigns and special offers, menu management and monitoring customer satisfaction, while leveraging our size by conducting administrative and strategic functions at the divisional or corporate level, as appropriate.

We are required to report information about operating segments in our financial statements 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. We have determined that our reportable segments are those that are based on our method of internal reporting, and we manage our business and operations through our four geographical divisions (Brazil, the Caribbean division, NOLAD and SLAD). The accounting policies of the segments are the same as those for the Company on a consolidated basis.

Principal Income Statement Line Items

Revenues

We generate revenues primarily from two sources: sales by Company-operated restaurants and revenue from franchised restaurants, which primarily consists of rental income, typically based on the greater of a flat fee or a percentage of sales reported by our franchised restaurants. This rent, along with occupancy and operating rights, is stipulated in our franchise agreements. These agreements typically have a 20-year term but may be shorter if necessary to mirror the term of the real estate lease. In ~~2019,~~2020, sales by Company-operated restaurants and revenues from franchised restaurants represented ~~95%~~95.5% and 5%4.5% of our total revenues, respectively. In ~~2018~~2019 and ~~2017,~~2018, sales by Company-operated restaurants and revenues from franchised restaurants represented 95.0% and 5.0% and 95.2% and 4.8% ~~and 95.3% and 4.7%~~ of our total revenues, respectively.

Operating Costs & Expenses

Our sales are heavily influenced by brand advertising, menu selection and initiatives to improve restaurant operations. Sales are also affected by the timing of restaurant openings and closures. We do not record sales from our franchised restaurants as revenues.

Company-operated restaurants incur four types of operating costs and expenses:

• food and paper costs, which represent the costs of the products that we sell to customers in Company-operated restaurants;

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• payroll and employee benefit costs, which represent the wages paid to Company-operated restaurant managers and crew, as well as the costs of benefits and training, and which tend to increase as we increase sales;

• occupancy and other operating expenses, which represent all other direct costs of our Company-operated restaurants, including advertising and promotional expenses, the costs of outside rent, which are generally tied to sales and therefore increase as we increase our sales, outside services, such as security and cash collection, building and leasehold improvement depreciation, depreciation on equipment, repairs and maintenance, insurance, restaurant operating supplies and utilities; and

• royalty fees, representing the continuing franchise fees we pay to McDonald’s pursuant to the MFAs, which are determined as a percentage of gross product sales.

Franchised restaurant occupancy expenses include, mainly, as applicable, the costs of depreciating and maintaining the land and buildings upon which franchised restaurants are situated or the cost of leasing that property. A significant portion of our leases establish that rent payments are based on the greater of a flat fee or a specified percentage of the restaurant’s sales.

We promote the McDonald’s brand and our products by advertising in all of the Territories. Pursuant to the MFAs, we are required to spend at least 5% of our gross sales on advertisement and promotion activities annually. These activities are guided by our overall marketing plan, which identifies the key strategic platforms that we leverage to drive sales. Our franchisees are generally required to pay us a certain percentage of their gross sales to cover advertising expenditures related to their restaurants. We account for these payments as a deduction to our advertising expenses. As a result, our advertising expenses only reflect the expenditures related to Company-operated restaurants. Advertising expenses are recorded within the “Occupancy and other operating expenses” line item in our consolidated ~~income statement.~~statement of (loss) income. The only exception to this policy is in Mexico, where both we and our franchisees contribute funds to a cooperative that is responsible for advertisement and promotion activities for Mexico. In connection with the COVID-19 outbreak, ~~we have agreed with McDonald's to reduce~~McDonald’s granted us a reduction of the advertising and promotion spending requirement from 5% to 4% of our gross sales for the full year 2020. Beginning on January 1, 2021, we resumed spending 5% of our gross sales on advertising and promotion.

General and administrative expenses include the cost of overhead, including salaries and facilities, travel expenses, depreciation of office equipment, buildings and vehicles, amortization of intangible assets, occupancy costs, professional services and the cost of field management for Company-operated and franchised restaurants, among others.

Other operating (expenses) income, ~~(expenses),~~ net, include gains and losses on asset acquisitions and dispositions, gains related to sales of restaurant businesses, write-offs of property and equipment, insurance recovery, impairment charges, rental income and depreciation expenses of excess properties, accrual for contingencies, write-offs and write-downs of inventory, recovery of taxes and other miscellaneous items.

Other Line Items

Net interest expense primarily includes interest expense on our short-term and long-term debt as well as the amortization of deferred financing costs. ~~Gain (loss)~~

(Loss) gain from derivative instruments relates primarily to the results of derivatives that are not designated for hedge accounting.

Gain from securities relates to transactions with certain securities.

Foreign currency exchange results relate to the impact of remeasuring monetary assets and liabilities denominated in currencies other than our functional currencies. See “—Foreign Currency Translation.”

Other non-operating income (expenses) ~~income,~~, net, primarily include contingencies, certain results related to tax credits, asset taxes that we are required to pay in certain countries and other non-operating charges.

Income tax expense includes both current and deferred income taxes. Current income taxes represent the amount accrued during the period to be paid to the tax authorities while deferred income taxes represent the earnings impact of the change in deferred tax assets and liabilities that are recognized in our balance sheet for future income tax consequences.

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Net income attributable to non-controlling interests relate to the participation of non-controlling interests in the net income of certain subsidiaries that collectively owned 15 restaurants at December 31, ~~2019~~2020 (15 restaurants at December 31, ~~2018)~~2019).

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Impact of Inflation and Changing Prices

Some of the countries in which we operate have experienced, or are currently experiencing, high rates of inflation. In general, we believe that, over time, we have demonstrated the ability to manage inflationary environments effectively. During 2019 and 2018, our revenues were favorably impacted by our pricing strategy in many of these inflationary environments, as we were able to increase average check to keep pace with inflation.

The Venezuelan market is also subject to price controls, which limit our ability to increase prices to offset the impact of continuing high inflation on our operating costs. Although we managed to navigate the negative impact of the price controls on our operations from 2015 through 2019, the existence of such laws and regulations continues to present a risk to our business. We continue to closely monitor developments in this dynamic environment.

Key Business Measures

We track our results of operations and manage our business by using three key business measures: comparable sales growth, average restaurant sales and sales growth.

In analyzing business trends, management considers a variety of performance and financial measures which are considered to be non-GAAP including: Adjusted EBITDA, comparable sales growth, systemwide data and constant currency measures.

Comparable Sales

Comparable sales is a key performance indicator used within the retail industry and is indicative of the success of our initiatives as well as local economic, competitive and consumer trends. Comparable sales are driven by changes in traffic and average check, which is affected by changes in pricing and product mix. Increases or decreases in comparable sales represent the percent change in sales from the prior year for all restaurants in operation for at least thirteen months, including those temporarily closed. Some of the reasons restaurants may close temporarily include reimaging or remodeling, rebuilding, road construction, ~~and~~ natural ~~disasters.~~disasters and/or other circumstances such as the COVID-19 pandemic. With respect to restaurants where there are changes in ownership, all previous months’ sales are reclassified according to the new ownership category when reporting comparable sales. As a result, there will be discrepancies between the sales figures used to calculate comparable sales and our results of operations. We report on a calendar basis, and therefore the comparability of the same month, quarter and year with the corresponding period for the prior year is impacted by the mix of days. The number of weekdays, weekend days and timing of holidays in a period can impact comparable sales positively or negatively. We refer to these impacts as calendar shift/trading day adjustments. These impacts vary geographically due to consumer spending patterns and have the greatest effect on monthly comparable sales while annual impacts are typically minimal.

We calculate and analyze comparable sales and average check in our divisions and systemwide on a constant currency basis, which means that sales in local currencies, including the Argentine peso and Venezuelan bolivar, are converted to U.S. dollar using the same exchange rate in the applicable division or systemwide, as applicable, over the periods under comparison to remove the effects of currency fluctuations from the analysis. We believe these constant currency measures, which are considered to be non-GAAP measures, provide a more meaningful analysis of our business by identifying the underlying business trend, without distortion from the effect of foreign currency fluctuations.

Company-operated comparable sales growth refers to comparable sales growth for Company-operated restaurants and franchised comparable sales growth refers to comparable sales growth for franchised restaurants. We believe comparable sales growth is a key indicator of our performance, as influenced by our strategic initiatives and those of our competitors.

Average Restaurant Sales

Average restaurant sales, or ARS, is an important measure of the financial performance of our systemwide restaurants and changes in the overall direction and trends of sales. ARS is calculated by dividing the sales for the relevant period by the arithmetic mean of the number of restaurants at the beginning and end of such period. ARS is influenced mostly by comparable sales performance and restaurant openings and closures. As ARS is provided in nominal terms, it is affected by movements in foreign currency exchange rates.

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Sales Growth

Sales growth refers to the change in sales by all restaurants, whether operated by us or by franchisees, from one period to another. We present sales growth both in nominal terms and on a constant currency basis, which means the latter is calculated by converting sales in local currencies, including the Argentine peso and Venezuelan bolivar, to U.S. dollar using the same exchange rate over the periods under comparison to remove the effects of currency fluctuations from the analysis.

Adjusted EBITDA

We use Adjusted EBITDA to facilitate operating performance comparisons from period to period. Adjusted EBITDA is defined as our operating income plus depreciation and amortization plus/minus the following losses/gains included within other operating income (expenses), net, and within general and administrative expenses in our statement of income: gains from sale or insurance recovery of property and equipment; write-offs of property and equipment; impairment of long-lived assets and goodwill; stock-based compensation related to the special awards in connection with the initial public offering, under the 2011 Equity Incentive Plan; reorganization and optimization plan expenses; and incremental compensation related to the modification of our 2008 long-term incentive plan. See “Item 3. Key Information—A. Selected Financial Data.”

We believe Adjusted EBITDA facilitates company-to-company operating performance comparisons by backing out potential differences caused by variations such as capital structures (affecting net interest expense and other financial charges), taxation (affecting income tax expense) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense), which may vary for different companies for reasons unrelated to operating performance. In addition, we exclude gains from sale or insurance recovery of property and equipment not related to our core business; write-offs of property and equipment and impairment of long-lived assets and goodwill that do not result in cash payments; ~~stock-based compensation related to the special awards under the 2011 Equity Incentive Plan;~~ reorganization and optimization plan expenses; and incremental compensation expense related to the modification of our 2008 long-term incentive plan. While a GAAP measure for purposes of our segment reporting, Adjusted EBITDA is a non-GAAP measure for reporting our total Company performance. Our management believes, however, that disclosure of Adjusted EBITDA provides useful information to investors, financial analysts and the public in their evaluation of our operating performance.

Systemwide data

Systemwide data represents measures for both Company-operated and franchised restaurants. While sales by franchisees are not recorded as revenues by us, management believes the information is important in understanding our financial performance because these sales are the basis on which we calculate and record franchised restaurant revenues and are indicative of the financial health of our franchisee base. Systemwide results are driven primarily by our Company-operated restaurants, as ~~68.9%~~70.5% of our systemwide restaurants are Company-operated as of December 31, ~~2019.~~2020.

Foreign Currency Translation

The financial statements of our foreign operating subsidiaries are translated in accordance with guidance in ASC 830, Foreign Currency Matters. Except for our Venezuelan and Argentine operations, the functional currencies of our foreign operating subsidiaries are the local currencies of the countries in which we conduct our operations. Therefore, the assets and liabilities of these subsidiaries are translated into U.S. dollars at the exchange rates as of the balance sheet date, and revenues and expenses are translated at the average exchange rates prevailing during the period. Translation adjustments are included in the “Accumulated other comprehensive loss” component of shareholders’ equity. We record foreign currency exchange results related to monetary assets and liabilities transactions, including intercompany transactions, denominated in currencies other than our functional currencies in our consolidated ~~income statement.~~statement of (loss) income.

Under U.S. GAAP, an economy is considered to be highly inflationary when its three-year cumulative rate of inflation meets or exceeds 100%. 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 each of these subsidiaries are remeasured as if its functional currency was the reporting currency of the relevant subsidiary’s immediate parent company (U.S. dollars for Venezuelan operations and Brazilian reais (“BRL”) for Argentine ~~operations)~~operations from July 2018 to June 2020 and U.S. dollars since July 2020, as a result of a change in the subsidiary’s immediate parent company). 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. See “Item 3. Key Information—A. Selected Financial Data—Exchange Rates and Exchange Controls” for information regarding exchange rates for the Argentine currencies.

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Venezuela

Venezuela’s exchange rate system is administered by the Central Bank of Venezuela, and currently consists of a unified foreign exchange market called DICOM, which operates through an auction mechanism and which was introduced in February 2018, replacing the previous dual exchange rate system. During 2018, the Company accessed to DICOM at an exchange rate greater than the one published by the governmental authorities. This rate is considered for remeasurements purposes.

On August 20, 2018, the Venezuelan government announced the removal of five zeros from the Venezuelan currency and renamed it the “Sovereign Bolivar” (VES). In addition, the new currency experienced devaluation from 2.48 to 59.93 VES per U.S. dollar. Since 2018, the Sovereign Bolivar has continued depreciating in value against U.S. dollar. ~~As of December 31, 2019, the exchange rate was 44,080.58 VES per U.S. dollar.~~

As of December 31, ~~2019, our local currency-denominated net~~2020, the Company did not have a material monetary position, ~~in Venezuela, that~~which would be subject to remeasurement in the event of further changes in the exchange ~~rate, was a net asset of $0.2 million.~~rate. In addition, ~~our Venezuelan subsidiary’s~~Venezuela’s non-monetary assets were ~~$13.6~~$10.1 million (mainly fixed assets).

Currency devaluations in Venezuela have had a significant effect on our income statements and have impacted the comparability of our income statements. For more details about the Venezuelan exchange rate used for financial reporting, see Note 22 to our consolidated financial statements.

Critical Accounting Policies and Estimates

This management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses as well as related disclosures. On an ongoing basis, we evaluate our estimates and judgments based on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or conditions.

We consider an accounting estimate to be critical if:

•the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and

•the impact of the estimates and assumptions on our financial condition or operating performance is material.

We believe that of our significant accounting policies, the following encompass a higher degree of judgment and/or complexity.

Depreciation of Property and Equipment

Accounting for property and equipment involves the use of estimates for determining the useful lives of the assets over which they are to be depreciated. We believe that the estimates we make to determine an asset’s useful life are critical accounting estimates because they require our management to make estimates about technological evolution and competitive uses of assets. We depreciate property and equipment on a straight-line basis over their useful lives based on management’s estimates of the period over which these assets will generate revenue (not to exceed the lease term plus renewal options for leased property). The useful lives are estimated based on historical experience with similar assets, taking into account anticipated technological or other changes. We periodically review these lives relative to physical factors, economic considerations and industry trends. If there are changes in the planned use of property and equipment, or if technological changes occur more rapidly than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation and amortization expense or write-offs in future periods. No significant changes to useful lives have been recorded in the past. A significant change in the facts and circumstances that we relied upon in making our estimates may have a material impact on our operating results and financial condition.

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Impairment of Long-Lived Assets and Goodwill

We review long-lived assets (including property and equipment, intangible assets with definite useful lives and lease right of use assets, net) for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We review goodwill for impairment annually, primarily during the fourth ~~quarter.~~quarter, or when an impairment indicator exists. In assessing the recoverability of our long-lived assets and goodwill, we consider changes in economic conditions and make assumptions regarding, among other factors, estimated future cash flows by market and by restaurant, discount rates by country and the fair value of the assets. Estimates of future cash flows are highly subjective judgments based on our experience and knowledge of our 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. A key assumption impacting estimated future cash flows is the estimated change in comparable sales.

See Note 3 to our consolidated financial statements for a detail of markets for which we performed impairment tests of our long-lived assets and goodwill, as well as impairment charges recorded.

If our estimates or underlying assumptions change in the future, we may be required to record additional impairment charges.

Leasing Arrangements

Accounting for Taxes

We record a valuation allowance to reduce the carrying value of deferred tax assets if it is more likely than not that some portion or all of our deferred assets will not be realized. Our valuation allowance as of December 31, 2020, 2019 ~~2018~~ and ~~2017~~2018 amounted to $235.2 million, $194.4 million ~~$219.9 million~~ and ~~$271.7~~$219.9 million, respectively. We have considered future taxable income and ongoing prudent and feasible tax strategies in assessing the need for the valuation allowance. This assessment is carried out on the basis of internal projections, which are updated to reflect our most recent operating trends, such as the expiration date for tax loss carryforwards. Because of the imprecision inherent in any forward-looking data, the further into the future our estimates project, the less objectively verifiable they become. Therefore, we apply judgment to define the period of time to include projected future income to support the future realization of the tax benefit of an existing deductible temporary difference or carryforward and whether there is sufficient evidence to support the projections at a more-likely-than-not level for this period of time. Determining whether a valuation allowance for deferred tax assets is necessary often requires an extensive analysis of positive (e.g., a history of accurately projecting income) and negative evidence (e.g., historic operating losses) regarding realization of the deferred tax assets and inherent in that, an assessment of the likelihood of sufficient future taxable income. In ~~2019, 2018 and 2017,~~2020, we recognized net loss amounting to $46.2 million as compared to net gains amounting to $23.9 million and $24.6 million in 2019 and ~~$19.1 million,~~2018, respectively. If these estimates and assumptions change in the future, we may be required to adjust the valuation allowance. This could result in a charge to, or an increase in, income in the period this determination is made.

In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. The Company assesses the likelihood of any adverse judgments or outcomes on its tax positions, including income tax and other taxes, based on the technical merits of a tax position derived from authorities such as legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position.

As of December 31, ~~2019,~~2020, there are certain matters related to the interpretation of income tax laws which could be challenged by tax authorities in an amount of ~~$183~~$169 million, related to assessments for the fiscal years 2009 to ~~2014.~~2015. 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.

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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 its 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 its unrecognized tax benefit balance, it believes that the liabilities recorded are appropriate and adequate as determined under ASC 740.

Provision for Contingencies

We have certain contingent liabilities with respect to existing or potential claims, lawsuits and other proceedings, including those involving labor, tax and other matters. Accounting for contingencies involves the use of estimates for determining the probability of each contingency and the estimated amount to settle the obligation, including related costs. We accrue liabilities when it is probable that future costs will be incurred and the costs can be reasonably estimated. The accruals are based on all the information available at the issuance date of the financial statements, including our estimates of the outcomes of these matters and our lawyers’ experience in contesting, litigating and settling similar matters. If we are unable to reliably measure the obligation, no provision is recorded and information is then presented in the notes to our consolidated financial statements. As the scope of the liabilities becomes better defined, there may be changes in the estimates of future costs. Because of the inherent uncertainties in this estimation, actual expenditures may be different from the originally estimated amount recognized. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings” for a description of significant claims, lawsuits and other proceedings.

See Note 18 to our consolidated financial statements.

Results of Operations

We have based the following discussion on our consolidated financial statements. You should read it along with these financial statements, and it is qualified in its entirety by reference to them.

In a number of places in this annual report, in order to analyze changes in our business from period to period, we present our results of operations and financial condition on a constant currency basis, which is considered to be a non-GAAP measure. Constant currency results isolate the effects of foreign exchange rates on our results of operations and financial condition. In particular, we have isolated the effects of appreciation and depreciation of local currencies in the Territories against the U.S. dollar because we believe that doing so is useful in understanding the development of our business. For these purposes, we eliminate the effect of movements in the exchange rates by converting the balances in local currency for both periods being compared from their local currencies to the U.S. dollar using the same exchange rate.

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Key Business Measures

The following tables present sales, sales growth, sales growth on a constant currency basis, comparable sales growth and average restaurant sales increases/(decreases):


	Sales			Sales growth				Sales growth in constant currency				Comparable sales growth
	For the Years Ended December 31,			For the Years Ended December 31,				For the Years Ended December 31,				For the Years Ended December 31,
	2020	2019	2018	2020(1)		2019(3)		2020(1)		2019(3)		2020(2)			2019(4)
	(in thousands of U.S. dollars, except percentages)
Sales by Company-operated restaurants	1,894,618	2,812,287	2,932,609	(32.6)	%	(4.1)	%	(16.3)	%	2,606.9	%		(19.1)	%		2,649.4	%
Franchised sales(5)	740,044	1,189,533	1,200,112	(37.8)	%	(0.9)	%	(14.0)	%	6,118.5	%		(13.2)	%		6,040.1	%
Systemwide sales	2,634,662	4,001,820	4,132,721	(34.2)	%	(3.2)	%	(15.6)	%	3,626.7	%		(17.4)	%		3,654.4	%

(1) In nominal terms, sales decreased during 2020 due to the negative impact of the depreciation of currencies mainly in Brazil, Venezuela and Argentina against the U.S. dollar and due to a17.4% decrease in comparable sales, mainly as a result of COVID-19 pandemic, which affected traffic in all Divisions. We had 1,576 Company-operated restaurants and 660 franchised restaurants as of December 31, 2020, compared to 1,580 Company-operated restaurants and 713 franchised restaurants as of December 31, 2019.

(2) Our comparable sales decrease on a systemwide basis in 2020 was driven by the decline in traffic due to the COVID-19 pandemic in the Territories. Venezuela was the only market that ended the period with positive comparable sales, which resulted mainly from price increases driven by the hyperinflation.

(3) In nominal terms, sales decreased during 2019 due to the negative impact of the depreciation of currencies mainly in Venezuela, Argentina and Brazil against the U.S. dollar. This was partially offset by comparable sales growth of 3,654.4%, as a result of hyperinflation in Venezuela. We had 1,580 Company-operated restaurants and 713 franchised restaurants as of December 31, 2019, compared to 1,540 Company-operated restaurants and 683 franchised restaurants as of December 31, 2018.

(4) Our comparable sales growth on a systemwide basis in 2019 was driven by the increase in average check, which resulted mainly from price increases in Venezuela and Argentina (driven by the hyperinflation), and from increased traffic at our restaurants, especially in Brazil.

(5) Franchised sales correspond to sales generated by franchised restaurants, which we do not collect. Revenues from franchised restaurants primarily consist of rental income.

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By division


	Sales						Sales growth				Sales growth in constant currency				Comparable sales growth
	For the Years Ended December 31,						For the Years Ended December 31,				For the Years Ended December 31,				For the Years Ended December 31,
	2020		2019		2018		2020		2019		2020		2019		2020		2019
	(in thousands of U.S. dollars, except percentages)
Sales by Company-operated restaurants:
Brazil	$	795,228	$	1,283,005	$	1,251,458	(38.0)	%	2.5	%	(20.6)	%	11.1	%	(22.4)	%	9.5	%
Caribbean division	379,663		390,589		467,352		(2.8)	%	(16.4)	%	24.8	%	16,275.6	%	11.6	%	16,506.1	%
NOLAD	298,210		410,601		388,233		(27.4)	%	5.8	%	(24.7)	%	6.3	%	(26.2)	%	5.3	%
SLAD	421,517		728,092		825,566		(42.1)	%	(11.8)	%	(26.0)	%	27.0	%	(27.9)	%	25.1	%
Total Sales by Company-operated restaurants	1,894,618		2,812,287		2,932,609		(32.6)	%	(4.1)	%	(16.3)	%	2,606.9	%	(19.1)	%	2,649.4	%

Franchised-sales:(3)
Brazil	540,974		834,653		773,908		(35.2)	%	7.8	%	(17.0)	%	16.8	%	(20.7)	%	9.8	%
Caribbean division	11,401		64,813		120,702		(82.4)	%	(46.3)	%	71.3	%	60,683.6	%	1,052.8	%	61,561.5	%
NOLAD	113,845		171,672		159,180		(33.7)	%	7.8	%	(29.6)	%	7.9	%	(29.1)	%	4.3	%
SLAD	73,824		118,395		146,322		(37.6)	%	(19.1)	%	(17.7)	%	26.9	%	(18.6)	%	26.4	%
Total Franchised sales	740,044		1,189,533		1,200,112		(37.8)	%	(0.9)	%	(14.0)	%	6,118.5	%	(13.2)	%	6,040.1	%

Systemwide sales:
Brazil	1,336,202		2,117,658		2,025,366		(36.9)	%	4.6	%	(19.2)	%	13.3	%	(21.8)	%	9.7	%
Caribbean division	391,064		455,403		588,054		(14.1)	%	(22.6)	%	31.4	%	25,390.7	%	32.6	%	25,753	%
NOLAD	412,055		582,273		547,414		(29.2)	%	6.4	%	(26.1)	%	6.8	%	(27)	%	5	%
SLAD	495,341		846,486		971,887		(41.5)	%	(12.9)	%	(24.8)	%	27	%	(26.7)	%	25.3	%
Total Systemwide sales	2,634,662		4,001,820		4,132,721		(34.2)	%	(3.2)	%	(15.6)	%	3,626.7	%	(17.4)	%	3,654.4	%


	Sales						Number of restaurants				Average restaurant sales
	For the Years Ended December 31,						For the Years Ended December 31,				For the Years Ended December 31,
	2020		2019		2018		2020	2019	2018	2017	2020(1)		2019(2)		2018(3)
	(in thousands of U.S. dollars, except for number of restaurants)
Sales by Company-operated restaurants	$	1,894,618	$	2,812,287	$	2,932,609	1,576	1,580	1,540	1,546	$	1,202	$	1,780	$	1,901
Franchised sales(3)		740,044		1,189,533		1,200,112	660	713	683	642		1,121		1,688		1,811
Systemwide sales		2,634,662		4,001,820		4,132,721	2,236	2,293	2,223	2,188		1,178		1,745		2,032


~~(1)~~			In nominal terms, sales decreased during 2019 due to the negative impact of the depreciation of currencies mainly in Venezuela, Argentina and Brazil against the U.S. dollar. This was partially offset by comparable sales growth of 3,654.4%, as a result of hyperinflation in Venezuela. We had 1,580 Company-operated restaurants and 713 franchised restaurants as of December 31, 2019, compared to 1,540 Company-operated restaurants and 683 franchised restaurants as of December 31, 2018.

(1) Our ARS decreased in 2020 due to a decrease in traffic as a result of the negative impact of the depreciation of currencies, mainly in Venezuela, Argentina and Brazil, against the U.S. dollar and lockdowns and capacity limits at our restaurants as a result of the COVID-19 pandemic in all divisions. This was partially offset by an average check growth of 42.5%, mainly driven by Venezuela’s hyperinflation and high inflation in Argentina.

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~~(2)~~	Our comparable sales growth on a systemwide basis in 2019 was driven by the increase in average check, which resulted mainly from price increases in Venezuela and Argentina (driven by the hyperinflation), and from increased traffic at our restaurants, especially in Brazil.

~~(3)~~

In nominal terms, sales decreased during 2018 due to the negative impact of the depreciation of currencies mainly in Venezuela, Argentina and Brazil against the U.S. dollar. This was partially offset by comparable sales growth of 1,778.1%, as a result of hyperinflation in Venezuela. We had 1,540 Company-operated restaurants and 683 franchised restaurants as of December 31, 2018, compared to 1,546 Company-operated restaurants and 642 franchised restaurants as of December 31, 2017.


~~(4)~~	Our comparable sales growth on a systemwide basis in 2018 was driven by the increase in average check, which resulted mainly from price increases in Venezuela (driven by the hyperinflation) and in Argentina and from increased traffic at our restaurants.


~~(5)~~	~~Franchised sales correspond to sales generated by franchised restaurants, which we do not collect. Revenues from franchised restaurants primarily consist of rental income.~~

(2) Our ARS decreased in 2019 due to the negative impact of the depreciation of currencies, mainly in Venezuela, Argentina and Brazil, against the U.S. dollar. This was partially offset by comparable sales growth of 3,654.4%, mainly driven by Venezuela´s hyperinflation.

~~By division~~(3) Our ARS decreased in 2018 due to the negative impact of the depreciation of currencies, mainly in Venezuela, Argentina and Brazil, against the U.S. dollar. This was partially offset by comparable sales growth of 1,778.1%, mainly driven by Venezuela´s hyperinflation.

(4) Franchised sales correspond to sales generated by franchised restaurants, which we do not collect. Revenues from franchised restaurants primarily derive from rental income.

Sales Sales growth
Sales growth in
constant currency
Comparable sales growth

For the Years Ended
December 31,
For the Years Ended December 31, For the Years Ended December 31, For the Years Ended December 31,
2019 2018 2017 2019 2018 2019 2018 2019 2018
(in thousands of U.S. dollars, except percentages)
Sales by Company-operated restaurants:
Brazil $ 1,283,005 $ 1,251,458 $ 1,396,411 2.5 % (10.4) % 11.1 % 2.0 % 9.5 % 1.1 %
Caribbean division 390,589 467,352 457,033 (16.4) % 2.3 % 16,275.6 % 8,559.0 % 16,506.1 % 8,719.4 %
NOLAD 410,601 388,233 370,457 5.8 % 4.8 % 6.3 % 6.3 % 5.3 % 6.4 %
SLAD 728,092 825,566 938,355 (11.8) % (12.0) % 27.0 % 19.7 % 25.1 % 19.6 %
Total Sales by Company-operated restaurants 2,812,287 2,932,609 3,162,256 (4.1) % (7.3) % 2,606.9 % 1,244.5 % 2,649.4 % 1,270.4 %

Franchised-sales:(3)
Brazil 834,653 773,908 815,184 7.8 % (5.1) % 16.8 % 8.1 % 9.8 % 2.3 %
Caribbean division 64,813 120,702 127,599 (46.3) % (5.4) % 60,683.6 % 30,277.9 % 61,561.5 % 30,716.2 %
NOLAD 171,672 159,180 142,657 7.8 % 11.6 % 7.9 % 13.5 % 4.3 % 6.8 %
SLAD 118,395 146,322 165,166 (19.1) % (11.4) % 26.9 % 31.3 % 26.4 % 22.3 %
Total Franchised sales 1,189,533 1,200,112 1,250,606 (0.9) % (4.0) % 6,118.5 % 3,100.2 % 6,040.1 % 2,983.0 %

Systemwide sales:
Brazil 2,117,658 2,025,366 2,211,595 4.6 % (8.4) % 13.3 % 4.3 % 9.7 % 1.6 %
Caribbean division 455,403 588,054 584,632 (22.6) % 0.6 % 25,390.7 % 13,299.2 % 25,753.0 % 13,557.8 %
NOLAD 582,273 547,414 513,114 6.4 % 6.7 % 6.8 % 8.3 % 5.0 % 6.5 %
SLAD 846,486 971,887 1,103,521 (12.9) % (11.9) % 27.0 % 21.4 % 25.3 % 20.1 %
Total Systemwide sales 4,001,820 4,132,721 4,412,862 (3.2) % (6.3) % 3,626.7 % 1,770.4 % 3,654.4 % 1,778.1 %

~~Table of Contents~~

Sales Number of restaurants Average restaurant sales
For the Years Ended December 31, For the Years Ended December 31, For the Years Ended December 31,
2019 2018 2017 2019 2018 2017 2016 2019(1) 2018(2) 2017
(in thousands of U.S. dollars, except for number of restaurants)
Sales by Company-operated restaurants $ 2,812,287 $ 2,932,609 $ 3,162,256 1,580 1,540 1,546 1,553 $ 1,780 $ 1,901 $ 2,041
Franchised sales(3) $ 1,189,533 $ 1,200,112 $ 1,250,606 713 683 642 603 $ 1,668 $ 1,811 $ 2,009
Systemwide sales $ 4,001,820 $ 4,132,721 $ 4,412,862 2,293 2,223 2,188 2,156 $ 1,745 $ 1,874 $ 2,032


~~(1)~~	Our ARS decreased in 2019 due to the negative impact of the depreciation of currencies, mainly in Venezuela, Argentina and Brazil, against the U.S. dollar. This was partially offset by comparable sales growth of 3,654.4%, mainly driven by Venezuela´s hyperinflation.


~~(2)~~	~~Our ARS decreased in 2018 due to the negative impact of the depreciation of currencies, mainly in Venezuela, Argentina and Brazil, against the U.S. dollar.This was partially offset by comparable sales growth of 1,778.1%, mainly driven by Venezuela’s hyperinflation.~~


~~(3)~~	~~Franchised sales correspond to sales generated by franchised restaurants, which we do not collect. Revenues from franchised restaurants primarily derive from rental income.~~

Year Ended December 31, ~~2019~~2020 Compared to Year Ended December 31, ~~2018~~

2019

Set forth below are our results of operations for the years ended December 31, ~~2019~~2020 and ~~2018.~~2019.


	For the Years Ended December 31,				% Change
	2020		2019
	(in thousands of U.S. dollars)
Sales by Company-operated restaurants	$	1,894,618	$	2,812,287	(32.6)	%
Revenues from franchised restaurants		89,601		146,790	(39.0)	%
Total revenues		1,984,219		2,959,077	(32.9)	%
Company-operated restaurant expenses:
Food and paper		(677,087)		(1,007,584)	(32.8)	%
Payroll and employee benefits		(413,074)		(567,653)	(27.2)	%
Occupancy and other operating expenses		(624,154)		(799,633)	(21.9)	%
Royalty fees		(110,957)		(155,388)	(28.6)	%
Franchised restaurants – occupancy expenses		(43,512)		(61,278)	(29.0)	%
General and administrative expenses		(171,382)		(212,515)	(19.4)	%
Other operating (expenses) income, net		(10,807)		4,910	(320.1)	%
Total operating costs and expenses		(2,050,973)		(2,799,141)	(26.7)	%
Operating (loss) income		(66,754)		159,936	(141.7)	%
Net interest expense		(59,068)		(52,079)	13.4	%
(Loss) Gain from derivative instruments		(2,297)		439	(623.2)	%
Gain from securities		25,676		—	100.0	%
Foreign currency exchange results		(31,707)		12,754	(348.6)	%
Other non-operating income (expenses), net		2,296		(2,097)	(209.5)	%
(Loss) income before income taxes		(131,854)		118,953	(210.8)	%
Income tax expense		(17,532)		(38,837)	(54.9)	%
Net (loss) income		(149,386)		80,116	(286.5)	%
Less: Net income attributable to non-controlling interests		(65)		(220)	(70.5)	%
Net (loss) income attributable to Arcos Dorados Holdings Inc.		(149,451)		79,896	(287.1)	%

For the Years Ended December 31,
%
Change
2019 2018
(in thousands of U.S. dollars)
Sales by Company-operated restaurants $ 2,812,287 $ 2,932,609 (4.1) %
Revenues from franchised restaurants $ 146,790 $ 148,962 (1.5) %
Total revenues $ 2,959,077 $ 3,081,571 (4.0) %
Company-operated restaurant expenses:
Food and paper $ (1,007,584) $ (1,030,499) (2.2) %
Payroll and employee benefits $ (567,653) $ (607,793) (6.6) %
Occupancy and other operating expenses $ (799,633) $ (803,539) (0.5) %
Royalty fees $ (155,388) $ (157,886) (1.6) %
Franchised restaurants – occupancy expenses $ (61,278) $ (67,927) (9.8) %
General and administrative expenses $ (212,515) $ (229,324) (7.3) %
Other operating income (expenses), net $ 4,910 $ (61,145) (108.0) %
Total operating costs and expenses $ (2,799,141) $ (2,958,113) (5.4) %
Operating income $ 159,936 $ 123,458 29.5 %
Net interest expense $ (52,079) $ (52,868) (1.5) %
Gain (loss) from derivative instruments $ 439 $ (565) (177.7) %
Foreign currency exchange results $ 12,754 $ 14,874 (14.3) %
Other non-operating (expenses) income, net $ (2,097) $ 270 (876.7) %
Income before income taxes $ 118,953 $ 85,169 39.7 %
Income tax expense $ (38,837) $ (48,136) (19.3) %
Net income $ 80,116 $ 37,033 116.3 %
Less: Net income attributable to non-controlling interests $ (220) $ (186) 18.3 %
Net income attributable to Arcos Dorados Holdings Inc $ 79,896 $ 36,847 116.8 %
67

Table of Contents

Set forth below is a summary of changes to our systemwide, Company-operated and franchised restaurant portfolios in ~~2019~~2020 and ~~2018.~~2019.


Systemwide Restaurants	For the Years Ended December 31,
	2020	2019
Systemwide restaurants at beginning of period	2,293	2,223
Restaurant openings	9	90
Restaurant closings	(66)	(20)
Systemwide restaurants at end of period	2,236	2,293


Company-Operated Restaurants	For the Years Ended December 31,
	2020	2019
Company-operated restaurants at beginning of period	1,580	1,540
Restaurant openings	3	65
Restaurant closings	(56)	(17)
Net conversions of franchised restaurants to Company-operated restaurants	49	(8)
Company-operated restaurants at end of period	1,576	1,580


Franchised Restaurants	For the Years Ended December 31,
	2020	2019
Franchised restaurants at beginning of period	713	683
Restaurant openings	6	25
Restaurant closings	(10)	(3)
Net conversions of franchised restaurants to Company-operated restaurants	(49)	8
Franchised restaurants at end of period	660	713

Revenues


	For the Years Ended December 31,				% Change
	2020		2019
	(in thousands of U.S. dollars)
Sales by Company-operated restaurants
Brazil	$	795,228	$	1,283,005	(38.0)	%
Caribbean division		379,663		390,589	(2.8)	%
NOLAD		298,210		410,601	(27.4)	%
SLAD		421,517		728,092	(42.1)	%
Total		1,894,618		2,812,287	(32.6)	%
Revenues from franchised restaurants
Brazil		67,520		102,561	(34.2)	%
Caribbean division		1,427		8,662	(83.5)	%
NOLAD		13,677		20,665	(33.8)	%
SLAD		6,977		14,902	(53.2)	%
Total		89,601		146,790	(39.0)	%
Total revenues
Brazil		862,748		1,385,566	(37.7)	%
Caribbean division		381,090		399,251	(4.5)	%
NOLAD		311,887		431,266	(27.7)	%
SLAD		428,494		742,994	(42.3)	%
Total		1,984,219		2,959,077	(32.9)	%

Systemwide Restaurants

For the Years Ended
December 31,
2019 2018
Systemwide restaurants at beginning of period 2,223 2,188
Restaurant openings 90 70
Restaurant closings (20) (35)
Systemwide restaurants at end of period 2,293 2,223
68

Company-Operated Restaurants
For the Years Ended
December 31,
2019 2018
Company-operated restaurants at beginning of period 1,540 1,546
Restaurant openings 65 42
Restaurant closings (17) (28)
Net conversions of franchised restaurants to Company-operated restaurants (8) (20)
Company-operated restaurants at end of period 1,580 1,540

Franchised Restaurants

For the Years Ended
December 31,
2019 2018
Franchised restaurants at beginning of period 683 642
Restaurant openings 25 28
Restaurant closings (3) (7)
Net conversions of franchised restaurants to Company-operated restaurants 8 20
Franchised restaurants at end of period 713 683

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~~Revenues~~

For the Years Ended
December 31,
% Change
2019 2018
(in thousands of U.S. dollars)
Sales by Company-operated restaurants
Brazil $ 1,283,005 $ 1,251,458 2.5 %
Caribbean division $ 390,589 $ 467,352 (16.4) %
NOLAD $ 410,601 $ 388,233 5.8 %
SLAD $ 728,092 $ 825,566 (11.8) %
Total $ 2,812,287 $ 2,932,609 (4.1) %
Revenues from franchised restaurants
Brazil $ 102,561 $ 93,995 9.1 %
Caribbean division $ 8,662 $ 16,391 (47.2) %
NOLAD $ 20,665 $ 18,615 11.0 %
SLAD $ 14,902 $ 19,961 (25.3) %
Total $ 146,790 $ 148,962 (1.5) %
Total revenues
Brazil $ 1,385,566 $ 1,345,453 3.0 %
Caribbean division $ 399,251 $ 483,743 (17.5) %
NOLAD $ 431,266 $ 406,848 6.0 %
SLAD $ 742,994 $ 845,527 (12.1) %
Total $ 2,959,077 $ 3,081,571 (4.0) %

Sales by Company-operated Restaurants

Total sales by Company-operated restaurants decreased by ~~$120.3~~$917.7 million, or ~~4.1%~~32.6%, from ~~$2,932.6 million in 2018 to~~ $2,812.3 million in ~~2019. In Argentina, total~~2019 to $1,894.6 million in 2020. This decrease was mainly driven by a decrease in traffic in the Territories as a result of lockdowns and capacity limits at our restaurants as a result of the COVID-19 pandemic, which led to a decrease in comparable sales by Company-operated restaurants ~~decreased by $93.7 million, mainly due to depreciation~~ of ~~the Argentine~~ ~~peso, against the U.S. dollar, which caused sales to decrease by $291.1~~$540.9 million. ~~This was partially offset by comparable sales growth of 38.7%, which caused sales in this market to increase by $186.4 million, mostly due to price increase related to~~In addition, the hyperinflation, together with 1 net restaurant opening and 3 franchised restaurants converting into Company-operated restaurants since January 1, 2018 which increased sales by $11.0 million. Additionally, the sharp currency depreciation in Venezuela caused a $61.2 million net negative impact on sales by Company-operated restaurants in 2019 compared to 2018. Moreover, in the other markets, sales by Company-operated restaurants increased $34.6 million mainly due to comparable sales growth of 6.8%, which caused sales to increase by $159.7 million, coupled with 53 net restaurant openings since January 1, 2018, which caused sales to increase by $31.1 million, partly offset by depreciation of currencies against the U.S. dollar ~~which~~ caused sales to ~~decrease~~decline by ~~$156.1 million.~~$459.2 million, mainly in Brazil, Argentina and Venezuela. This was partially offset by the conversion of 41 franchised restaurants into Company-operated restaurants, the opening of 68 Company-operated restaurants and the closing of 73 Company-operated restaurants since January 1, 2019, which contributed $82.4 million to sales.

In Brazil, sales by Company-operated restaurants ~~increased~~decreased by ~~$31.5~~$487.8 million, or ~~2.5%~~38.0%, to ~~$1,283.0~~$795.2 million. This was primarily a consequence of comparable sales ~~growth~~decline of ~~9.5%~~22.4%, mainly driven by the ~~increase~~decrease in traffic as a result of lockdowns and capacity limits at our restaurants as a result of the COVID-19 pandemic, which caused sales to ~~increase~~decrease by ~~$116.4~~$285.3 million. Also, 56 net restaurants openings coupled with the conversion of 23 Company-operated restaurants into franchised restaurants since January 1, 2018, caused sales to increase by $22.4 million. This was partially offset byIn addition, the depreciation of the Brazilian real against the U.S. dollar, ~~which~~ caused sales to decrease by ~~$107.3~~$223.1 million. This was partially offset by 33 net restaurants openings, partly offset by the conversion of 7 Company-operated restaurants into franchised restaurants since January 1, 2019, that caused sales to increase by $20.6 million.

In the Caribbean division, sales by Company-operated restaurants decreased by ~~$76.8~~$10.9 million, or ~~16.4%~~2.8%, to ~~$390.6~~$379.7 million. The hyperinflationary environment in Venezuela caused a ~~$61.2~~$5.0 million net negative impact on sales by Company-operated restaurants in ~~2019~~2020 compared to ~~2018.~~2019. In the other markets of the Caribbean division, sales by Company-operated restaurants decreased by ~~$15.6~~$5.9 million mainly due to a decrease in traffic as a result of lockdowns and capacity limits at our restaurants as a result of COVID-19 pandemic, which led to a decrease in comparable sales growth of $44.5 million. In addition, the depreciation of currencies against the U.S. dollar ~~which~~ caused sales to decrease by ~~$17.6 million~~$5.7 million. This was partially offset by the conversion of 33 franchised restaurants into Company-operated restaurants, the opening of 2 Company-operated restaurants and the closing of ~~15 company operated restaurants. This was partly offset by the opening of 3~~17 Company-operated restaurants since January 1, 2019, which ~~led~~contributed $44.3 million to ~~a $0.1 million increase in sales, and comparable sales growth of 0.5%, which caused sales to increase by $1.9 million.~~sales.

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In NOLAD, sales by Company-operated restaurants ~~increased~~decreased by ~~$22.4~~$112.4 million, or ~~5.8%~~27.4%, to ~~$410.6~~$298.2 million. This was a consequence of comparable sales ~~growth~~decline of ~~5.3%~~26.2%, driven by the traffic ~~increase,~~decrease as a result of lockdowns and capacity limits at our restaurants as a result of the COVID-19 pandemic, which ~~contributed $19.9~~caused sales to decrease by $105.4 million ~~to the increase in sales,~~ and 9 net restaurant openings, partially offset by the conversion of 8 Company-operated restaurants into franchised restaurants since January 1, 2018, which contributed in $4.5 million to sales. This was partially offset by the depreciation of local currencies, which had a negative impact of ~~$2.0~~$11.0 million in sales. This was partially offset by the conversion of 8 franchised restaurants into Company-operated restaurant, the opening of 18 Company-operated restaurant and closure of 35 Company-operated restaurants since January 1, 2019, which contributed in $4.0 million to sales.

In SLAD, sales by Company-operated restaurants decreased by ~~$97.5~~$306.6 million, or ~~11.8%~~42.1%, to ~~$728.1~~$421.5 million. This was a consequence of decline in traffic in the SLAD division as a result of lockdowns and capacity limits at our restaurants as a result of the COVID-19 pandemic, which led to a decrease in comparable sales of $201.0 million, coupled with the depreciation of currencies against the U.S. dollar, in particular the Argentine peso, which caused sales to decrease by ~~$320.3~~$117.2 million. This was partially offset by 25.1% growth in comparable sales, which caused sales to increase by $207.8 million, driven by an increase in average check, mainly related with Argentine inflation. Additionally, the opening of 16 restaurants, together with the conversion of 37 franchised restaurants into Company-operated restaurants, ~~partly offset by~~ the ~~closing~~opening of 711 Company-operated restaurants and closure of 17 Company-operated restaurants since January 1, ~~2018~~2019, which contributed ~~$15.0~~$11.6 million to the increase in sales.

Revenues from Franchised Restaurants

Our total revenues from franchised restaurants decreased by ~~$2.2~~ $57.2 million, or ~~1.5%~~ 39.0%, from ~~$149.0 million in 2018 to~~ $146.8 million in ~~2019. In Argentina,~~2019 to $89.6 million in 2020. The decrease in revenues ~~from franchised restaurants decreased $5.5 million~~was mainly ~~explained~~driven by the depreciation of ~~the Argentine~~ ~~peso~~currencies against ~~the~~ U.S. dollar, that reduced revenues by $7.7 million, along with the decrease in rental income as a percentage of sales which had a negative effect of $1.8 million. This was partly offset by comparable sales growth of 33.1%, which caused revenues to ~~increase $4.0 million. Additionally, sharp currency depreciation~~decrease by $35.4 million, coupled with a decrease in ~~Venezuela caused~~traffic in the Territories as a ~~$7.5 million net negative impact on revenues from franchised restaurants. These decreases were partly offset by an increase~~result of ~~revenues from franchised~~lockdowns and capacity limits at our restaurants ~~in other markets~~as a result of ~~$10.8 million, mainly due to comparable sales growth of 8.3%,~~ the COVID-19 pandemic,which caused revenues ~~from franchised restaurants~~ to ~~increase~~decrease by ~~$10.9~~$16.7 million. ~~Additionally,~~In addition, the decrease in rent income to support franchisees during the COVID-19 pandemic had a $2.9 million negative effect, together with the conversion of ~~38 Company-operated~~41 franchised restaurants into ~~franchised restaurants and~~Company-operated, partially offset by the net opening of 3118 franchised restaurants, ~~caused~~which decreased revenues ~~to increase~~ by ~~$7.4~~$2.2 million. Also, a slight increase in rent due to different conditions in new contracts caused an increase in revenues of $1.9 million. These increases in our other markets were partly offset by the effect of currencies depreciation against the U.S. dollar which had a negative effect of $9.4 million.

In Brazil, revenues from franchised restaurants ~~increased~~decreased by ~~$8.6~~$35.0 million, or ~~9.1%~~34.2%, to ~~$102.6~~$67.5 million primarily due to comparable sales ~~growth~~decrease of ~~9.8%,~~20.7% due to a decline in traffic in Brazil as a result of lockdowns and capacity limits at our restaurants as a result of the COVID-19 pandemic, which ~~increased~~decreased revenues by ~~$9.7~~$21.7 million the net opening of 38 franchised restaurants and the conversion of 23 Company-operated restaurants into franchised restaurants, since January 1, 2018, which caused revenues from franchised restaurants to increase in $6.4 million along with the increase in rental income as ~~a percentage of sales, which increased revenues by $1.1 million. This was partially offset by~~well as the depreciation of the real against the U.S. dollar, ~~that~~which decreased revenues by ~~$8.6~~$19.0 million. This was partially offset by the net opening of 19 franchised restaurants and the conversion of 7 Company-operated restaurants into franchised restaurants, since January 1, 2019, which caused revenues from franchised restaurants to increase by $4.0 million. In addition, an increase in rental income as a percentage of sales contributed $1.7 million to revenues.

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In the Caribbean division, revenues from franchised restaurants decreased by ~~$7.7~~$7.2 million, or ~~47.2%~~83.5%, to ~~$8.7~~$1.4 million. The conversion of all 33 franchised restaurants into Company-operated restaurants in Puerto Rico and the net closure of 4 franchised restaurants caused non-comparable sales and rental income to decrease, which led to a decrease in revenues of $5.8 and $0.7 million respectively. In addition, the sharp currency depreciation in Venezuela more than offset the hyperinflationary environment, ~~in Venezuela caused~~causing a ~~$7.5~~$0.7 million net negative impact on revenues from franchised restaurants in 2019 compared to 2018. In Puerto Rico, the other market of the division with franchised restaurants, revenues decreased by $0.2 million, mainly due to a decline in comparable sales growth of 1.4%, which caused revenues of franchised restaurants to decrease by $0.1 million, coupled with the closing of 2 restaurants since January 1, 2018, with a negative impact in revenues of $0.1 million.restaurants.

In NOLAD, revenues from franchised restaurants ~~increased~~decreased by ~~$2.1~~$7.0 million, or ~~11.0%~~33.8%, to ~~20.7~~$13.7 million. This ~~increase~~decrease was a result of comparable sales ~~growth~~decline of ~~4.3%~~29.1%, which resulted in a ~~$0.8~~$5.7 million ~~increase~~decrease in revenues, coupled with the depreciation of local currencies, which had a negative impact of $0.8 million in revenues. In addition, the conversion of 8 ~~Company-operated~~franchised restaurants into ~~franchised restaurants and the net opening of 2~~Company-operated restaurants since January 1, ~~2018, which~~2019 caused revenues to ~~increase~~decrease by ~~$0.7 million, coupled with increase in rental income as a percentage of sales, which increased revenues by $0.6~~$0.5 million.

In SLAD, revenues from franchised restaurants decreased by ~~$5.1~~$7.9 million, or ~~25.3%~~53.2%, to ~~$14.9~~$7.0 million. This decrease is mainly explained by the support given to franchisees during the COVID-19 pandemic, which caused rental income to decrease as a percentage of sales in the division, and reduced revenues by $3.7 million. In addition, the depreciation of ~~the~~ currencies against the U.S. dollar ~~especially~~in the ~~Argentine~~ ~~peso, which~~division represented a decrease in revenues of ~~$8.5 million. In addition,~~$2.2 million, and the comparable sales decline due to a decrease in ~~rental income~~traffic in the SLAD division as a ~~percentage~~result of ~~sales reduced~~lockdowns and capacity limits at our restaurants due to the COVID-19 pandemic caused revenues to decrease by $1.5 million This was partially offset by comparable sales growth of 26.4%, which resulted in a $4.5 million increase in revenues, driven by an increase in average check strongly related with the inflation in Argentina, coupled with the net opening of 5 restaurants and the$1.9 million. The conversion of 37 franchised restaurants into Company-operated restaurants, partially offset by the opening of 3 franchised restaurants, since January 1, ~~2018, which~~2019, also caused revenues from franchised restaurants to ~~increase~~decrease by ~~$0.4~~$0.1 million.

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Operating Costs and Expenses

Food and Paper

Our total food and paper costs decreased by ~~$22.9~~$330.5 million, or ~~2.2%~~32.8%, to ~~$1,007.6~~$677.1 million in ~~2019,~~2020, as compared to ~~2018.~~2019. As a percentage of our total sales by Company-operated restaurants, food and paper costs ~~increased 0.7~~decreased 0.1 percentage points to ~~35.8%, primarily as a result of product mix in Brazil and Argentina.~~35.7%.

In Brazil, food and paper costs ~~increased~~decreased by ~~$33.0~~$158.9 million, or 36.2%, to ~~$439.3~~$280.5 million. As a percentage of the division’s sales by Company-operated restaurants, food and paper costs increased by ~~1.7~~1.0 percentage points to ~~34.2%~~35.3%, primarily as a result of ~~an unfavorable change~~important cost increases that could not be fully transferred to prices in ~~product mix, derived from promotional activities carried out with~~ the ~~goal of increasing traffic in response to the unfavorable macroeconomic conditions and strong competitive environment.~~division.

In the Caribbean division, food and paper costs decreased by ~~$30.7~~$7.9 million, or ~~18.1%~~5.7%, to ~~$139.5~~$131.5 million. As a percentage of the division’s sales by Company-operated restaurants, food and paper costs decreased by ~~0.7~~1.1 percentage points to ~~35.7%~~34.6%, primarily due to ~~the hyperinflationary environment~~a favorable product mix in Colombia, Puerto Rico and ~~sharp currency depreciation in~~ Venezuela.

In NOLAD, food and paper costs ~~increased~~decreased by ~~$7.3~~$44.2 million, or ~~4.8%~~27.9%, to ~~$158.4~~$114.2 million. As a percentage of the division’s sales by Company-operated restaurants, food and paper costs decreased by 0.3 percentage points to ~~38.6%, resulting~~38.3%. The decline in food and paper costs in NOLAD were primarily ~~from higher price increases as compared to cost increases~~driven by a favorable product mix in ~~every market of the division.~~Mexico and improved inventory and waste management in Mexico and Panama.

In SLAD, food and paper costs decreased by ~~$32.5~~$119.5 million, or ~~10.7%~~44.2%, to ~~$270.4~~$150.9 million. As a percentage of the division’s sales by Company-operated restaurants, food and paper costs ~~increased~~decreased by ~~0.4~~1.3 percentage points to ~~37.1%~~35.8%, mainly due to higher price increases than cost increases ~~above price increases, related to the effect of the depreciation of the Argentine~~ ~~peso~~ ~~against the U.S. dollar~~particularly in ~~imported products~~Argentina, but also in Chile and Uruguay that coupled with a favorable product mix ~~also primarily in Argentina.~~could decrease the food and paper cost over sales.

Payroll and Employee Benefits

Our total payroll and employee benefits costs decreased by ~~$40.1~~$154.6 million, or ~~6.6%~~27.2%, to ~~$567.7~~$413.1 million in ~~2019,~~2020, as compared to ~~2018.~~2019. As a percentage of our total sales by Company-operated restaurants, payroll and employee benefits costs ~~decreased 0.5~~increased 1.6 percentage points to ~~20.2%~~21.8%. The ~~decrease is~~increase was mostly attributable to lower productivity of our employees, especially during the months that our stores were fully or partially closed as a result of the COVID-19 pandemic, as there is a minimum number of hours the Company must guarantee to its employees, that varies among markets, as well as higher ~~productivity~~management payroll as a percentage of sales in ~~Brazil, tax reform~~every division, explained by a decrease in ~~Argentina~~traffic in the Territories. This was partly offset by subsidies provided by governments in some markets.

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The decrease in traffic in both cases was due to lockdowns and ~~operational efficiencies~~capacity limits at our restaurants as a result of the COVID-19 pandemic, which led to lower absorption of fixed costs. This was partly offset by an average check increase above regular crew hour rates, which increased in ~~almost all~~most markets.

In Brazil, payroll and employee benefits costs decreased by ~~$8.2~~$83.7 million, or ~~3.0%~~31.3%, to $267.4 million. As a percentage of the division’s sales by Company-operated restaurants, payroll and employee benefits costs decreased by 1.2 percentage points to 20.8%, mainly as a result of efficiencies in management payroll, coupled with higher productivity and lower labor contingencies.

~~In the Caribbean division, payroll and employee benefits costs decreased by $4.1 million, or 4.6%, to $84.2~~$183.8 million. As a percentage of the division’s sales by Company-operated restaurants, payroll and employee benefits costs increased by ~~2.7~~2.3 percentage points to ~~21.6%~~23.1%, mainly as a result of lower productivity due to the decrease in traffic in the division as a result of lockdowns and capacity limits at our restaurants due to the COVID-19 pandemic. In addition, management payroll costs increased as a percentage of sales due to the decrease in sales, also driven by the COVID-19 pandemic.

In the Caribbean division, payroll and employee benefits costs increased by $1.3 million, or 1.5%, to $85.5 million primarily due to the net conversion of 33 franchised restaurants into Company-operated restaurants that increased payroll expenses. As a percentage of the division’s sales by Company-operated restaurants, payroll and employee benefits costs increased by 1.0 percentage points to 22.5%, mainly due to ~~lower income related~~management payroll costs, which increased as a percentage of sales due to ~~government benefits~~the decrease in ~~Colombia and higher management salaries in Venezuela.~~sales, driven by the COVID-19 pandemic.

In NOLAD, payroll and employee benefits costs ~~increased~~decreased by ~~$2.5~~$13.6 million, or ~~3.9%~~20.5%, to ~~$66.3~~$52.8 million. As a percentage of the division’s sales by Company-operated restaurants, payroll and employee benefits costs ~~decreased~~increased by ~~0.2~~1.5 percentage points to ~~16.2%~~17.7%, ~~resulting primarily from higher price increases~~mainly due to a decrease in productivity, coupled with an increase in management payroll as ~~compared~~a percentage of sales due to ~~cost increases together with operational efficiencies,~~lower sales in the division, all related to a decrease in ~~Mexico.~~traffic as a result of lockdowns and capacity limits at our restaurants as a result of the COVID-19 pandemic, partially offset by an increase in the average check above the regular crew hour rate in Costa Rica.

In SLAD, payroll and employee benefits costs decreased by ~~$30.3~~$58.6 million, or ~~16.9%~~39.2%, to ~~$149.6~~$91.0 million. As a percentage of the division’s sales by Company-operated restaurants, payroll and employee benefits ~~decreased~~increased by ~~1.2~~1.0 percentage points to ~~20.6%~~21.6% mainly as a result of ~~tax benefits~~a decrease in ~~Argentina~~traffic in the division as a result of lockdowns and ~~Uruguay.~~capacity limits at our restaurants as a result of the COVID-19 pandemic, which had a negative impact in sales, increasing management payroll and decreasing productivity.

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Occupancy and Other Operating Expenses

Our total occupancy and other operating expenses decreased by ~~$3.9~~$175.5 million, or ~~0.5%~~21.9%, to ~~$799.6~~$624.2 million in ~~2019,~~2020, as compared to ~~2018.~~2019. As a percentage of our total sales by Company-operated restaurants, occupancy and other operating expenses increased ~~1.0~~4.5 percentage points to ~~28.4%~~32.9%, mainly as a consequence of the decrease in sales due to ~~higher delivery costs and IT expenses in Brazil and Argentina.~~the COVID-19 pandemic, which led to lower absorption of fixed costs. Additionally, there were higher depreciation and amortization expenses in ~~Brazil.~~Brazil and Uruguay, coupled with higher delivery costs in every division and utilities expenses in Brazil and Argentina. This was partially offset by a reduction of advertising and promotion expenses by 1.0 percentage point of sales in every market, according to an agreement with McDonald’s we entered into at the beginning of the pandemic to reduce our advertising and promotion spending from 5% to 4% of our gross sales for the year 2020.

In Brazil, occupancy and other operating expenses ~~increased~~decreased by ~~$16.2~~$94.6 million, or ~~4.8%~~26.8%, to ~~$352.9~~$258.3 million. As a percentage of the division’s sales by Company-operated restaurants, occupancy and other operating expenses increased by ~~0.6~~5.0 percentage points to ~~27.5%~~32.5%, ~~mainly~~ due to the COVID-19 pandemic, which led to lower sales that had a negative impact on the absorption of fixed costs, mainly utilities and occupancy expenses. This increase was also caused by higher delivery costs ~~and IT expenses coupled with~~due to a higher participation of delivery in sales driven by circulation restrictions. In addition, there was higher depreciation and amortization related to the ~~2017-2019~~ reinvestment plan and ~~dessert center openings.~~to the opening of restaurants and Dessert Centers mainly in previous years.

In the Caribbean division, occupancy and other operating expenses decreased by ~~$18.2~~$5.3 million, or ~~13.6%~~4.6%, to ~~$116.0~~$110.6 million. As a percentage of the division’s sales by Company-operated restaurants, occupancy and other operating expenses ~~increased 1.0~~decreased 0.6 percentage points to ~~29.7%~~29.1%, mainly due to ~~higher utilities in Venezuela, Colombia~~reduction of costs such as advertising and ~~Puerto Rico, coupled with higher~~promotion, maintenance and repair ~~costs~~of stores and other expenses, together with savings in Venezuela and Colombia. In addition, higher depreciation and amortization expenses in Venezuela and Colombia also contributed, explained by lower sales in both countries. This was partially offset by lower insurance payments in Venezuela compared to 2018.rent.

In NOLAD, occupancy and other operating expenses ~~increased~~decreased by ~~$8.4~~$22.7 million, or ~~6.8%~~17.1%, to ~~$133.0~~$110.3 million. As a percentage of the division’s sales by Company-operated restaurants, occupancy and other operating expenses increased by ~~0.3~~4.6 percentage points to ~~32.4%~~37.0% due to ~~higher delivery~~lower absorption of fixed costs, ~~and IT expenses, partially offset by lower~~such as utilities due to the COVID-19 pandemic, which had a negative impact on sales, coupled with higher depreciation and amortization expenses in ~~Mexico.~~the division. Also, delivery expenses increased driven by an increase in sales through our delivery channel in connection with the COVID-19 pandemic.

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In SLAD, occupancy and other operating expenses decreased by ~~$18.0~~$56.3 million, or ~~8.2%~~27.9%, to ~~$201.9~~$145.6 million. As a percentage of the division’s sales by Company-operated restaurants, occupancy and other operating expenses increased by ~~1.1~~6.8 to ~~27.7%~~34.5%, due to a decrease in sales as a result of the COVID-19 pandemic, which had a negative impact on fixed costs absorption such as IT services, utilities, maintenance and repair and insurance. Additionally, delivery expenses increased as this segment participation grew during the COVID-19 pandemic. Also, there was higher depreciation and ~~amortization expenses in Argentina and Chile, coupled with higher delivery costs, utilities and IT expenses in Argentina.~~amortization.

Royalty Fees

Our total royalty fees decreased by ~~$2.5~~$44.4 million, or ~~1.6%~~28.6%, to ~~$155.4~~$111.0 million in ~~2019,~~2020, as compared to ~~2018.~~2019. As a percentage of sales, royalty fees increased by ~~0.1~~0.3 percentage points to ~~5.5%~~5.9% mainly due to ~~lower~~the absence of growth support funding ~~that~~from McDonald’s Corporation ~~began providing~~ in ~~August 2017 and waiver of royalty fees in Venezuela.~~2020 compared to 2019.

In Brazil, royalty fees ~~increased~~decreased by ~~$0.5~~$20.9 million, or ~~0.8%~~31.1%, to ~~$67.2~~$46.3 million in 2020. As a percentage of sales, royalty fees increased 0.6 percentage points to 5.8% due to the absence of growth support funding from McDonald’s Corporation in 2020 compared to 2019.

In the Caribbean division, royalty fees decreased by $0.3 million, or 1.5%, to $22.4 million in 2020, as compared to 2019. As a percentage of sales, royalty fees increased 0.1 percentage points to 5.9% due to due to an increase in sales subject to royalty fees.

In NOLAD, royalty fees decreased by $6.5 million, or 26.9%, to $17.6 million in 2020, as compared to 2019. As a percentage of sales, royalty fees remained ~~almost~~ flat.

In ~~the Caribbean division,~~SLAD, royalty fees ~~increased~~decreased by ~~$0.6~~$16.8 million, or ~~2.7%~~40.4%, to ~~$22.7~~$24.7 million in ~~2019,~~2020, as compared to ~~2018.~~2019. As a percentage of sales, royalty fees increased by ~~1.1 percentage points to 5.8%, due to waiver of royalty fees in Venezuela.~~

~~In NOLAD, royalty fees increased by $1.4 million, or 6.2%, to $24.1 million in 2019, as compared to 2018. As a percentage of sales, royalty fees increased by 0.1~~0.2 percentage points to 5.9%, ~~due to an increase in the sales subject to royalty fees.~~

~~In SLAD, royalty fees decreased by $5.0 million, or 10.8%, to $41.5 million in 2019, as compared to 2018. As a percentage of sales, royalty fees increased by 0.1 percentage points to 5.7%,~~ as a result of ~~lower~~absence of growth support funding ~~that~~from McDonald’s ~~Corporation began providing in August 2017.~~compared to the same period of 2019.

Franchised Restaurants—Occupancy Expenses

Occupancy expenses from franchised restaurants decreased by ~~$6.6~~$17.8 million or ~~9.8%~~29.0%, to ~~$61.3~~$43.5 million in ~~2019,~~2020, as compared to ~~2018,~~2019, mainly due to the depreciation of currencies, ~~mainly~~especially in Venezuela, Brazil and Argentina against the U.S. ~~dollar. This was partially offset by higher rent expenses~~dollar, together with lower allowances for ~~leased properties,~~doubtful accounts in Puerto Rico as ~~a consequence of the increase~~all restaurants in ~~comparable sales from franchised restaurants, the conversion of~~this market have been Company-operated ~~restaurants into franchised restaurants and store openings.~~since May 31, 2020.

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In Brazil, occupancy expenses from franchised restaurants ~~increased~~decreased by ~~$2.8~~$10.5 million, or ~~6.2%~~22.2%, to ~~$47.2~~$36.7 million in ~~2019,~~2020, as compared to ~~2018,~~2019, primarily due to ~~higher rent expenses for leased properties, as a consequence of~~ the ~~increase in comparable sales from franchised restaurants, the conversion of Company-operated restaurants into franchised restaurants and store openings. This was partially offset by~~ depreciation of the Brazilian real against dethe U.S. dollar.

In the Caribbean division, occupancy expenses from franchised restaurants ~~decreased by $10.3~~recorded a positive variation of $4.6 million, ~~or 94.6%~~from an expense of $0.6 million to ~~$0.6 million,~~an income of $4.0 million. This was mainly explained by the reduction of the allowance for doubtful accounts, in Puerto Rico, due to ~~the executed~~a settlement agreement with ~~certain~~the remaining Puerto Rican franchisees in the market ~~mentioned~~and the subsequent conversion of all restaurants in ~~“Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings—Puerto Rican Franchisees.” Also,~~this market to Company-operated restaurants. This was partially offset by the depreciation of the Venezuelan bolivar against the U.S. dollar, ~~partly offset~~which decreased occupancy expenses from franchised restaurants.

In NOLAD, occupancy expenses from franchised restaurants decreased by ~~higher~~$1.9 million, or 20.7%, to $7.4 million in 2020, as compared to 2019, mainly due to lower rent expenses for leased properties, as a consequence of negotiations with lessors mainly in Mexico to provide financial support by deferring or reducing rental payments during the ~~increase in sales from franchised restaurants, caused by~~COVID-19 pandemic. In addition, depreciation of currencies against the ~~hyperinflation in Venezuela contributed to the reduction in occupancy expenses.~~

~~In NOLAD, occupancy~~U.S. dollar decreased expenses from franchised restaurants increased by $0.8 million, or 9.7%, to $9.3 million in 2019, as compared to 2018, mainly due to higher rent expenses for leased properties, as a consequence of the increase in comparable sales from franchised restaurants and the conversion of Company-operated restaurants into franchised restaurants and stores openings.restaurants.

In SLAD, occupancy expenses from franchised restaurants decreased by ~~$0.8~~$1.3 million, or ~~14.6%~~28.1%, to ~~$4.7~~$3.4 million in ~~2019,~~2020, as compared to ~~2018,~~2019, mainly due to the depreciation of the Argentinean peso against the U.S. ~~dollar. This was partially offset by higher~~dollar, coupled with lower rent expenses for leased properties that had a variable component over sales, as a consequence of the ~~increase~~decrease in comparable sales from franchised ~~restaurants.~~restaurants, related to lockdowns and circulation restrictions in connection with the COVID-19 pandemic.

Set forth below are the margins for our franchised restaurants in ~~2019,~~2020, as compared to ~~2018.~~2019. The margin for our franchised restaurants is expressed as a percentage and is equal to the difference between revenues from franchised restaurants and occupancy expenses from franchised restaurants, divided by revenues from franchised restaurants.

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For the Years Ended
December 31,
2019 2018
Brazil 54.0 % 52.8 %
Caribbean Division 93.1 % 33.2 %
NOLAD 54.9 % 54.3 %
SLAD 68.4 % 72.3 %
Total 58.3 % 54.4 %


	For the Years Ended December 31,
	2020		2019
Brazil	45.7	%	54.0	%
Caribbean Division	377.1	%	93.1	%
NOLAD	45.9	%	54.9	%
SLAD	51.4	%	68.4	%
Total	51.4	%	58.3	%

General and Administrative Expenses

General and administrative expenses decreased by ~~$16.8~~$41.1 million, or ~~7.3%~~19.4%, to ~~$212.5~~$171.4 million in ~~2019.~~2020. This is explained primarily by the depreciation of currencies, especially the Argentine peso and the Brazilian real,, that contributed ~~$40.4~~$35.8 million to the reduction in general and administrative expenses, ~~and~~together with a net reduction of expenses in Venezuela of ~~$2.2 million as well as lower~~$1.2 million. In addition, there were efforts to reduce expenses in every division. Brazil and NOLAD decreased their general and administrative expenses by $6.3 million, primarily in bonuses and other ~~markets in~~variable compensation, travel and outside services expenses. Also, the Caribbean decreased their general and administrative expenses in $0.3 million mainly because of ~~$9.2 million, primarily due to the fact that we had no severance payments in 2019 as compared to 2018.~~lower travel and outside services expenses. These reductions were partially offset by an increase in general and administrative expenses in ~~Argentina~~Corporate and ~~corporate of $36.1~~SLAD amounting $2.6 million, mainly in payroll, related to the ~~hyperinflation~~high inflation in Argentina.

In Brazil, general and administrative expenses decreased by ~~$10.6~~$17.8 million, or ~~13.8%~~26.8%, to ~~$66.6~~$48.8 million in ~~2019,~~2020, as compared to ~~2018.~~2019. The decrease resulted from the depreciation of the Brazilian real against the U.S. dollar amounting to ~~$5.7~~$14.1 million, and lower bonuses and other ~~and outside services amounting to $1.1 million as compared to 2018.~~variable compensation for $4.1 million. In addition, we ~~did not have any severance payments in 2019 as compared~~had lower expenses related to ~~$5.2~~travel amounting $1.1 million, ~~in severance payments in 2018.~~coupled with lower other expenses for $0.9 million. This was partially offset by higher occupancy expenses for an amount of ~~$1.3~~$2.4 million.

~~Table of Contents~~

In the Caribbean division, general and administrative expenses decreased by ~~$6.7~~$2.0 million, or ~~20.7%~~7.7%, to ~~$25.8~~$23.8 million in ~~2019,~~2020, as compared to ~~2018.~~2019. The sharp currency depreciation in Venezuela caused a net decrease of general and administrative expenses ~~to decrease by $2.2~~of $1.2 million. Moreover, in the other markets in this division, general and administrative expenses decreased by ~~$4.5~~$0.8 million as compared to ~~2018~~2019. This reduction is mainly ~~due to higher severance payment in 2018 of $1.9 million coupled with a reduction in occupancy expenses,~~explained by lower outside services ~~other~~amounting $0.7 million, together with lower travel expenses ~~and travel~~ for an amount of ~~$0.9~~$0.5 million, and ~~savings in payroll and variable compensation of $0.8 million in 2019. In addition,~~ the depreciation of various currencies against the U.S. dollar decreased general and administrative expenses by ~~$1.0~~$0.5 million. These effects were partially offset by higher payroll expenses and bonuses and other variable compensation amounting $0.4 million and $0.4 million respectively related to the conversion of 33 franchised restaurants into Company-operated restaurants.

In NOLAD, general and administrative expenses decreased by ~~$0.8~~$3.8 million, or ~~3.3%~~15.8%, to ~~$24.4~~$20.5 million in ~~2019,~~2020, as compared to ~~2018.~~2019. This decrease is a result of ~~$1.3~~the depreciation of the Costa Rica colon and the Mexican peso against the U.S. dollar amounting to $1.2 million, together with lower ~~severance payment than in 2018~~bonuses and other variable compensations amounting to $1.2 million. In addition, there were lower outside services expenses for $0.9 million and lower ~~other~~travel and occupancy expenses amounting ~~to $0.1 million. This was~~$0.6 million and $0.3 million respectively. These effects were partially offset by higher payroll ~~and bonuses amounting to $0.6~~for an amount of $0.4 million.

In SLAD, general and administrative expenses decreased by ~~$4.2~~$5.0 million, or ~~13.0%~~17.8%, to ~~$28.1~~$23.1 million in ~~2019,~~2020, as compared to ~~2018.~~2019. This decrease was mostly due to the depreciation of various currencies against the U.S. dollar, mainly the Argentine peso, amounting to ~~$8.7~~$5.9 million, coupled with lower ~~severance payment than in 2018 for an amount of $1.5 million~~bonuses and other variable compensation amounting to $1.1 million. In addition, there were lower occupancy expenses for $0.9 million, together with lower travel expenses and other expenses, amounting to ~~$0.8 million.~~$0.6 million and $0.3 million respectively. This was partially offset by higher payroll expenses amounting to $3.1 million, mainly ~~as a result of inflation~~ in Argentina ~~coupled with other variable compensation~~ amounting to ~~$4.4~~$1.8 million ~~and $1.0 million, respectively. In addition, there were~~due to Argentina’s inflationary environment, coupled with higher outside services ~~and other expenses for an amount of $1.5~~amounting $0.7 million.

General and administrative expenses for Corporate and others ~~increased~~decreased by ~~$5.6~~$12.5 million, or ~~9.0%~~18.4%, to ~~$67.6~~$55.1 million in ~~2019,~~2020, as compared to ~~2018.~~2019. This ~~increase~~decrease was mostly due to the depreciation of currencies against the U.S. dollar, especially the Argentine peso and the Brazilian real, amounting to $14.2 million, coupled with lower bonuses and other variable compensations for an amount of $3.7 million. In addition, there were lower travel expenses for $3.1 million, together with lower outside services expenses and other expenses of $0.9 million and $0.2 million respectively. This was partially offset by higher payroll related to Argentina’s inflation, as a portion of our corporate expenses are nominated in Argentine pesos, amounting to ~~$11.0~~$6.0 million, coupled with higher ~~bonuses and other variable compensation provisions, for an amount~~occupancy expenses amounting $3.6 million.

Table of $3.3 million. Additionally, higher outside services, occupancy, other and travel expenses for an amount of $16.6 million also contributed. This was partially offset by the depreciation of currencies against the U.S. dollar, especially the Argentine ~~peso, amounting to $24.9 million and no severance payment in 2019 as compared to severance payments of $0.4 million in 2018.~~Contents

Other Operating (Expenses) Income, ~~(Expense),~~ net

Other operating (expenses) income, ~~(expense),~~ net ~~increased~~decreased by ~~$66.1~~$15.7 million, to a loss of $10.8 million in 2020 from a gain of $4.9 million in ~~2019 from a loss of $61.1 million in 2018.~~2019. This ~~increase~~decrease was primarily attributable to ~~a lower inventory write down~~positive results in ~~Venezuela~~2019 related to the refranchising of ~~approximately $56.5~~some company-operated restaurants amounting to $5 million and ~~lower impairment~~the recovery in provision for contingencies in Brazil, as a result of ~~long-live assets~~a positive outcome in legal proceeding, amounting to $4.3 million. In addition, during 2020 there was an increase in inventory write-off of ~~approximately $9.6~~about $4.7 million ~~both as compared~~mainly related to ~~2018.~~the food waste caused by the closing of our restaurant at the beginning of the COVID-19 outbreak in the region.

Operating (Loss)/Income


	For the Years Ended December 31,				% Change
	2020		2019
	(in thousands of U.S. dollars)
Brazil	$	16,121	$	164,342	(90.2)	%
Caribbean division		4,494		(1,100)	(508.6)	%
NOLAD		(16,680)		16,539	(200.8)	%
SLAD		(16,626)		42,410	(139.2)	%
Corporate and other and purchase price allocation		(54,063)		(62,255)	(13.2)	%
Total		(66,754)		159,936	(141.7)	%

For the Years Ended
December 31,
% Change
2019 2018
(in thousands of U.S. dollars)
Brazil $ 164,342 $ 159,511 3.0 %
Caribbean division $ (1,101) $ (49,567) 97.8 %
NOLAD $ 16,539 $ 7,726 114.1 %
SLAD $ 42,410 $ 53,777 (21.1) %
Corporate and other and purchase price allocation $ (62,254) $ (47,989) 29.7 %
Total $ 159,936 $ 123,458 29.5 %

Operating (loss) income ~~increased~~decreased by ~~$36.5~~$226.7 million, or ~~29.5%~~141.7%, to a loss of $66.8 million in 2020 from a gain of $159.9 million in 2019, ~~as compared to 2018,~~ as a result of the foregoing.

Net Interest Expense

Net interest expense ~~decreased~~increased by ~~$0.8~~$7 million, or ~~1.5%~~13.4%, to ~~$52.1~~$59.1 million in ~~2019,~~2020, as compared to ~~2018.~~2019. The ~~decrease~~increase was primarily explained by ~~lower~~higher interest expense on new short-term debt drawn to maintain liquidity at the beginning of the COVID-19 pandemic amounting to $5.7 million. In addition, there was an increase in interest expenses ~~from~~due to the ~~derivatives held~~aggregate principal amount of 2027 Notes of $4.7 million, partially offset by ~~our Brazilian subsidiary, amounting to $1.2~~a reduction in 2023 Notes interest expense of $2.2 million.

~~Table of Contents~~

~~Gain~~ (Loss) gain from Derivative Instruments

~~Gain (loss)~~(Loss) gain from derivative instruments ~~increased~~decreased by ~~$1.0~~$2.7 million to a loss of $2.3 million in 2020, from a gain of $0.4 million in 2019, ~~from a loss of $0.6 million in 2018,~~ attributable ~~primarily~~ to the results of derivatives ~~that are~~instruments not designated ~~for~~as hedge accounting.

Gain from Securities

Gain from securities was $25.7 million in the full year ended December 31, 2020.

Foreign Currency Exchange Results

Foreign currency exchange results decreased by ~~$2.1~~$44.5 million, from ~~a gain of $14.9 million in 2018 to~~ a gain of $12.8 million in ~~2019. The variation is primarily attributable~~2019 to a loss of ~~$5.6~~$31.7 million ~~related to a significant devaluation of the Venezuelan~~ ~~bolivar~~ ~~against U.S. dollars during 2018~~ in ~~comparison with a lower devaluation in 2019, partially offset by a gain of $3.7 million related~~2020. The variation was primarily attributable to the impact of ~~operating lease liabilities denominated~~a higher depreciation of the Brazilian reais of 29% in ~~currencies other than their functional ones.~~comparison with 4% in 2019.

Other Non-operating Income (Expenses) ~~Income,~~, Net

Other non-operating ~~(expenses)~~ income (expenses), net ~~decreased~~increased by ~~$2.4~~$4.4 million to a $2.3 million gain in 2020, as compared to a $2.1 million loss in 2019, ~~as compared to a $0.3 million gain in 2018,~~ primarily related to ~~contingencies.~~an income tax credit generated by dividend distributions between subsidiaries.

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Income Tax Expense

Income tax expense decreased by ~~$9.3~~$21.3 million, from ~~$48.1 million in 2018 to~~ $38.8 million in ~~2019.~~2019 to $17.5 million in 2020, mainly related to changes in pre-tax (loss) income. The consolidated effective tax rate was (13.3)% in 2020, as compared to 32.6% in 2019, ~~as compared to 56.5% in 2018,~~ primarily explained by Venezuela remeasurement and inflationary impacts (amounting to $1.7 million) and income tax withholding on intercompany transactions (amounting to $5.0 million); each representing a higher effective tax rate of 1.5% and 4.2%the change in ~~2019 with respect to~~ the weighted-average statutory income tax rate (which amounted to 22.9% in 2020 as compared to 37% in 2019 ) related to the weighting of the results of certain markets over the total result; changes in valuation allowance of deferred tax assets, a result of net operating losses, which increased income tax by $3.0 million in 2020 compared to a ~~higher~~decrease by $24.9 million in 2019, the latter mainly related to expiration of tax loss carryforwards. In addition, non-deductible expenses, non-taxable income and withholding taxes from intercompany transactions increased income tax by $ 18.6 million in 2020 and $ 12.6 million in 2019, impacting negatively the effective ~~tax rate of 19.8% and 9.1% in 2018, respectively.~~rate.

See Note 16 to our consolidated financial statements for additional information

Net Income Attributable to Non-controlling Interests

Net income attributable to non-controlling interests ~~for 2019 remained unchanged from 2018.~~was $0.07 million in the full year ended December 31, 2020.

Net (loss) Income Attributable to Arcos Dorados Holdings Inc.

As a result of the foregoing, net (loss) income attributable to Arcos Dorados Holdings Inc. ~~increased~~decreased by ~~$43.0~~$229.3 million ~~or 116.8%~~ from ~~$36.8 million in 2018, to~~a gain of $79.9 million in ~~2019.~~2019, to a loss of $149.5 million in 2020.

Year Ended December 31, ~~2018~~2019 Compared to Year Ended December 31, ~~2017~~2018

For a discussion of our results of operations for the year ended December 31, ~~2018~~2019 compared to the year ended December 31, ~~2017,~~2018, please see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Year Ended December 31, ~~2018.~~2019 Compared to Year Ended December 31, ~~2017”~~2018” of our annual report on Form 20-F for the year ended December 31, ~~2018.~~2019.

B. Liquidity and Capital Resources

Our financial condition and liquidity are and will continue to be influenced by a variety of factors, including:

•our ability to generate cash flows from our operations;

•the level of our outstanding indebtedness and the interest we pay on this indebtedness;

•our dividend policy;

•changes in exchange rates which will impact our generation of cash flows from operations when measured in U.S. dollars; and

•our capital expenditure requirements.

~~Table~~Although we had a very comfortable cash balance, with no short-term debt drawn, as of ~~Contents~~

~~We also expect~~December 31, 2020, our liquidity and capital resources ~~in 2020 to~~could be negatively impacted byif government restrictions on mobility to stem the spread of COVID-19 ~~outbreak,~~become as strict as the ~~duration and scope of which are uncertain. In particular,~~previous year. If needed, we can rely on short term funding from several uncommitted lines of credit, which we began to drawn on in March 2020 to maintain our liquidity in the face of the COVID-19 pandemic and the related disruption to our business. We expect that we will need to continue drawing on such credit lines while the pandemic is ongoing.credit. Any unavailability of such credit lines may also negatively impact our liquidity in ~~2020~~2021 and capital resources.

Under the MFAs, we are required to agree with McDonald’s on a restaurant opening plan and a reinvestment plan for each three-year period during the term of the MFAs. The restaurant opening plan specifies the number and type of new restaurants to be opened in the Territories during the applicable three-year period, while the reinvestment plan specifies the amount we must spend reimaging or upgrading restaurants in the Territories during the applicable three-year period. ~~See “Item 4. Information on~~Prior to the ~~Company—A. History and Development~~expiration of the ~~Company—Capital Expenditures~~then-applicable three-year period we must agree with McDonald’s on a subsequent restaurant opening plan and ~~Divestitures.”~~reinvestment plan. In the event that we are unable to reach an agreement on subsequent plans prior to the expiration of the then-existing plan, the MFAs provide for an automatic increase of 20% in the required amount of reinvestments as compared to the then-existing reinvestment plan and a number of new restaurants no less than 210 multiplied by a factor that increases each period during the subsequent three-year restaurant opening plan. ~~As a result of the business disruptions caused by COVID-19 outbreak, we have agreed with~~We may also propose, subject to McDonald’s prior written consent, amendments to ~~withdraw our previously-approved 2020-2022~~any restaurant opening plan ~~and~~and/or reinvestment plan ~~and we do not expect~~ to ~~finalize a revised 2020-2022 plan at least until the COVID-19 outbreak is under control. If we are unable~~adapt to ~~meet our commitments under a future plan and we are unable to reach an agreement on revised terms~~changes in economic or political conditions.

Table of ~~the restaurant opening plan and reinvestment plan or are otherwise unable to obtain a waiver from McDonald’s, we will be in default under the terms of the MFAs.~~Contents

Our management believes in our ability to obtain the sources of liquidity and capital resources that are necessary in this challenging economic environment and also believes that our liquidity and capital resources, including working capital, are adequate for our present requirements and business operations and will be adequate to satisfy our currently anticipated requirements during at least the next twelve months for working capital, capital expenditures and other corporate needs. See “Item 3. Key Information—D. Risk Factors—~~Certain Factors Relating~~Risks Related to Our ~~Business—~~Business and Operations—The spread of COVID-19 has materially and adversely affected our business, results of operations and cash flows, and may continue to do so” and “—Risks Related to Our Results of Operations and Financial Condition—We use non-committed lines of credit to partially finance our working capital needs.”

Overview

~~Overview~~Net cash provided by operations decreased by $207.5 million, from $223.5 million in 2019 to $16.0 million in 2020. Cash used in our investing activities was $88.7 million in 2020, compared to $261.0 million in 2019. Cash provided by financing activities was $126.0 million in 2020, compared to cash used in financing activities of $29.6 million in 2019. Cash provided by financing activities included $153.4 million from the issuance of 2027 notes, partially offset by net short-term borrowings of $10.6 million and dividend payments of $10.2 million.

Net cash provided by operations increased by $43.8 million, from $179.7 million in 2018 to $223.5 million in 2019. Cash used in our investing activities was $261.0 million in 2019, compared to $163.8 million in 2018. Cash used in financing activities was $29.6 million in 2019, compared to $73.4 million in 2018. Cash used in financing activities was primarily used for the purchase of treasury stock amounting to $14.0 million and the payments of dividends of $22.4 million. This was partially offset by cash inflows of $13.2 million from net short-term borrowings.

~~Net cash provided by operations decreased by $75.4~~At December 31, 2020, our total financial debt was $673.3 million, ~~from $255.2~~consisting of $776.6 million in ~~2017~~long-term debt (of which $215.9 million related to ~~$179.7~~the 2023 notes, including the original issue discount, $549.2 million related to 2027 notes, including the original issue discount, $10.2 million in ~~2018. Cash used in our investing activities was $163.8~~other long-term borrowings, and $5.9 million in ~~2018, compared~~finance lease obligations, partially offset by $4.6 million related to ~~$124.5~~deferred financing costs) the amount of which was offset by $103.3 million ~~in 2017. Cash used in financing activities was $73.4 million in 2018, compared~~related to ~~$3.4 million in 2017. Cash used in financing activities was primarily used for~~ the ~~purchase~~fair market value of ~~treasury stock amounting to $46.0 million and the payments of dividends of $20.9 million.~~our outstanding derivative instruments.

At December 31, 2019, our total financial debt was $595.8 million, consisting of (i) $626.8 million in long-term debt (of which $346.5 million related to the 2023 notes, including the original issue discount, $265.0 million related to 2027 notes, $13.3 million in other long-term borrowings, and $5.4 million in finance lease obligations, partially offset by $3.4 million related to deferred financing costs) the amount of which was offset by $44.3 million related to the fair market value of our outstanding derivative instruments and (ii) $13.3 million in short-term debt.

At December 31, 2018, our total financial debt was $589.8 million, consisting of (i) $630.3 million in long-term debt (of which $346.1 million related to the 2023 notes, including the original issue discount, $265.0 million related to 2027 notes, $16.7 million in other long-term borrowings, and $6.5 million in capital lease obligations) the amount of which was offset by $40.9 million related to the fair market value of our outstanding derivative instruments, (ii) $4.0 million related to deferred financing costs and (iii) $0.4 million in short-term debt.

Cash and cash equivalents were $166.0 million at December 31, 2020 and $121.9 million at December 31, ~~2019 and $197.3 million at December 31, 2018.~~

~~Table of Contents~~

2019.

Comparative Cash Flows

The following table sets forth our cash flows for the periods indicated:


	For the Years Ended December 31,
	2020		2019		2018
	(in thousands of U.S. dollars)
Net cash provided by operating activities	$	15,966	$	223,481	$	179,731
Net cash used in investing activities	(88,706)		(260,991)		(163,784)
Net cash provided by (used) in financing activities	126,009		(29,632)		(73,442)
Effect of exchange rate changes on cash and cash equivalents	(9,160)		(8,260)		(53,714)
Increase (Decrease) in cash and cash equivalents	44,109		(75,402)		(111,209)

For the Years Ended December 31,
2019 2018 2017
(in thousands of U.S. dollars)
Net cash provided by operating activities $ 223,481 $ 179,731 $ 255,170
Net cash used in investing activities (260,991) (163,784) (124,480)
Net cash used in financing activities (29,632) (73,442) (3,353)
Effect of exchange rate changes on cash and cash equivalents (8,260) (53,714) (13,649)
(Decrease) increase in cash and cash equivalents (75,402) (111,209) 113,688

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Operating Activities


	For the Years Ended December 31,
	2020		2019		2018
	(in thousands of U.S. dollars)
Net (loss) income attributable to Arcos Dorados Holdings Inc.	$	(149,451)	$	79,896	$	36,847
Non-cash charges and credits	172,201		117,498		121,448
Changes in assets and liabilities	(6,784)		26,087		21,436
Net cash provided by operating activities	15,966		223,481		179,731

For the Years Ended December 31,
2019 2018 2017
(in thousands of U.S. dollars)
Net income attributable to Arcos Dorados Holdings Inc. $ 79,896 $ 36,847 $ 129,166
Non-cash charges and credits 117,498 121,448 60,926
Changes in assets and liabilities 26,087 21,436 65,078
Net cash provided by operating activities 223,481 179,731 255,170

For the year ended December 31, 2020, net cash provided by operating activities was $16.0 million, compared to $223.5 million in 2019. The $207.5 million decrease was mainly explained by the negative impact of COVID-19 disruptions on our operations.

For the year ended December 31, 2019, net cash provided by operating activities was $223.5 million, compared to $179.7 million in 2018. The $43.8 million increase is attributable to the increase in net income and the positive change in assets and liabilities of $47.7 million and a decrease of non-cash charges of $4.0 million.

For the year ended December 31, 2018, net cash provided by operating activities was $179.7 million, compared to $255.2 million in 2017. The $75.4 million decrease is attributable to the decrease in net income and a negative change in assets and liabilities of $136.0 million and a positive change of non-cash charges of $60.5 million.

Investing Activities

Investments in new restaurants and the modernization of existing restaurants are primarily concentrated in markets with opportunities for long-term growth and returns on investment above a pre-defined threshold that is significantly above our cost of capital. Average development costs vary widely by market depending on the types of restaurants built and the real estate and construction costs within each market and are affected by foreign currency fluctuations. These costs, which include land, buildings and equipment, are managed through the use of optimally sized restaurants, construction and design efficiencies and the leveraging of best practices.

The following table presents our cash (used in) provided by investing activities by type:


	For the Years Ended December 31,
	2020		2019		2018
	(in thousands of U.S. dollars)
Property and equipment expenditures	$	(86,311)	$	(265,235)	$	(197,041)
Purchases of restaurant businesses paid at acquisition date	(3,833)		(2,658)		—
Proceeds from sales of property and equipment and related advances	800		3,340		2,891
Proceeds from sales of restaurant businesses and related advances	—		4,818		10,158
Recovery of short-term investments	—		—		19,588
Others, net	638		(1,256)		620
Net cash used in investing activities	(88,706)		(260,991)		(163,784)

~~Table of Contents~~

For the Years Ended December 31,
2019 2018 2017
(in thousands of U.S. dollars)
Property and equipment expenditures $ (265,235)
$ (197,041)
$ (174,766)
Purchases of restaurant businesses paid at acquisition date (2,658) — (870)
Proceeds from sales of property and equipment and related advances 3,340 2,891 61,983
Proceeds from sales of restaurant businesses and related advances 4,818 10,158 10,407
Recovery (acquisitions) of short-term investments — 19,588 (19,588)
Others, net (1,256) 620 (1,646)
Net cash used in investing activities (260,991) (163,784) (124,480)

The following table presents our property and equipment expenditures by type:


	For the Years Ended December 31,
	2020		2019		2018
	(in thousands of U.S. dollars)
New restaurants	$	19,345	$	88,427	$	55,982
Existing restaurants	49,457		149,681		107,202
Other(1)	17,509		27,127		33,857
Total property and equipment expenditures	86,311		265,235		197,041

For the Years Ended December 31,
2019 2018 2017
(in thousands of U.S. dollars)
New restaurants $ 88,427 $ 55,982 $ 41,557
Existing restaurants 149,681 107,202 105,396
Other(1) 27,127 33,857 27,813
Total property and equipment expenditures 265,235 197,041 174,766


~~(1)~~	~~Primarily corporate equipment and other office expenditures.~~

(1)Primarily corporate equipment and other office expenditures.

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In 2020, net cash used in investing activities was $88.7 million, compared to $261.0 million in 2019. This $172.3 million decrease was primarily attributable to a decrease in property and equipment expenditures of $178.9 million, due to our decision to reduce property and equipment expenditures after mid-March when the COVID-19 pandemic spread to Latin America and the Caribbean (in 2020, we opened 9 restaurants and closed 66 restaurants).

Proceeds from sales of restaurant businesses and related advances decreased by $4.8 million, mainly as a result of a lower rate of conversion of company-operated restaurants into franchised restaurants in 2020 compared with 2019.

In 2019, net cash used in investing activities was $261.0 million, compared to $163.8 million in 2018. This $97.2 million increase was primarily attributable to an increase in property and equipment expenditures of $68.2 million, the recovery of short-term investments in 2018 for $19.6 million, a decrease in proceeds from sale of restaurant businesses and related advances of $5.3 million, the purchases of restaurant businesses for $2.7 million and a decrease in other investing activities of $1.9 million. This was partially offset by the increase in proceeds from sales of property and equipment and related prepayments of $0.4 million.

Property and equipment expenditures increased by $68.2 million, from $197.0 million in 2018 to $265.2 million in 2019. The increase in property and equipment expenditures is explained by an increase in investment in new restaurants of $32.4 million, as well as in existing restaurants of $42.5 million, and a decrease in corporate equipment and other office expenditures of $6.7 million. In 2019, we opened 90 restaurants and closed 20 restaurants.

Proceeds from sales of restaurant businesses and related advances decreased by $5.3 million, mainly as a result of a lower rate of conversion of company-operated restaurants into franchised restaurants in 2019 compared with 2018.

In 2018, net cash used in investing activities was $163.8 million, compared to $124.5 million in 2017. This $39.3 million increase was primarily attributable to an increase in property and equipment expenditures of $22.3 million, a decrease in proceeds from sales of property and equipment and related advances of $59.1 million, partially offset by the collection of short-term investments, made during 2017, amounting to $39.2 million.

Property and equipment expenditures increased by $22.3 million, from $174.8 million in 2017 to $197.0 million in 2018. The increase in property and equipment expenditures is explained by an increase in investment in new restaurants of $14.4 million and an increase in investment in existing restaurants, $13.9 million, partly offset by a decrease in corporate equipment and other office expenditures of $6.0 million. In 2018, we opened 70 restaurants and closed 35 restaurants.

Proceeds from sales of property and equipment and related advances decreased by $59.1 million to $2.9 million in 2018, as compared to 2017, primarily as a consequence of a decrease in sales from the Company’s asset monetization plan.

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Financing Activities


	For the Years Ended December 31,
	2020		2019		2018
	(in thousands of U.S. dollars)
Dividend payments to Arcos Dorados Holdings Inc. shareholders	$	(10,220)	$	(22,425)	$	(20,937)
Issuance of 2027 Notes	153,375		—		—
Treasury stock purchases	—		(13,965)		(46,035)
Net short-term borrowings	(10,578)		13,159		—
Other financing activities	(6,568)		(6,401)		(6,470)
Net cash provided by (used in) financing activities	126,009		(29,632)		(73,442)

For the Years Ended December 31,
2019 2018 2017
(in thousands of U.S. dollars)
Repayment of 2016 Secured Loan Agreement $ —
$ —
$ (169,511)

Dividend payments to Arcos Dorados Holdings Inc. shareholders (22,425) (20,937) —
Net payment of derivative instruments — — (40,822)
Purchase of 2023 Notes — — (48,885)
Issuance of 2027 Notes — — 265,000
Treasury stock purchases (13,965) (46,035) —
Net short-term borrowings 13,159 — —
Other financing activities (6,401) (6,470) (9,135)
Net cash used in financing activities (29,632) (73,442) (3,353)

Net cash provided by financing activities was $126.0 million in 2020, compared to net cash used in financing activities of $29.6 million in 2019. The $155.6 million decrease in the amount of cash used in financing activities was primarily attributable to cash inflows of $153.4 million from the issuance of the 2027 notes in 2020.

Net cash used in financing activities was $29.6 million in 2019, compared to $73.4 million used in 2018. The $43.8 million decrease in the amount of cash used in financing activities was primarily attributable to lower purchase of treasury stock amounting to $32.1 million and issuance of short-term debt for $13.2 million.

Net cash used in financing activities was $73.4 million in 2018, compared to $3.4 million used in 2017. The $70.1 million increase in the amount of cash used in financing activities was primarily attributable to the purchase of treasury stock amounting to $46.0 million and the payments of dividends of $20.9 million.

~~The 2016 Secured Loan Agreement~~

On March 29, 2016, our Brazilian subsidiary, Arcos Dourados Comércio de Alimentos Ltda. (“Arcos Comércio”), entered into a secured loan agreement with Citibank N.A., Bank of America, N.A., Itau BBA International plc, JPMorgan Chase Bank, N.A. and Banco Santander (Brasil) S.A., Cayman Islands Branch, as initial lenders, under which Arcos Comércio received total proceeds of $167.3 million (R$613.9 million as of the signing date).

On April 11, 2017, we repaid the Secured Loan Agreement, plus accrued and unpaid interest and certain transaction costs for a total of $169.7 million. In addition, on April 13, 2017 and April 17, 2017, we unwound the related derivative instruments for a total of R$122.7 million. These payments were made using the proceeds of the offering of the 2027 notes. For more information on the 2027 notes, see “The 2027 Notes.”

Revolving Credit Facilities

WeIn 2011, we and Arcos Dorados B.V. entered into revolving credit facilities in order to borrow money from time to time to cover our working capital needs and for other lawful general corporate purposes. Interest on each loan under these facilities is 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 on which the applicable loan was made.

On August 3, 2011, our subsidiary, Arcos Dorados B.V., entered into a committed revolving credit facility with Bank of America, N.A., as lender, for $50 million. We ~~have~~ renewed this loan annually ~~since~~between 2015 and 2019, including most recently on August 2, 2019 for $25 million maturing on August 2, 2020, with an annual interest rate equal to LIBOR plus 2.40%.

~~As a result of the Company’s decision to change the exchange rates used for remeasurement of its~~ ~~bolivar-denominated assets and liabilities and operating results in Venezuela, we were not in compliance with the indebtedness to EBITDA ratio~~ We repaid amounts due under ~~the~~this revolving credit facility as of June 30, 2014. At such date our consolidated indebtedness to EBITDA ratio was 2.73. On July 28, 2014, we reached an agreement with Bank of America, N.A. to change the consolidated net indebtedness to EBITDA ratio from 2.5 to 1 to 3.0 to 1. We subsequently amended the ratios in ~~2015 and 2016. On~~full upon maturity on August ~~1, 2016, we amended the~~2, 2020. This revolving credit facility which resulted in changes to our net indebtedness to EBITDA ratio. As of the last day of the fiscal quarter ended September 30, 2016 the ratio changed to 3.25 to 1, and as of the last day of the fiscal quarter ended December 31, 2016, the ratio changed to 3.0 to 1.was not renewed after its maturity.

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On ~~November 10, 2016, Arcos Dorados B.V.~~December 11, 2019, the Company entered into a revolving credit facility with JPMorgan Chase Bank, N.A. for up to $25 million maturing on ~~November 10, 2017. We renewed this revolving credit facility annually until its maturity in November 2019.~~December 11, 2020. On December 11, ~~2019,~~2020 the Company entered into ~~a substantially similar~~an amended and restated credit agreement with JPMorgan Chase Bank, N.A. ~~for up~~Pursuant to ~~$25~~this agreement, we are required to comply with a net indebtedness (including interest payable) to EBITDA ratio of 9.50 to 1 as of the last day of the fiscal quarter ended December 31, 2020, 15.25 to 1 as of the last day of the fiscal quarter ending on March 30, 2021, 5.25 to 1 as of the last day of the fiscal quarter ending on June 30, 2021 and 4.25 to 1 as of the last day of the fiscal quarter ending on September 30, 2022. In addition, we are required to comply with a liquidity covenant requiring the Company and its subsidiaries to maintain at all times at least $50 million ~~maturing on December 11, 2020.~~in unrestricted cash, cash equivalents and/or marketable securities. Each loan made to ~~Arcos Dorados B.V. or~~ the Company, ~~as applicable,~~ under this amended and restated agreement bears interest at an annual rate equal to LIBOR plus ~~2.25%.~~3.00% that will be payable on the date of any prepayment or at maturity.

The obligations of ~~Arcos Dorados B.V. and the~~ Company under ~~both~~the revolving credit ~~facilities~~facility are jointly and severally guaranteed by certain of the Company’s subsidiaries on an unconditional basis. Furthermore, ~~both agreements include~~the revolving credit facility includes customary covenants including, among others, restrictions on the ability of ~~Arcos Dorados B.V.,~~ 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; and (vi) engage in transactions that violate certain anti-terrorism ~~laws; and (vii) permit the consolidated net indebtedness to EBITDA ratio to be greater than 3.0 to 1.~~laws. The revolving credit ~~facilities provide~~facility provides for customary events of default, which, if any of them occurs, would permit or require ~~the relevant lender~~JPMorgan to terminate its obligation to provide loans under the ~~relevant~~ revolving credit facility and/or to declare all sums outstanding under the loan documents immediately due and payable.

As of December 31, ~~2019, the~~2020, our net indebtedness to EBITDA ~~ratios for us and for Arcos Dorados B.V. were 1.66 and 0.95, respectively,~~ratio was 7.62 and as such we were in compliance with such ratios. We expect to be in compliance with such ratios in the first quarter of 2020. However, as a result of the COVID-19 pandemic, we likely will be unable to meet such ratios in subsequent quarters if current conditions persist or worsen. See “Item 3. Key Information—D. Risk Factors—Certain Factors Relating to Our Business—The spread of COVID-19 has materially and adversely affected our business, results of operations and cash flows, and may continue to do so.”ratio.

2023 Notes

In September 2013, we issued senior notes for an aggregate principal amount of $473.8 million under an indenture dated September 27, 2013, which we refer to as the 2023 notes. The total aggregate principal amount of the 2023 notes consists of $375 million issued for cash and $98.8 million issued in exchange for the 7.5% senior notes due 2019 issued by Arcos Dorados B.V. in October 2009 (the “2019 notes”) that were properly tendered (and not validly withdrawn) pursuant to a tender offer, exchange offer and consent solicitation we launched in September 2013 (the “2013 Tender and Exchange ~~Offer)~~Offer”). The 2023 notes mature on September 27, 2023 and bear interest of 6.625% per year. Interest is paid semiannually on March 27 and September 27. The proceeds from the issuance of the 2023 notes were used to pay the principal and premium on the 2019 notes in connection with the 2013 Tender and Exchange Offer, to repay certain of the short-term indebtedness we had with Banco Itaú BBA S.A., to unwind a cross-currency interest rate swap with Bank of America, N.A. and for general corporate purposes.

The 2023 notes are redeemable at our option at any time at the applicable redemption price set forth in the indenture.

The 2023 notes are fully and unconditionally guaranteed on a senior unsecured basis by certain of our subsidiaries. The 2023 notes and guarantees (i) are senior unsecured obligations and rank equal in right of payment with all of our and the guarantors’ existing and future senior unsecured indebtedness; (ii) will be effectively junior to all of our and the guarantors’ existing and future secured indebtedness to the extent of the assets securing that indebtedness; and (iii) are structurally subordinated to all obligations of our subsidiaries that are not guarantors.

The indenture governing the 2023 notes limits our and our 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 2023 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 notes to be due and payable immediately.

On June 1, 2016, we launched a cash tender offer to purchase up to $80 million of the outstanding 2023 Notes (the “2016 Tender Offer”) at a redemption price equal to 98%, which expired on June 28, 2016. The holders who tendered their 2023 Notes prior to June 14, 2016 received a redemption price equal to 101%. As a result of the 2016 Tender Offer, we redeemed 16.89% of the outstanding principal amount of the 2023 notes. The total payment was $80.8 million (including $0.8 million of early tender payment) plus accrued and unpaid interest. The results related to the 2016 Tender Offer and the accelerated amortization of the related deferred financing cost were recognized as interest expense in the income statement.

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On March 16, 2017, we announced the commencement of a second tender offer to purchase for cash up to $80 million aggregate principal amount of the properly tendered (and not validly withdrawn) outstanding 2023 notes (the “2017 Tender Offer”). As a result of the early settlement of the 2017 Tender Offer, we repurchased $45.3 million of the 2023 notes on April 5, 2017. The 2017 Tender Offer expired on April 12, 2017. As a result of the final settlement of the 2017 Tender Offer, we repurchased an additional $0.4 million of the 2023 notes on April 19, 2017. As of December 31, 2019, $348.1 million aggregate principal amount of the 2023 notes was outstanding.

On September 15, 2020, we launched an offer to exchange any and all of our outstanding 2023 notes for an additional issuance of our 2027 notes (as defined below) (the “2020 Exchange Offer”) 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 $126.80 million 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 $4.67 million, representing 1.34% of the outstanding principal amount of 2023 notes.

The 2023 notes are listed on the Luxembourg Stock Exchange and trade on the Euro MTF Market.

We may issue additional 2023 notes from time to time pursuant to the indenture governing the 2023 notes.

2027 Notes

In April 2017, we issued senior notes for an aggregate principal amount of $265.0 million under an indenture dated April 4, 2017, which we refer to as the 2027 notes. The 2027 notes mature on April 4, 2027 and bear interest of 5.875% per year. Interest is paid semiannually on April 4 and October 4, commencing on October 4, 2017. The proceeds from the issuance of the 2027 notes were used to repay the 2016 Secured Loan Agreement and unwind the related derivative instruments, to pay the principal and premium on the 2023 notes in connection with the 2017 Tender Offer and for general corporate purposes.

In September 2020, we announced a reopening of the 2027 notes and issued an additional $150.0 million in aggregate principal amount of the 2027 notes. The notes were issued at a price of 102.250% plus accrued interest from April 4, 2020 and will mature, along with the previously issued 2027 notes, on April 24, 2027. The proceeds from the issuance of the additional 2027 notes were used to repay short-term indebtedness and for general corporate purposes. In addition, on September 15, 2020, we announced the commencement of the 2020 Exchange Offer. In connection with the 2020 Exchange Offer, we issued an additional $138.4 million in aggregate principal amount of the 2027 notes.

The 2027 notes are redeemable at our option under certain circumstances as set forth in the indenture at the applicable redemption prices set forth therein.

The 2027 notes are fully and unconditionally guaranteed on a senior unsecured basis by certain of our subsidiaries. The 2027 notes and guarantees (i) are senior unsecured obligations and rank equal in right of payment with all of our and the guarantors’ existing and future senior unsecured indebtedness; (ii) will be effectively junior to all of our and the ~~'guarantors'~~‘guarantors’ existing and future secured indebtedness to the extent of the assets securing that indebtedness; and (iii) are structurally subordinated to all obligations of our subsidiaries that are not guarantors.

The indenture governing the 2027 notes limits our and our subsidiaries’ ability to, among other things, (i) incur additional indebtedness; (ii) make certain restricted payments; (iii) create certain liens; (iv) enter into sale and lease-back transactions; and (v) consolidate, merge or transfer assets. These covenants are subject to important qualifications and exceptions. The indenture governing the 2027 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 2027 notes to be due and payable immediately.

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C. Research and Development, Patents and Licenses, etc.

We have not had significant research and development activities for the past three years because we rely primarily on McDonald’s research and development. McDonald’s operates research and development facilities in the United States, Europe and Asia, and independent suppliers also conduct research activities that benefit McDonald’s and us. ~~Nevertheless,~~Within Arcos Dorados, we also have ~~developed certain~~a “Menu Innovation Team” that develops new menu items ~~such as Almuerzos Colombianos in Colombia or McPicanha in Brazil,to better tailor our product offerings to~~ at a divisional/local ~~tastes and to provide our customers with additional food options.~~level.

D. Trend Information

Our business and results of operations have been impacted by increasingly negative macroeconomic and consumer trends in some of our main ~~markets. We expect economic growth and consumption rates to decrease further in the near-term in 2020 as a result of the COVID-19 pandemic,~~markets, which ~~has~~ caused us to close or reduce the operations of a significant percentage of our restaurants during 2020, led to a significant decline in sales and disrupted our supply chain. WeAlthough we saw some recovery in economic growth and consumer consumption rates towards the end of 2020, there was a significant spike in COVID-19 cases in certain regions in which we operate in the first few months of 2021 and there can be no guarantee that such recovery will continue. As a result, we expect some of these trends to continue until the COVID-19 pandemic is brought under control, which cannot be predicted at this time. ~~We expect that these trends will lead to a significant decline in revenue and cash from operations beginning in mid-March 2020.~~ Moreover, if the impacts of the COVID-19 pandemic become other than temporary, we may also need to consider it as an indicator of impairment in future quarters, which could further negatively impact our financial condition.

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~~Moreover, in~~In response to the COVID-19 pandemic and related disruption in regional and global economic activity, ~~as of March 31, 2020~~ we ~~had drawn $136 million of short-term indebtedness from~~drew on our ~~lines of credit, including $35 million from our committed~~available revolving credit facilities and short-term lines of credit to stabilize our cash flow and had to obtain waivers for our compliance with financial ratio covenants from our lenders for certain periods in 2020.

Although we ~~expect to continue~~stabilized our cash flow in 2020 and successfully re-financed our short-term indebtedness, we may need to draw on our available revolving credit facility short-term credit lines ~~as needed and until~~in the future if our liquidity continues to be impacted by the COVID-19 pandemic ~~is brought under control. As a result~~and we are unable to find alternative sources of ~~the availability of our lines of credit and revolving credit facilities,~~funding. In addition, we ~~do not at this time expect an impact on our liquidity due~~are required to the availability of our lines of credit and revolving credit facilities. However, due to the negative impact of the COVID-19 pandemic on our results of operations since mid-March 2020, we may not meet ourremain compliant with certain financial ratios under our ~~lines of credit and~~ revolving credit facilities in the future. While we expect to be in compliance with such ratios in the first quarter of 2020, we likely will be unable to meet such ratios in subsequent quarters if current conditions persist or worsen and will need to seek an amendment to our facilities or waivers from our lenders. If we are unable to obtain waivers for such non-compliance, we will be in default under our lines of credit and revolving credit facilities. In the case of our revolving credit facilities, any amounts drawn under such facilities may be declared immediately due and payable by the relevant lender, who may also terminate its obligation to provide loans under such agreements. In the case of the non-committed lines of credit, if we have previously drawn any amounts, then such amounts may be immediately due and payable to the relevant lender, subject to the terms of each non-committed line of credit.facility. Any default under our lines of credit or revolving credit ~~facilities~~facility and any inability to draw upon our non-committed lines of credit and revolving credit ~~facilities~~facility in the future could have an adverse effect on our liquidity, working capital, financial condition and results of operations. See ~~“Item 3. Key Information—D.~~“D. Risk Factors—~~Certain Factors Relating~~Risks Related to Our ~~Business—~~Business and Operations—The spread of COVID-19 has materially and adversely affected our business, results of operations and cash flows, and may continue to do ~~so” and “—We use non-committed lines of credit to partially finance our working capital needs.~~so.”

Our business and results of operations have also recently experienced the following trends, which we expect will continue in the near term:

•

• Social upward mobility in Latin America and the Caribbean: Historically, our sales have benefited, and we expect to continue to benefit, from our Territories’ population size, younger age profile and improving socio-economic conditions when compared to more developed markets. This has led to a modernization of consumption patterns and increased affordability of our products across socio-economic segments, leading to greater demand for our products. While consumer behavior will continue to be cyclical and dependent on macroeconomic activity, we expect to continue to benefit from this trend in the long term.

• Nutrition & Healthier products: Growing interest for products that are perceived to be healthy. Consumers are looking for more information regarding nutritional facts and demanding healthier products.

• Product offerings: Our beverages, core meals, desserts, breakfast, reduced calorie and sodium products, and value menu item offerings have been popular among customers and—combined with our revenue management—have helped us remain relevant with our customers.

• Increased competition in some markets: The popularity of the QSR concept in Latin America has attracted new competitors. Even though we have been able to protect our market share in many of these markets, we have seen a reduction in pricing flexibility and have increased the focus of our marketing efforts on value offerings.

• Historically, our sales have benefited, and we expect to continue to benefit, from our Territories’ population size, younger age profile and improving socio-economic conditions when compared to more developed markets. This has led to a modernization of consumption patterns and increased affordability of our products across socio-economic segments, leading to greater demand for our products. While consumer behavior will continue to be cyclical and dependent on macroeconomic activity, we expect to continue to benefit from this trend in the long term.


•	~~Nutrition & Healthier products: Growing interest for products that are perceived to be healthy. Consumers are looking for more information regarding nutritional facts and demanding healthier products.~~


•	~~Product offerings:~~ Our beverages, core meals, desserts, breakfast, reduced calorie and sodium products, and value menu item offerings have been popular among customers and—combined with our revenue management—have helped us remain relevant with our customers.


•	~~Increased competition in some markets:~~ The popularity of the QSR concept in Latin America has attracted new competitors. Even though we have been able to protect our market share in many of these markets, we have seen a reduction in pricing flexibility and have increased the focus of our marketing efforts on value offerings.

•

Inflationary environment: Over the last few years, we have been able through our revenue management strategy to partially mitigate cost increase tied to inflation. However, inflation has been, and will continue to be, an important factor affecting our results of operations, specifically impacting our labor costs, food and paper costs, occupancy and other operating expenses and general administrative expenses.

•

~~Increased volatility of foreign exchange rates and impact of currency controls:~~ Our results of operations have been impacted by increased volatility in foreign exchange rates in many of the Territories, particularly the significant devaluation of local currencies against the U.S. dollar. We expect that foreign exchange rates will continue to be an important factor affecting our foreign currency exchange results and the “Accumulated other comprehensive loss” component of shareholders’ equity and, consequently, our results of operations and financial condition.

•

~~Social unrest:~~ Towards the end of 2019, there was a significant uptick in social unrest in several countries in which we operate. There were large social protests against inequality in many of these countries, and certain of our properties were damaged. Although social unrest had generally calmed down by the end of 2019 and most of our losses were covered by our insurance, any continuation of or increase in social unrest in 2020 could lead to further damage to our properties, a decline in sales or otherwise negatively impact our results.

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• Increased volatility of foreign exchange rates and impact of currency controls: Our results of operations have been impacted by increased volatility in foreign exchange rates in many of the Territories, particularly the significant devaluation of local currencies against the U.S. dollar. We expect that foreign exchange rates will continue to be an important factor affecting our foreign currency exchange results and the “Accumulated other comprehensive loss” component of shareholders’ equity and, consequently, our results of operations and financial condition.

•

•Social unrest: Towards the end of 2019, there was a significant uptick in social unrest in several countries in which we operate. There were large social protests against inequality in many of these countries, and certain of our properties were damaged. Although social unrest had generally calmed down by the end of 2019 and most of our losses were covered by our insurance, any continuation of or increase in social unrest in 2020 could lead to further damage to our properties, a decline in sales or otherwise negatively impact our results.

•Environmental Consciousness: Over the last few years, our customers have demonstrated a growing interest in sustainable practices, including as it relates to limiting food waste and sourcing our ingredients and paper and packaging costs. In particular, movements such as the anti-plastic movement have gained momentum in recent years and caused us to make changes in the sourcing of our raw materials. We may need to make further changes in our supply chain and food and paper costs in the future in order to adequately respond to our customers’ focus on sustainability.

•Changing Consumer Trends: In 2020, as a result of the COVID-19 pandemic, we saw a significant change in consumer trends whereby demand has focused on cleaner and more hygienic public places. There has also been a shift in consumer habits to eating at home, demanding healthier food options, choosing money-saving options and focusing on relaxing activities.

~~Environmental Consciousness~~: Over the last few years, our customers have demonstrated a growing interest in sustainable practices, including as it relates to sourcing our ingredients and paper and packaging costs. In particular, movements such as the anti-plastic movement have gained momentum in recent years and caused us to make changes in the sourcing of our raw materials. We may need to make further changes in our supply chain and food and paper costs in the future in order to adequately respond to our customers’ focus on sustainability.

E. Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

F. Tabular Disclosure of Contractual Obligations

The following table presents information relating to our contractual obligations as of December 31, ~~2019.~~2020.


	Payment Due by Period
Contractual Obligations	Total		2021		2022		2023		2024		2025		Thereafter
	(in thousands of U.S. dollars)
Finance lease obligations(1)	$	9,770	$	939	$	857	$	857	$	857	$	875	$	5,385
Operating lease obligations	$	1,415,322	128,202		121,246		115,914		112,145		107,585		830,230
Contractual purchase obligations(2)	$	100,991	55,382		18,773		13,676		10,260		2,224		676
2023 and 2027 notes(1) (3)	$	1,024,308	46,859		46,859		263,452		32,510		32,510		602,118
Other long-term borrowings(1)	$	11,744	3,330		4,206		2,422		1,786		—		—
Derivative instruments	$	(103,342)	4,024		5,412		(71,479)		2,203		1,830		(45,332)
Total	$	2,458,793	$	238,736	$	197,353	$	324,842	$	159,761	$	145,024	$	1,393,077

Payment Due by Period
Contractual Obligations Total 2020 2021 2022 2023 2024 Thereafter
(in thousands of U.S. dollars)
Finance lease obligations(1) $ 9,383 $ 864 $ 787 $ 919 $ 427 $ 427 $ 5,959

Operating lease obligations $ 1,660,260 149,369 140,667 133,459 128,213 124,138 984,414
Contractual purchase obligations(2) $ 108,821 61,057 19,728 14,958 8,406 2,336 2,336
2023 and 2027 notes(1) (3) $ 822,076 38,629 38,629 38,629 386,698 15,569 303,922
Other long-term borrowings(1) $ 16,384 3,930 3,653 3,390 3,126 2,285 —
Derivative instruments $ (44,321) 9,908 8,834 7,663 (46,442) 1,278 (25,562)
Total $ 2,572,603 $ 263,757 $ 212,298 $ 199,018 $ 480,428 $ 146,033 $ 1,271,069


~~(1)~~	~~Includes interest payments.~~


~~(2)~~	Includes automatic annual renewals, which contains only enforceable and legally binding unconditional obligations corresponding to prevailing agreements without considering future undefined renewals when the agreement is cancellable by us. This type of purchase obligation represents $21.0 million of contractual obligations for 2020 only.


~~(3)~~	~~Does not include the impact of the deferred financing costs and the net discount related to the issue of the 2023 notes.~~

(1) Includes interest payments.

(2) Includes automatic annual renewals, which contains only enforceable and legally binding unconditional obligations corresponding to prevailing agreements without considering future undefined renewals when the agreement is cancellable by us. This type of purchase obligation represents $11.6 million of contractual obligations for 2021 only.

(3) Does not include the impact of the deferred financing costs and the net discount related to the issue of the 2023 and 2027 notes.

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The table set forth above excludes projected payments on our restaurant opening plans and reinvestment plans pursuant to the MFAs in respect of which we do not yet have any contractual commitments.

G. Safe Harbor

See “Forward-Looking Statements.”

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management

Board of Directors

Our Board of Directors currently consists of ~~eleven~~ten members, ~~five~~four of whom are independent directors. In case of a tie vote by the Board of Directors, the Executive Chairman will have the deciding vote. Our memorandum and articles of association authorize us to have eight members, and the number of authorized members may be increased or decreased by a resolution of shareholders or by a resolution of directors.

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Pursuant to our articles of association, our Board of Directors is divided into three classes. There is no distinction in the voting or other powers and authorities of directors of different classes. The members of each class serve staggered, three-year terms. Upon the expiration of the term of a class of directors, directors in that class will be elected for three-year terms at the annual meeting of shareholders in the year in which their term expires. At our most recent annual general meeting of shareholders, held on April ~~22, 2019,~~28, 2021, our shareholders re-elected Mr. ~~Hernández-Artigas~~Woods Staton, Mr. Sergio Alonso and ~~Mrs. Franqui~~Mr. Francisco Staton to serve as Class III directors. Mr. Ricardo Gutiérrez Muñoz, whose term expired at the annual meeting of shareholders held on April 28, 2021, did not seek reelection.

The classes are currently composed as follows:

~~Mr. Woods Staton, Mr. Gutiérrez, Mr. Alonso and Mr. Francisco Staton are Class I directors, whose term will expire at the annual meeting of shareholders to be held in 2021;~~

• Mr. Hernández-Artigas,Mrs. Franqui, Mr. Rabach and Mrs. Presz Palmaka De Luca are Class II directors, whose term will expire at the annual meeting of shareholders to be held in 2022; ~~and~~

• Mr. Chu, Mr. Vélez and Mr. Fernández are Class III directors, whose term will expire at the annual meeting of shareholders to be held in ~~2020.~~2023; and

•Mr. Woods Staton, Mr. Alonso and Mr. Francisco Staton are Class I directors, whose term will expire at the annual meeting of shareholders to be held in 2024.

Any additional directorships resulting from an increase in the number of directors and any directors elected to fill vacancies on the board will be distributed among the three classes so that, as nearly as possible, each class will consist of one third of our directors. This classification of our Board of Directors may have the effect of delaying or preventing changes in control of our company. Any director may be removed, with or without cause, by a resolution of shareholders or a resolution of directors. Our directors do not have a retirement age requirement under our memorandum and articles of association.

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The following table presents the names of the members of our Board of Directors:



Name			Position	Age
Woods Staton			Executive Chairman	7071
Marcelo ~~Rabach(1)~~Rabach			CEO	5051
Sergio ~~Alonso(1)~~Alonso			Director	5657
Annette Franqui			Director	5859
Carlos Hernández-Artigas			Director	5556
Michael Chu			Director	7172
José Alberto Vélez			Director	7071
José Fernández			Director	57
~~Ricardo Gutiérrez Muñoz~~	~~Director~~	7658
Francisco Staton			Divisional President – Caribbean	3940
Cristina Presz Palmaka De Luca			Director	5253


~~(1)~~	Mr. Rabach was appointed as, and succeeded to the role of, Chief Executive Officer effective July 1, 2019. Mr. Alonso stepped down from his role as Chief Executive Officer effective as of the same date and remained a member of the Board of Directors.

*Mr. Ricardo Gutiérrez Muñoz served on the Board of Directors until the annual meeting of shareholders on April 28, 2021, when his term expired.

The following is a brief summary of the business experience of our directors. Unless otherwise indicated, the current business addresses for our directors is Dr. Luis Bonavita 1294, Office 501, WTC Free Zone, Montevideo, Uruguay (CP 11300) and Roque Saenz Peña 432, Olivos, Buenos Aires, Argentina (B1636 FFB).

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Woods Staton. Mr. Staton is our Executive Chairman. He was our Chairman and Chief Executive Officer from 2007 through October 2015. Mr. Staton holds an MBA from the International Institute for Management Development (IMD) in Switzerland and a Bachelor’s degree in economics from Emory University in Atlanta. As McDonald’s joint venture partner, Mr. Staton opened the first McDonald’s restaurant in Argentina in 1986 and later served as President of McDonald’s South Latin American Division. He founded Arcos Dorados in 2007 when he led a consortium of investors in the purchase of McDonald’s operations in Latin America. Mr. Staton is co-founder of Endeavor Argentina, an organization for promoting entrepreneurship. He is a member of the Latin America Advisory Board of Harvard Business School and is also a Board Member of the IMD Foundation in Lausanne, Switzerland. In addition, he serves as Chair of the Advisory Board of the Latin American Program at the Woodrow Wilson International Center for Scholars and is also on the Chairman’s International Advisory Council of the Americas Society/Council of the Americas.

Marcelo Rabach. Mr. Rabach, ~~50,~~51, has been our Chief Executive Officer since July 2019. Prior to his appointment, he was the Chief Operating Officer from August 2015 to July 2019, Divisional President for NOLAD from 2013 to August 2015, Vice President of Operations Development since 2012 and Divisional President in Brazil since 2008. He graduated with a degree in Business Administration from Universidad Argentina de la Empresa in 2002. He began his career at McDonald’s Argentina in 1990 and has over 20 years of line operations experience, starting as a crew employee and steadily advancing into larger operational roles. From 1999 until his appointment as McDonald’s Chief Operating Officer in Venezuela in 2005, Mr. Rabach was responsible for the operations, real estate, construction, human resources, local store marketing, and training and franchising of a region within Argentina, holding the positions of Operations Manager and Operations Director. He was the Chief Operating Officer in Venezuela from 2005 until 2008.

Sergio Alonso. Mr. Alonso has been a member of our board of directors since 2010. Mr. Alonso was our Chief Executive Officer from 2015 to 2019 and was, prior to his appointment as such, our Chief Operating Officer from 2007 to 2015. Prior to that, he was McDonald’s Divisional President in Brazil. He graduated with a degree in Accounting from Universidad de Buenos Aires in 1986. He began his career at McDonald’s as Accounting Manager and subsequently moved to the operations area, eventually being promoted to Vice President of Operations in six years. From 1999 until 2003, Mr. Alonso was involved in the development of the Aroma Café brand in Argentina. In addition, in July 2017, Mr. Alonso was appointed as a member of the board of directors of Loma Negra Compañía Industrial Argentina S.A., a leading cement producer in Argentina.

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Annette Franqui. Mrs. Franqui has been a member of our board of directors since 2007 and is a member of the Compensation and Nomination Committee. She graduated with a Bachelor of Science degree in Economics from the Wharton School of the University of Pennsylvania in 1984 and an MBA from the Stanford Graduate School of Business in 1986. She is also a Chartered Financial Analyst. Mrs. Franqui began her career in 1986 with J.P. Morgan and joined Goldman Sachs in 1989. In 1994, she returned to J.P. Morgan where she became a Managing Director and the Head of the Latin America Research Department. Mrs. Franqui joined Panamco in 2001 as Vice President of Corporate Finance and became the Chief Financial Officer in 2002. She is one of the founding partners of Forrestal Capital and is a board member of many of its portfolio companies as well as of LatAm, ~~LLC, and,~~LLC. She is the Chairman of the Board of AARP on a volunteer ~~basis, AARP.~~basis.

Carlos Hernández-Artigas. Mr. Hernández-Artigas has been a member of our board of directors since 2007 and is Chairman of the Compensation and Nomination Committee. He graduated from the Escuela de Derecho at Universidad Panamericana, in 1987 and University of Texas at Austin, School of Law in 1988. He received an MBA from IPADE in Mexico City in 1996. Mr. Hernández-Artigas worked as a lawyer for several years in Mexico and as a foreign attorney in Dallas, Texas and New York. He served as the General Counsel, Chief Legal Officer and Secretary of Panamco for ten years. He is an advisor at Big Sur Partners in Miami, Florida and is currently a board member of MAC Hospitales in Mexico and board member of ~~iinside,~~CrowdVision, a ~~technology~~leading automated pedestrian analysis and insights company ~~in Anaheim, California.~~with global presence.

Michael Chu. Mr. Chu has been an independent member of our board of directors since April 2011 and is a member of our Audit Committee. He graduated with honors from Dartmouth College in 1968 and received an MBA with highest distinction from the Harvard Business School in 1976. From 1989 to 1993, Mr. Chu served as an executive and limited partner in the New York office of the private equity firm Kohlberg Kravis Roberts & Co. From 1993 to 2000, Mr. Chu was with ACCION International, a nonprofit corporation dedicated to microfinance, where he served as President and CEO and participated in the founding and governance of various banks in Latin America. Mr. Chu currently holds an appointment as Senior Lecturer at the Harvard Business School, where he is the Faculty Chair for Latin America, and is Managing Director and cofounder of the IGNIA Fund, a venture capital firm dedicated to investing in ~~commercial enterprises~~disruptive business models serving the emerging middle class and low-income populations in ~~Mexico.~~Mexico and Latin America. He was a founding partner of, and continues to serve as Senior Advisor to, Pegasus Group, a private equity firm in Buenos Aires. He also serves on the board of ~~Sealed Air Corporation (NYSE:SEE) and~~ Takeoff Technologies, Inc, a private company in Boston, Massachusetts.

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José Alberto Vélez. Mr. Vélez has been an independent member of our board of directors since June 2011 and is a member of our Audit Committee. Mr. Vélez received a Master of Science degree in Engineering from the University of California, Los Angeles, and a degree in Administrative Engineering from Universidad Nacional de Colombia. Mr. Vélez previously served as the CEO of Suramericana de Seguros, the leading insurance company in Colombia, and as the CEO of Inversura, a holding company that integrates the leading insurance and social security companies in Colombia. He was the Chief Executive Officer of Cementos Argos S.A. between 2003 and 2012. From 2012 until March 2016, he was the President of Grupo Argos, a holding group with investments in cement, energy and infrastructure concessions (roads and airports). He is currently a member of the Boards of Directors of Grupo Crystal and Grupo Daabon in Colombia. He also is Chairman of the Board of Trustees of the Universidad EAFIT. In addition, he is member of the Latin American Chapter of the Wilson Center in Washington D.C.

José Fernández. Mr. Fernandez has been aan independent member of our board of directors since October 1, 2013 and is a member of the Compensation and Nomination Committee. Mr. Fernández was the Divisional President of operations for SLAD until 2013. Mr. Fernández is a Mechanical Engineer from Instituto Tecnológico Buenos Aires and began his career at McDonald’s in 1986. He held the positions of Development Director, Development Vice President and Managing Director of McDonald’s Argentina before becoming the Divisional President of operations of SLAD. In August 2019, Mr. Fernández was appointed as a member of the board of directors of Cencosud Shopping S.A. in Chile.

~~Ricardo Gutiérrez Muñoz~~. Mr. Gutiérrez Muñoz is an independent member of our board of directors since July 1, 2016 and is a member of our Audit Committee. He graduated with a Bachelor’s Degree in Accounting from the Instituto Politécnico Nacional (Mexico City) and a Master’s Degree in Financing from the Universidad Lasalle (Mexico City). He also pursued postgraduate studies in Mexico and in the USA. Mr. Gutiérrez Muñoz was CEO of Mexichem from 1994 to 2010. Before joining Mexichem, he was Vice-President of Empresas Lanzagorta, CEO and board member of Industrias Synkro and CFO of the Indetel/Alcatel Company. Currently he is the CEO of the CP Latina Company, a drilling Pemex contractor. In addition, he is also board member of Grupo Kaluz, Cinépolis (Organización Ramírez), Empresas ICA, Genommalab e Industria Mexicana del Aluminio (IMASA).

Francisco Staton. Mr. Francisco Staton has been a member of our board of directors since April 2018. Mr. Francisco Staton is Divisional President for the Caribbean. Prior to his appointment as such in 2019, he was Arcos Dorados’ Managing Director for Colombia, Aruba, Curaçao and Trinidad & Tobago. He joined the Arcos Dorados executive team in 2013 as Senior Manager of Business Development for our NOLAD Division. Prior to serving as Senior Manager of Business Development for our NOLAD Division, he held different operating roles within the organization and also worked as a consultant at the Boston Consulting Group office in Buenos Aires. He completed his undergraduate studies at Princeton University in 2003, and subsequently earned an MBA from Columbia Business School in 2010. He has served on the board of Princeton in Latin America since 2015. Mr. Francisco Staton is the son of our Executive Chairman, Woods Staton.

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Cristina Presz Palmaka De Luca. Ms. Palmaka has been an independent member of our board of directors since November 12, 2019. Ms. Palmaka has been the ~~Managing Director and~~ President of SAP ~~Brazil~~Latin America since ~~October 2013.~~August 2020, following 7 years as President of SAP Brazil. Ms. Palmaka also sits on ~~the advisory~~C&A board of ~~Eurofarma.~~directors and on Eurofarma advisory board. Ms. Palmaka holds an accounting degree from Fundação Álvares Penteado (Brazil) and received her MBA from Fundação Getúlio Vargas (Brazil). She also holds a master’s degree in International Business & Marketing from the University of Texas.

Executive Officers

Our executive officers are responsible for the management and representation of our company. We have a strong centralized management team led by Mr. Marcelo Rabach, our CEO, with broad experience in development, revenue, supply chain management, operations, finance, marketing, legal affairs, human resources, communications and training. Most of our executive officers have worked in the food service industry for several years. Many of the members of the management team have a long history with McDonald’s operations in Latin America and the Caribbean and with Mr. Rabach, as they have worked together as a team for many years. Our executive officers were appointed by our Board of Directors for an indefinite term.

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The following table lists our current executive officers:


Name	Position	Initial Year of Appointment	At Arcos Dorados Since
Marcelo Rabach	Chief Executive Officer	2019	1990
Luis Raganato	Chief Operating Officer	2019	1991
Mariano Tannenbaum	Chief Financial Officer	2017	2008
Juan David Bastidas	Chief Legal Counsel	2010	2010
Paulo Camargo	Divisional President—Brazil	2015	2011
Alejandro Yapur	Divisional President—SLAD	2013	1986
Gustavo Pascualino(1)	Divisional President—NOLAD	2021	1989
Francisco Staton	Divisional President—Caribbean	2019	2013
Sebastian Magnasco	Vice President of Development	2007	1994
Santiago Blanco	Chief Marketing and Digital Officer	2019	2019
Diego Benenzon	Vice President of Human Resources	2014	2009
José Valledor Rojo	Vice President of Supply Chain	2015	1990
Marlene Fernandez del Granado	Vice President of Government Relations	2011	2009
David Grinberg	Vice President of Corporate Communications	2018	2010
Marco Cordón	Chief Transformation Officer	2019	2019
Daniel Schleiniger	Vice President of Investor Relations	2020	2020
Gabriel Serber	Director of Social Impact and Sustainable Development	2021	1990

Name Position Initial Year of Appointment At Arcos Dorados Since
Marcelo Rabach Chief Executive Officer 2019 1990
Luis Raganato Chief Operating Officer 2019 1991
Mariano Tannenbaum Chief Financial Officer 2017 2008
Juan David Bastidas Chief Legal Counsel 2010 2010
Paulo Camargo Divisional President—Brazil 2015 2011
Alejandro Yapur Divisional President—SLAD 2013 1986
Rogério Barreira Divisional President—NOLAD 2015 1984
Francisco Staton Divisional President—Caribbean 2019 2013
Sebastian Magnasco Vice President of Development 2007 1994
Santiago Blanco Chief Marketing and Digital Officer 2019 2019
Diego Benenzon Vice President of Human Resources 2014 2009
José Valledor Rojo Vice President of Supply Chain 2015 1990
Marlene Fernandez del Granado Vice President of Government Relations 2011 2009
David Grinberg Vice President of Corporate Communications 2018 2010
Marco Cordón Chief Transformation Officer 2019 2019
Daniel Schleiniger Vice President of Investor Relations 2020 2020*

* Mr. Schleiniger first joined Arcos in 2014 then left(1) Rogerio Barreira served as our Divisional President for ~~15 months in 2018 and rejoined Arcos in 2020~~.

NOLAD until March 31, 2021, when he was replaced by Gustavo Pascualino.

The following is a brief summary of the business experience of our executive officers who are not also directors. Unless otherwise indicated, the current business addresses for our executive officers is Roque Saenz Peña 432, Olivos, Buenos Aires, Argentina (B1636 FFB) and Dr. Luis Bonavita 1294, Office 501, WTC Free Zone, Montevideo, Uruguay.

Luis Raganato. Mr. Raganato, ~~49,~~50, has been our Chief Operating Officer since July 2019. Prior to his appointment as such, he was the Divisional President for the Caribbean, and before that, the General Director of Arcos Dorados in Peru. Mr. Raganato began his career at Arcos Dorados in 1991 as a Trainee in the Nuevocentro Shopping location in the province of Córdoba, Argentina and has held various positions in Operations Management over the years. Mr. Raganato holds a Bachelor’s degree in Business Administration from Instituto Aeronáutico de Argentina, a Master’s degree in Marketing and Business Development from Escuela Superior de Estudios de Marketing de Madrid and an MBA from Universidad de Piura, Peru.

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Mariano Tannenbaum. Mr. Tannenbaum, ~~46,~~47, is our Chief Financial Officer. He joined Arcos Dorados in 2008 and has held several positions at the corporate level, with his last position being Senior Director of Corporate Finance. Previously, Mr. Tannenbaum had a long international career in Europe and the United States. He worked for the IFG Group in Switzerland, for Tyco International in Switzerland and Princeton, New Jersey and for Sabre Holdings in London. He began his career working for an economic consulting firm in Argentina as well as for the Argentine government, as part of the Ministry of Treasury and Public Finances. Mr. Tannenbaum has an economics degree from the Universidad de Buenos Aires, a Master’s in finance from the Universidad Torcuato Di Tella and an MBA with a concentration in finance from the London Business School.

Juan David Bastidas. Mr. Bastidas, ~~52,~~53, is our Chief Legal Counsel. He attended Universidad Pontificia Bolivariana in Colombia, where he received a Law Degree in 1989. He graduated in 1990 as a Business Law Specialist from the same university. He also pursued postgraduate studies in Business Administration at New York University, which he completed in 1994. He also graduated in 2000 from the International Business program at EAFIT University and from the Senior Management Program at Los Andes University, which he completed in 2009 in Colombia. He also attended the Executive Directors Training Program from IAE Business School in Argentina (2017). Mr. Bastidas worked from 1994 to 1995 as an international operations lawyer for Banco Industrial Colombiano (Bancolombia). He served as Chief Legal Counsel and Secretary of the board of directors of Interconexión Electrica S.A. E.S.P.–ISA from 1995 to 2010 before joining us in July 2010.

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Paulo Camargo. Mr. Camargo, ~~51,~~53, was appointed Divisional President for Brazil in October 2015. Prior to Mr. Camargo’s promotion, he served as Vice President of Operations for the Brazil Division for four years. Mr. Camargo has over 20 years of experience in the consumer, retail and services industry. He has worked for companies such as PepsiCo, FASA Corporation and Iron Mountain across a variety of geographies. Before joining Arcos Dorados in 2011, he was President of the Spain Division at Iron Mountain. Mr. Camargo holds a postgraduate degree in Business Administration from Mackenzie University in São Paulo, and also holds an MBA from Universidad Europea de Madrid.

Alejandro Yapur. Mr. Yapur, ~~51,~~53, was appointed Divisional President of SLAD in July 2013. He began his career in 1986 as a crew member at the first McDonald’s restaurant in Argentina and had the opportunity to serve as Manager in the Marketing, Operations and Corporate Communications areas of Arcos Dorados in Argentina. In 2005 he was promoted to Managing Director of Uruguay and in 2007 became responsible for the Company’s Chilean operations. In 2011, Mr. Yapur became Regional Managing Director for the Southern Cone Region (Argentina, Chile and Uruguay) until 2013 when he was promoted to his current position. He holds a Master’s degree in Communications from Universidad Austral in Buenos Aires, Argentina. He has also received executive training from IAE Business School in Argentina, IPADE Business School in Mexico and IESE Business School in Spain. Mr. Yapur has also completed the Digital Business Management Program at the San Andres University in Buenos Aires.

~~Rogério Barreira.~~Gustavo Pascualino. Mr. ~~Barreira, 51,~~Pascualino, 52, was appointed Divisional President for NOLAD in ~~October 2015.~~April 2021. Prior to his promotion, Mr. ~~Barreira’s promotion, he~~Pascualino served as Operations Vice President ~~of Operations~~ for the Brazil Division, ~~for four years. Mr. Barreira has over 35 years of experience~~beginning in 2016. He began his career in 1989 as a crew member at ~~Arcos Dorados, acting~~the iconic Florida Street restaurant in ~~different key positions~~Buenos Aires, Argentina. In addition to his most recent role in ~~Brazil.~~Brazil, Mr. ~~Barreira~~Pascualino held various leadership positions in operations, including Operations Director for Puerto Rico and the Caribbean Division and Corporate Operations Development Director. Mr. Pascualino has ~~a Master in Business Administration from Foundation Getulho Vargas in Brazil and also holds~~ a degree in Marketing from Universidad de Morón in Buenos Aires, Argentina, and ~~Business Planning from Anhembi-Morumbi University in Brazil. He~~has also received executive training from the IAE Business School in Argentina ~~IPADE Business School in Mexico.~~and the University of Miami.

Sebastian Magnasco. Mr. Magnasco, ~~50,~~51, is our Vice President of Development and served, prior to his appointment as such in 2007, in the same capacity in SLAD. He graduated in 1990 with a degree in Engineering from Instituto Tecnológico Buenos Aires and completed a post graduate Management Development Program in ~~1990.~~ Business from I.A.E. Management and Business School in 2001. He began his career at McDonald’s in 1994 and held the positions of Real Estate & Equipment Director of Argentina and IT, Real Estate and Equipment Director of Argentina until his appointment as Vice President of Development of SLAD in 2005.

Santiago Blanco. Mr. Blanco, ~~49,~~50, is our Chief Marketing and Digital Officer. He joined the company in 2019 and is responsible for designing and implementing the marketing and digital strategy. Prior to joining Arcos Dorados, he served as Chief Marketing, Digital & Communications Officer at ALSEA from 2017 to 2019. Mr. Blanco holds a Bachelor’s degree in Marketing from the Instituto Tecnológico de Monterrey and an MBA from University of Texas at Austin.

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Diego Benenzon. Mr. Benenzon, ~~53,~~54, is our Vice President for Human Resources. He joined the Company in June 2009. He has extensive experience as an executive of high responsibility in multinational companies. He has also served as a senior consultant to various large companies and NGOs and has teaching experience. Mr. Benenzon graduated with a degree in psychology from Universidad John F. Kennedy and holds postgraduate degrees on strategic consultancy and organizational ~~behavior from the Universidad de Buenos Aires.~~behaviors. He also graduated from the Management Development Program at IAE Business School.

José Valledor. Mr. Valledor, ~~53,~~54, is our Vice President of Supply Chain. Prior to his appointment as such, he was Divisional President in Brazil. He joined us in 1990 as an assistant in the accounting department, and four years later he became Manager of that department. In 2005, he became Regional Operations Director, responsible for the markets of Uruguay, Paraguay and Argentina. Two years later, he became Argentina’s General Director while continuing to supervise the market operations in Uruguay, Chile and Paraguay. Mr. Valledor Rojo has a degree in Business Administration and a postgraduate degree from the Instituto de Altos Estudios (IAE) in Buenos Aires, Argentina.

Marlene Fernandez. Ms. Fernandez, ~~58,~~59, is Corporate Vice President for Government Relations. Prior to joining Arcos Dorados in 2009, she served as an elected Member of the House of Representatives in Bolivia where she held various leadership positions, including Ambassador of Bolivia to the United States of America, Ambassador to the Organization of American States, Ambassador to the Government of Italy and Representative of Bolivia to different specialized agencies of the United Nations. She was also Bureau Chief and Main Political Correspondent for CNN Spanish in Washington, D.C. Ms. Fernandez holds a Master of Science in Broadcast Journalism from Boston University, graduated Summa Cum Laude from the Universidad Argentina John. F. Kennedy and has completed courses in Finance for Executives, Strategic Communications, Conflict Resolution and Negotiations in Conflict at Harvard University.

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David Grinberg. Mr. Grinberg, ~~41,~~42, is our Vice President of Corporate Communications. Mr. Grinberg joined Arcos Dorados in 2010, ~~after leading the Communications division at Samsung and serving~~ as Sports Marketing ~~Head~~Director to coordinate our sponsorship of the FIFA World Cup Brazil 2014 and 2016 Rio Olympic Games. He later served as Corporate Communications Director for the Brazil Division, before assuming his current role. Mr. Grinberg came from Samsung of Brazil where he led the Sports Marketing and Communications team. Prior to that, he served as Corporate Communications Director, Brazil Division of Nike. Mr. Grinberg holds a Bachelor’s Degree in Social Communication from FIAM in São Paulo, Brazil and a Master’s Degree in Corporate Communication & Public Affairs from the Cásper Líbero ~~Foundation.~~Foundation, also in São Paulo, Brazil.

Marco Cordón. Mr. Cordón, ~~51,~~52, was appointed as our Chief Technology Officer in October 2019. Mr. Cordón has more than 30 years of experience in the restaurant industry, and held various leadership positions at McDonald’s Mesoamerica, which covers Guatemala, El Salvador, Honduras and Nicaragua, between 1997 and 2019, including Operations Manager, Director of Operations and Vice President from 2013 to 2019. Mr. Cordón holds a degree in Industrial engineering from the University of San Carlos de Guatemala and an MBA from Pontificia Universidad Católica de Chile.

Daniel Schleiniger. Mr. Schleiniger, ~~46,~~47, is our Vice President of Investor Relations. He joined Arcos Dorados in 2014 and, after leaving us for fifteen months to serve as Vice President of Investor Relations for BrightView Holdings, Inc., Mr. Schleiniger rejoined the Company in January 2020. Prior to joining Arcos Dorados, he worked at the Cisneros Group from 2000 to 2014, holding ~~progressively more senior roles within~~positions in investor relations, finance and treasury. Mr. Schleiniger’s experience also includes equity research at Morgan Stanley corporate banking with Unibanco and consulting work for Wharton Econometric Forecasting Associates (WEFA) ~~in Philadelphia.~~. He holds a Bachelor of Science degree in chemistry as well as an MBA with a concentration in finance, both from the University of Delaware.

Gabriel Serber. Mr. Serber, 49, started his career in 1990 as a crew member in one of our restaurants in Buenos Aires, Argentina. He rose through the operation’s ranks until 2002, where he moved to McDonald’s global headquarters in Chicago to work as an operations manager, among other roles. He continued his tenure in Europe based in Paris where he was responsible for leading the deployment of several operational programs in Spain, Italy, Belgium, Holland, Portugal, Switzerland, Morocco and Greece. In 2008, he returned to Argentina in the role of Corporate Director of Operations Development. In 2013, he was transferred to Puerto Rico, where he was promoted to Managing Director for the Caribbean Region. In 2017, he returned to Argentina as Managing Director for that market. Finally, in 2019, he assumed the leadership of our Social Impact and Sustainable Development team, where he oversees all ESG matters for Arcos Dorados. Mr. Serber is a business graduate from Universidad Nacional de General San Martin in Buenos Aires, Argentina and has completed post graduate studies at the IAE Business School.

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B. Compensation

Long-term and Equity Incentive Plans

Equity Incentive Plans

The 2011 Plan

In March 2011, we adopted an equity incentive plan (the “2011 Plan”), to attract and retain the most highly qualified and capable professionals and to promote the success of our business. The 2011 Plan is being used to reward certain employees for the success of our business through an annual award program. The 2011 Plan permits grants of awards relating to class A shares, including awards in the form of share (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 our Board.

The maximum number of shares that may be issued under the 2011 Plan is 5,238,235 ~~Class~~class A shares, equal to 2.5% of our total outstanding class A and class B shares immediately following our initial public offering on April 14, 2011. In ~~2018, 494,775 Class~~2020, 472,130 class A shares were issued pursuant to the 2011 Plan.

We carried out a special grant of stock options and restricted share units in 2011 in connection with our initial public offering, which are fully vested. We also made recurring grants of stock options and restricted share units in each of the fiscal years from 2011 to 2019 (from 2015 to 2019 only restricted share units). Units granted from 2011 to ~~2014~~2015 are fully vested. 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, except for the 2019 award which ~~vests~~vested on May 10, 2020. In the event of death, disability or retirement of the employee, any unvested portion of the annual award will fully vest. For all grants, each stock option granted represents the right to acquire one ~~Class~~class A share at it’s a strike price equal to fair market value, while each restricted share unit represents the right to receive one ~~Class~~class A share when vested.

The following table shows unvested restricted share units as of December 31, ~~2019:~~

2020:



Date of the grant		Restricted share units
~~May 8, 2015~~		~~99,604~~
May 10, 2016	~~220,566~~105.773
May 10, 2017		~~186,455~~117.821
May 10, 2018		~~396,214~~
~~May 10, 2019~~	~~35,000~~227.604

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In addition, although all of the stock options issued under the 2011 Plan have vested, ~~247,440~~176,768 stock options issued in ~~2013 and~~ 2014 remain outstanding and unexercised.

~~We issued 470,558 Class A shares during 2019, of which 10,870 were related to the partial vesting of restricted share units issued in 2018.~~

~~We currently intend to make the 2020 annual grant under the 2011 Plan during the second quarter of 2020.~~

Phantom RSU Award

In May 2019, ~~the Company~~we implemented a new long-term incentive plan (the “Phantom RSU Plan”) to provide employees the opportunity to share in the success of the Company. Through this plan, ~~the Company issues~~we grant phantom restricted share units (“Phantom RSUs”). When vested, Phantom RSUs entitle the employee to a cash payment equal to the closing price of one ~~Class~~class A shares on the date of vesting, including any dividends declared and paid on the ~~Class~~class A shares, if any, since the grant date. In the event of death, disability or retirement of the employee, any unvested portion of the annual amount will fully vest.

There are ~~two~~three types of Phantom ~~RSUs.~~ RSUs:

•Type one Phantom RSUs 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.~~ years

•Type two Phantom RSUs vest 100% on the fifth anniversary of the grant date. ~~In the event of death, disability or retirement~~

•Type three Phantom RSUs vest 100% on May 10th of the ~~employee, any unvested portion~~following year.

Table of ~~the annual amount will fully vest. The grant-date stock price of both types of grants was $6.78. The Company recognizes~~Contents

We recognize compensation expense related to these benefits 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 total compensation cost as of December 31, 2020 and 2019, relating to the Phantom RSUs amounted to ~~$2.2~~$1.2 million and $2.1 million, respectively, and is recorded under “General and administrative expenses” within the consolidated statement of (loss) income. The accrued liability is remeasured at the end of each reporting period until settlement.

The following table shows Phantom RSUs ~~issued~~outstanding as of December 31, ~~2019:~~2020:


Date of the grant	Phantom RSU, Type 1	Phantom RSU, Type 2	Phantom RSU, Type 3
December 1, 2020	—	—	65,440
May 10, 2019	436,355	1,188,689	—

Date of the grant Phantom RSU, Type 1 Phantom RSU, Type 2
May 10, 2019 454,365 1,207,455

See Note 17 to our consolidated financial statements for additional information.

~~We intend to make an annual grant of Phantom RSUs in the second quarter of 2020.~~

Compensation of Directors and Officers

General

The approximate aggregate annual total cash compensation for our ~~executive~~executive officers in ~~2019, including to Mr. Alonso for his service as CEO until July 2019,~~2020, was ~~$9.5~~$8.6 million. The approximate annual total cash compensation for our directors in ~~2019~~2020 was ~~$1.0~~$1.1 million. We also issued an aggregate of ~~35,000 RSUs~~65,440 PRSUs to our directors in ~~2019.~~2020.

We have not entered into any service contracts with our directors to provide for benefits upon termination of ~~employment~~employment.

C. Board Practices

Our Committees

Audit Committee

Our audit committee consists of ~~three~~two directors, Mr. Michael Chu (chairman of the committee)~~, Mr. Vélez~~ and Mr. ~~Gutiérrez,~~José Alberto Vélez, who are independent within the meaning of the SEC and NYSE corporate governance rules applicable to foreign private issuers. Our Board of Directors has determined that Mr. Chu and Mr. Vélez ~~and Mr. Gutiérrez~~ are also “audit committee financial experts” as defined by the SEC. There is one vacancy on the audit committee, as Mr. Ricardo Gutiérrez Muñoz served on the Board of Directors until the annual meeting of shareholders on April 28, 2021, when his term expired and did not seek reelection. The Company intends to fill this position.

The charter of the audit committee states that the purpose of the audit committee is to assist the Board of Directors in its oversight of:

• the integrity of our financial statements;

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• the annual independent audit of our financial statements, the engagement of the independent auditor and the evaluation of the qualifications, independence and performance of our independent auditor;

• the performance of our internal audit function; and

• our compliance with legal and regulatory requirements.

Compensation and Nomination Committee

Our compensation and nomination committee consists of Mr. Carlos Hernández-Artigas (chairman of the committee), Ms. Annette Franqui and Mr. José Fernández. Pursuant to its charter, the compensation and nomination committee is responsible for, among other things:

• approving corporate goals and objectives relevant to compensation, evaluating the performance of executives in light of such goals and objectives and recommending compensation based on such evaluation, recommending any long-term incentive component of compensation and approving the compensation of our executive officers;

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• reviewing and reporting to the board of directors on our management succession plan and on compensation for directors;

• evaluating our compensation and benefits policies;

• evaluating the structure of our board of directors;

• nominating candidates to executive positions and to the board of directors; and

• reporting to the board periodically.

D. Employees

Our employees are a crucial component of our customers’ restaurant service experience. As such, we consistently train our employees to deliver fast and friendly service through a series of training programs. We support our McDonald’s-based training programs with an extensive set of quality controls throughout production, processing and distribution and also in our restaurants, where we monitor restaurant managers’ performance and use ongoing external customer satisfaction opportunity reports that analyze key operating indicators.

Our employees can be divided into three different categories: crew, restaurant managers and professional staff. Due to the different tasks of each of these categories of employees, turnover rates differ significantly. Crew turnover is considerably higher than turnover for ~~managers~~managers and professional staff.

As of December 31, ~~2019,~~2020, we had a total of approximately ~~80,855~~73,438 employees in Company-operated restaurants and staff throughout the Territories. Of this number, ~~82%~~81% were crew, ~~15%~~16% were restaurant managers and the remainder were professional staff. Approximately ~~41%~~42% of our employees were located in Brazil.

We have various types of employment arrangements with our employees in Brazil. Some of our employees receive monthly wages whereas others are paid by the hour, and all of our employees have fixed work schedules due to a settlement signed with Labor Prosecutor Office of the State of Pernambuco. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings—Brazilian Labor Litigation.” Most of our employees in Brazil, in particular students and minors, work schedules of less than 180 hours per month. Brazilian law requires that employers provide a minimum monthly wage, which, in the case of employees who are paid by the hour, is prorated in terms of wages per hour.

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The following table illustrates the distribution of our employees by division and employee category as of December 31, ~~2019.~~2020.


Division	Crew	Restaurant Managers	Professional Staff	Total
Brazil	24,381	5,499	688	30,568
Caribbean division	8,136	1,334	530	10,000
NOLAD	7,551	1,850	463	9,864
SLAD	19,448	2,713	483	22,644
Corporate and other	—	—	362	362
Total	59,516	11,396	2,526	73,438

Division Crew Restaurant Managers Professional Staff Total
Brazil 26,980 5,681 746 33,407
Caribbean division 8,189 1,430 418 10,037
NOLAD 8,186 2,099 479 10,764
SLAD 23,058 2,820 469 26,347
Corporate and other - - 300 300
Total
66,413 12,030 2,412 80,855

Restaurant managers are responsible for the daily management of our restaurants. As such, we have a comprehensive training program for them that is focused on customer management practices, food preparation and other operational procedures. Standards are taught and continuously reinforced through the use of such training programs. We also use performance measurements on a continual basis, both internally and externally in connection with all our restaurants. Our internal on-site visit restaurant operations improvement process evaluates operational standards, which are compared globally to assure continuous improvement. We also contract third parties, which we refer to as third-party shoppers, to visit our restaurants anonymously and report on our performance. Our external third-party shopper measurements and customer satisfaction opportunity reports help maintain our competitiveness. In addition, Hamburger University provides restaurant managers, mid-managers and owner/operators with training on best practices in different aspects of our business. In ~~2019,~~2020, approximately ~~17,723~~ 86,465 people attended different courses or events, in person or online, organized by Hamburger University in areas such as restaurant and customer management, sales and accounting.

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The role performed by our crew is of critical importance in our interactions with our customers. Employee relations are thus key to maintaining the level of motivation and enthusiasm on the part of our crew that help differentiate our restaurants from those of our competitors. We have been recognized by many independent organizations for being a “great place to work.”

Although we have unions in some of our most important markets, including Brazil, Argentina and Mexico, the unions only have an active role in our Brazil restaurants. In these markets, the restaurant industry is unionized by law. However, in Brazil every employee and company are necessarily represented by unions. Workers unions can negotiate directly with companies through Collective Bargaining Agreements, or CBAs, or with the company’s union through Collective Convention. Under Brazilian law, employees or groups of employees cannot opt-out of the terms under union agreements, which integrate the employment contract for all legal purposes. In Brazil, the CBA or the Collective Convention should provide, on a yearly basis, the salary adjustment to be afforded by all employees, and may also provide certain additional guarantees or rights, to be applicable to all employees, regardless of their unit or position in the company, during a certain term (maximum of two years). All collective agreements are mandatory in Brazil.

On November 11, 2017, an overhaul in the labor laws in Brazil (the “Labor Overhaul”) entered into effect and brought significant changes to labor relations and labor law itself. Prior to the Labor Overhaul, the Consolidated Labor Statutes governed labor relations in Brazil. The Labor Overhaul introduces and changes several articles of the Consolidated Labor Statutes aiming to give more flexibility and legal certainty to the legal framework around labor relations thus meeting current demands of modern society. Out of several changes made in the Labor Overhaul, the most relevant for us is a change providing that collective labor agreements (CBAs or Collective Convention) will now prevail over statutory law in certain circumstances, giving priority to what has been agreed over what has been legislated and providing greater autonomy to the parties.

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E. Share Ownership

The following table presents the beneficial ownership of our shares owned by our directors and officers as of the date of this annual report. Other than those persons listed below, none of our directors or officers beneficially own any of our shares.

Shareholder

Class A Shares

Percentage of Outstanding Class A Shares(1)

Class B Shares

Percentage of Outstanding Class B Shares(1)

Total Economic Interest(1)

Total Voting Interest(1) (2)

Los Laureles Ltd.(3)(4)

—

80,000,000

100.00

38.60

75.86

Woods Staton(4)

—

Sergio Alonso

—

Annette Franqui

—

Carlos Hernández-Artigas

—

Juan David Bastidas

—

José Valledor Rojo

—

José Fernandez

—

Marcelo Rabach

—

Mariano Tannenbaum

—

Sebastian Magnasco

—

Diego Benenzon

—

Marlene Fernandez

—

Luis Raganato

—

Gustavo Pascualino(5)

—

Alejandro Yapur

—

Paulo Camargo

—

Santiago Blanco

—

David Grinberg

—

Francisco Staton

—

Marco Cordón

—

Daniel Schleiniger

—

Gabriel Serber

—

Shareholder Class A Shares
Percentage of Outstanding Class A Shares⁽¹⁾
Class B Shares
Percentage of Outstanding Class B Shares⁽¹⁾
Total Economic Interest⁽¹⁾
Total Voting Interest^{(1) (2)}
Los Laureles Ltd.⁽³⁾⁽⁴⁾
—
—
80,000,000
100.00 % 39.20 % 76.33 %
Woods Staton⁽⁴⁾
828,955
0.67 % —
—
0.41 % 0.16 %
Sergio Alonso *
*
—
—
*
*
Annette Franqui *
*
—
—
*
*
Carlos Hernández-Artigas *
*
—
—
*
*
Juan David Bastidas *
*
—
—
*
*
José Valledor Rojo *
*
—
—
*
*
José Fernandez *
*
—
—
*
*
Marcelo Rabach *
*
—
—
*
*
Mariano Tannenbaum *
*
—
—
*
*
Sebastian Magnasco *
*
—
—
*
*
Diego Benenzon *
*
—
—
*
*
Marlene Fernandez *
*
—
—
*
*
Luis Raganato *
*
—
—
*
*
Rogério Barreira *
*
—
—
*
*
Alejandro Yapur *
*
—
—
*
*
Paulo Camargo *
*
—
—
*
*
Dan Gertsacov⁽⁵⁾
*
*
—
—
*
*
Santiago Blanco *
*
—
—
*
*
David Grinberg *
*
—
—
*
*
Francisco Staton *
*
__
__
*
*
Marco Cordón *
*
__
__
*
*
Daniel Schleiniger *
*
__
__
*
*


*	* Each of these directors and officers beneficially owns less than 1% of the total number of outstanding class A shares.


~~(1)~~	~~Percentages are based on 124,070,029 Class A shares issued and outstanding as of the date of this annual report and exclude 7,993,602 Class A shares issued and held in treasury.~~


~~(2)~~	~~Class A shares are entitled to one vote per share and class B shares are entitled to five votes per share.~~


~~(3)~~	~~Los Laureles Ltd. is beneficially owned by Mr. Woods Staton, our Executive Chairman. See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders—Los Laureles Ltd.”~~

~~(4)~~

In addition to the class B shares he beneficially owns through Los Laureles Ltd., Mr. Woods Staton beneficially owns 828,955 class A shares (includes 30,784 shares of common stock issuable upon exercise of stock options, 113,150 restricted share units that have vested or will vest within 60 days of this annual report and excludes 55,908 unvested restricted share units) directly, and indirectly through Chablais Investments S.A. (“~~Chablais~~”). Of these 828,955 class A shares, Chablais has pledged an aggregate of 684,971 shares for the benefit of JPMorgan Chase Bank, N.A., in connection with a financing transaction. On a combined basis, Mr. Woods Staton is the beneficial owner of an aggregate of 39.61% of the total economic interests of Arcos Dorados and 76.49% of its total voting interests. The address of Mr. Woods Staton is Mantua No. 6575 (esquina Potosí), Montevideo, Uruguay 11500. The address of Chablais is Level 1, Palm Grove House, Wickham’s Cay 1, Road Town, Tortola, BVI.


~~(5)~~	~~Resigned from his role effective March 1, 2019.~~

87(1) Percentages are based on 127,265,773 class A shares issued and outstanding as of the date of this annual report and exclude 5,269,988 class A shares issued and held in treasury.

(2) Class A shares are entitled to one vote per share and class B shares are entitled to five votes per share.

(3) Los Laureles Ltd. is beneficially owned by Mr. Woods Staton, our Executive Chairman. See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders—Los Laureles Ltd.”

~~Table~~(4) In addition to the class B shares he beneficially owns through Los Laureles Ltd., Mr. Woods Staton beneficially owns 50 class A shares (excluding 25,046 unvested restricted share units) directly, and indirectly through Chablais Investments S.A. (“Chablais”). On a combined basis, Mr. Woods Staton is the beneficial owner of ~~Contents~~an aggregate of 38.60% of the total economic interests of Arcos Dorados and 75.86% of its total voting interests. The address of Mr. Woods Staton is Mantua No. 6575 (esquina Potosí), Montevideo, Uruguay 11500. The address of Chablais is Level 1, Palm Grove House, Wickham’s Cay 1, Road Town, Tortola, BVI.

(5) Rogerio Barreira served as our Divisional President for NOLAD until March 31, 2021, when he was replaced by Gustavo Pascualino.

As of the date of this annual report, our 1716 officers had been granted (i) a total of 978,325 restricted share units ~~and 54,919 stock options at an exercise price of $14.31 per share~~ pursuant to the 2011 Plan. For more information, see “—B. Compensation—Long-term and Equity Incentive Plans” above. Our non-executive directors had been granted a total of ~~35,000~~65,440 restricted share units, ~~66,888 stock options at an exercise price of $14.31~~ and 176,768 options at an exercise price of $8.58 per share per share pursuant to the 2011 Plan.

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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major Shareholders

As of the date of this annual report, under our memorandum and articles of association, we are authorized to issue a maximum of 420,000,000 class A shares, no par value per share, and 80,000,000 class B shares, no par value per share. Each of our class A shares entitles its holder to one vote. Each of our class B shares entitles its holder to five votes. Los Laureles Ltd., our controlling shareholder, owns ~~39.61%~~38.60% of our issued and outstanding share capital, and ~~76.49%~~75.86% of our voting power by virtue of its ownership of 100% of our class B shares. The following table presents the beneficial ownership of our shares based on the most recent information available as of the date of this annual report:


Shareholder	Class A Shares	% of Outstanding Class A Shares		Class B Shares(1)	% of Outstanding Class B Shares(1)		Total Economic Interest(1)		Total Voting Interest(1) (2)
Los Laureles Ltd(3)(4)	—	—		80,000,000	100.0	%	38.60	%	75.86	%
Woods Staton(4)	50	—		—	—		—		—
TIAA Board of Overseers(5)	18,887,596	14.84	%	—	—		9.11	%	3.58	%
Invesco Ltd.(6)	18,043,437	14.18	%	—	—		8.71	%	3.42	%
Remaining Public Shareholders	90,334,690	70.98	%	—	—		43.58	%	17.13	%
Total(7)	127,265,773	100.00%		80,000,000	100.00	%	100.00	%	100.00%(8)

Shareholder Class A Shares % of
Outstanding Class A Shares
Class B Shares⁽¹⁾
% of
Outstanding Class B Shares⁽¹⁾
Total Economic Interest⁽¹⁾
Total Voting Interest^{(1) (2)}
Los Laureles Ltd⁽³⁾⁽⁴⁾
—
—
80,000,000
100.0 % 39.20 % 76.33 %
Woods Staton⁽⁴⁾
828,955
0.67 % —
—
0.41 % 0.16 %
William H. Gates III⁽⁵⁾
11,641,400
9.38 % —
—
5.70 % 2.22 %
Invesco Ltd.⁽⁶⁾
8,612,670
6.94 % —
—
4.22 % 1.64 %
TIAA-CREF Investment Management, LLC ⁽⁷⁾
11,838,125
9.54 % —
—
5.80 % 2.26 %
Teachers Advisors, LLC ⁽⁸⁾
8,722,405
7.03 % —
—
4.27 % 1.66 %
International Value Advisers, LLC ⁽⁹⁾
2,379,000
1.92 % 1.17 % 0.45 %
Public 80,047,474
64.52 % —
—
39.23 % 15.27 %
Total⁽¹¹⁾
124,070,029
100.00%⁽¹⁰⁾

80,000,000
100.00 % 100.00 %
100.00%⁽¹⁰⁾


~~(1)~~	~~Percentages are based on 124,070,029 Class A shares issued and outstanding as of the date of this annual report and exclude 7,993,602 Class~~ (1) Percentages are based on 127,265,773 class A shares issued and outstanding as of the date of this annual report and exclude 5,269,988 class A shares issued and held in treasury.


~~(2)~~	~~Class A shares are entitled to one vote per share and class B shares are entitled to five votes per share.~~

~~(3)~~

The address of Los Laureles Ltd. is 325 Waterfront Drive, Omar Hodge Building, 2nd Floor, Wickham’s Cay 1, Road Town, Tortola, British Virgin Islands. Los Laureles Ltd. is beneficially owned by Mr. Woods Staton, our Executive Chairman. Los Laureles Ltd. established a voting trust with respect to the voting interests in us held by Los Laureles Ltd. Los Laureles Ltd. is the beneficiary of the voting trust. See “—Los Laureles Ltd.”

~~(4)~~

~~(5)~~

William H. Gates III (“Mr. Gates”) indirectly owns Class A shares through Cascade Investment, LLC (“Cascade”) and the Bill & Melinda Gates Foundation Trust (the “Trust”). Cascade, the Trust, Mr. Gates and Melinda French Gates (“Mrs. Gates”) filed with the SEC a Schedule 13G/A dated February 13, 2015. Based solely on the disclosure set forth in such Schedule 13G/A, (i) Cascade has sole voting power with respect to 8,580,900 class A shares and sole dispositive power with respect to 8,580,900 class A shares; (ii) the Trust has shared voting power with respect to 3,060,500 class A shares and shared dispositive power with respect to 3,060,500 class A shares; (iii) Mr. Gates has, through Cascade, sole voting power and sole dispositive power with respect to 8,580,900 class A shares and has, through the Trust, shared voting power and shared dispositive power with respect to 3,060,500 class A shares; and (iv) Mrs. Gates has, through the Trust, shared voting power with respect to 3,060,500 class A shares and shared dispositive power with respect to 3,060,500 class A shares. The address of Cascade Investment, LLC is 2365 Carillon Point, Kirkland, Washington 98033. The address of the Trust and Mrs. Gates is 500 Fifth Avenue North, Seattle, Washington 98119. The address of Mr. Gates is One Microsoft Way, Redmond, Washington 98052.


~~(6)~~	Invesco Ltd. filed with the SEC a Schedule 13G/A dated February 11, 2020. Based solely on the disclosure set forth in such Schedule 13G/A, Invesco Ltd. has sole voting power with respect to 8,612,670 class A shares and sole dispositive power with respect to 8,612,670 class A shares. The address of Invesco Ltd. is 1555 Peachtree Street NE, Suite 1800, Atlanta, GA 30309.

88(2) Class A shares are entitled to one vote per share and class B shares are entitled to five votes per share.

~~Table~~(3) The address of ~~Contents~~

Los Laureles Ltd. is 325 Waterfront Drive, Omar Hodge Building, 2nd Floor, Wickham’s Cay 1, Road Town, Tortola, British Virgin Islands. Los Laureles Ltd. is beneficially owned by Mr. Woods Staton, our Executive Chairman. Los Laureles Ltd. established a voting trust with respect to the voting interests in us held by Los Laureles Ltd. Los Laureles Ltd. is the beneficiary of the voting trust. See “—Los Laureles Ltd.”

(4) In addition to the class B shares he beneficially owns through Los Laureles Ltd., Mr. Woods Staton beneficially owns 50 class A shares (excluding 25,046 unvested restricted share units) directly, and indirectly through Chablais Investments S.A. (“Chablais”). On a combined basis, Mr. Woods Staton is the beneficial owner of an aggregate of 38.60% of the total economic interests of Arcos Dorados and 75.86% of its total voting interests. The address of Mr. Woods Staton is Mantua No. 6575 (esquina Potosí), Montevideo, Uruguay 11500. The address of Chablais is Level 1, Palm Grove House, Wickham’s Cay 1, Road Town, Tortola, BVI.

~~(7)~~

TIAA-CREF Investment Management, LLC filed with the SEC a Schedule 13G/A dated February 14, 2020. Based solely on the disclosure set forth in such Schedule 13G/A, TIAA-CREF Investment Management, LLC has sole voting power with respect to 11,814,337 class A shares and sole dispositive power with respect to 11,814,337 class A shares. In addition, an affiliate of TIAA-CREF Investment Management, LLC, Nuveen Asset Management, has sole voting power and sole dispositive power with respect to 13,788 class A shares. The address of TIAA-CREF Investment Management, LLC is 730 Third Avenue, New York, NY 10017-3206.

~~(8)~~

Teachers Advisors, LLC filed with the SEC a Schedule 13G/A dated February 14, 2020. Based solely on the disclosure set forth in such Schedule 13G/A, Teachers Advisors, LLC is the investment adviser to three registered investment companies and has sole voting power with respect to 8,722,405 class A shares and sole dispositive power with respect to 8,722,405 class A shares. The address of Teachers Advisors, LLC is 730 Third Avenue, New York, NY 10017-3206.

~~(9)~~

International Value Advisers, LLC filed with the SEC a Schedule 13G/A dated February 13, 2020. Based solely on the disclosure set forth in such Schedule 13G/A, International Value Advisers, LLC has sole voting power with respect to 2,210,768 class A shares and sole dispositive power with respect to 2,379,00 class A shares. The address of International Value Advisers, LLC is 717 Fifth Avenue, 10th Floor, New York, New York, 10022.


~~(10)~~	~~Numbers do not sum to 100% due to the effects of rounding.~~


~~(11)~~	~~Excludes 7,993,602 Class A shares issued and held in treasury.~~

(5) TIAA Board of Overseers is the ultimate parent of four funds, which filed Form 13F with the SEC on February 12, 2021: Teachers Advisors, LLC, TIAA-CREF Investment Management LLC, Nuveen Asset Management LLC and US Bancorp Asset Management, Inc. Based solely on the disclosure set forth in such Form 13F, as of December 31, 2020, these four funds together had sole voting power with respect to 18,887,596 class A shares and sole dispositive power with respect to 18,887,596 class A shares. The address of TIAA Board of Overseers is 730 Third Avenue, New York, NY 10017-3206.

(6) Invesco Ltd. is the ultimate parent of four funds, which filed Form 13F with the SEC on February 12, 2021: Invesco Advisers, Inc., Invesco Asset Management Ltd., Invesco Canada Ltd. and Invesco Hong Kong Ltd. Based solely on the disclosure set forth in such Form 13F, as of December 31, 2020, these four funds together had sole voting power with respect to 18,043,437 class A shares and sole dispositive power with respect to 18,043,437 class A shares. The address of Invesco Ltd. is 1555 Peachtree Street NE, Suite 1800, Atlanta, GA 30309.

(7) Numbers do not sum to 100% due to the effects of rounding.

(8) Excludes 5,269,988 class A shares issued and held in treasury.

As of April ~~24, 2020,~~26, 2021, there were 87 class A shareholders of record. We believe the number of beneficial owners is substantially greater than the number of record holders because a large portion of class A shares is held in “street name” by brokers.

Los Laureles Ltd.

Los Laureles Ltd. is our controlling shareholder and is beneficially owned by Mr. Woods Staton, our Executive Chairman. Los Laureles Ltd. currently owns ~~39.20%~~38.60% of the economic interests of Arcos Dorados and ~~76.33%~~75.86% of its voting interests. Los Laureles Ltd. has established a voting trust with respect to the voting interests in us held by Los Laureles Ltd. Los Laureles Ltd. is the beneficiary of the voting trust. The voting trust exercises the vote of the class B shares through a voting committee, which consists of only Mr. Woods Staton. The decision of the voting committee must be approved by Los Laureles (PTC) Limited, a British Virgin Islands company that is a wholly owned subsidiary of Los Laureles Limited. Mr. Woods Staton is the sole director of Los Laureles (PTC) Limited. Without the consent of McDonald’s, Mr. Woods Staton may add any one or more of his descendants, certain other relatives, any board member of Arcos Dorados and the chief executive officer, chief operating officer or chief financial officer of Arcos Dorados to the committee.

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Following Mr. Woods Staton’s death or during Mr. Woods Staton’s incapacity, the voting committee will consist of (1) certain officers or directors of Arcos Dorados, (2) certain descendants of Mr. Woods Staton or their representatives, and (3) other persons appointed by Los Laureles (PTC) Limited, subject to McDonald’s consent if such person is not one of Mr. Woods Staton’s descendants and is not the chief executive officer, chief operating officer or chief financial officer of Arcos Dorados. For the first five years from the date of the execution of the voting trust, the officers and directors of Arcos Dorados on the voting committee will have the tie-breaking vote (if any). Thereafter, Mr. Woods Staton’s descendants will have the tie-breaking vote.

B. Related Party Transactions

Our Board of Directors has created and adopted a related party transactions policy for the purpose of assisting the Board of Directors in reviewing, approving and ratifying related party transactions. This Policy is intended to supplement, and not to supersede, our other policies that may be applicable to or involve transactions with related parties, such as our Standards of Business Conduct.

Axionlog Split-off

In March 2011, we effected a split-off of Axionlog (formerly known as Axis) to our principal shareholders. The split-off was effected through the redemption of 41,882,966 shares (25,129,780 class A shares and 16,753,186 class B shares). As consideration for the redemption, the Company transferred to its principal shareholders its equity interests in the operating subsidiaries of the Axionlog business totaling a net book value of $15.4 million and an equity contribution that was made to the Axionlog holding company amounting to $29.8 million. Following the split-off, Los Laureles Ltd. acquired the Axionlog shares held by Gavea Investment AD, L.P. and investment funds controlled by Capital International, Inc. and DLJ South American Partners L.L.C. (through its affiliates). The split-off of Axionlog did not have a material effect on our results of operations or financial condition.

In 2011, we entered into a master commercial agreement with Axionlog on arm’s-length terms pursuant to which Axionlog provides us with distribution inventory, storage (dry, frozen and chilled) and transportation services in Argentina,

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Chile, Colombia, Ecuador, Mexico, Venezuela, Uruguay and Peru. Pricing under the agreement is determined pursuant to an agreed upon formula that is considered standard in the distribution services industry. Additionally, Axionlog must comply with McDonald’s quality program, the Distributor Quality Management System (DQMP) and other supplier requirements to maintain its status as a McDonald’s-approved supplier pursuant to the MFA. The pricing formula considers certain variables to determine the applicable fees, including (i) cost inputs (i.e., transportation expenses and salaries); (ii) time required for completion; (iii) storage requirements; (iv) merchandise volume; and (v) inflation and exchange rate adjustments. We use similar pricing formulas with our other distribution service providers in the territories not covered by Axionlog. Under the terms of the agreement, the pricing formula is reviewed on a yearly basis. During these reviews, we share information in order to find potential cost efficiencies and savings. In addition, we or Axionlog may request a renegotiation of the pricing formula in the event that, due to factors outside of our or their control, the formula is substantially altered based on changes to its variable inputs.

During ~~2019,~~2020, we incurred ~~$38,658~~$24.3 million in total distribution fees payable to Axionlog, which accounted for approximately 4%4% of our total food and paper costs.

See Note 25 to our consolidated financial statements for details of the outstanding balances and transactions with related parties as of December 31, ~~2019~~2020 and ~~2018~~2019 and for the fiscal years ended December 31, 2020, 2019 ~~2018~~ and ~~2017.~~2018.

Employment of Francisco Staton

Mr. Francisco Staton, Woods Staton’s son, is Arcos Dorados’ President of the Caribbean Division and a member of our board of directors. For his services as President of the Caribbean Division, Francisco Staton receives customary compensation and benefits commensurate with his level of responsibility within the Company. His compensation package is aligned with the compensation packages of similar positions in other companies in Colombia, according to external compensation surveys. Francisco Staton was appointed as a Board Member, Class I, at our Annual General (Shareholders) Meeting held on April 24, 2018.

C. Interests of Experts and Counsel

Not applicable.

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ITEM 8. FINANCIAL INFORMATION

A. Consolidated Statements and Other Financial Information

Financial statements

See “Item 18. Financial Statements,” which contains our financial statements prepared in accordance with U.S. GAAP.

Legal Proceedings

Puerto Rican Franchisees

In January 2007, several Puerto Rican franchisees filed a lawsuit against McDonald’s Corporation and certain subsidiaries ~~which~~purchased by the Company ~~purchased~~ during the acquisition of the LatAm business (the “Puerto Rican franchisees lawsuit”). The ~~lawsuit~~claim sought declaratory judgment and damages in the aggregate amount of $66.7 million plus plaintiffs’ ~~attorney’s fees~~attorney fees. During the years the lawsuit was in ~~connection with the alleged breach by~~force, the Company of the Dealers’ Act of Puerto Rico, which limited the grounds under which a principal may refuse to renew or terminate a distribution contract. The complaint also sought preliminary and permanent injunctions to restrict the Company from declining to renew the plaintiffs’ agreements except for just cause, and to prohibit the Company from opening restaurants or kiosks within a three-mile radius of a franchisee’s restaurant. In September 2008, the Company filed a counter-suit requesting the termination of the franchise agreements with these franchisees due to several material breaches. The case went to trial in the Court of First Instance in 2012 and at the end of 2014 the plaintiffs finalized their presentation of evidence. Atbelieved that ~~time, the Company filed a Motion of Non Suit seeking to dismiss the case. Although our assessment of~~ the probability of loss was ~~remote, on~~remote. On December 28, 2019 and March 31, 2020, wethe Company reached confidential settlement agreements with Puerto Rican franchisees finalizing all controversies and disputes among the parties. ~~Because certain of these agreements were reached during the COVID-19 outbreak, we have been unable to file the final~~All corresponding judicial documentation was filed to end the proceedings ~~because~~and the ~~courts are closed in Puerto Rico. However, we will file such documentation~~case was successfully dismissed by the Court, finalizing all controversies and ~~officially close these proceedings as soon as~~disputes among the ~~courts reopen.~~parties.

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~~During~~Additionally, during 2014, another franchisee filed a complaint (the “related Puerto Rican franchisee lawsuit”) against usthe 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 sought declaratory judgment and damages in the amount of $30 million plus ~~plaintiff’s attorney’s~~plaintiffs’ attorney fees. ~~As of~~During December ~~28,~~ 2019, wethe franchisee reached a ~~confidential settlement agreement~~Confidential Settlement Agreement with the ~~Puerto Rican franchisee~~Company finalizing all controversies and ~~dispute~~disputes among ~~us.~~them.

~~On March 26, 2010, we filed a collection claim against~~Furthermore, the Puerto Rico Owner Operator’s Association (“PROA”), an association integrated by ~~our~~the Company’s franchisees that ~~meets~~met periodically to coordinate the development of promotional and marketing campaigns ~~for~~(an association that at the ~~reimbursement~~time of the ~~monetary contribution made during August 2007. On June 15, 2010, PROA, also known as~~claim was formed solely by franchisees that are plaintiffs in the ~~cooperative,~~Puerto Rican franchisees lawsuit), filed a third party complaint and counterclaim (the “PROA claim”) against usthe Company and other third party defendants, in the amount of $31 million. ~~On June 9, 2014, after several motions for summary judgment duly filed and opposed by~~During the ~~parties,~~years the ~~Court entered a “Partial Summary Judgment and Resolution”~~lawsuit was in ~~favor of PROA, before initiating~~force, the ~~discovery phase,~~Company believed that requires us to participate and contribute funds to the association. However, the Court did not specify any amount for which we should be held liable due to its preliminary and interlocutory nature and the lack of discovery conducted regarding the amounts claimed by the plaintiffs. By means of a Motion to Reconsider, we opposed such determination. In December 2018, the First Instance Court confirmed this determination, and we filed a Writ of Certiorari in the Court of Appeals. In July 2019, the Court of Appeals overturned the Court of First Instance’s summary judgment in favor of PROA. PROA filed an appeal of such determination with the Puerto Rico Supreme Court, which was denied by the Court and PROA filed a reconsideration which was also denied. Although our assessment of the probability of loss was ~~remote, on~~remote. On December 28, 2019 and March 31, 2020 wethe Company reached confidential settlement agreements with Puerto Rican franchisees, sole members of PROA, finalizing all controversies and disputes among the parties. ~~Because certain of these agreements were reached during the COVID-19 outbreak, we have been unable to file the final~~All corresponding judicial documentation was filed to end this proceeding and the ~~proceedings because~~case was successfully dismissed by the ~~courts are closed in Puerto Rico. However, we will file such documentation and officially close these proceedings as soon as the courts reopen.~~Court.

Brazilian Labor Litigation

In August 2012, the Labor Prosecutor’s Office of the State of Pernambuco (Ministério Público do Trabalho do Estado de Pernambuco) in Brazil filed a civil complaint against us in the Labor Court of Pernambuco (Justiça do Trabalho de Pernambuco) in order to (i) compel us to change the variable work schedule applicable to our 14 restaurants in Pernambuco, a state in northeastern Brazil, to a fixed work schedule, (ii) seek fines of R$3,000 per employee per month for alleged noncompliance with labor laws related to, for example, overtime payment, breaks between workdays, night shift premiums, duration of breaks and weekly rest time, (iii) seek a penalty of R$20,000 related to the non-exhibition of documentation relating to audit labor inspections and (iv) seek collective damages of R$30,000,000 related to the variable work schedule practices in Pernambuco in recent years. In February 2013, the Labor Prosecutor’s Office of Pernambuco filed an additional petition seeking the extension of the original complaint throughout Brazil and increasing the amount of collective damages requested from R$30,000,000 to R$50,000,000. The Labor Prosecutor’s Office of the State of Pernambuco also added a demand that all employees should be allowed to bring their own meals for consumption during breaks in our restaurants.

We settled all of the pending claims with the Labor Prosecutor’s Office in March 2013, other than the claim to guarantee the payment of the minimum wage independently of working hours. In connection with the payment of the minimum wage, the Labor Court denied this plea.

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In parallel with the judicial case, in December 2016, an administrative assessment of compliance with our 2013 settlement was initiated by a team composed of Labor Prosecutors. Additional audits of our compliance with the 2013 settlement were performed in relation to the period from March 2013 to March 2017, and we entered into a new settlement agreement in August 2018, which included paying a fine of R$7 million that was already paid. Subsequent to this, the Labor Prosecutor began a new investigation of our compliance with the 2018 settlement, in relation to the period of April 2017 to July 2018. The Labor Prosecutor concluded its investigation in 2019 and alleged that we were not in compliance with the 2018 settlement and owed an additional R$15.8 million in fines. We submitted a petition for review, including documentation defending our compliance with the settlement. In 2019, we entered into a new settlement with the Labor Prosecutor. As part of the settlement agreement, the additional fines previously imposed were waived and we agreed to use paper liners for one month on trays in our restaurants beginning in the second quarter of 2020 to further protect the health and safety of our employees.

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our compliance with the settlement at this time. Our agreement with the Labor Prosecutor’s Office remains in effect and we must continue to comply with the requirements thereunder.

Sinthoresp – Brasília

On February 23, 2015, a coalition of labor unions filed a lawsuit against us, alleging that we have defaulted on our obligations to our employees with a variety of inadequate working conditions such as an unhealthy working environment, failure to pay the legal minimum wage or wages established through collective bargaining agreements, time-card fraud, failure to grant legally-mandated meal and rest periods and failure to pay corresponding overtime, among other claims.

The plaintiffs have requested an order requiring: (i) immediate rectification of the alleged practices; (ii) an injunction against opening any new restaurants until compliance with the labor practices is demonstrated; (iii) damages for pain and suffering equal to an amount between 1% and 30% of gross income; (iv) that the Economic Defense Administrative Council – CADE be placed on notice of these conditions; and (v) service of process to the Labor Prosecutor to require it to follow up on the lawsuit.

The lawsuit is currently before the 22^nd DF Labor Court in Brasilia. On March 27, 2017, the Labor Court entered a judgment rejecting all claims made by the coalition of labor unions and affirmed that the coalition was not able to prove its allegations. The coalition filed an appeal against it, and the Regional Labor Court determined to reopen the discovery phase for the parties to take depositions of witnesses, after which the 22^nd DF Labor Court in Brasilia (first instance) will judge the claim again. We presented an appeal against this decision that was denied, and the discovery phase was reopened. A new discovery hearing was scheduled for May 4, ~~2020.~~2020 but, due to the COVID-19 pandemic, the hearing was cancelled. The court scheduled a new discovery hearing for August 2, 2021.

Complaint 0528900-98.2006.5.02.0080

On December 13, 2006, a civil complaint was filed by the Labor Prosecutor’s Office in São Paulo, questioning our compliance with rules related to sanitary surveillance, workers’ health and safety, work ergonomics and working hours. After a preliminary injunction was granted for compliance with issues related to relevant rules cited in the complaint, an agreement (the “TAC”) was entered into between the Company and the Labor Prosecutor’s Office that provides for a daily fine of R$5,000 for non-compliance with the TAC provisions. The full contents of the TAC were ratified by the Labor Court on March 16, 2007.

On October 18, 2010, we entered into a new agreement with the Labor Prosecutor’s Office in São Paulo, which maintained the previous commitments assumed by us in the TAC, but also included an obligation to annually pay R$1,300,000 (as adjusted on a yearly basis from 2011 to 2019) towards the financing of campaigns against child labor and to make a one-time contribution in the amount of R$1,500,000 to the São Paulo’s Medical University’s Foundation. Furthermore, according to the agreement, the company was required to file a schedule for the compliance with the obligations set forth in the TAC. The company has been in compliance with this agreement, and the final payment of the annual R$1,300,000 obligatory contribution to help finance campaigns against child labor was made in 2019. While we have paid all fines due under the agreement, our agreement with the Labor Prosecutor’s Office remains in effect and we must continue to comply with the other requirements thereunder.

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In parallel with the judicial lawsuit’s developments, the Labor Prosecutor’s Office initiated an administrative audit regarding the company’s compliance with the TAC. On November 2016, the Labor Prosecutor’s Office claimed that it had identified violations of the TAC and demanded R$13 million in connection with such violations. On April 3, 2017, we submitted a petition and documents as evidence that we have complied with the settlement, rejecting the Labor Prosecutor’s claims. We attended a series of hearings with the Labor Prosecutor’s Office to discuss TAC compliance, Arcos’ petition, and the possibility of entering into a new settlement in order to reduce the previous commitments and the fines assumed by us. A new hearing is expected to be scheduled soon.

Administrative Investigation under Labor Prosecutor’s Office

The Labor Prosecutor’s Office in Curitiba initiated an administrative procedure to investigate Arcos Dourados in May 2019, based on a complaint made by the General Union of Workers (UGT) that alleged systematic workplace harassment, moral and sexual harassment and racial discrimination. On July 2020, another administrative procedure was initiated by the Labor Prosecutor’s Office in São Paulo, based on a compliant made by UGT, the Central Workers Union (CUT) and other workers unions that also alleged systematic workplace harassment. The procedures have now been joined under the second administrative procedure. In response to the allegations, Arcos Dourados has presented evidence of its good practices related to the subject, which it believes disproves the allegations of systematic discrimination, moral and sexual harassment. On January 25, 2021 the first hearing was held and a new hearing is expected to be scheduled this year. Isolated cases alleging discrimination and/or moral and sexual harassment are also being discussed within minor administrative investigations and individual labor claims filed in Brazil.

Retained Lawsuits and Contingent Liabilities

We have certain contingent liabilities with respect to existing or potential claims, lawsuits and other proceedings, including those involving labor, tax and other matters. As of December 31, ~~2019~~2020 we maintained a provision for contingencies amounting to ~~$38.8~~$35.1 million ($~~42.1~~38.8 million as of December 31, ~~2018)~~2019), which is disclosed net of judicial deposits amounting to ~~$12.7~~$8.1 million ($~~13.6~~12.7 million as of December 31, ~~2018)~~2019) that we were required to make in connection with the proceedings. As of December 31, ~~2019,~~2020, the net amount of ~~$26.2~~$27 million included ~~$24.1~~$24.9 million as a non-current liability. See Note 18 to our consolidated financial statements for more details.

Pursuant to the Acquisition, McDonald’s Corporation indemnifies us for certain Brazilian claims. As of December 31, ~~2019,~~2020, the provision for contingencies included ~~$1.6~~$1.3 million ($~~4.0~~1.6 million as of December 31, ~~2018)~~2019) related to Brazilian

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~~claims~~ claim that ~~are~~is covered by the indemnification agreement. As a result, we have recorded a non-current asset in respect of McDonald’s Corporation’s indemnity in our consolidated balance sheet.

Several of these proceedings have already been resolved successfully, either by a judicial decision or a cash settlement. The cash settlements were made pursuant to the reopening of a 2009 amnesty granted by the Brazilian federal government, in which ~~McDonalds~~McDonald’s opted to participate. The amnesty was originally granted in 2009 as a way to reduce litigation with federal authorities and increase tax collection during the financial crisis. The amnesty allowed Brazilian taxpayers to settle federal tax debts under favorable conditions, including reduced penalties and interest and the ability to pay principal in up to 180 installments. In 2014, pursuant to an additional amnesty, such outstanding Brazilian federal tax debts were paid in full using mainly applicable tax loss carryforwards. The remaining retained proceedings are pending a final decision.

As of December 31, ~~2019,~~2020, there are certain matters related to the interpretation of tax and labor law 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 ~~$210~~$226 million and ~~$227~~$249 million.

Other Proceedings

In addition to the matters described above, we are from time to time subject to certain claims and party to certain legal proceedings incidental to the normal course of our business. In view of the inherent difficulty of predicting the outcome of legal matters, we cannot state with confidence what the eventual outcome of these pending matters will be, what the timing of the ultimate resolution of these matters will be or what the eventual loss, fines or penalties related to each pending matter may be. We believe that we have made adequate reserves related to the costs anticipated to be incurred in connection with these various claims and legal proceedings and believe that liabilities related to such claims and proceedings should not have, in the aggregate, a material adverse effect on our business, financial condition, or results of operations. However, in light of the uncertainties involved in these claims and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves currently accrued by us; as a result, the outcome of a particular matter may be material to our operating results for a particular period, depending upon, among other factors, the size of the loss or liability imposed and the level of our income for that period.

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Dividends and Dividend Policy

Our Board of Directors considers the legal requirements with regard to our net income and retained earnings and our cash flow generation, targeted leverage ratios and debt covenant requirements in determining the amount of dividends to be paid, if any. Dividends may only be paid in accordance with the provisions of our memorandum and articles of association and Section 57 of the BVI Business Companies Act, 2004 (as amended) and after having fulfilled our capital expenditures program and after satisfying our indebtedness and liquidity thresholds, in that order. Pursuant to our memorandum and articles of association, all dividends unclaimed for three years after having been declared may be forfeited by a resolution of directors for the benefit of the Company.

Since the Acquisition, we declared the following dividends (all dividends shown in the aggregate for all outstanding shares, other than per share figures):

•a stock dividend distribution to all class A and class B stockholders distributed on August 12, 2020 of one (1) share for every seventy-five (75) shares held by its shareholders of record at the close of business on August 3, 2020;

•a $10.2 million dividend paid on April 10, ~~2020 and dividends of $0.03 per share to be paid on each of August 13, 2020 and December 10,~~ 2020;

•a $10.2 million dividend and two $6.1 million dividends in 2019;

•a $10.6 million and a $10.4 million dividend in 2018;

•four $12.5 million dividends in 2014;

•four $12.5 million dividends in 2013;

•four $12.5 million dividends in 2012;

•four $12.5 million dividends in 2011; and

•a $40 million dividend with respect to our results of operations for fiscal year 2009.

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The amounts and dates of future dividend payments, if any, will be subject to, among other things, the discretion of our Board of Directors. Accordingly, there can be no assurance that any future distributions will be made, or, if made, as to the amount of such distributions.

B. Significant Changes

Except as otherwise disclosed in this annual report, we are not aware of any significant changes that have occurred since December 31, ~~2019.~~2020.

ITEM 9. THE OFFER AND LISTING

A. Offering and Listing Details

See “—C. Markets.”

B. Plan of Distribution

Not applicable.

C. Markets

Our class A shares have been listed on the NYSE, since April 14, 2011 under the symbol “ARCO.”

D. Selling Shareholders

Not applicable.

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E. Dilution

Not applicable.

F. Expenses of the Issue

Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A. Share Capital

Not applicable.

B. Memorandum and Articles of Association

General

Our company number in the British Virgin Islands is 1619553. As provided in sub-regulation 4.1 of our memorandum of association, subject to British Virgin Islands law, we have full capacity to carry on or undertake any business or activity, do any act or enter into any transaction and, for such purposes, full rights, powers and privileges. Our registered office is at Maples Corporate Services (BVI) Limited, Kingston Chambers, P.O. Box 173, Road Town, Tortola, British Virgin Islands.

The transfer agent and registrar for our class A and class B shares is Continental Stock Transfer & Trust Company, which maintains the share registrar for each class in New York, New York.

As of the date of this annual report, under our memorandum and articles of association, we are authorized to issue up to 420,000,000 class A shares and 80,000,000 class B shares. As of the date of this annual report, ~~124,070,029~~127,265,773 class A shares and 80,000,000 class B shares are issued, fully paid and outstanding. In addition, ~~7,993,602 Class~~5,269,988 class A shares are issued and being held in treasury.

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The maximum number of shares that we are authorized to issue may be changed by resolution of shareholders amending our memorandum and articles of association. Shares may be issued from time to time only by resolution of shareholders.

Our class A shares are listed on the NYSE under the symbol ~~“ARCO.~~��ARCO.”

The following is a summary of the material provisions of our memorandum and articles of association.

Class A Shares

Holders of our class A shares may freely hold and vote their shares.

The following summarizes the rights of holders of our class A shares:

• each holder of class A shares is entitled to one vote per share on all matters to be voted on by shareholders generally, including the election of directors;

• holders of class A shares vote together with holders of class B shares;

• there are no cumulative voting rights;

•

~~the holders of our class A shares are entitled to dividends and other distributions,~~ ~~pari passu~~ with our class B shares, as may be declared from time to time by our board of directors out of funds legally available for that purpose, if any, and pursuant to our memorandum and articles of association, all dividends unclaimed for three years after having been declared may be forfeited by a resolution of directors for the benefit of the Company;


•	~~upon our liquidation, dissolution or winding up, the holders of class A shares will be entitled to share ratably,~~ ~~pari passu~~ ~~with our class B shares, in the distribution of all of our assets remaining available for distribution after satisfaction of all our liabilities; and~~

• the holders of our class A shares are entitled to dividends and other distributions, pari passu with our class B shares, as may be declared from time to time by our board of directors out of funds legally available for that purpose, if any, and pursuant to our memorandum and articles of association, all dividends unclaimed for three years after having been declared may be forfeited by a resolution of directors for the benefit of the Company;

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• upon our liquidation, dissolution or winding up, the holders of class A shares will be entitled to share ratably, pari passu with our class B shares, in the distribution of all of our assets remaining available for distribution after satisfaction of all our liabilities; and

• the holders of class A shares have preemptive rights in connection with the issuance of any securities by us, except for certain issuances of securities by us, including (i) pursuant to any employee compensation plans; (ii) as consideration for (a) any merger, consolidation or purchase of assets or (b) recapitalization or reorganization; (iii) in connection with a pro rata division of shares or dividend in specie or distribution; or (iv) in a bona fide public offering that has been registered with the SEC, but they are not entitled to the benefits of any redemption or sinking fund provisions.

Class B Shares

All of our class B shares are owned by Los Laureles Ltd. Holders of our class B shares may freely hold and vote their shares.

The following summarizes the rights of holders of our class B shares:

• each holder of class B shares is entitled to five votes per share on all matters to be voted on by shareholders generally, including the election of directors;

• holders of class B shares vote together with holders of class A shares;

• class B shares may not be listed on any U.S. or foreign national or regional securities exchange or market;

• there are no cumulative voting rights;

•

• the holders of our class B shares are entitled to dividends and other distributions, pari passu with our class A shares, as may be declared from time to time by our board of directors out of funds legally available for that purpose, if any, and pursuant to our memorandum and articles of association, all dividends unclaimed for three years after having been declared may be forfeited by a resolution of directors for the benefit of the Company;


•	~~upon our liquidation, dissolution or winding up, the holders of class B shares will be entitled to share ratably,~~ ~~pari passu~~ ~~with our class A shares, in the distribution of all of our assets remaining available for distribution after satisfaction of all our liabilities;~~

95• upon our liquidation, dissolution or winding up, the holders of class B shares will be entitled to share ratably, pari passu with our class A shares, in the distribution of all of our assets remaining available for distribution after satisfaction of all our liabilities;

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• the holders of class B shares have preemptive rights in connection with the issuance of any securities by us, except for certain issuances of securities by us, including (i) pursuant to any employee compensation plans; (ii) as consideration for (a) any merger, consolidation or purchase of assets or (b) recapitalization or reorganization; (iii) in connection with a pro rata division of shares or dividend in specie or distribution; or (iv) in a bona fide public offering that has been registered with the SEC, but they are not entitled to the benefits of any redemption or sinking fund provisions;

• each class B share is convertible into one class A share at the option of the holder at any time, subject to the prior written approval of McDonald’s; and

• each class B share will convert automatically into one class A share at such time as the holders of class B shares cease to hold, directly or indirectly, at least 20% of the aggregate number of outstanding class A and class B shares.

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Limitation on Liability and Indemnification Matters

Under British Virgin Islands law, each of our directors and officers, in performing his or her functions, is required to act honestly and in good faith with a view to our best interests and exercise the care, diligence and skill that a reasonably prudent director would exercise in comparable circumstances. Our memorandum and articles of association provide that, to the fullest extent permitted by British Virgin Islands law or any other applicable laws, our directors will not be personally liable to us or our shareholders for any acts or omissions in the performance of their duties. This limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. These provisions will not limit the liability of directors under United States federal securities laws.

Our memorandum and articles of association provide that we shall indemnify any of our directors or anyone serving at our request as a director of another entity against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings or suits. We may pay any expenses, including legal fees, incurred by any such person in defending any legal, administrative or investigative proceedings in advance of the final disposition of the proceedings. If a person to be indemnified has been successful in defense of any proceedings referred to above, the director is entitled to be indemnified against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred by the director or officer in connection with the proceedings.

We may purchase and maintain insurance in relation to any of our directors, officers, employees, agents or liquidators against any liability asserted against them and incurred by them in that capacity, whether or not we have or would have had the power to indemnify them against the liability as provided in our memorandum and articles of association.

Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, or the Securities Act, may be permitted to our directors, officers or controlling persons pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable as a matter of United States law.

Shareholders’ Meetings and Consents

The following summarizes certain relevant provisions of British Virgin Islands law and our articles of association in relation to our shareholders’ meetings:

• the directors of the Company may convene meetings of shareholders at such times and in such manner and places within or outside the British Virgin Islands as the directors consider necessary or desirable; provided that at least one meeting of shareholders be held each year;

• upon the written request of shareholders entitled to exercise 30 percent or more of the voting rights in respect of the matter for which the meeting is requested, the directors are required to convene a meeting of the shareholders. Any such request must state the proposed purpose of the meeting;

• the directors convening a meeting must give not less than ten days’ notice of a meeting of shareholders to: (i) those shareholders whose names on the date the notice is given appear as shareholders in the register of members of our company and are entitled to vote at the meeting, and (ii) the other directors;

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• a meeting of shareholders held in contravention of the requirement to give notice is valid if shareholders holding at least 90 percent of the total voting rights on all the matters to be considered at the meeting have waived notice of the meeting and, for this purpose, the presence of a shareholder at the meeting shall constitute waiver in relation to all the shares that such shareholder holds;

• a shareholder may be represented at a meeting of shareholders by a proxy who may speak and vote on behalf of the shareholder;

• a meeting of shareholders is duly constituted if, at the commencement of the meeting, there are present in person or by proxy not less than 50 percent of the votes of the shares or class or series of shares entitled to vote on resolutions of shareholders to be considered at the meeting;

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• if within two hours from the time appointed for the meeting a quorum is not present, the meeting, if convened upon the requisition of shareholders, shall be dissolved; in any other case it shall be adjourned to the next business day in the jurisdiction in which the meeting was to have been held at the same time and place or to such other date, time and place as the directors may determine, and if at the adjourned meeting there are present within one hour from the time appointed for the meeting in person or by proxy not less than one third of the votes of the shares or each class or series of shares entitled to vote on the matters to be considered by the meeting, those present shall constitute a quorum, but otherwise the meeting shall be dissolved. Notice of the adjourned meeting need not be given if the date, time and place of such meeting are announced at the meeting at which the adjournment is taken;

• a resolution of shareholders is valid (i) if approved at a duly convened and constituted meeting of shareholders by the affirmative vote of a majority of the votes of the shares entitled to vote thereon which were present at the meeting and were voted, or (ii) if it is a resolution consented to in writing by a majority of the votes of shares entitled to vote thereon; and

• an action that may be taken by the shareholders at a meeting may also be taken by a resolution of shareholders consented to in writing by a majority of the votes of shares entitled to vote thereon, without the need for any notice, but if any resolution of shareholders is adopted otherwise than by unanimous written consent of all shareholders, a copy of such resolution shall forthwith be sent to all shareholders not consenting to such resolution.

Compensation of Directors

The compensation of our directors is determined by our Board of Directors, and there is no requirement that a specified number or percentage of “independent” directors must approve any such determination.

Differences in Corporate Law

We were incorporated under, and are governed by, the laws of the British Virgin Islands. The corporate statutes of the State of Delaware and the British Virgin Islands in many respects are similar, and the flexibility available under British Virgin Islands law has enabled us to adopt a memorandum of association and articles of association that will provide shareholders with rights that, except as described in this annual report, do not vary in any material respect from those they would enjoy if we were incorporated under the Delaware General Corporation Law, or Delaware corporate law. Set forth below is a summary of some of the differences between provisions of the BVI Act applicable to us and the laws applicable to companies incorporated in Delaware and their shareholders.

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Director’s Fiduciary Duties

Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director act in a manner he reasonably believes to be in the best interests of the corporation. He must not use his corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling stockholder and not shared by the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, a director must prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation.

British Virgin Islands law provides that every director of a British Virgin Islands company, in exercising his powers or performing his duties, shall act honestly and in good faith and in what the director believes to be in the best interests of the company. Additionally, the director shall exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances, taking into account the nature of the company, the nature of the decision and the position of the director and his responsibilities. In addition, British Virgin Islands law provides that a director shall exercise his powers as a director for a proper purpose and shall not act, or agree to the company acting, in a manner that contravenes British Virgin Islands law or the memorandum association or articles of association of the company.

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Amendment of Governing Documents

Under Delaware corporate law, with very limited exceptions, a vote of the shareholders is required to amend the certificate of incorporation. In addition, Delaware corporate law provides that shareholders have the right to amend the bylaws, and the certificate of incorporation also may confer on the directors the right to amend the bylaws. Our memorandum of association may only be amended by a resolution of shareholders, provided that any amendment of the provision related to the prohibition against listing our class B shares must be approved by not less than 50% of the votes of the class A shares entitled to vote that were present at the relevant meeting and voted. Our articles of association may also only be amended by a resolution of shareholders.

Written Consent of Directors

Under Delaware corporate law, directors may act by written consent only on the basis of a unanimous vote. Similarly, under our articles of association, a resolution of our directors in writing shall be valid only if consented to by all directors or by all members of a committee of directors, as the case may be.

Written Consent of Shareholders

Under Delaware corporate law, unless otherwise provided in the certificate of incorporation, any action to be taken at any annual or special meeting of shareholders of a corporation may be taken by written consent of the holders of outstanding stock having not less than the minimum number of votes that would be necessary to take that action at a meeting at which all shareholders entitled to vote were present and voted. As permitted by British Virgin Islands law, shareholders’ consents need only a majority of shareholders signing to take effect. Our memorandum and articles of association provide that shareholders may approve corporate matters by way of a resolution consented to at a meeting of shareholders or in writing by a majority of shareholders entitled to vote thereon.

Shareholder Proposals

Under Delaware corporate law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. A special meeting may be called by the board of directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings. British Virgin Islands law and our memorandum and articles of association provide that our directors shall call a meeting of the shareholders if requested in writing to do so by shareholders entitled to exercise at least 30% of the voting rights in respect of the matter for which the meeting is requested. Any such request must state the proposed purpose of the meeting.

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Sale of Assets

Under Delaware corporate law, a vote of the shareholders is required to approve the sale of assets only when all or substantially all assets are being sold. In the British Virgin Islands, shareholder approval is required when more than 50% of the Company’s total assets by value are being disposed of or sold if not made in the usual or regular course of the business carried out by the company. Under our memorandum and articles of association, the directors may by resolution of directors determine that any sale, transfer, lease, exchange or other disposition is in the usual or regular course of the business carried on by us and such determination is, in the absence of fraud, conclusive.

Dissolution; Winding Up

Under Delaware corporate law, unless the board of directors approves the proposal to dissolve, dissolution must be approved in writing by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware corporate law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. As permitted by British Virgin Islands law and our memorandum and articles of association, we may be voluntarily liquidated under Part XII of the BVI Act by resolution of directors and resolution of shareholders if we have no liabilities or we are able to pay our debts as they fall due.

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Redemption of Shares

Under Delaware corporate law, any stock may be made subject to redemption by the corporation at its option, at the option of the holders of that stock or upon the happening of a specified event, provided shares with full voting power remain outstanding. The stock may be made redeemable for cash, property or rights, as specified in the certificate of incorporation or in the resolution of the board of directors providing for the issue of the stock. As permitted by British Virgin Islands law and our memorandum and articles of association, shares may be repurchased, redeemed or otherwise acquired by us. However, the consent of the shareholder whose shares are to be repurchased, redeemed or otherwise acquired must be obtained, except as described under “—Compulsory Acquisition” below. Moreover, our directors must determine that immediately following the redemption or repurchase we will be able to pay our debts as they become due and that the value of our assets will exceed our liabilities.

Compulsory Acquisition

Under Delaware General Corporation Law § 253, in a process known as a “short form” merger, a corporation that owns at least 90% of the outstanding shares of each class of stock of another corporation may either merge the other corporation into itself and assume all of its obligations or merge itself into the other corporation by executing, acknowledging and filing with the Delaware Secretary of State a certificate of such ownership and merger setting forth a copy of the resolution of its board of directors authorizing such merger. If the parent corporation is a Delaware corporation that is not the surviving corporation, the merger also must be approved by a majority of the outstanding stock of the parent corporation. If the parent corporation does not own all of the stock of the subsidiary corporation immediately prior to the merger, the minority shareholders of the subsidiary corporation party to the merger may have appraisal rights as set forth in § 262 of the Delaware General Corporation Law.

Under the BVI Act, subject to any limitations in a Company’s memorandum or articles, members holding 90% of the votes of the outstanding shares entitled to vote, and members holding 90% of the votes of the outstanding shares of each class of shares entitled to vote, may give a written instruction to the company directing the company to redeem the shares held by the remaining members. Upon receipt of such written instruction, the company shall redeem the shares specified in the written instruction, irrespective of whether or not the shares are by their terms redeemable. The company shall give written notice to each member whose shares are to be redeemed stating the redemption price and the manner in which the redemption is to be effected. A member whose shares are to be so redeemed is entitled to dissent from such redemption, and to be paid the fair value of his shares, as described under “—Shareholders’ Rights under British Virgin Islands Law Generally” below.

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Variation of Rights of Shares

Under Delaware corporate law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of that class, unless the certificate of incorporation provides otherwise. As permitted by British Virgin Islands law and our memorandum of association, we may vary the rights attached to any class of shares only with the consent in writing of holders of not less than 50% of the issued shares of that class and of holders of not less than 50% of the issued shares of any other class which may be adversely affected by such variation.

Removal of Directors

Under Delaware corporate law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Our memorandum and articles of association provide that directors may be removed at any time, with or without cause, by a resolution of shareholders or a resolution of directors.

In addition, directors are subject to rotational retirement every three years. The initial terms of office of the Class I, Class II and Class III directors have been staggered over a period of three years to ensure that all directors of the company do not face reelection in the same year.

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Mergers

Under Delaware corporate law, one or more constituent corporations may merge into and become part of another constituent corporation in a process known as a merger. A Delaware corporation may merge with a foreign corporation as long as the law of the foreign jurisdiction permits such a merger. To effect a merger under Delaware General Corporation Law § 251, an agreement of merger must be properly adopted and the agreement of merger or a certificate of merger must be filed with the Delaware Secretary of State. In order to be properly adopted, the agreement of merger must be adopted by the board of directors of each constituent corporation by a resolution or unanimous written consent. In addition, the agreement of merger generally must be approved at a meeting of stockholders of each constituent corporation by a majority of the outstanding stock of the corporation entitled to vote, unless the certificate of incorporation provides for a supermajority vote. In general, the surviving corporation assumes all of the assets and liabilities of the disappearing corporation or corporations as a result of the merger.

Under the BVI Act, two or more BVI companies may merge or consolidate in accordance with the statutory provisions. A merger means the merging of two or more constituent companies into one of the constituent companies, and a consolidation means the uniting of two or more constituent companies into a new company. In order to merge or consolidate, the directors of each constituent BVI company must approve a written plan of merger or consolidation which must be authorized by a resolution of shareholders. One or more BVI companies may also merge or consolidate with one or more companies incorporated under the laws of jurisdictions outside the BVI, if the merger or consolidation is permitted by the laws of the jurisdictions in which the companies incorporated outside the BVI are incorporated. In respect of such a merger or consolidation a BVI company is required to comply with the provisions of the BVI Act, and a company incorporated outside the BVI is required to comply with the laws of its jurisdiction of incorporation.

Shareholders of BVI companies not otherwise entitled to vote on the merger or consolidation may still acquire the right to vote if the plan of merger or consolidation contains any provision which, if proposed as an amendment to the memorandum of association or articles of association, would entitle them to vote as a class or series on the proposed amendment. In any event, all shareholders must be given a copy of the plan of merger or consolidation irrespective of whether they are entitled to vote at the meeting or consent to the written resolution to approve the plan of merger or consolidation.

Inspection of Books and Records

Under Delaware corporate law, any shareholder of a corporation may for any proper purpose inspect or make copies of the corporation’s stock ledger, list of shareholders and other books and records. Under British Virgin Islands law, members of the general public, on payment of a nominal fee, can obtain copies of the public records of a company available at the office of the British Virgin Islands Registrar of Corporate Affairs which will include the company’s certificate of incorporation, its memorandum and articles of association (with any amendments) and records of license fees paid to date, and will also disclose any articles of dissolution, articles of merger and a register of registered charges if such a register has been filed in respect of the company.

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A member of a company is entitled, on giving written notice to the company, to inspect:


~~(a)~~	~~the memorandum and articles;~~


~~(b)~~	~~the register of members;~~


~~(c)~~	~~the register of directors; and~~

~~(d)~~

the minutes of meetings and resolutions of members and of those classes of members of which he is a member; and to make copies of or take extracts from the documents and records referred to in (a) to (d) above. Subject to the memorandum and articles, the directors may, if they are satisfied that it would be contrary to the company’s interests to allow a member to inspect any document, or part of a document, specified in (b), (c) or (d) above, refuse to permit the member to inspect the document or limit the inspection of the document, including limiting the making of copies or the taking of extracts from the records.

(a) the memorandum and articles;

(b) the register of members;

(d) the minutes of meetings and resolutions of members and of those classes of members of which he is a member; and to make copies of or take extracts from the documents and records referred to in (a) to (d) above. Subject to the memorandum and articles, the directors may, if they are satisfied that it would be contrary to the company’s interests to allow a member to inspect any document, or part of a document, specified in (b), (c) or (d) above, refuse to permit the member to inspect the document or limit the inspection of the document, including limiting the making of copies or the taking of extracts from the records.

Where a company fails or refuses to permit a member to inspect a document or permits a member to inspect a document subject to limitations, that member may apply to the court for an order that he should be permitted to inspect the document or to inspect the document without limitation.

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A company is required to keep at the office of its registered agent the memorandum and articles of the company; the register of members maintained or a copy of the register of members; the register of directors or a copy of the register of directors; and copies of all notices and other documents filed by the company in the previous ten years.

Where a company keeps a copy of the register of members or the register of directors at the office of its registered agent, it is required to notify any changes to the originals of such registers to the registered agent, in writing, within 15 days of any change; and to provide the registered agent with a written record of the physical address of the place or places at which the original register of members or the original register of directors is kept. Where the place at which the original register of members or the original register of directors is changed, the company is required to provide the registered agent with the physical address of the new location of the records within fourteen days of the change of location.

A company is also required to keep at the office of its registered agent or at such other place or places, within or outside the British Virgin Islands, as the directors determine, the minutes of meetings and resolutions of members and of classes of members; and the minutes of meetings and resolutions of directors and committees of directors. If such records are kept at a place other than at the office of the company’s registered agent, the company is required to provide the registered agent with a written record of the physical address of the place or places at which the records are kept and to notify the registered agent, within 14 days, of the physical address of any new location where such records may be kept.

A company is further required to:


~~(a)~~	keep at the office of its registered agent or at such other place or places, within or outside the British Virgin Islands, as the directors may determine, the records and underlying documentation of the company;


~~(b)~~	retain the records and underlying documentation for a period of at least five years from the date: (i) of completion of the transaction to which the records and underlying documentation relate; or (ii) the company terminates the business relationship to which the records and underlying documentation relate; and

~~(c)~~

provide its registered agent without delay any records and underlying documentation in respect of the company that the registered agent requests pursuant to the entitlement of the company’s registered agent to make such a request where the registered agent is required to do so by the British Virgin Islands Financial Services Commission or any other competent authority in the British Virgin Islands acting pursuant to the exercise of a power under an enactment.

(a) keep at the office of its registered agent or at such other place or places, within or outside the British Virgin Islands, as the directors may determine, the records and underlying documentation of the company;

(b) retain the records and underlying documentation for a period of at least five years from the date: (i) of completion of the transaction to which the records and underlying documentation relate; or (ii) the company terminates the business relationship to which the records and underlying documentation relate; and

(c) provide its registered agent without delay any records and underlying documentation in respect of the company that the registered agent requests pursuant to the entitlement of the company’s registered agent to make such a request where the registered agent is required to do so by the British Virgin Islands Financial Services Commission or any other competent authority in the British Virgin Islands acting pursuant to the exercise of a power under an enactment.

The records and underlying documentation of the company are required to be in such form as:


~~(a)~~	~~are sufficient to show and explain the company’s transactions; and~~


~~(b)~~	(a) are sufficient to show and explain the company’s transactions; and (b) will, at any time, enable the financial position of the company to be determined with reasonable accuracy.

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Where the records and underlying documentation of a company are kept at a place or places other than at the office of the company’s registered agent, the company is required to provide the registered agent with a written:


~~(a)~~	~~record of the physical address of the place at which the records and underlying documentation are kept; and~~


~~(b)~~	~~record of the name of the person who maintains and controls the company’s records and underlying documentation.~~

(a)record of the physical address of the place at which the records and underlying documentation are kept; and

(b)record of the name of the person who maintains and controls the company’s records and underlying documentation.

Where the place or places at which the records and underlying documentation of the company, or the name of the person who maintains and controls the company’s records and underlying documentation, change, the company must within 14 days of the change, provide:


~~(a)~~	~~its registered agent with the physical address of the new location of the records and underlying documentation; or~~


~~(b)~~	~~the name of the new person who maintains and controls the company’s records and underlying documentation.~~

(a)its registered agent with the physical address of the new location of the records and underlying documentation; or

(b)the name of the new person who maintains and controls the company’s records and underlying documentation.

For the foregoing purposes:


~~(a)~~	~~“business relationship” means a continuing arrangement between a company and one or more persons with whom the company engages in business, whether on a one-off, regular or habitual basis; and~~


~~(b)~~	“records and underlying documentation” includes accounts and records (such as invoices, contracts and similar documents) in relation to: (i) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place; (ii) all sales and purchases of goods by the company; and (iii) the assets and liabilities of the company.

(a) “business relationship” means a continuing arrangement between a company and one or more persons with whom the company engages in business, whether on a one-off, regular or habitual basis; and

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(b) “records and underlying documentation” includes accounts and records (such as invoices, contracts and similar documents) in relation to: (i) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place; (ii) all sales and purchases of goods by the company; and (iii) the assets and liabilities of the company.

Conflict of Interest

Under Delaware corporate law, a contract between a corporation and a director or officer, or between a corporation and any other organization in which a director or officer has a financial interest, is not void as long as the material facts as to the director’s or officer’s relationship or interest are disclosed or known and either a majority of the disinterested directors authorizes the contract in good faith or the shareholders vote in good faith to approve the contract. Nor will any such contract be void if it is fair to the corporation when it is authorized, approved or ratified by the board of directors, a committee or the shareholders.

The BVI Act provides that a director shall, forthwith after becoming aware that he is interested in a transaction entered into or to be entered into by the company, disclose that interest to the board of directors of the company. The failure of a director to disclose that interest does not affect the validity of a transaction entered into by the director or the company, so long as the director’s interest was disclosed to the board prior to the Company’s entry into the transaction or was not required to be disclosed because the transaction is between the company and the director himself and is otherwise in the ordinary course of business and on usual terms and conditions. As permitted by British Virgin Islands law and our memorandum and articles of association, a director interested in a particular transaction may vote on it, attend meetings at which it is considered and sign documents on our behalf which relate to the transaction, provided that the disinterested directors consent.

Transactions with Interested Shareholders

Delaware corporate law contains a business combination statute applicable to Delaware public corporations whereby, unless the corporation has specifically elected not to be governed by that statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following the date that the person becomes an interested shareholder. An interested shareholder generally is a person or group that owns or owned 15% or more of the target’s outstanding voting stock within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which the shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction that resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware public corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.

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British Virgin Islands law has no comparable provision. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination statute. However, although British Virgin Islands law does not regulate transactions between a company and its significant shareholders, it does provide that these transactions must be entered into bona fide in the best interests of the company and not with the effect of constituting a fraud on the minority shareholders.

Independent Directors

There are no provisions under Delaware corporate law or under the BVI Act that require a majority of our directors to be independent.

Cumulative Voting

Under Delaware corporate law, cumulative voting for elections of directors is not permitted unless the Company’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. There are no prohibitions to cumulative voting under the laws of the British Virgin Islands, but our memorandum of association and articles of association do not provide for cumulative voting.

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Shareholders’ Rights under British Virgin Islands Law Generally

The BVI Act provides for remedies which may be available to shareholders. Where a company incorporated under the BVI Act or any of its directors engages in, or proposes to engage in, conduct that contravenes the BVI Act or the Company’s memorandum and articles of association, the BVI courts can issue a restraining or compliance order. Shareholders cannot also bring derivative, personal and representative actions under certain circumstances. The traditional English basis for members’ remedies has also been incorporated into the BVI Act: where a shareholder of a company considers that the affairs of the company have been, are being or are likely to be conducted in a manner likely to be oppressive, unfairly discriminatory or unfairly prejudicial to him, he may apply to the court for an order based on such conduct.

Any shareholder of a company may apply to court for the appointment of a liquidator of the company and the court may appoint a liquidator of the company if it is of the opinion that it is just and equitable to do so.

The BVI Act provides that any shareholder of a company is entitled to payment of the fair value of his shares upon dissenting from any of the following: (a) a merger, if the company is a constituent company, unless the company is the surviving company and the member continues to hold the same or similar shares; (b) a consolidation, if the company is a constituent company; (c) any sale, transfer, lease, exchange or other disposition of more than 50% in value of the assets or business of the company if not made in the usual or regular course of the business carried on by the company but not including (i) a disposition pursuant to an order of the court having jurisdiction in the matter, (ii) a disposition for money on terms requiring all or substantially all net proceeds to be distributed to the shareholders in accordance with their respective interest within one year after the date of disposition, or (iii) a transfer pursuant to the power of the directors to transfer assets for the protection thereof; (d) a redemption of 10% or fewer of the issued shares of the company required by the holders of 90% or more of the shares of the company pursuant to the terms of the BVI Act; and (e) an arrangement, if permitted by the court.

Generally any other claims against a company by its shareholders must be based on the general laws of contract or tort applicable in the British Virgin Islands or their individual rights as shareholders as established by the Company’s memorandum and articles of association.

C. Material Contracts

The MFAs

We received exclusive master franchising rights from McDonald’s for the Territories on August 3, 2007 when Mr. Woods Staton, our Executive Chairman and controlling shareholder and our founding private equity shareholders purchased McDonald’s LatAm business for $698.1 million (including $18.7 million of acquisition costs) and entered into the MFAs. Prior to the Acquisition, Mr. Woods Staton had been the joint venture partner of McDonald’s Corporation in Argentina for over 20 years and had served as President of McDonald’s South Latin American division since 2004.

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McDonald’s has a long-standing presence in Latin America and the Caribbean dating to the opening of its first restaurant in Puerto Rico in 1967. Since then, McDonald’s expanded its footprint across the region as consumer markets and opportunities arose, opening its first restaurants in Brazil in 1979, in Mexico and Venezuela in 1985 and in Argentina in 1986.

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The MFAs set forth McDonald’s and our rights and obligations in respect of the ownership and operation of the McDonald’s-branded restaurants located in the Territories. The MFAs do not include the following Latin American and Caribbean countries and territories, among others: Anguilla, Antigua and Barbuda, the Bahamas, Barbados, Belize, Bolivia, the British Virgin Islands, the Cayman Islands, Cuba, Dominica, Dominican Republic, El Salvador, Grenada, Guatemala, Guiana, Haiti, Honduras, Jamaica, Montserrat, Nicaragua, Paraguay, Suriname, St. Barthélemy, St. Kitts and Nevis, St. Lucia, St. Maarten, St. Vincent and the Grenadines, Turks & Caicos Islands and the U.S. Virgin Islands, with the exception of St. Croix and St. Thomas.

The material provisions of the MFAs are set forth below.

Term

The initial term of the franchise granted pursuant to the MFAs is 20 years for all of the Territories other than French Guiana, Guadeloupe and Martinique. After the expiration of the initial term, McDonald’s may grant us an option to extend the term of the MFAs with respect to all Territories for an additional period of 10 years. The initial term of the franchise for French Guiana, Guadeloupe and Martinique was 10 years. Under the MFA, we had the right to extend the term of the MFA with respect to French Guiana, Guadeloupe and Martinique for an additional term of 10 years. On June 27, 2016, we exercised this right and McDonald’s granted us an extension of the initial term for the franchises in French Guiana, Guadeloupe and Martinique for a period of 10 years, expiring August 2, 2027.

Our Right to Own and Operate McDonald’s-Branded Restaurants

Under the MFAs, in the Territories, we have the exclusive right to (i) own and operate, directly or indirectly, McDonald’s restaurants, (ii) license and grant franchises with respect to McDonald’s-branded restaurants, (iii) adopt and use, and to grant the right and license to franchisees to adopt and use, the McDonald’s operations system in our restaurants, (iv) advertise to the public that we are a franchisee of McDonald’s, and (v) to use, and to sublicense to our franchisees the right to use the McDonald’s intellectual property solely in connection with the development, ownership, operation, promotion and management of our restaurants, and to engage in related advertising, promotion and marketing programs and activities.

Under the MFAs, McDonald’s cannot grant the rights described in clauses (i), (ii) and (iii) of the preceding paragraph to any other person while the MFAs are in effect. Notwithstanding the foregoing, McDonald’s has reserved, with respect to the McDonald’s restaurants located in the Territories, all rights not specifically granted to us, including the right, directly or indirectly, to (i) use and sublicense the McDonald’s intellectual property for all other purposes and means of distribution, (ii) sell, promote or license the sale of products or services under the intellectual property and (iii) use the intellectual property in connection with all other activities not prohibited by the MFAs.

In addition, under the MFAs, McDonald’s provides us with know-how and new developments, techniques and improvements in the areas of restaurant management, food preparation and service, and operations manuals that contain the standards and procedures necessary for the successful operation of McDonald’s-branded restaurants.

Franchise Fees

Under the MFAs, we are responsible for the payment to McDonald’s of initial franchise fees, continuing franchise fees and transfer fees.

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The initial franchise fee is payable upon the opening of a new restaurant and the extension of the term of any existing franchise agreement. For Company-operated restaurants, the initial fee is based on the term remaining under the MFAs for the country in which the restaurant is located. For franchised restaurants, we receive an initial fee from the franchisee based on the term of the franchise agreement (generally 20 years), and pay 50% of this fee to McDonald’s.

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The continuing franchise fee is paid, with respect to each calendar month, to McDonald’s in an amount generally equal to 7% of the U.S. dollar equivalent of the gross sales, as defined therein, of each of the McDonald’s restaurants in the Territories for that calendar month, minus, as applicable, a brand building adjustment. During the first 10 years of the MFAs, the brand building adjustment is 2% of the gross sales, for a net continuing franchise fee payment of 5% of the gross sales. During years 11 through 15 of the MFAs, the brand building adjustment will be 1% of the gross sales, for a net continuing franchise fee payment of 6%; and the brand building adjustment will be 0% thereafter, for a net continuing franchise fee payment of 7% of the gross sales. In addition, on January 25, 2017, McDonald’s Corporation agreed to provide growth support for the years 2017, 2018 and 2019. The impact of this support resulted in an effective royalty rate of 5.2% in 2017, 5.4% in 2018 and 5.5% in 2019. McDonald’s Corporation had previously agreed to provide growth support for the years 2020, 2021 and 2022. However, due to the business disruptions caused by the COVID-19 outbreak, we have agreed with McDonald’s to withdraw our previously-approved 2020-2022 restaurant opening plan and reinvestment ~~plan.~~plan, agreeing in place of this obligation a plan for 2021 only. We ~~do not~~ expect to ~~finalize a revised 2020-2022 plan at least until after the COVID-19 outbreak is under control. As a result, until we are able to finalize a revised 2020-2022~~discuss our 2022 restaurant opening plan and reinvestment plan ~~we can make no assurances related to receiving growth support for 2020-2022.~~with McDonald’s in the second half of 2021.

We are responsible for collecting the continuing franchise fee from our franchisees and must pay that amount to McDonald’s. In the event that a franchisee does not pay the full amount of the fee or any of our subsidiaries are unable to transfer funds to us due to currency restrictions or otherwise, we are responsible for any resulting shortfall. In connection with the COVID-19 pandemic, ~~McDonald's~~McDonald’s has agreed to defer all franchise fee payments, whether they are related to company-operated or franchisee-operated restaurants, for March, April, May and June 2020 sales until 2021. If we are unable to pay such franchise fees when they are due, or we have further difficulty meeting our obligations in coming months and are unable to obtain a similar deferral, we will be in default under the MFAs. See “Item 3. Key Information—D. Risk Factors—~~Certain Factors Relating~~Risks Related to Our ~~Business—~~Business and Operations—Our financial condition and results of operations depend, to a certain extent, on the financial condition of our franchisees and their ability to fulfill their obligations under their franchise agreements,” “—~~Certain Factors Relating~~Risks Related to ~~Latin America~~Our Results of Operations and ~~the Caribbean—~~Financial Condition—We are subject to significant foreign currency exchange controls and depreciation in certain countries in which we operate” and “—~~Certain Factors Relating~~Risks Related to Our ~~Business—~~Business and Operations—The spread of COVID-19 has materially and adversely affected our business, results of operations and cash flows, and may continue to do so.”

In the event of a voluntary or involuntary transfer of any of the McDonald’s restaurants located in the Territories to a person other than a subsidiary of ours or an affiliate of one of our franchisees, we must charge a transfer fee of not less than $10,000 and must pay to McDonald’s an amount equal to 50% of the fee charged.

All payments to McDonald’s must be made in U.S. dollars, but are based on local currency exchange rates at the time of payment.

Material Breach

A material breach under the MFAs would occur if we, or our subsidiaries that are a party to the MFAs, materially breached any of the representations or warranties or obligations under the MFAs (not cured within 30 days after receipt of notice thereof from McDonald’s) relating to or otherwise in connection with any aspect of the master franchise business, the franchised restaurants or any other matter in or affecting any one or more Territories. The following events, among others, constitute a material breach under the MFAs: our noncompliance with anti-terrorism or anti-corruption policies and procedures required by applicable law; our bankruptcy, insolvency, voluntary filing or filing by any other person of a petition in commercial insolvency; our conviction or that of our subsidiaries, or of our or our subsidiaries’ agents or employees for a crime or offense that is punishable by incarceration for more than one year or a felony, or a crime or offense or the indictment on charges thereof that, in the determination of McDonald’s, is likely to adversely affect the reputation of such person, any franchised restaurant or McDonald’s; the entry of any judgment against us or our subsidiaries in excess of $1,000,000 that is not duly paid or otherwise discharged within 30 days (unless such judgment is being contested on appeal in good faith); our failure to maintain certain quarterly financial ratios and not cure any non-compliance within 30 days; our failure to achieve (a) at least 80% of the targeted openings during any one-calendar year of any restaurant opening plan; or (b) at least 90% of the targeted openings during the three-calendar year term of any restaurant opening plan; and our failure to comply with at least 80% of the funding requirements of any reinvestment plan with respect to any Territory for a period of one year.

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Business of the Company and the Other Owner Entities

In addition to the payment of franchise fees described above, we and the other Owner Entities are subject to a variety of obligations and restrictions under the MFAs.

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Under the MFAs, we cannot, directly or indirectly, enter into any other QSR business or any business other than the operation of McDonald’s-branded restaurants in the Territories. Neither we nor any of the other Owner Entities can engage in a business other than holding, directly or indirectly, our equity interests. In addition, neither we nor any of the other Owner Entities can engage in any activity or participate in any business that competes with McDonald’s business.

Under the MFAs, Los Laureles Ltd., a British Virgin Islands company beneficially owned by Mr. Woods Staton, our Executive Chairman and controlling shareholder, is required to own not less than 40% of our economic interests and 51% of our voting interests. The MFAs do provide an exception for any dilution following an initial public offering, so long as such dilution does not cause Los Laureles Ltd. to be diluted below 30% of our economic interests. Also, under the MFAs, we are required to own, directly or indirectly, 100% of the equity interests of our subsidiaries and cannot enter into any partnership, joint venture or similar arrangement without McDonald’s consent. In addition, at least 50% of all McDonald’s-branded restaurants in the Territories must be Company-operated restaurants.

Real Estate

Under the MFAs, we must own or lease the real estate property where all of our Company-operated restaurants are located. In addition, we cannot transfer or encumber a significant portion of the real estate properties that we own without McDonald’s consent. Due to the geographic and commercial importance of certain restaurants, we may not sell certain “iconic” properties without the prior written consent of McDonald’s. For certain of these selected properties, we have already perfected a first priority lien in favor of McDonald’s.

Under the MFAs, no more than 50% of the total number of restaurants in each Territory, and no more than 10% of the total number of restaurants in all the Territories, can be located on real estate property that is owned, held or leased by our franchisees.

In addition, the MFA lists 25 restaurants that we are prohibited from selling or otherwise transferring without McDonald’s consent.

Transfer of Equity Interests or Significant Assets

Under the MFAs, neither we nor any of the other Owner Entities can transfer or pledge the equity interests of any of our subsidiaries, or any significant portion of our assets, without McDonald’s consent.

Operational Control

Under the MFAs, McDonald’s is entitled to approve the appointment of our chief executive officer and our chief operating officer.

In the event that McDonald’s modifies its standards applicable to technology and related equipment, we must purchase any new or modified technology, software, hardware or equipment necessary to comply with the modified standards.

Restaurant Opening Plan and Reinvestment Plan

In the event we are unable to reach an agreement on subsequent plans prior to the expiration of the then-existing plan, the MFAs provide for an automatic increase of 20% in the required amount of reinvestments as compared to the then-existing

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plan and a number of new restaurants no less than 210 multiplied by a factor that increases each period during the subsequent three-year restaurant opening plan.

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Advertising and Promotion Plan

Under the MFAs, we must develop and implement a marketing plan with respect to each Territory that must be approved in advance by McDonald’s. The MFAs require us to spend at least 5% of our gross sales on advertisement and promotion activities. In connection with the COVID-19 outbreak, we have agreed with ~~McDonald's~~McDonald’s to reduce this spending requirement from 5% to 4% of our gross sales for the full year 2020. Beginning on January 1, 2021, we resumed spending 5% of our gross sales on advertising and promotion. Our ~~advertisement~~advertising and promotion activities are guided by our overall marketing plan, which identifies the key strategic platforms that we aim to leverage in order to drive sales.

Insurance

Under the MFAs, we are required to acquire and maintain a variety of insurance policies with certain minimum coverage limits, including commercial general liability, workers compensation, “all risk” property and business interruption insurance, among others.

Call Option Right and Security Interest in Equity Interests of the Company

Under the MFAs, McDonald’s has the right, or Call Option, to acquire our non-public shares or our interests in one or more Territories upon: (i) the expiration of the initial term of the MFAs on August 2, 2027 if the initial term is not extended, (ii) the occurrence of a material breach of the MFAs or (iii) during the period of 12 months following the earlier of (x) the 18th month anniversary of the death or permanent incapacity of Mr. Woods Staton or (y) the receipt by McDonald’s of notice from Mr. Woods Staton’s heirs that they have elected to have the period of 12 months commence as of the date specified in the notice. McDonald’s generally has the right either to exercise the Call Option with respect to all of the Territories, or, in its sole discretion, with respect to the Territory or Territories identified by McDonald’s as being affected by such material breach or to which such material breach may be attributable except upon the occurrence of an initial material breach relating to any Territory or Territories in which there are less than 100 restaurants in operation. In such case, McDonald’s only has the right to acquire the equity interests of any of our subsidiaries in the relevant Territory or Territories. As of December 31, ~~2019,~~2020, we had more than 100 restaurants in operation in each of Argentina, Brazil, Mexico and Venezuela. In Puerto Rico, we had 9996 restaurants in operation, and no other Territory had more than 85 restaurants in operation.

If McDonald’s exercises the Call Option upon the occurrence of the events described in clause (i) or (iii) of the preceding paragraph, it must pay a purchase price equal to 100% of the fair market value of our non-public shares. If the Call Option is exercised upon the occurrence of a material breach, however, the purchase price is reduced to 80% of the fair market value of all of our non-public shares or of all of the equity interests of the subsidiaries operating restaurants in the Territory related to such material breach, as applicable. The purchase price paid by McDonald’s upon exercise of the Call Option is, in all events, reduced by the amount of debt and contingencies and increased by the amount of cash attributable to the entity whose equity interests are being acquired pursuant to the Call Option. In the event McDonald’s were to exercise its right to acquire all of our non-public shares, McDonald’s would become our controlling shareholder.

If McDonald’s exercises the Call Option with respect to any of our subsidiaries (but not all of them) and the amount of debt and contingencies (minus cash) attributable to the equity interests of those subsidiaries is greater than the fair market value of those equity interests, we must, at our election, either (i) assume the debts and contingencies (minus cash) and deliver the equity interests to McDonald’s free of any obligations with respect thereto or (ii) pay to McDonald’s the absolute value of that amount. The fair market value of any of the equity interests is to be determined by internationally recognized investment banks without taking into consideration the debt, contingencies or cash attributable to the equity interests.

In order to secure McDonald’s right to exercise the Call Option, McDonald’s was granted a perfected security interest in the equity interests of the Master Franchisee, the Brazilian Master Franchisee and our subsidiaries other than our subsidiaries organized in Costa Rica, Mexico, French Guiana, Guadeloupe and Martinique. The equity interests of our subsidiaries organized in Costa Rica and Mexico were transferred to a trust for the benefit of McDonald’s. McDonald’s does not have a security interest in the equity interests of our subsidiaries organized in French Guiana, Guadeloupe and Martinique.

The equity interests were transferred to Citibank, N.A., acting as escrow agent. Subject to the terms of the Escrow Agreement and the Intercreditor Agreement, upon McDonald’s exercise of the Call Option and its payment of the respective purchase price, the escrow agent must transfer the equity interests, free of any liens or encumbrances, to McDonald’s.

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Limitations on Indebtedness

Under the MFAs, we cannot incur any indebtedness secured by the collateral pledged by us and certain of our subsidiaries in connection with the letters of credit or amend or waive any of the terms related to the collateral, without McDonald’s consent. The pledged collateral includes the equity interests of certain of our subsidiaries, certain of our rights under certain of the Acquisition documents, franchise document payment rights, and our intercompany debt and notes.

Under the MFAs, we must maintain a fixed charge coverage ratio (as defined therein) at least equal to 1.50 and a leverage ratio (as defined therein) not in excess of 4.25. If we are unable to comply with our original commitments under the MFA or to obtain a waiver for any non-compliance in the future, we could be in material breach. Our breach of the MFA would give McDonald’s certain rights, including the ability to acquire all or portions of our business. See “—Material Breach.” As a consequence of the negative impacts of the COVID-19 pandemic on the Company’s operations, during 2020, McDonald’s Corporation granted us limited waivers from June 30, 2020 through and including December 31, ~~2019, our~~2021, during which time the Company is not required to comply with the financial ratios set forth in the MFA.

For the three-month periods ended from June 30, 2020. September 30, 2020 and December 31, 2020, we were not in compliance with the Fixed Charge Coverage Ratio ~~was 1.86~~ and ~~our~~ Leverage ~~Ratio was 3.77.~~Ratio. The ratios for these periods were as follows:

Arcos Dorados Financial Ratios under the MFA


	Quarter ended
	December 31, 2019	March 31, 2020	June 30, 2020	September 30, 2020	December 31, 2020
Leverage Ratio	3.77	4.15	5.37	6.31	7.71
Fixed Charge Coverage Ratio	1.86	1.74	1.35	1.15	0.96

Quarter ended

December 31,
2018
March 31,
2019
June 30,
2019
September 30,
2019
December 31,
2019
Leverage Ratio 4.07 3.83 3.76 3.83 3.77
Fixed Charge Coverage Ratio 1.70 1.83 1.86 1.80 1.86

Letters of Credit

As security for the performance of our obligations under the MFAs, we have obtained (i) on August 3, 2007, an irrevocable standby letter of credit in favor of McDonald’s in an amount of $65.0 million and later reduced to $45.0 million on October 30, 2015, issued by Credit Suisse acting as issuing bank through its Cayman Islands Branch, (ii) on May 9, 2011, an irrevocable standby letter of credit in favor of McDonald’s in an amount of $15.0 million, issued by Itaú Unibanco S.A. (“Itaú”), acting as issuing bank through its New York Branch, and (iii) on November 3, 2015, an irrevocable standby letter of credit in favor of McDonald’s in an amount of $20.0 million, issued by JPMorgan, acting as issuing bank through its New York Branch. The Credit Suisse, Itaú and JP Morgan letters of credit expire on ~~November 10,~~September 30, 2022, April 24, 2021 and November 6, 2021, respectively, but we will be required by the MFAs to renew these letters of credit or obtain new standby letters of credit in the same amount.

The Credit Suisse letter of credit and reimbursement agreement contains a limited number of customary affirmative and negative covenants. These include limitations on (i) any transfer of the MFAs, (ii) amendment or waiver of the MFAs without the consent of the issuing bank, (iii) our leverage ratio, (iv) taking any action to elect to assume the debt of any of our subsidiaries upon McDonald’s exercise of a partial Call Option, (v) our ability to guaranty obligations of our subsidiaries, and (vi) amendments to the credit agreement.

Credit Suisse, as issuing bank, has a security interest in certain of our rights under certain Acquisition documents, franchise document payment rights and our intercompany debt notes. In addition, our subsidiaries (other than those organized in Ecuador, French Guiana, Guadeloupe, Martinique and Peru, and certain subsidiaries organized in Argentina, Colombia and Mexico) guaranteed to Credit Suisse the full and prompt payment of our obligations under the Credit Suisse letter of credit and reimbursement agreement.

The letter of credit that we obtained from Itaú effectively replaced the cash collateral that we had previously pledged in favor of McDonald’s in an amount of $15.0 million. The Itaú continuing standby letter of credit agreement contains a limited number of customary affirmative and negative covenants. These include limitations on (i) any transfer of the MFAs, (ii) amendment or waiver of the MFAs without the consent of the issuing bank, (iii) our leverage ratio, (iv) taking any action to elect to assume the debt of any of our subsidiaries upon McDonald’s exercise of a Call Option, and (v) permitting ourselves or any of our subsidiaries to become insolvent.

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We delivered a promissory note to Itaú in an amount of $15.0 million evidencing our obligations to Itaú under the continuing standby letter of credit agreement and a guarantee letter from our Brazilian subsidiary guaranteeing the full and punctual payment when due of our obligations and liabilities to Itaú in respect of the Itaú letter of credit and the continuing standby letter of credit agreement, including without limitation our reimbursement obligations for any payments made by Itaú under the letter of credit.

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The letter of credit that we obtained from JPMorgan effectively replaced the $20.0 million reduction in the Credit Suisse letter of credit.

The JPMorgan letter of credit is guaranteed by certain of our subsidiaries and contains a limited number of customary affirmative and negative covenants. These include limitations on (i) our leverage ratio, (ii) the dissolution, liquidation or winding-up of the applicant or a guarantor, (iii) a material breach or failure to comply with the MFA, and (iv) permitting the applicant or any guarantor to become insolvent.

Although we do not have any amounts outstanding under our letters of credit at this time, any default under the letters of credit would also result in a material breach of our obligations under the MFAs. See “Item 3. Key Information—D. Risk Factors—~~Certain Factors Relating~~Risks Related to Our ~~Business—~~Business and Operations—The spread of COVID-19 has materially and adversely affected our business, results of operations and cash flows, and may continue to do so.”

We received waivers from our lenders for any event of default which may have occurred related to compliance with the financial ratio covenants in our letters of credit, which are measured at the end of each quarter, through and including the first quarter of 2021, for Itaú and JPMorgan, and December 31, 2021 for Credit Suisse.

Termination

The MFAs automatically terminate without the need for any party to it to take any further action if any type of insolvency or similar proceeding in respect of us or any of the other Owner Entities commences.

In the event of the occurrence of certain material breaches, such as if we fail to comply with the reinvestment plan or restaurant opening plan, McDonald’s has the right to terminate the MFAs.

Upon the termination of the MFAs, McDonald’s has the right to acquire all, but not less than all, of our equity interests at fair market value, which is to be calculated by internationally recognized investment banks selected by us and McDonald’s. The fair market value of our equity interests shall be calculated in U.S. dollars based on the amount that would be received for our equity interests in an arm’s-length transaction between a willing buyer and a willing seller, taking into account the benefits provided by the MFAs.

The 2023 Notes and the 2027 Notes

For a description of the 2023 notes and the 2027 notes, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources.”

The Revolving Credit Facilities

For a description of the revolving credit facilities entered into by Arcos Dorados B.V. with Bank of America, N.A. and JP Morgan Chase Bank, N.A. see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Net Cash (used in) Financing Activities—Revolving Credit Facilities.”

D. Exchange Controls

There are currently no exchange control regulations in the BVI applicable to us or our shareholders. For information about any exchange controls or restrictions in Argentina, Brazil and Mexico, see “Item 3. Key Information—A. Selected Financial Data—Exchange Rates and Exchange Controls.”

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E. Taxation

British Virgin Islands Tax Considerations

The following summary contains a general description of certain British Virgin Islands tax consequences of the acquisition, ownership and disposition of class A shares, but it does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to hold class A shares. The general summary is based upon the tax laws of the British Virgin Islands and regulations thereunder as of the date hereof, which are subject to change.

We are not liable to pay any form of corporate taxation in the BVI and all dividends, interests, rents, royalties, compensations and other amounts paid by us to persons who are not persons resident in the BVI or providing services in the BVI are exempt from all forms of taxation in the BVI and any capital gains realized with respect to any shares, debt obligations, or other securities of ours by persons who are not persons resident in the BVI are exempt from all forms of taxation in the BVI.

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No estate, inheritance, succession or gift tax, rate, duty, levy or other charge is payable by persons who are not persons resident in the BVI with respect to any shares, debt obligation or other securities of ours.

Subject to the payment of stamp duty on the acquisition or certain leasing of property in the BVI by us (and in respect of certain transactions in respect of the shares, debt obligations or other securities of BVI incorporated companies owning land in the BVI), all instruments relating to transfers of property to or by us and all instruments relating to transactions in respect of the shares, debt obligations or other securities of ours and all instruments relating to other transactions relating to our business are exempt from payment of stamp duty in the BVI.

There are currently no withholding taxes or exchange control regulations in the BVI applicable to us or our shareholders who are not providing services in the BVI.

The BVI has signed an ~~intergovernmental~~inter-governmental agreement to improve international tax compliance and the exchange of information with the United States (the “U.S. IGA”). The BVI has also signed, along with over 100 other countries, a multilateral competent authority agreement to implement the Organisation for Economic Co-Operation and Development (OECD) Standard for Automatic Exchange of Financial Account Information - Common Reporting Standard (the “CRS” and together with the U.S. IGA, “AEOI”).

Amendments have been made to the Mutual Legal Assistance (Tax Matters) Act 2003 ~~(as amended) (the “2003 Act”)~~ and orders have been made pursuant to ~~the 2003 Act~~this statute (the “BVI Legislation”) to give effect to the terms of the U.S. IGA under BVI law. Guidance notes were published by the government of the BVI in March 2015 to provide practical assistance to entities and others affected by the U.S. IGA and the BVI Legislation (the “FATCA Guidance Notes”). Further amendments have been made to the BVI Legislation to give effect to the terms of the CRS, ~~(together “AEOI”~~which took effect on January 1, 2016. The implementing legislation makes it clear that the CRS commentary published by the OECD is an integral part of the CRS and applies for the purposes of the automatic exchange of financial account information. Additional guidance was issued by the BVI International Tax Authority (the “ITA”) ~~under~~in October 2016 (and most recently updated by the ITA in February 2019) to aid with compliance with the BVI ~~law~~legislation relating to CRS (the ~~“BVI Legislation”~~“CRS Guidance Notes”).

All BVI “Financial Institutions” are required to comply with the registration, due diligence and reporting requirements of the BVI Legislation, ~~which also implements the CRS,~~ except to the extent that they can rely on an exemption that allows them to become a “Non-Reporting Financial Institution” (as defined in the relevant BVI Legislation). with respect to one or more of the AEOI regimes.

We do not believe we are classified as a “Foreign Financial Institution” or “Financial Institution” within the meaning of AEOI and the BVI Legislation. However, if we were to determine that our classification has changed, we may request additional information from any shareholder and its beneficial owners to identify whether shares in the Company are held directly or indirectly by “Reportable Persons” (as defined by AEOI). Information in respect of Reportable Persons would be disclosed to the ~~International Tax Authority (“ITA”)~~ITA of the BVI. The ITA in turn is required under AEOI and the BVI Legislation to disclose information in respect of Reportable Persons to the foreign fiscal authorities relevant to such Reportable Persons.

There is no income tax treaty currently in effect between the United States and the BVI.

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Material U.S. Federal Income Tax Considerations for U.S. Holders

The following summary describes the material U.S. federal income tax consequences of the ownership and disposition of class A shares, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to own such securities. This summary applies only to U.S. Holders (as defined below) that own class A shares as capital assets for U.S. federal income tax purposes. In addition, it does not describe all of the tax consequences that may be relevant in light of a U.S. Holder’s particular circumstances, including alternative minimum tax consequences, the potential application of the provisions of the Internal Revenue Code of 1986, as amended, (the “Code”) known as the Medicare contribution tax, and tax consequences applicable to certain U.S. Holders subject to special rules, such as:

• certain financial institutions;

• dealers or traders in securities who use a mark-to-market method of tax accounting;

• persons holding class A shares as part of a hedge, “straddle,” wash sale, conversion transaction or integrated transaction or persons entering into a constructive sale with respect to the class A shares;

• persons whose “functional currency” for U.S. federal income tax purposes is not the U.S. dollar;

• tax exempt entities, including “individual retirement accounts” and “Roth IRAs”;

• entities classified as partnerships for U.S. federal income tax purposes;

• persons that own or are deemed to own ten percent or more of our shares, by vote or by value;

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• persons who acquired our class A shares pursuant to the exercise of an employee stock option or otherwise as compensation; or

• persons holding class A shares in connection with a trade or business conducted outside the United States.

If an entity that is classified as a partnership for U.S. federal income tax purposes holds class A shares, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships holding class A shares and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of holding and disposing of the class A shares.

This discussion is based upon the Code, administrative pronouncements, judicial decisions and final, temporary and proposed Treasury Regulations, all as of the date hereof, changes to any of which may affect the tax consequences described herein—possibly with retroactive effect.

A “U.S. Holder” is a holder who, for U.S. federal income tax purposes, is a beneficial owner of class A shares that is:


~~(1)~~	~~a citizen or individual resident of the United States;~~


~~(2)~~	~~a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein or the District of Columbia; or~~


~~(3)~~	~~an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.~~

(1) a citizen or individual resident of the United States;

(2) a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein or the District of Columbia; or

(3) an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.

U.S. Holders should consult their tax advisers concerning the U.S. federal, state, local and foreign tax consequences of owning and disposing of class A shares in their particular circumstances.

This discussion assumes that we are not, and will not become, a passive foreign investment company, as described below.

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Taxation of Distributions

Distributions paid on class A shares, other than certain pro rata distributions of class A shares, will be treated as dividends to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, we expect that distributions generally will be reported to U.S. Holders as dividends. Subject to applicable limitations, dividends paid to certain non-corporate U.S. Holders may be eligible for taxation as “qualified dividend income” and therefore may be taxable at rates applicable to long-term capital gains. Non-corporate U.S. Holders should consult their tax advisers regarding the availability of the reduced tax rates on dividends in their particular circumstances. The amount of the dividend will be treated as foreign-source dividend income to U.S. Holders and will not be eligible for the dividends-received deduction generally available to U.S. corporations under the Code. Dividends will be included in a U.S. Holder’s income on the date of the U.S. Holder’s receipt of the dividend.

Sale or Other Taxable Disposition of Class A Shares

For U.S. federal income tax purposes, gain or loss realized on the sale or other taxable disposition of class A shares will be capital gain or loss, and will be long-term capital gain or loss if the U.S. Holder owned the class A shares for more than one year. The amount of the gain or loss will equal the difference between the U.S. Holder’s tax basis in the class A shares disposed of and the amount realized on the disposition, in each case as determined in U.S. dollars. This gain or loss will generally be U.S.-source gain or loss for foreign tax credit purposes.

Passive Foreign Investment Company Rules

We believe that we were not a “passive foreign investment company” (a “PFIC”) for U.S. federal income tax purposes for our ~~2019~~2020 taxable year. However, because the application of the Treasury Regulations is not entirely clear and because PFIC status depends on the composition of a company’s income and assets and the market value of its assets from time to time, there can be no assurance that we will not be a PFIC for any taxable year.

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If we were a PFIC for any taxable year during which a U.S. Holder owned class A shares, gain recognized by such U.S. Holder on a sale or other disposition (including certain pledges) of the class A shares would be allocated ratably over the U.S. Holder’s holding period for the class A shares. The amounts allocated to the taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed on the resulting tax liability for each taxable year. Further, to the extent that any distribution received by a U.S. Holder on its class A shares exceeds 125% of the average of the annual distributions on the class A shares received during the preceding three years or such U.S. Holder’s holding period, whichever is shorter, that distribution would be subject to taxation in the same manner as gain on the disposition of a share of a PFIC, described immediately above. If we were a PFIC, certain elections may be available that would result in alternative treatments (such as mark-to-market treatment) of the class A shares that differ from the treatment set forth in this paragraph.

In addition, if we were a PFIC or, with respect to any U.S. Holder, were treated as a PFIC for the taxable year in which we paid a dividend or for the prior taxable year, the preferential dividend rates discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply.

If we are a PFIC for any taxable year during which a U.S. Holder owned our class A shares, the U.S. Holder will generally be required to file IRS Form 8621 (or any successor form) with their annual U.S. federal income tax returns, subject to certain exceptions.

Information Reporting and Backup Withholding

Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting, and may be subject to backup withholding, unless (i) the U.S. Holder is an exempt recipient or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding.

Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the holder’s U.S. federal income tax liability and may entitle it to a refund, provided that the required information is timely furnished to the IRS.

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Certain U.S. Holders who are individuals (and specified entities that are formed or availed of for purposes of holding certain foreign financial assets) may be required to report information relating to their ownership of stock of a non-U.S. person, subject to certain exceptions (including an exception for stock held in certain accounts maintained by a U.S. financial institution). U.S. Holders should consult their tax advisers regarding the effect, if any, of these reporting requirements on their ownership and disposition of class A shares.

F. Dividends and Paying Agents

Not applicable.

G. Statement by Experts

Not applicable.

H. Documents on Display

We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Accordingly, we are required to file reports and other information with the SEC, including annual reports on Form 20-F and reports on Form 6-K. The SEC maintains an Internet website that contains reports and other information filed by us electronically with the SEC. The address of that website is www.sec.gov.

As a foreign private issuer, we are exempt under the Exchange Act from, among other things, the rules prescribing the furnishing and content of proxy statements, and our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we will not be required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act.

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We will send the transfer agent a copy of all notices of shareholders’ meetings and other reports, communications and information that are made generally available to shareholders. The transfer agent has agreed to mail to all shareholders a notice containing the information (or a summary of the information) contained in any notice of a meeting of our shareholders received by the transfer agent and will make available to all shareholders such notices and all such other reports and communications received by the transfer agent.

I. Subsidiary Information

Not applicable.

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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk Management

In the ordinary course of our business activities, we are exposed to various market risks that are beyond our control, including fluctuations in foreign exchange rates and the price of our primary supplies, and which may have an adverse effect on the value of our financial assets and liabilities, future cash flows and profit. As a result of these market risks, we could suffer a loss due to adverse changes in foreign exchange rates and the price of commodities in the international markets. In addition, we are subject to equity price risk relating to our share-based compensation plans. Our policy with respect to these market risks is to assess the potential of experiencing losses and the consolidated impact thereof, and to mitigate these market risks. We do not enter into market risk sensitive instruments for trading or speculative purposes.

Foreign Currency Exchange Rate Risk

Foreign Currency Exchange Rate Risk in ~~2019~~2020

We are exposed to foreign currency exchange rate risk primarily in connection with the fluctuation in the value of the local currencies of the countries in which we operate, ~~primarily~~such as the Brazilian real~~, the Argentine~~ ~~peso~~and the Mexican peso, among others. We generate revenues and cash from our operations in local currencies while a significant portion of our long-term debt is denominated in U.S. dollars. An adverse change in foreign currency exchange rates would therefore affect the generation of cash flow from operations in U.S. dollars, which could negatively impact our ability to pay amounts owed in U.S. dollars. In order to partially mitigate the foreign exchange rate risk related to our long-term debt, we entered into certain derivative instruments. See Note 13 to our consolidated financial statements for more detail. Moreover, our continuing franchise fee payments to McDonald’s pursuant to the MFAs must be translated into and paid in U.S. dollars using the exchange rate of the last business day of the month, payable on the seventh day subsequent to each month-end. As such, in the intervening period we are subject to foreign exchange risk.

While substantially all our income is denominated in the local currencies of the countries in which we operate, our supply chain management involves the importation of various products, and some of our imports are denominated in U.S. dollars. Therefore, we are exposed to foreign currency exchange risk related to imports. We have entered into various forward contracts to hedge a portion of the foreign exchange risk associated with the forecasted imports of certain countries. See Note 13 to our consolidated financial statements for more details. In addition, we attempt to minimize this risk also by entering into annual and semi-annual pricing arrangements with our main suppliers.

We are also exposed to foreign exchange risk related to U.S. dollar-denominated intercompany balances held by certain of our operating subsidiaries with our holding companies, and to foreign currency-denominated intercompany balances held by our holding companies with certain operating subsidiaries. Although these intercompany balances are eliminated through consolidation, a fluctuation in exchange rates could have a significant impact on our results through the recognition of foreign currency exchange losses in our consolidated (loss) income statement. To help mitigate some of these foreign currency exchange rate risks, we have entered into certain derivative instruments. See Note 13 to our consolidated financial statements for more details.

A depreciation of 10% in the value of the Brazilian reais against the U.S. dollar would result in a net foreign exchange loss totaling $12.9 million over (i) U.S. dollar-denominated intercompany loans held by our Brazilian subsidiary partially offset by derivatives of $135.5, (ii) the cross-currency interest rate swap used to partially hedge the intercompany loan receivable of Arcos Dorados B.V. denominated in Brazilian reais (R$22.7 million including accrued interest), (iii) the Brazilian reais-denominated intercompany net receivable held by our subsidiaries, Arcos Dorados B.V. and LatAm LLC (R$45 million including accrued interest), (iv) the outstanding balance of the U.S. dollar-denominated intercompany net debt held by our Brazilian subsidiaries of $2.5 million as of December 31, 2020.

An appreciation of 10% in the value of the European euro against the U.S. dollar would result in a foreign exchange loss of $5 million mainly related to the outstanding U.S. dollar-denominated intercompany receivable held by our subsidiary in Martinique of $46.4 million as of December 31, 2020.

An appreciation of 10% in the value of the Costa Rican colones against the U.S. dollar would result in a foreign exchange loss of $4.6 million mainly related to the outstanding U.S. dollar-denominated intercompany receivable held by our subsidiary in Costa Rica of $42.3 million as of December 31, 2020.

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An appreciation of 10% in the value of the Uruguayan peso against the U.S. dollar would result in a foreign exchange loss of $4.1 million mainly related to the outstanding U.S. dollar-denominated intercompany net receivable held by our subsidiaries in Uruguay of $36.8 million as of December 31, 2020.

A depreciation of 10% in the value of the Peruvian peso against the U.S. dollar would result in a foreign exchange loss of $2.2 million mainly related to the outstanding U.S. dollar-denominated intercompany payable held by our subsidiary in Peru of $24.5 million as of December 31, 2020.

Fluctuations in the value of the other local currencies against the U.S. dollar would not result in material foreign exchange gains or losses as of December 31, 2020 since there are no other significant intercompany balances exposed to foreign exchange risk.

We are also exposed to foreign currency exchange risk related to the currency translation of our Venezuelan operations. A devaluation of the Venezuelan bolívar against the U.S. dollar would result in a foreign currency exchange loss as a result of remeasuring monetary balances denominated in Venezuelan bolívares. See Note 22 to our consolidated financial statements for details about exchange controls affecting our operations in Venezuela.

Summary of Foreign Currency Exchange Rate Risk in 2019

A depreciation of 10% in the value of the Brazilian real against the U.S. dollar would result in a net foreign exchange loss totaling $4.5 million over (i) the cross-currency interest rate swap used to partially hedge the intercompany loan receivable of Arcos Dorados B.V. denominated in Brazilian reais (R$115 million including accrued interest), (ii) the Brazilian reais-denominated intercompany net receivable held by our subsidiaries, Arcos Dorados B.V. and LatAm LLC (R$46 million including accrued interest), and (iii) the outstanding balance of the U.S. dollar-denominated intercompany net debt held by our Brazilian subsidiaries of $9.5 million as of December 31, 2019. In addition, since July 1, 2018, when the functional currency of our Argentine subsidiaries was changed to Brazilian reais as result of the highly inflationary environment in Argentina, an appreciation of the Argentine peso against the Brazilian reais would result in a foreign currency exchange loss as a result of remeasuring of our net monetary liability position denominated in Argentine pesos.

An appreciation of 10% in the value of the Mexican peso against the U.S. dollar would result in a foreign exchange loss of $1.1 million, mainly related to the outstanding U.S. dollar-denominated intercompany receivable held by our subsidiary in Mexico of $9.8 million as of December 31, 2019.

An appreciation of 10% in the value of the Uruguayan peso against the U.S. dollar would result in a foreign exchange loss of $6.2 million over the outstanding U.S. dollar-denominated intercompany net receivable held by our subsidiaries in Uruguay of $56 million as of December 31, 2019.

An appreciation of 10% in the value of the Costa Rican colones against the U.S. dollar would result in a foreign exchange loss of $5.8 million mainly related to the outstanding U.S. dollar-denominated intercompany net receivable held by our subsidiary in Costa Rica of $52.4 million as of December 31, 2019.

An appreciation of 10% in the value of the European euro against the U.S. dollar would result in a foreign exchange loss of $3.9 million mainly related to the outstanding U.S. dollar-denominated intercompany receivable held by our subsidiary in Martinique of $35 million as of December 31, 2019.

A depreciation of 10% in the value of the Colombian peso against the U.S. dollar would result in a foreign exchange loss of $4.2 million mainly related to the outstanding U.S. dollar-denominated intercompany payable held by our subsidiary in Colombia of $46 million as of December 31, 2019.

A depreciation of 10% in the value of the Peruvian peso against the U.S. dollar would result in a foreign exchange loss of $1 million mainly related to the outstanding U.S. dollar-denominated intercompany payable held by our subsidiary in Peru of $11.6 million as of December 31, 2019.

Fluctuations in the value of the other local currencies against the U.S. dollar would not result in material foreign exchange gains or losses as of December 31, 2019 since there are no other significant intercompany balances exposed to foreign exchange risk.

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We are also exposed to foreign currency exchange risk related to the currency translation of our Venezuelan operations. A devaluation of the Venezuelan bolívar against the U.S. dollar would result in a foreign currency exchange loss as a result of remeasuring monetary balances denominated in Venezuelan bolí~~vares.~~vares. See Note 22 to our consolidated financial statements for details about exchange controls affecting our operations in Venezuela.

~~Summary of Foreign Currency Exchange Rate Risk in 2018~~

~~A depreciation of 10% in the value of the Brazilian~~ ~~real~~ ~~against the U.S. dollar would result in a net foreign exchange loss totaling $7.2 million over (i) the intercompany loan receivable of Arcos Dorados B.V. denominated in Brazilian~~ ~~reais, partially offset by the cross-currency interest rate swap (R$964.2 million including accrued interest), (ii) the Brazilian~~ ~~reais~~-denominated intercompany net receivable held by our subsidiaries, Arcos Dorados B.V. and LatAm LLC (R$1,223.0 million including), and (iii) the outstanding balance of the U.S. dollar-denominated intercompany net debt held by our Brazilian subsidiaries of $7.6 million as of December 31, 2018. In addition, from July 1, 2018, when the functional currency of our Argentine subsidiaries was changed to Brazilian ~~reais~~ ~~as result of the highly inflationary environment in Argentina, through the end of 2018, an appreciation of the Argentine~~ ~~peso~~ ~~against the Brazilian~~ ~~reais~~ ~~would result in a foreign currency exchange loss as a result of remeasuring of our net monetary liability position denominated in Argentine~~ ~~pesos~~.

~~An appreciation of 10% in the value of the Mexican~~ ~~peso~~ against the U.S. dollar would result in a foreign exchange loss of $2.0 million, mainly related to the outstanding U.S. dollar-denominated intercompany receivable held by our subsidiary in Mexico of $17.6 million as of December 31, 2018.

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~~An appreciation of 10% in the value of the Uruguayan~~ ~~peso~~ against the U.S. dollar would result in a foreign exchange loss of $5.6 million over the outstanding U.S. dollar-denominated intercompany net receivable held by our subsidiaries in Uruguay of $50.5 million as of December 31, 2018.

~~An appreciation of 10% in the value of the Costa Rican~~ ~~colones~~ against the U.S. dollar would result in a foreign exchange loss of $4.7 million mainly related to the outstanding U.S. dollar-denominated intercompany net receivable held by our subsidiary in Costa Rica of $42.5 million as of December 31, 2018.

An appreciation of 10% in the value of the European euro against the U.S. dollar would result in a foreign exchange loss of $3.3 million mainly related to the outstanding U.S. dollar-denominated intercompany receivable held by our subsidiary in Martinique of $29.3 million as of December 31, 2018.

Fluctuations in the value of the other local currencies against the U.S. dollar would not result in material foreign exchange gains or losses as of December 31, 2018 since there are no other significant intercompany balances exposed to foreign exchange risk.

We are also exposed to foreign currency exchange risk related to the currency translation of our Venezuelan operations. A depreciation of the Venezuelan bolívar against the U.S. dollar would result in a foreign currency exchange loss as a result of remeasuring monetary balances denominated in Venezuelan bolívares. See Note 22 to our consolidated financial statements for details about exchange controls affecting our operations in Venezuela.

Commodity Price Risk

We purchase our primary supplies, including beef, chicken, buns, produce, cheese, dairy mixes and toppings pursuant to oral agreements with our approved suppliers at prices that are derived from international market prices, local conversion costs and local tariffs and taxes. We therefore carry market risk exposure to changes in commodity prices that have a direct impact on our costs. We do not enter into futures or options contracts to protect ourselves against changes in commodity prices, although we may do so in the future. We attempt to minimize this risk by entering into annual and semi-annual pricing arrangements with our main suppliers. This allows us to provide cost predictability while avoiding the costs related to the use of derivative instruments, which we may not be able to pass on to our customers due to the competitive nature of the QSR industry.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

A. Debt Securities

Not applicable.

B. Warrants and Rights

Not applicable.

C. Other Securities

Not applicable.

D. American Depositary Shares

Not applicable.

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PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

A. Defaults

No matters to report.

B. Arrears and Delinquencies

No matters to report.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

A. Material Modifications to Instruments

None.

B. Material Modifications to Rights

None.

C. Withdrawal or Substitution of Assets

None.

D. Change in Trustees or Paying Agents

None.

E. Use of Proceeds

Not applicable.

ITEM 15. CONTROLS AND PROCEDURES

A. Disclosure Controls and Procedures

As of December 31, ~~2019,~~2020, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, ~~2019~~2020 in ensuring that information we are required to disclose in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

B. Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining an adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act.

Our internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes, in accordance with generally accepted accounting principles. These include those policies and procedures that:

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• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of our assets;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements, in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorization of our management and directors; and

• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, effective control over financial reporting cannot, and does not, provide absolute assurance of achieving our control objectives. Also, projections of, and any evaluation of effectiveness of the internal controls in future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We have adapted our internal control over financial reporting based on the guidelines set by the Internal Control—Integrated Framework of the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework), or COSO.

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, ~~2019,~~2020, based on the guidelines set forth by the COSO.

Based on this assessment, management believes that, as of December 31, ~~2019,~~2020, its internal control over financial reporting was effective based on those criteria.

Pistrelli, Henry Martin y Asociados S.R.L., member firm of Ernst & Young Global, independent registered public accounting firm, has audited and reported on the effectiveness of our internal controls over financial reporting as of December 31, ~~2019.~~2020.

C. Attestation Report of the Registered Public Accounting Firm

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

ARCOS DORADOS HOLDINGS INC.:

Opinion on Internal Control over Financial Reporting

We have audited Arcos Dorados Holdings Inc.’s internal control over financial reporting as of December 31, ~~2019,~~2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Arcos Dorados Holdings Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2019,~~2020, based on the COSO ~~criteria~~.criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, ~~2019~~2020 and ~~2018,~~2019, and the related consolidated statements of (loss) income, comprehensive (loss) income, ~~(loss),~~ changes in equity and cash flows for each of the three years in the period ended December 31, ~~2019,~~2020, and the related notes (collectively referred to as the “financial statements”) and our report dated March ~~18, 2020~~17, 2021 expressed an unqualified opinion thereon.

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Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



		/s/ Pistrelli, Henry Martin y Asociados S.R.L.
				PISTRELLI, HENRY MARTIN Y ASOCIADOS S.R.L.
				Member of Ernst & Young Global

Buenos Aires, Argentina

March ~~18, 2020~~17, 2021

D. Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15 or 15d-15 that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

Our audit committee consists of ~~three~~two directors, Mr. Chu and Mr. Vélez, ~~and Mr. Gutiérrez,~~ who are independent within the meaning of the SEC and NYSE corporate governance rules applicable to foreign private issuers. Our Board of Directors has determined that Mr. Chu and Mr. Vélez ~~and Mr. Gutiérrez~~ are also “audit committee financial experts” as defined by the SEC.

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ITEM 16B. CODE OF ETHICS

Our Board of Directors has approved and adopted our Standards of Business Conduct, which are a code of ethics that applies to all employees of Arcos Dorados, including executive officers, and to our board members. Our Standards of Business Conduct are an exhibit to this annual report.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table describes the amounts billed to us by the principal accountant, for audit and other services performed in fiscal years ~~2019~~2020 and ~~2018.~~2019.


	2020	2019
	(in thousands of U.S. dollars)
Audit fees	$ 2,036	$ 2,670
Audit-related fees	–	21
Tax fees	276	273
All other fees	–	22

2019 2018
(in thousands of U.S. dollars)
Audit fees $ 2,670 $ 2,414
Audit-related fees 21 21
Tax fees 273 342
All other fees 22 36

Audit Fees

Audit fees are fees billed for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. It includes the audit of our annual consolidated financial statements, the reviews of our quarterly consolidated financial statements submitted on Form 6-K and other services that generally only the independent accountant reasonably can provide, such as comfort letters, statutory audits, attestation services, consents and assistance with and review of documents filed with the SEC.

Audit-Related Fees

Audit-related fees are fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements for fiscal years ~~2019~~2020 and ~~2018~~2019 and not reported under the previous category. These services would include, among others: employee benefit plan audits, due diligence related to mergers and acquisitions, accounting consultations and audits in connection with acquisitions, internal control reviews, attest services that are not required by statute or regulation and consultation concerning financial accounting and reporting standards.

Tax Fees

Tax fees are fees billed for professional services for tax compliance, tax advice and tax planning.

All Other Fees

All other fees are fees not reported under other categories. This category mainly includes advisory services on process improvement related to diagnostics and recommendations.

Pre-Approval Policies and Procedures

Our audit committee charter requires the audit committee to pre-approve the audit services and non-audit services to be provided by our independent auditor before the auditor is engaged to render such services. The audit committee may delegate its authority to pre-approve services to the Chair of the audit committee, provided that such designees present any such approvals to the full audit committee at the next audit committee meeting.

All of the audit fees, audit-related fees, tax fees and all other fees described in this Item 16C have been pre-approved by the audit committee in accordance with these pre-approval policies and procedures.

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ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

On May 22, 2018, our Board of Directors approved the adoption of a share repurchase program, pursuant to which the Company may repurchase from time to time up to $60 million of issued and outstanding ~~Class~~class A shares of the Company (the “Repurchase Program”). The Repurchase Program expired on May 22, 2019. ~~As of February 15, 2019,~~In 2020, the Company ~~had repurchased 7,993,602 Class~~did not purchase any class A shares. However, on August 12, 2020, the Company distributed 2,723,614 treasury shares ~~amounting~~ to ~~$60 million.~~satisfy a stock dividend distribution.

Month of repurchase Total number of Class A shares purchased Average price paid per Class A share Total number of Class A shares purchased as part of publicly announced plans or program Approximate dollar value of Class A shares that may be purchased under the program
January, 2019 1,197,286 $8.48 1,197,286 $3,791,217
February, 2019 435,490 $8.68 435,490 $0
Total at end of period 1,632,776 $8.58 1,632,776
$0

~~(1) Amounts reflect commissions paid to the administrator of the repurchase program.~~

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

None.

ITEM 16G. CORPORATE GOVERNANCE

Our class A shares are listed on the NYSE. We are therefore required to comply with certain of the NYSE’s corporate governance listing standards, or the NYSE Standards. As a foreign private issuer, we may follow our home country’s corporate governance practices in lieu of most of the NYSE Standards. Our corporate governance practices differ in certain significant respects from those that U.S. companies must adopt in order to maintain a NYSE listing and, in accordance with Section 303A.11 of the NYSE Listed Company Manual, a brief, general summary of those differences is provided as follows.

Director independence

The NYSE Standards require a majority of the membership of NYSE-listed company boards to be composed of independent directors. Neither British Virgin Islands law, the law of our country of incorporation, nor our memorandum and articles of association require a majority of our board to consist of independent directors. Our Board of Directors currently consists of eight members, three of whom are independent directors.

Non-management directors’ executive sessions

The NYSE Standards require non-management directors of NYSE-listed companies to meet at regularly scheduled executive sessions without management. Our memorandum and articles of association do not require our non-management directors to hold such meetings.

Committee member composition

The NYSE Standards require NYSE-listed companies to have a nominating/corporate governance committee and a compensation committee that are composed entirely of independent directors. British Virgin Islands law, the law of our country of incorporation, does not impose similar requirements. We do not have a nominating/corporate governance committee.

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Independence of the compensation and nomination committee and its advisers

NYSE listing standards require that the board of directors of a listed company consider two factors (in addition to the existing general independence tests) in the evaluation of the independence of compensation committee members: (i) the source of compensation of the director, including any consulting, advisory or other compensatory fees paid by the listed company, and (ii) whether the director has an affiliate relationship with the listed company, a subsidiary of the listed company or an affiliate of a subsidiary of the listed company. In addition, before selecting or receiving advice from a compensation consultant or other adviser, the compensation committee of a listed company is required to take into consideration six specific factors, as well as all other factors relevant to an adviser’s independence.

Foreign private issuers such as us are exempt from these requirements if home country practice is followed. British Virgin Islands law does not impose similar requirements.

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Miscellaneous

In addition to the above differences, we are not required to: make our audit and compensation and nomination committees prepare a written charter that addresses either purposes and responsibilities or performance evaluations in a manner that would satisfy the NYSE’s requirements; acquire shareholder approval of equity compensation plans in certain cases; or adopt and make publicly available corporate governance guidelines.

We were incorporated under, and are governed by, the laws of the British Virgin Islands. For a summary of some of the differences between provisions of the BVI Act applicable to us and the laws application to companies incorporated in Delaware and their shareholders, see “Item 10. Additional Information—B. Memorandum and Articles of Association—Differences in Corporate Law.”

ITEM 16H. MINE SAFETY DISCLOSURE

Not applicable.

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PART III

ITEM 17. FINANCIAL STATEMENTS

We have responded to Item 18 in lieu of this item.

ITEM 18. FINANCIAL STATEMENTS

Financial Statements are filed as part of this annual report. See page F-1.

ITEM 19. EXHIBITS



Exhibit No.			Description
1.1			Memorandum and Articles of Association, incorporated herein by reference to Exhibit 3.1 to the Company’s Registration Statement on Form F-1 (File No. 333-173063) filed with the SEC on March 25, 2011.
2.1			Indenture dated September 27, 2013 among Arcos Dorados Holdings Inc., as issuer, the Subsidiary Guarantors named therein, Citibank N.A., as trustee, registrar, paying agent and transfer agent, and Banque Internationale à Luxembourg Société Anonyme, as Luxembourg paying agent, incorporated herein by reference to Exhibit 2.2 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2013 filed with the SEC on April 28, 2014.
2.2			Indenture dated April 4, 2017 among Arcos Dorados Holdings Inc., as issuer, the Subsidiary Guarantors named therein, and Citibank N.A., as trustee, registrar, paying agent and transfer agent, incorporated herein by reference to Exhibit 2.2 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2016 filed with the SEC on April 27, 2017.
2.3*2.3			Description of the Registrant’s Capital ~~Stock.~~Stock, incorporated herein by reference to Exhibit 2.3 to the Company's Annual Report on Form 20-F for the year ended December 31, 2019 filed with the SEC on April 29, 2020.
3.1			Los Laureles Voting Trust, incorporated herein by reference to Exhibit 9.1 to the Company’s Registration Statement on Form F-1 (File No. 333-173063) filed with the SEC on March 25, 2011.
4.1			Amended and Restated Master Franchise Agreement for McDonald’s Restaurants in All of the Territories, except Brazil, incorporated herein by reference to Exhibit 10.1 to the Company’s Registration Statement on Form F-1 (File No. 333-173063) filed with the SEC on March 25, 2011.
4.2			Amendment No. 1 to the Amended and Restated Master Franchise Agreement for McDonald’s Restaurants in All of the Territories, except Brazil, incorporated herein by reference to Exhibit 10.2 to the Company’s Registration Statement on Form F-1 (File No. 333-173063) filed with the SEC on March 25, 2011.
4.3			Second Amended and Restated Master Franchise Agreement for McDonald’s Restaurants in Brazil, incorporated herein by reference to Exhibit 10.3 to the Company’s Registration Statement on Form F-1 (File No. 333-173063) filed with the SEC on March 25, 2011.
4.4			Amendment No. 3 to the Amended and Restated Master Franchise Agreement for McDonald’s Restaurants in all the Territories, except Brazil dated March 17, 2016 incorporated herein by reference to Exhibit 4.4 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2015 filed with the SEC on April 29, 2016.
4.5			Letter of Agreement dated as of July 31, 2014 among McDonald’s Latin America and LatAm, LLC, incorporated herein by reference to Exhibit 4.4 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2014 filed with the SEC on April 29, 2015.
4.6			Amended and Restated Escrow Agreement dated October 12, 2010 among McDonald’s Latin America, LLC, LatAm, LLC, each of the Escrowed MF Subsidiaries, Arcos Dorados Restaurantes de Chile Ltda., Arcos Dorados B.V., Deutsche Bank Trust Company Americas, as collateral agent, and Citibank, N.A., as escrow agent, incorporated herein by reference to Exhibit 10.4 to the Company’s Registration Statement on Form F-1 (File No. 333-173063) filed with the SEC on March 25, 2011.
4.7			Letter of Credit Reimbursement Agreement dated August 3, 2007 between Arcos Dorados B.V. and Credit Suisse, acting through its Cayman Islands Branch, incorporated herein by reference to Exhibit 10.5 to the Company’s Registration Statement on Form F-1 (File No. 333-173063) filed with the SEC on March 25, 2011.
4.8			Amendment to Letter of Credit Reimbursement Agreement dated November 3, 2008 between Arcos Dorados B.V. and Credit Suisse, acting through its Cayman Islands Branch, incorporated herein by reference to Exhibit 10.6 to the Company’s Registration Statement on Form F-1 (File No. 333-173063) filed with the SEC on March 25, 2011.

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Exhibit No.		Description
4.9		Second Amendment to Letter of Credit Reimbursement Agreement dated December 10, 2008 between Arcos Dorados B.V. and Credit Suisse, acting through its Cayman Islands Branch, incorporated herein by reference to Exhibit 10.7 to the Company’s Registration Statement on Form F-1 (File No. 333-173063) filed with the SEC on March 25, 2011.
4.10		Third Amendment to Letter of Credit Reimbursement Agreement dated July 8, 2009 between Arcos Dorados B.V. and Credit Suisse, acting through its Cayman Islands Branch, incorporated herein by reference to Exhibit 10.8 to the Company’s Registration Statement on Form F-1 (File No. 333-173063) filed with the SEC on March 25, 2011.
4.11		Fourth Amendment to Letter of Credit Reimbursement Agreement dated April 23, 2010 between Arcos Dorados B.V. and Credit Suisse AG, Cayman Islands Branch, incorporated herein by reference to Exhibit 10.9 to the Company’s Registration Statement on Form F-1 (File No. 333-173063) filed with the SEC on March 25, 2011.
4.12		ISDA Schedule to the 2002 Master Agreement dated as of December 14, 2009 between Morgan Stanley & Co. International plc and Arcos Dorados B.V., incorporated herein by reference to Exhibit 10.16 to the Company’s Registration Statement on Form F-1(File No. 333-173063) filed with the SEC on March 25, 2011.
4.13		ISDA Schedule to the 2002 Master Agreement dated as of December 14, 2009 between JPMorgan Chase Bank, N.A. and Arcos Dorados B.V., incorporated herein by reference to Exhibit 10.19 to the Company’s Registration Statement on Form F-1 (File No. 333-173063) filed with the SEC on March 25, 2011.
4.14		Credit Support Annex to the Schedule to the Master Agreement dated as of December 14, 2009 between JPMorgan Chase Bank, N.A. and Arcos Dorados B.V., incorporated herein by reference to Exhibit 10.20 to the Company’s Registration Statement on Form F-1 (File No. 333-173063) filed with the SEC on March 25, 2011.
4.15		Equity Incentive Plan, incorporated herein by reference to Exhibit 10.23 to the Company’s Registration Statement on Form F-1 (File No. 333-173063) filed with the SEC on March 25, 2011.
4.16		Amendment No. 2 to the Amended and Restated Master Franchise Agreement for McDonald’s Restaurants in All of the Territories, except Brazil, incorporated herein by reference to Exhibit 10.17 to the Company’s Registration Statement on Form F-1 (File No. 333-177210) filed with the SEC on October 7, 2011.
4.17		ISDA Master Agreement dated as of April 20, 2012 between Bank of America, N.A. and Arcos Dorados Holdings Inc., incorporated herein by reference to Exhibit 4.19 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2012 filed with the SEC on April 26, 2013.
4.18		ISDA Schedule to the 2012 Master Agreement dated as of April 20, 2012 between Bank of America, N.A. and Arcos Dorados Holdings Inc., incorporated herein by reference to Exhibit 4.20 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2012 filed with the SEC on April 26, 2013.
4.19		Guarantee dated as of April 20, 2012 of Arcos Dourados Comercio de Alimentos ~~Ltda.~~S.A . in favor of Bank of America, N.A. in connection with the ISDA Master Agreement and Schedule thereto, each dated as of April 20, 2012, and any confirmations thereunder, incorporated herein by reference to Exhibit 4.21 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2012 filed with the SEC on April 26, 2013.
4.20		Confirmation dated June 8, 2012 between Arcos Dorados Holdings Inc. and Bank of America, N.A., incorporated herein by reference to Exhibit 4.22 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2012 filed with the SEC on April 26, 2013.
4.21		Credit Agreement dated as of August 3, 2011 among Arcos Dorados B.V., as borrower, certain subsidiaries of the borrower, as guarantors, and Bank of America, N.A., as lender, incorporated herein by reference to Exhibit 4.23 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2012 filed with the SEC on April 26, 2013.
~~4.22~~	First Amendment to Credit Agreement dated as of August 3, 2012 among Arcos Dorados B.V., as borrower, certain subsidiaries of the borrower, as guarantors, and Bank of America, N.A., as lender, incorporated herein by reference to Exhibit 4.24 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2012 filed with the SEC on April 26, 2013.
~~4.23~~	Second Amendment to Credit Agreement dated as of August 2, 2013 among Arcos Dorados B.V., as borrower, certain subsidiaries of the borrower, as guarantors, and Bank of America, N.A., as lender, incorporated herein by reference to Exhibit 4.26 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2013 filed with the SEC on April 28, 2014.
~~4.24~~	Third Amendment to Credit Agreement dated as of July 28, 2014 among Arcos Dorados B.V., as borrower, certain subsidiaries of the borrower, as guarantors, and Bank of America, N.A., as lender, incorporated herein by reference to Exhibit 4.31 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2014 filed with the SEC on April 29, 2015.

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~~Exhibit No.~~	~~Description~~
~~4.25~~	Fourth Amendment to Credit Agreement dated as of July 30, 2015 among Arcos Dorados B.V., as borrower, certain subsidiaries of the borrower, as guarantors, and Bank of America, N.A., as lender, incorporated herein by reference to Exhibit 4.25 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2015 filed with the SEC on April 29, 2016.
~~4.26~~	Waiver and Fifth Amendment to Credit Agreement dated as of March 16, 2016 among Arcos Dorados B.V., as borrower, certain subsidiaries of the borrower, as guarantors, and Bank of America, N.A., as lender, incorporated herein by reference to Exhibit 4.26 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2015 filed with the SEC on April 29, 2016.
~~4.27~~	Sixth Amendment to Credit Agreement dated as of August 1, 2016 among Arcos Dorados B.V., as borrower, certain subsidiaries of the borrower, as guarantors, and Bank of America, N.A., as lender, incorporated herein by reference to Exhibit 4.27 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2016 filed with the SEC on April 27, 2017.
~~4.28~~	Seventh Amendment to Credit Agreement dated as of August 1, 2017 among Arcos Dorados B.V., as borrower, as guarantors, and Bank of America, N.A., as lender, incorporated herein by reference to Exhibit 4.28 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2017 filed with the SEC on April 27, 2018.
~~4.29~~	Eighth Amendment to Credit Agreement dated as of August 3, 2018 among Arcos Dorados B.V., as borrower, as guarantors, and Bank of America, N.A., as lender, incorporated by reference to Exhibit 4.29 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2018 filed with the SEC on April 26, 2019.
4.30*	~~Ninth Amendment to Credit Agreement dated as of August 2, 2019 among Arcos Dorados B.V., as borrower, as guarantors, and Bank of America, N.A., as lender.~~
4.31*	~~Credit Agreement dated as of December 11, 2019 among Arcos Dorados Holdings Inc., as borrower, certain subsidiaries of the borrower, as guarantors and JPMorgan Chase Bank, N.A., as lender.~~
~~4.32~~	Accession Agreement dated as of March 21, 2018 executed and delivered by Arcos Dorados Group B.V. pursuant to the Amended and Restated Master Franchise Agreement for McDonald’s Restaurants, dated November 10, 2008, incorporated by reference to Exhibit 4.33 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2018 filed with the SEC on April 26, 2019.
8.14.22		Continuing Standby Letter of Credit Agreement dated as of May 2, 2011 among Arcos Dorados B.V., as applicant, McDonald’s Latin America, LLC, as beneficiary, and Itaú Unibanco S.A., New York Branch, as lender.
4.23*		Extension dated May 9, 2018 to the Continuing Standby Letter of Credit Agreement dated as of May 2, 2011 among Arcos Dorados B.V., as applicant, McDonald’s Latin America, LLC, as beneficiary, and Itaú Unibanco S.A., New York Branch, as lender.
4.24*		ISDA Master Agreement dated as of September 6, 2013 between Citibank, N.A. and Arcos Dorados Holdings Inc.
4.25*		ISDA Schedule to the 2013 Master Agreement dated as of September 6, 2013 between Citibank, N.A. and Arcos Dorados Holdings Inc.

130

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Exhibit No.			Description
4.26*			Application and Agreement for Irrevocable Standby Letter of Credit Agreement dated as of November 3, 2015 among Arcos Dorados B.V., as applicant, McDonald’s Latin America, LLC, as beneficiary, and JPMorgan Chase Bank, N.A., as lender.
4.27*			Amendment No. 1 dated as of November 5, 2018 to the Application and Agreement for Irrevocable Standby Letter of Credit Agreement dated as of November 3, 2015 among Arcos Dorados B.V., as applicant, McDonald’s Latin America, LLC, as beneficiary, and JPMorgan Chase Bank, N.A., as lender.
4.28*			Credit Agreement dated as of December 11, 2020 among Arcos Dorados Holdings Inc., as borrower, certain subsidiaries of the borrower, as guarantors and JPMorgan Chase Bank, N.A., as lender.
8.1*			List of subsidiaries.
11.1			Standards of Business Conduct of the Company, incorporated by reference to Exhibit 11.1 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2018 filed with the SEC on April 26, 2019.
12.1*			Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
12.2*			Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
13.1*			Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code.
13.2*			Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code.
15.1*			Consent of Pistrelli, Henry Martin y Asociados S.R.L., member firm of Ernst & Young Global, independent registered public accounting firm.
101.INS**			XBRL Instance Document
101.SCH**			XBRL Taxonomy Extension Schema Document
101.CAL**			XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**			XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**			XBRL Taxonomy Extension Label Linkbase Document
101.PRE**			XBRL Taxonomy Extension Presentation Linkbase Document
104**			Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

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*	* Filed with this Annual Report on Form 20-F.

In accordance with Rule 402 of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

** In accordance with Rule 402 of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

~~125~~

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SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.



Arcos Dorados Holdings Inc.
By:			/s/ Mariano Tannenbaum
			Name: Mariano Tannenbaum
			Title: Chief Financial Officer

Date: April 29, ~~2020~~2021

~~126~~

132

Table of Contents

Arcos Dorados Holdings Inc.

Consolidated Financial Statements

As of December 31, ~~2019~~2020 and ~~2018~~2019 and for each of the three years in the period ended December 31, ~~2019~~2020

F-1

Table of Contents

INDEX TO FINANCIAL STATEMENTS

Audited Consolidated Financial Statements – Arcos Dorados Holdings Inc.



Report of Independent Registered Public Accounting Firm			F-3
Consolidated Statements of (Loss) Income for the fiscal years ended December 31, 2020, 2019 ~~2018~~ and ~~2017~~2018			6F-6
Consolidated Statements of Comprehensive (Loss) Income ~~(Loss)~~ for the fiscal years ended December 31, 2020, 2019 ~~2018~~ and ~~2017~~2018			7F-7
Consolidated Balance Sheet as of December 31, ~~2019~~2020 and ~~2018~~2019			8F-8
Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2020, 2019 ~~2018~~ and ~~2017~~2018			9F-9
Consolidated Statements of Changes in Equity for the fiscal years ended December 31, 2020, 2019 ~~2018~~ and ~~2017~~2018			10F-10
Notes to the Consolidated Financial Statements as of December 31, ~~2019~~2020 and ~~2018~~2019 and for each of the three years in the period ended December 31, ~~2019~~2020			11F-11

F-2

Table of Contents

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, ~~2019~~2020 and ~~2018,~~2019, and the related consolidated statements of (loss) income, comprehensive (loss) income, ~~(loss),~~ changes in equity and cash flows for each of the three years in the period ended December 31, ~~2019,~~2020, 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, ~~2019~~2020 and ~~2018,~~2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, ~~2019,~~2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the company´s internal control over financial reporting as of December 31, ~~2019,~~2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March ~~18, 2020,~~17, 2021, expressed an unqualified opinion thereon.

Adoption of New Accounting Standards

As discussed in note 3 to the consolidated financial statements, the Company changed its method of accounting for leases. TheCompany adopted Accounting Standard Codification Topic 842, Leases (“ASC 842”), on January 1, 2019. ~~As explained below, auditing the Company’s leases accounting method change was a critical audit matter.~~

Basis for Opinion

These financial statements are the responsibility of the ~~Company's~~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)~~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

Table of Contents



		~~Adoption of New Lease Accounting Standard~~

~~Description of the Matter~~	~~As explained above and in Note 3 to the consolidated financial statements, the Company adopted Accounting Standard Codification Topic 842,~~ ~~Leases~~ (“ASC 842”), on January 1, 2019. The adoption of ASC 842 resulted in the recognition of right of use assets and lease liabilities for thousands of $913,086 as of January 1, 2019. Management elected to adopt ASC 842 using the modified retrospective approach. Certain aspects of adopting ASC 842 required management to exercise significant judgment. In particular, auditing management’s judgments involved in the determination of the lease term for a large volume of contracts in many jurisdictions and in estimating the incremental borrowing rate was complex and especially challenging.
~~How We Addressed the Matter in Our Audit~~	We obtained an understanding, evaluated the design and tested the effectiveness of the Company’s internal controls around the implementation of the new guidance. For example, we tested controls over management’s review of the application of accounting policy elections to its portfolio of leases and over management’s review of the incremental borrowing rate (IBR) model. To test the Company’s adoption of ASC 842, we performed audit procedures that included, among others, evaluating the completeness of the population of contracts that meet the definition of a lease under ASC 842, testing the assumptions made by management in determining the term of the contract based on the Company´s policy, and the accuracy of the Company’s calculations of right of use assets and lease liabilities. Additionally, we tested management’s model for estimating the IBRs, evaluating management’s methodology for developing the IBR and testing significant assumptions. ~~We also assessed the completeness of the related disclosures in Notes 3, 14 and 15 to the consolidated financial statements.~~
	Impairment of long-lived assets for markets with impairment indicators

Description of the Matter		As of December 31, ~~December 2019,~~2020, the carrying amount of long-lived assets is thousands of ~~$1,919,412,~~$1,618,946, 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 ~~$8,790,~~$6,636, during ~~2019.~~2020. 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, ~~and~~ 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, ~~amongst~~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 ~~services personnel~~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~~note 3 to the consolidated financial statements.
		Tax and labor contingencies

F-4

Table of Contents



	~~Tax and labor contingencies~~

Description of the Matter	The Company has operations in Brazil representing ~~47%~~43% of the revenues of the group for the year ended December ~~31,2019~~31, 2020 and maintains a provision for tax and labor contingencies in that country that represents a ~~71%~~74% of the provision for contingencies balance of the group as of December 31, ~~2019.~~2020. As described in ~~Note~~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 ~~and~~ 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, ~~amongst~~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 a confirmation ~~letter~~letters from the group’s ~~chief legal counsel~~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~~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 ~~18, 2020~~17, 2021

~~except for Note 27.b, as to which the date is~~

~~April 29, 2020~~

F-5

Arcos Dorados Holdings Inc.

Consolidated Statements of (Loss) Income

For the fiscal years ended December 31, 2020, 2019 ~~2018~~ and ~~2017~~2018

Amounts in thousands of US dollars, except for share data and as otherwise indicated


REVENUES	2019			2018			2017			REVENUES	2020		2019		2018
Sales by Company-operated restaurants	$	2,812,287		$	2,932,609		$	3,162,256		Sales by Company-operated restaurants	$	1,894,618	$	2,812,287	$	2,932,609
Revenues from franchised restaurants	146,790			148,962			157,269			Revenues from franchised restaurants	89,601		146,790		148,962
Total revenues	2,959,077			3,081,571			3,319,525			Total revenues	1,984,219		2,959,077		3,081,571

OPERATING COSTS AND EXPENSES										OPERATING COSTS AND EXPENSES
Company-operated restaurant expenses:										Company-operated restaurant expenses:
Food and paper	(1,007,584		)	(1,030,499		)	(1,110,240		)	Food and paper	(677,087)		(1,007,584)		(1,030,499)
Payroll and employee benefits	(567,653		)	(607,793		)	(683,954		)	Payroll and employee benefits	(413,074)		(567,653)		(607,793)
Occupancy and other operating expenses	(799,633		)	(803,539		)	(842,519		)	Occupancy and other operating expenses	(624,154)		(799,633)		(803,539)
Royalty fees	(155,388		)	(157,886		)	(163,954		)	Royalty fees	(110,957)		(155,388)		(157,886)
Franchised restaurants – occupancy expenses	(61,278		)	(67,927		)	(69,836		)	Franchised restaurants – occupancy expenses	(43,512)		(61,278)		(67,927)
General and administrative expenses	(212,515		)	(229,324		)	(244,664		)	General and administrative expenses	(171,382)		(212,515)		(229,324)
Other operating income (expenses), net	4,910			(61,145		)	68,577
Other operating (expenses) income, net										Other operating (expenses) income, net	(10,807)		4,910		(61,145)
Total operating costs and expenses	(2,799,141		)	(2,958,113		)	(3,046,590		)	Total operating costs and expenses	(2,050,973)		(2,799,141)		(2,958,113)
Operating income	159,936			123,458			272,935
Operating (loss) income										Operating (loss) income	(66,754)		159,936		123,458
Net interest expense	(52,079		)	(52,868		)	(68,357		)	Net interest expense	(59,068)		(52,079)		(52,868)
Gain (loss) from derivative instruments	439			(565		)	(7,065		)
(Loss) gain from derivative instruments										(Loss) gain from derivative instruments	(2,297)		439		(565)
Gain from securities										Gain from securities	25,676		0		0
Foreign currency exchange results	12,754			14,874			(14,265		)	Foreign currency exchange results	(31,707)		12,754		14,874
Other non-operating (expenses) income, net	(2,097		)	270			(435		)
Income before income taxes	118,953			85,169			182,813
Other non-operating income (expenses), net										Other non-operating income (expenses), net	2,296		(2,097)		270
(Loss) income before income taxes										(Loss) income before income taxes	(131,854)		118,953		85,169
Income tax expense	(38,837		)	(48,136		)	(53,314		)	Income tax expense	(17,532)		(38,837)		(48,136)
Net income	80,116			37,033			129,499
Net (loss) income										Net (loss) income	(149,386)		80,116		37,033
Less: Net income attributable to non-controlling interests	(220		)	(186		)	(333		)	Less: Net income attributable to non-controlling interests	(65)		(220)		(186)
Net income attributable to Arcos Dorados Holdings Inc.	$	79,896		$	36,847		$	129,166
Net (loss) income attributable to Arcos Dorados Holdings Inc.										Net (loss) income attributable to Arcos Dorados Holdings Inc.	$	(149,451)	$	79,896	$	36,847


Earnings per share information:
Basic net income per common share attributable to Arcos Dorados Holdings Inc.	$	0.39		$	0.18		$	0.61
Diluted net income per common share attributable to Arcos Dorados Holdings Inc.	0.39			0.18			0.61
(Loss) earnings per share information:										(Loss) earnings per share information:
Basic net (loss) income per common share attributable to Arcos Dorados Holdings Inc.										Basic net (loss) income per common share attributable to Arcos Dorados Holdings Inc.	$	(0.73)	$	0.39	$	0.18
Diluted net (loss) income per common share attributable to Arcos Dorados Holdings Inc.										Diluted net (loss) income per common share attributable to Arcos Dorados Holdings Inc.	(0.73)		0.39		0.18

See Notes to the Consolidated Financial Statements.

F-6

Arcos Dorados Holdings Inc.

Consolidated Statements of Comprehensive (Loss) Income ~~(Loss)~~

For the fiscal years ended December 31, 2020, 2019 ~~2018~~ and ~~2017~~2018

Amounts in thousands of US dollars

2019 2018 2017
Net income $ 80,116
$ 37,033
$ 129,499

Other comprehensive income (loss), net of tax:

Foreign currency translation (12,246 ) (63,130 ) 4,783
Post-employment benefits (expenses):

Loss recognized in accumulated other comprehensive loss (55 ) (418 ) (938 )
Reclassification of net loss to consolidated statement of income 864
494
386
Post-employment benefits (expenses) (net of deferred income taxes of $42, $122 and $(272)). 809
76
(552 )
Cash flow hedges:

Net (loss) gain recognized in accumulated other comprehensive loss (5,185 ) 13,888
6,462
Reclassification of net loss (gain) to consolidated statement of income 85
(23,887 ) 1,592
Cash flow hedges (net of deferred income taxes of $1,290, $4,062 and $(3,938)) (5,100 ) (9,999 ) 8,054
Total other comprehensive (loss) income (16,537 ) (73,053 ) 12,285
Comprehensive income (loss) 63,579
(36,020 ) 141,784
Less: Comprehensive income attributable to non-controlling interests (142 ) (52 ) (316 )
Comprehensive income (loss) attributable to Arcos Dorados Holdings Inc. $ 63,437
$ (36,072 ) $ 141,468


	2020		2019		2018
Net (loss) income	$	(149,386)	$	80,116	$	37,033

Other comprehensive (loss) income, net of tax:

Foreign currency translation	(76,382)		(12,246)		(63,130)
Post-employment benefits (expenses):
Loss recognized in accumulated other comprehensive loss	(195)		(55)		(418)
Reclassification of net loss to consolidated statement of income	236		864		494
Post-employment benefits (net of deferred income taxes of $70, $42 and $122).	41		809		76
Cash flow hedges:
Net gain (loss) recognized in accumulated other comprehensive loss	54,287		(5,185)		13,888
Reclassification of net (gain) loss to consolidated statement of income	(43,324)		85		(23,887)
Cash flow hedges (net of deferred income taxes of $(2,582), $1,290 and $4,062)	10,963		(5,100)		(9,999)
Total other comprehensive (loss) income	(65,378)		(16,537)		(73,053)
Comprehensive (loss) income	(214,764)		63,579		(36,020)
Less: Comprehensive income attributable to non-controlling interests	(42)		(142)		(52)
Comprehensive (loss) income attributable to Arcos Dorados Holdings Inc.	$	(214,806)	$	63,437	$	(36,072)

See Notes to the Consolidated Financial Statements.

F-7

Arcos Dorados Holdings Inc.

Consolidated Balance Sheet

As of December 31, ~~2019~~2020 and ~~2018~~2019

Amounts in thousands of US dollars, except for share data and as otherwise indicated


ASSETS	2020		2019
Current assets
Cash and cash equivalents	$	165,989	$	121,880
Short-term investment	0		25
Accounts and notes receivable, net	94,249		99,862
Other receivables	19,946		28,174
Inventories	33,601		37,815
Prepaid expenses and other current assets	100,469		117,612
Derivative instruments	702		0
McDonald’s Corporation’s indemnification for contingencies	575		0
Total current assets	415,531		405,368
Non-current assets
Miscellaneous	72,649		95,814
Collateral deposits	2,500		2,500
Property and equipment, net	796,532		960,986
Net intangible assets and goodwill	37,046		43,044
Deferred income taxes	55,567		68,368
Derivative instruments	121,901		57,828
McDonald’s Corporation’s indemnification for contingencies	1,259		1,612
Lease right of use asset, net	790,969		922,165
Total non-current assets	1,878,423		2,152,317
Total assets	$	2,293,954	$	2,557,685
LIABILITIES AND EQUITY
Current liabilities
Accounts payable	$	209,535	$	259,577
Royalties payable to McDonald’s Corporation	44,779		17,132
Income taxes payable	34,447		61,982
Other taxes payable	56,837		61,823
Accrued payroll and other liabilities	79,218		86,379
Provision for contingencies	2,024		2,035
Interest payable	11,947		9,936
Short-term debt	0		13,296
Current portion of long-term debt	3,129		3,233
Derivative instruments	4,727		9,907
Operating lease liabilities	56,828		70,147
Total current liabilities	503,471		595,447
Non-current liabilities
Accrued payroll and other liabilities	21,884		23,497
Provision for contingencies	24,924		24,123
Long-term debt, excluding current portion	773,445		623,575
Derivative instruments	14,534		3,598
Deferred income taxes	5,067		4,297
Operating lease liabilities	752,613		861,582
Total non-current liabilities	1,592,467		1,540,672
Total liabilities	$	2,095,938	$	2,136,119
Equity
Class A shares of common stock	$	386,603	$	383,204
Class B shares of common stock	132,915		132,915
Additional paid-in capital	11,540		13,375
Retained earnings	290,895		471,149
Accumulated other comprehensive loss	(584,860)		(519,505)
Common stock in treasury	(39,547)		(60,000)
Total Arcos Dorados Holdings Inc. shareholders’ equity	197,546		421,138
Non-controlling interests in subsidiaries	470		428
Total equity	198,016		421,566
Total liabilities and equity	$	2,293,954	$	2,557,685

ASSETS 2019 2018
Current assets
Cash and cash equivalents $ 121,880
$ 197,282
Short-term investment 25
—
Accounts and notes receivable, net 99,862
84,287
Other receivables   28,174
25,350
Inventories      37,815
46,089
Prepaid expenses and other current assets 117,612
109,230
McDonald’s Corporation’s indemnification for contingencies —
2,324
Total current assets   405,368
464,562
Non-current assets

Miscellaneous    95,814
99,049
Collateral deposits    2,500
2,500
Property and equipment, net    960,986
856,192
Net intangible assets and goodwill    43,044
41,021
Deferred income taxes    68,368
58,334
Derivative instruments     57,828
54,735
McDonald’s Corporation’s indemnification for contingencies 1,612
1,646
Lease right of use asset, net 922,165
—
Total non-current assets    2,152,317
1,113,477
Total assets    $ 2,557,685
$ 1,578,039
LIABILITIES AND EQUITY

Current liabilities

Accounts payable $ 259,577
$ 242,455
Royalties payable to McDonald’s Corporation 17,132
14,576
Income taxes payable   61,982
53,843
Other taxes payable    61,823
61,006
Accrued payroll and other liabilities 86,379
94,166
Provision for contingencies 2,035
2,436
Interest payable   9,936
9,951
Short-term debt   13,296
356
Current portion of long-term debt 3,233
3,836
Derivative instruments 9,907
10,687
Operating lease liabilities 70,147
—
Total current liabilities 595,447
493,312
Non-current liabilities

Accrued payroll and other liabilities 23,497
35,322
Provision for contingencies   24,123
26,073
Long-term debt, excluding current portion   623,575
626,424
Derivative instruments 3,598
3,192
Deferred income taxes 4,297
957
Operating lease liabilities 861,582
—
Total non-current liabilities    1,540,672
691,968
Total liabilities   $ 2,136,119
$ 1,185,280
Equity

Class A shares of common stock $ 383,204
$ 379,845
Class B shares of common stock 132,915
132,915
Additional paid-in capital      13,375
14,850
Retained earnings 471,149
413,074
Accumulated other comprehensive loss (519,505 ) (502,266 )
Common stock in treasury

(60,000 ) (46,035 )
Total Arcos Dorados Holdings Inc. shareholders’ equity   421,138
392,383
Non-controlling interests in subsidiaries   428
376
Total equity 421,566
392,759
Total liabilities and equity   $ 2,557,685
$ 1,578,039

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, 2020, 2019 ~~2018~~ and ~~2017~~2018

Amounts in thousands of US dollars

2019 2018 2017
Operating activities
Net income attributable to Arcos Dorados Holdings Inc. $ 79,896
$ 36,847
$ 129,166
Adjustments to reconcile net income attributable to Arcos Dorados Holdings Inc. to cash provided by operating activities:

Non-cash charges and credits:

Depreciation and amortization 123,218
105,800
99,382
(Gain) loss from derivative instruments (439 ) 565
7,065
Amortization and accrual of letter of credit fees and deferred financing costs 3,190
3,189
3,433
Gain of property and equipment sales (664 ) (2,030 ) (93,122 )
Deferred income taxes (7,974 ) 648
1,731
Foreign currency exchange results (11,656 ) (15,388 ) 20,366
Accrued net share-based compensation expense 4,060
2,638
4,216
Impairment of long-lived assets and goodwill 9,063
19,117
17,764
Write-offs of property and equipment 4,733
4,167
8,528
Gain on Sales of restaurants businesses (5,078 ) (6,154 ) (14,742 )
Others, net (955 ) 8,896
6,305
Changes in assets and liabilities:

Accounts payable 39,434
16,563
102,660
Accounts and notes receivable and other receivables (27,988 ) (35,770 ) (50,211 )
Inventories, prepaid and other assets (21,802 ) (12,074 ) (53,466 )
Income taxes payable 10,931
12,529
18,946
Other taxes payable 20,891
8,675
12,672
Interest payable (14 ) (35 ) 2,942
Accrued payroll and other liabilities and provision for contingencies 1,320
27,134
35,075
Others 3,315
4,414
(3,540 )
Net cash provided by operating activities 223,481
179,731
255,170
Investing activities

Property and equipment expenditures (265,235 ) (197,041 ) (174,766 )
Purchases of restaurant businesses paid at acquisition date (2,658 ) —
(870 )
Proceeds from sales of property and equipment and related advances 3,340
2,891
61,983
Proceeds from sales of restaurant businesses and related advances 4,818
10,158
10,407
Recovery (acquisitions) of short-term investments —
19,588
(19,588 )
Other investing activity (1,256 ) 620
(1,646 )
Net cash used in investing activities (260,991 ) (163,784 ) (124,480 )
Financing activities

Issuance of 2027 Notes —
—
265,000
Repayment of secured loan agreement —
—
(169,511 )
Purchase of 2023 Notes —
—
(48,885 )
Net payment of derivative instruments —
—
(40,822 )
Dividend payments to Arcos Dorados Holdings Inc.’ shareholders (22,425 ) (20,937 ) —
Net short-term borrowings 13,159
—
—
Treasury stock purchases

(13,965 ) (46,035 ) —
Other financing activities (6,401 ) (6,470 ) (9,135 )
Net cash used in financing activities (29,632 ) (73,442 ) (3,353 )
Effect of exchange rate changes on cash and cash equivalents (8,260 ) (53,714 ) (13,649 )
(Decrease) increase in cash and cash equivalents (75,402 ) (111,209 ) 113,688
Cash and cash equivalents at the beginning of the year 197,282
308,491
194,803
Cash and cash equivalents at the end of the year $ 121,880
$ 197,282
$ 308,491
Supplemental cash flow information:

Cash paid during the year for:

   Interest $ 52,458
$ 55,400
$ 53,206
   Income tax 34,092
32,188
24,112
Non-cash investing and financing activities:

   Seller financing pending of payment and settlement of franchise receivables related to purchases of restaurant businesses 905
469
36
   Exchange of assets —
—
6,721


	2020		2019		2018
Operating activities
Net (loss) income attributable to Arcos Dorados Holdings Inc.	$	(149,451)	$	79,896	$	36,847
Adjustments to reconcile net income attributable to Arcos Dorados Holdings Inc. to cash provided by operating activities:
Non-cash charges and credits:
Depreciation and amortization	126,853		123,218		105,800
Loss (gain) from derivative instruments	2,297		(439)		565
Amortization and accrual of letter of credit fees and deferred financing costs	3,505		3,190		3,189
Gain of property and equipment sales	(201)		(664)		(2,030)

Deferred income taxes	471		(7,974)		648
Foreign currency exchange results	35,928		(11,656)		(15,388)
Accrued net share-based compensation expense	1,360		4,060		2,638

Impairment of long-lived assets and goodwill	7,721		9,063		19,117
Write-offs of property and equipment	4,501		4,733		4,167
Gain on Sales of restaurants businesses	0		(5,078)		(6,154)
Others, net	(10,234)		(955)		8,896
Changes in assets and liabilities:
Accounts payable	(23,993)		39,434		16,563
Accounts and notes receivable and other receivables	(13,210)		(27,988)		(35,770)
Inventories, prepaid and other assets	(25,032)		(21,802)		(12,074)
Income taxes payable	(5,825)		10,931		12,529
Other taxes payable	13,014		20,891		8,675
Interest payable	0		0		0
Accrued payroll and other liabilities and provision for contingencies	16,755		1,320		27,134
Royalties payable to McDonald’s Corporation	28,981		2,979		4,302
Others	2,526		322		77
Net cash provided by operating activities	15,966		223,481		179,731
Investing activities
Property and equipment expenditures	(86,311)		(265,235)		(197,041)
Purchases of restaurant businesses paid at acquisition date	(3,833)		(2,658)		0
Proceeds from sales of property and equipment and related advances	800		3,340		2,891

Proceeds from sales of restaurant businesses and related advances	0		4,818		10,158
Recovery of short-term investments	0		0		19,588

Other investing activity	638		(1,256)		620
Net cash used in investing activities	(88,706)		(260,991)		(163,784)
Financing activities
Issuance of 2027 Notes	153,375		0		0



Dividend payments to Arcos Dorados Holdings Inc.’ shareholders	(10,220)		(22,425)		(20,937)

Net short-term borrowings	(10,578)		13,159		0
Treasury stock purchases	0		(13,965)		(46,035)
Other financing activities	(6,568)		(6,401)		(6,470)
Net cash provided by used in financing activities	126,009		(29,632)		(73,442)
Effect of exchange rate changes on cash and cash equivalents	(9,160)		(8,260)		(53,714)
Increase (decrease) in cash and cash equivalents	44,109		(75,402)		(111,209)
Cash and cash equivalents at the beginning of the year	121,880		197,282		308,491
Cash and cash equivalents at the end of the year	$	165,989	$	121,880	$	197,282

Supplemental cash flow information:
Cash paid during the year for:
Interest	$	57,066	$	52,458	$	55,400
Income tax	22,502		34,092		32,188
Non-cash investing and financing activities:

Stock dividend payments to Arcos Dorados Holdings Inc.’ Shareholders, at cost	20,453		0		0
Seller financing pending of payment and settlement of franchise receivables related to purchases of restaurant businesses	1,606		905		469

See Notes to the Consolidated Financial Statements.

F-9

Arcos Dorados Holdings Inc.

Consolidated Statements of Changes in Equity

For the fiscal years ended December 31, 2020, 2019 ~~2018~~ and ~~2017~~2018

Amounts in thousands of US dollars, except for share data and as otherwise indicated


																						Arcos Dorados Holdings Inc.’ Shareholders
	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
	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	Additional paid-in capital	Retained earnings	Accumulated other comprehensive loss	Number	Amount	Total	Non-controlling interests	Total
	Number	Amount	Number	Amount	Additional paid-in capital		Retained earnings		Accumulated other comprehensive loss		Number		Amount		Total		Non-controlling interests		Total
Balances at December 31, 2016	130,711,224	373,969	80,000,000	132,915	13,788		271,968		(441,649	)	—		—		350,991		585		351,576
Balances at December 31, 2017																					Balances at December 31, 2017	131,072,508	376,732	80,000,000	132,915	14,216	401,134	(429,347)	0	0	495,650	492	496,142
Net income for the year	—	—	—	—	—		129,166		—		—		—		129,166		333		129,499		Net income for the year	—	—	—	—	—	36,847	—	—	—	36,847	186	37,033
Other comprehensive loss	—	—	—	—	—		—		12,302		—		—		12,302		(17	)	12,285		Other comprehensive loss	—	—	—	—	—	—	(72,919)	—	—	(72,919)	(134)	(73,053)
Issuance of shares in connection with the partial vesting of outstanding restricted share units under the 2011 Equity Incentive Plan	361,284	2,763	—	—	(2,763	)	—		—		—		—		—		—		—
Stock-based compensation related to the 2011 Equity Incentive Plan	—	—	—	—	3,191		—		—		—		—		3,191		—		3,191
Portion of non-controlling interests related to business sold	—	—	—	—	—		—		—		—		—		—		(108	)	(108	)
Dividends to non-controlling interests	—	—	—	—	—		—		—		—		—		—		(301	)	(301	)
Balances at December 31, 2017	131,072,508	376,732	80,000,000	132,915	14,216		401,134		(429,347	)	—		—		495,650		492		496,142
Net income for the year	—	—	—	—	—		36,847		—		—		—		36,847		186		37,033
Other comprehensive income	—	—	—	—	—		—		(72,919	)	—		—		(72,919	)	(134	)	(73,053	)
Dividends to Arcos Dorados Holdings Inc.’s shareholders ($0.10 per share)	—	—	—	—	—		(20,937	)	—		—		—		(20,937	)	—		(20,937	)	Dividends to Arcos Dorados Holdings Inc.’s shareholders ($0.10 per share)	—	—	—	—	—	(20,937)	—	—	—	(20,937)	—	(20,937)
Dividends on restricted share units under the 2011 Equity Incentive Plan	—	—	—	—	—		(174	)	—		—		—		(174	)	—		(174	)	Dividends on restricted share units under the 2011 Equity Incentive Plan	—	—	—	—	—	(174)	—	—	—	(174)	—	(174)
Issuance of shares in connection with the partial vesting of outstanding restricted share units under the 2011 Equity Incentive Plan	520,565	3,113	—	—	(3,113	)	—		—		—		—		—		—		—		Issuance of shares in connection with the partial vesting of outstanding restricted share units under the 2011 Equity Incentive Plan	520,565	3,113	—	—	(3,113)	—	—	—	—	—	—	0
Stock-based compensation related to the 2011 Equity Incentive Plan	—	—	—	—	3,747		—		—		—		—		3,747		—		3,747		Stock-based compensation related to the 2011 Equity Incentive Plan	—	—	—	—	3,747	—	—	—	—	3,747	—	3,747
Treasury stock purchases	—	—	—	—	—		—		—		(6,360,826	)	(46,035	)	(46,035	)	—		(46,035	)	Treasury stock purchases	—	—	—	—	—	—	—	(6,360,826)	(46,035)	(46,035)	—	(46,035)
Dividends to non-controlling interests	—	—	—	—	—		—		—		—		—		—		(168	)	(168	)	Dividends to non-controlling interests										—	(168)	(168)
Adoption of accounting standard ASC 606 - net of $1,555 of deferred income tax	—	—	—	—	—		(3,796	)	—		—		—		(3,796	)	—		(3,796	)	Adoption of accounting standard ASC 606 - net of $1,555 of deferred income tax	—	—	—	—	—	(3,796)	—	—	—	(3,796)	—	(3,796)
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		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		Net income for the year	—	—	—	—	—	79,896	—	—	—	79,896	220	80,116
Other comprehensive loss	—	—	—	—	—		—		(16,459	)	—		—		(16,459	)	(78	)	(16,537	)
Other comprehensive (loss)																					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 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	)	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	)	—		—		—		—		—		—		—		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)	—	—	—	—	—	—	0
Stock-based compensation related to the 2011 Equity Incentive Plan	—	—	—	—	1,884		—		—		—		—		1,884		—		1,884		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	)	Treasury stock purchases	—	—	—	—	—	—	—	(1,632,776)	(13,965)	(13,965)	—	(13,965)
Dividends to non-controlling interests	—	—	—	—	—		—		—		—		—		—		(90	)	(90	)	Dividends to non-controlling interests	—	—	—	—	—	—	—	—	—	—	(90)	(90)
Adoption of ASU 2017-12	—	—	—	—	—		780		(780	)	—		—		—		—		—		Adoption of ASU 2017-12	—	—	—	—	—	780	(780)	—	—	—	—	0
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		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																					Net loss for the year	—	—	—	—	—	(149,451)	—	—	—	(149,451)	65	(149,386)
Other comprehensive loss																					Other comprehensive loss	—	—	—	—	—	—	(65,355)	—	—	(65,355)	(23)	(65,378)
Cash Dividends to Arcos Dorados Holdings Inc.’s shareholders ($0.05 per share)																					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																					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)																					Stock Dividends to Arcos Dorados Holdings Inc.’s shareholders (75 shares per share)	—	—	—	—	—	(20,453)	—	2,723,614	20,453	—	—	0
Issuance of shares in connection with the partial vesting of outstanding restricted share units under the 2011 Equity Incentive Plan																					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)	—	—	—	—	—	—	0
Stock-based compensation related to the 2011 Equity Incentive Plan																					Stock-based compensation related to the 2011 Equity Incentive Plan	—	—	—	—	1,564	—	—	—	—	1,564	—	1,564
Balances at December 31, 2020																					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

See Notes to the Consolidated Financial Statements.

F-10

~~F- 10~~

Table of Contents

Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, ~~2019~~2020 and ~~2018~~2019 and for each of the three years in the period ended December 31, ~~2019~~2020

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 ~~liability company organized~~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 3 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 20 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 (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

On March 11, 2020, a novel virus known as COVID-19 was declared by the World Health Organization’s (WHO) as a pandemic, resulting in federal, state and local governments mandating 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. In order to comply with these government measures, some of our markets closed all restaurants for a period of time, especially from the end of March through the middle of April 2020. During that period, approximately 50% of our entire restaurant footprint was fully closed. These limitations have significantly disrupted the Company’s business operations with a negative impact on the Company’s financial results, including a decline in revenues as well as cash from operations. However, starting in the middle of April 2020, we began steadily re-opening restaurants and were able to resume operating at least one sales channel, such as drive-thru, delivery and/or take away, in nearly all restaurants, as well as, the vast majority of our dessert centers by December 31, 2020.

In order to mitigate the impact on Company’s business, results of operations, financial conditions and outlook, the Company has implemented several cash preservation measures including, but not limited to, reducing costs and expenses, limiting capital expenditures and renegotiating terms and conditions with lessors and other suppliers of goods and services. The Company expects to continue with cash preservation measures while the environment remains dynamic. In addition, on July 6, 2020, the Company announced the cancellation of the two remaining cash dividend installments to be paid in August and December, 2020 and approved a stock dividend distributed on August, 2020. See note 23 for details. Moreover, McDonald’s granted the Company a deferral of all the royalty payments due related to sales in March, April, May, June and July 2020 until 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-approved 2020-2022 restaurant opening plan and reinvestment plan, agreeing in place of this obligation a plan for 2021 only. In addition, McDonald’s provided the Company with a growth support which is expected to result in a consolidated royalty effective rate of about 5.3% in 2021.See note 18 for details.

Furthermore, the Company had drawn short-term debt in most of its Territories, from March to September 2020, in order to maintain liquidity. Short-term debt was $136 million, $158.2 million, $11 million and $NaN at the end of each quarter

F-11

Table of Contents

Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

COVID - 19 (continued)

during 2020. On September 11, 2020 the Company announced the issuance of $150 million aggregate principal amount of 2027 Notes. See Note 12 for further information. The proceeds from the aggregate 2027 Notes were used mainly to repay short-term indebtedness. As the cash flow from operations has been stabilized during the second quarter of the year and sequential sales recovery continue quarter by quarter, the Company does not expect significant increases in short-term debt. However, all short-term lines are available if needed. Additionally, in order to extend the maturity profile of the long-term debt, on September 15, 2020 the Company launched an offer to exchange any and all of the 2023 Notes for newly issued 2027 Notes. As a result of this exchange, the Company issued 2027 Notes for an aggregate principal amount of $138,354. See Note 12 for further information.

Additionally, the Company benefited from some government measures enacted in Latin America and the Caribbean to help companies deal with the economic fallout of the COVID-19 pandemic. Government measures include: modification of existing regulations to reduce workdays or tax costs, tax payment deferral 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 consolidated statement of income. The Company fulfils all the terms and conditions required by the governments to maintain the benefits granted. Although as of December 31, 2020, some of the government measures continued in force, the Company cannot predict the extent or duration of current or forthcoming programs.

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~~

~~F- 11~~

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Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, ~~2019~~2020 and ~~2018~~2019 and for each of the three years in the period ended December 31, ~~2019~~2020

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)

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 (loss) income.

~~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, ~~and~~ Brazilian reais (“BRL”) for Argentinian ~~operation)~~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.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASC 606), “Revenue Recognition - Revenue from Contracts with Customers”, which amends the guidance in former ASC 605, “Revenue Recognition”, and requires entities to 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.

On January 1, 2018, the Company adopted this new accounting standard using modified retrospective method and concluded that the sole source of revenue affected is the initial franchise fee. The ~~Company's~~Company’s previous accounting policy was to recognize it when a new restaurant opens or at the start of a new franchise term, however, in accordance with the new guidance, the initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement and should be treated as a single performance obligation. As such, initial franchise fees received are deferred over the term of the franchise agreement.

In accordance with the modified retrospective method, the Company recognized the cumulative effect of applying the new standard at the date of initial application with no restatement to the comparative information. Furthermore, the changes made to the consolidated balance sheet as of January 1, 2018 for the adoption of ASC 606 were as follows:

~~F- 12~~F-13

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Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, ~~2019~~2020 and ~~2018~~2019 and for each of the three years in the period ended December 31, ~~2019~~2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

3. Summary of significant accounting policies (continued)

Revenue recognition (continued)


Balance Sheet	Balance at December 31, 2017	Adjustments Due to ASC 606	Balance at January 1, 2018
ASSETS
Non-current Assets
Deferred income taxes	74,299	1,555	75,854
LIABILITIES AND EQUITY
Current liabilities
Accrued payroll and other liabilities	119,088	339	119,427
Non-current liabilities
Accrued payroll and other liabilities	29,366	5,012	34,378
EQUITY
Retained earnings	401,134	(3,796)	397,338

Balance Sheet Balance at December 31, 2017 Adjustments Due to ASC 606 Balance at January 1, 2018
ASSETS
Non-current Assets
Deferred income taxes 74,299
1,555
75,854

LIABILITIES AND EQUITY
Current liabilities
Accrued payroll and other liabilities 119,088
339
119,427

Non-current liabilities
Accrued payroll and other liabilities 29,366
5,012
34,378

EQUITY
Retained earnings 401,134
(3,796 ) 397,338

~~There are no expectations that the adoption of the new revenue standard will have a material impact within the net income on an ongoing basis.~~ The disclosure of the impact of adoption on the consolidated balance sheet and income statements, as of December 31, 2018 and for the fiscal year ended December 31, 2018, iswere as follows:


	As of December 31, 2018
Balance Sheet	As Reported	Balances Without Adoption of ASC 606	Effect of Change
ASSETS
Non-current Assets
Deferred income taxes	58,334	56,522	1,812
LIABILITIES AND EQUITY
Current liabilities
Accrued payroll and other liabilities	94,166	93,770	396
Non-current liabilities
Accrued payroll and other liabilities	35,322	29,495	5,827
EQUITY
Retained earnings	413,074	417,485	(4,411)

As of December 31, 2018
Balance Sheet As Reported Balances Without Adoption of ASC 606 Effect of Change
ASSETS
Non-current Assets
Deferred income taxes 58,334
56,522
1,812

LIABILITIES AND EQUITY
Current liabilities
Accrued payroll and other liabilities 94,166
93,770
396

Non-current liabilities
Accrued payroll and other liabilities 35,322
29,495
5,827

EQUITY
Retained earnings 413,074
417,485
(4,411 )

For the fiscal year ended December 31, 2018
Income Statement As Reported Balances Without Adoption of ASC 606 Effect of Change

Revenues from franchised restaurants 148,962
149,834
(872 )
Income tax expense (48,136 ) (48,393 ) 257


	For the fiscal year ended December 31, 2018
Income Statement		As Reported	Balances Without Adoption of ASC 606	Effect of Change

Revenues from franchised restaurants		148,962	149,834	(872)
Income tax expense		(48,136)	(48,393)	257

~~F- 13~~

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Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, ~~2019~~2020 and ~~2018~~2019 and for each of the three years in the period ended December 31, ~~2019~~2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

3. Summary of significant accounting policies (continued)

Accounts and notes receivable and allowance for doubtful accounts

Accounts receivable primarily consist of royalty and rent receivables due from franchisees, debit, credit and ~~debit and credit card~~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 ~~losses resulting from~~ the ~~inability of its franchisees to make required payments.~~expected credit losses. In judging the adequacy of the allowance for doubtful accounts, the Company ~~considers~~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 ~~the aging of the receivables.~~future economic conditions.

Other receivables

As of December 31, 2020, other receivables primarily consist of related party receivables, value-added tax and other tax receivables, insurance claim receivables, amounting to $10,110. As of December 31, 2019, other receivables primarily consist of insurance claim receivables, value-added tax, ~~and~~ other tax receivables and related party receivables, amounting to $17,046. ~~As of December 31, 2018, other receivables primarily consist of insurance claim receivables, related party receivables, value-added tax and other tax receivables, amounting to $16,809.~~

Other receivables are reported at the amount expected to be collected.

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.~~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.

~~F- 14~~F-15

Table of Contents

Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, ~~2019~~2020 and ~~2018~~2019 and for each of the three years in the period ended December 31, ~~2019~~2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

3. Summary of significant accounting policies (continued)

Intangible assets, net (continued)

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~~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.

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~~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 2020, 2019 ~~2018~~ and ~~2017. In addition,~~2018. However, as a consequence of the impact that the spread of COVID-19 caused in Company’s operations, during ~~2018,~~2020 the Company performed impairment ~~testings~~testing of its long-lived assets in ~~Venezuela~~some territories in previous ~~quarters considering the operating losses incurred~~quarters; as well as it did during 2018 in ~~this market~~Venezuela as a consequence of currency exchange rate changes. 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 ~~(including property and equipment, intangible assets with definite useful lives and lease right of use asset, net)~~ on a per store basis, in: ~~Curacao,~~Ecuador, Puerto Rico, Mexico, Peru, Aruba, USVI, Venezuela, Colombia, Trinidad and ~~Colombia~~Tobago, Curacao, Panama and Argentina for the fiscal ~~year~~years ended December 31, ~~2019 and in Ecuador,~~2020; Curacao, Puerto Rico, Mexico, Peru, Aruba, USVI, Venezuela, Colombia and Trinidad and Tobago for the fiscal year ended December 31, 2019 and in Ecuador, Aruba, Puerto Rico, Mexico, Peru, USVI, Venezuela, Colombia and Trinidad and Tobago for the fiscal years ended December 31, ~~2018 and 2017.~~2018.

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
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
2018	Mexico, Puerto Rico, USVI, Peru, Colombia, Venezuela and Trinidad and Tobago.	18,950

Fiscal year Markets Total
2019 Mexico, Puerto Rico, USVI, Peru, Aruba, Curacao, Colombia and Venezuela $ 8,790
2018 Mexico, Puerto Rico, USVI, Peru, Colombia, Venezuela and Trinidad and Tobago. 18,950
2017 Mexico, Puerto Rico, USVI, Peru, Ecuador, Colombia, Venezuela and Trinidad and Tobago 17,564

While the extent and duration of the economic fallout from the COVID-19 pandemic remains unclear, the Company will be monitoring the situation closely.

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Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020

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. The annual impairment test is performed~~basis during the fourth quarter, ~~of the fiscal year and~~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.

~~F- 15~~

~~Table of Contents~~

~~Arcos Dorados Holdings Inc.~~

~~Notes to the Consolidated Financial Statements~~

~~As of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019~~

~~Amounts in thousands of US dollars, except for share data and as otherwise indicated~~

3. ~~Summary of significant accounting policies (continued)~~

~~Goodwill (continued)~~

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 2020, 2019 and 2018, 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 (expenses) income, ~~(expenses),~~ net on the consolidated statements of income:

Fiscal year Markets Total
2019 Ecuador $ 273
2018 Peru 167
2017 Mexico 200


Fiscal year	Markets	Total
2020	Mexico	$	1,085
2019	Ecuador	273
2018	Peru	167

Advertising costs

Advertising costs are expensed as incurred. Advertising expenses related to Company-operated restaurants were $60,855, $115,568 and $120,839 in 2020, 2019 and ~~$130,277 in 2019,~~ 2018, ~~and 2017,~~ 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 $26,486, $43,039 and $43,940 in 2020, 2019 and ~~$46,536 in 2019,~~ 2018, ~~and 2017,~~ 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.

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Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020

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, 2020 and 2019, $13,354 and ~~2018,~~ $8,896, ~~and $4,014,~~ respectively, of the Company’s total accounts payable are available for this purpose and have been sold by suppliers to participating financial institutions.

~~F- 16~~

~~Table of Contents~~

~~Arcos Dorados Holdings Inc.~~

~~Notes to the Consolidated Financial Statements~~

~~As of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019~~

~~Amounts in thousands of US dollars, except for share data and as otherwise indicated~~

3. ~~Summary of significant accounting policies (continued)~~

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 (loss) income ~~(loss)~~

Comprehensive (loss) 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 ~~gains~~losses and ~~losses,~~gains, unrealized results on cash flow hedges as well as unrecognized post-retirement benefits as components of comprehensive ~~income~~ (loss). income.

F-18

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Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020

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 ~~collectibility~~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.

~~F- 17~~

~~Table of Contents~~

~~Arcos Dorados Holdings Inc.~~

~~Notes to the Consolidated Financial Statements~~

~~As of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019~~

~~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 (continued)~~

During fiscal years 2020, 2019 ~~2018~~ and ~~2017,~~2018, the Company recorded results from sales of property and equipment and restaurant businesses, amounting to $201, $6,415 ~~$8,184~~ and ~~$107,867,~~$8,184, respectively, included within “Other operating (expenses) income, ~~(expenses),~~ net”. ~~The sales performed during fiscal year 2017 were primarily related to the redevelopment of certain real estate assets.~~

Recent accounting pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC 842), which modifies lease accounting for lessees to increase transparency and comparability by recording a right-of-use asset and lease liability on their balance sheet for operating leases. Entities need to disclose qualitative and quantitative information about their leases, including characteristics and amounts recognized in the financial statements. This standard iswas effective for annual periods beginning after December 15, 2018, including interim periods.

The Company adopted ASU 2016-02 in its first quarter of 2019 utilizing the modified retrospective method, without restatement of comparative financial information periods, and applied the package of practical expedients permitted under the transition guidance within the standard which, among other things, allowed the Company to carry forward the historical lease classification. The adoption, and the ultimate effect on the consolidated financial statements, was based on an evaluation of the contract-specific facts and circumstances. The Company adoption of the standard resulted in the recognition of lease right-of-use assets and lease liabilities of $913 million, as of January 1, 2019. The right-of-use assets and lease liabilities were recognized at the commencement date based on the present value of the remaining future minimum lease payments, which include options that are reasonably assured of being exercised. As the interest rate implicit in the Company’s leases was not readily determinable, the Company utilizes its incremental borrowing rate to discount the lease payments.

Furthermore, the changes made to the consolidated balance sheet as of January 1, 2019 for the adoption of ASC 842 were as follows:


Consolidated Balance Sheet	Balance at December 31, 2018	Adjustments Due to ASC 842	Balance at January 1, 2019
ASSETS
Non-current assets
Lease right of use asset, net	—	896,682	896,682	(i)
LIABILITIES AND EQUITY
Current liabilities
Operating lease liabilities	—	72,272	72,272	(ii)
Non-current liabilities
Accrued payroll and other liabilities	35,322	(16,404)	18,918	(iii)
Operating lease liabilities	—	840,814	840,814	(iv)

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Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

3. Summary of significant accounting policies (continued)

Consolidated Balance Sheet Balance at December 31, 2018 Adjustments Due to ASC 842 Balance at January 1, 2019
ASSETS
Non-current assets
Lease right of use asset, net —
896,682
896,682
(i)
LIABILITIES AND EQUITY
Current liabilities
Operating lease liabilities —
72,272
72,272
(ii)
Non-current liabilities
Accrued payroll and other liabilities 35,322
(16,404 ) 18,918
(iii)
Operating lease liabilities —
840,814
840,814
(iv)
Recent accounting pronouncements (continued)

(i) Represents capitalization of operating lease right of use assets of $913,086 net of the reclassification of straight-line rent accrual of $16,404.

(ii) Represents recognition of current portion of operating lease liabilities.

(iii) Represents reclassification of straight-line rent accrual to lease right of use asset, net.

(iv) Represents recognition of non-current portion of operating lease liabilities.

~~F- 18~~

~~Table of Contents~~

~~Arcos Dorados Holdings Inc.~~

~~Notes to the Consolidated Financial Statements~~

~~As of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019~~

~~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)~~

The standard did not have a significant impact on the Company’s consolidated statements of income and cash flows, except for the exchange results related to lease liabilities denominated in other currencies than its functional one. The disclosure of the impact of adoption on the consolidated balance sheet and income statement, as of December 31, 2019 and for the fiscal year ended in December 31, 2019, ~~are~~were as follows:

As of December 31, 2019
Consolidated Balance Sheet As Reported Balances Without Adoption of ASC 842 Effect of Change
ASSETS
Non-current assets
Lease right of use asset, net 922,165
—
922,165
LIABILITIES AND EQUITY
Current liabilities
Operating lease liabilities 70,147
—
70,147
Non-current liabilities
Accrued payroll and other liabilities 23,497
41,084
(17,587 )
Operating lease liabilities

861,582
—
861,582
EQUITY
Retained earnings 471,149
467,560
3,589
Accumulated other comprehensive loss (519,505 ) (523,939 ) 4,434

For the fiscal year ended December 31, 2019
Consolidated Statement of Income As Reported Balances Without Adoption of ASC 842 Effect of Change

Foreign currency exchange results 12,754
9,165
3,589


	As of December 31, 2019
Consolidated Balance Sheet	As Reported	Balances Without Adoption of ASC 842	Effect of Change
ASSETS
Non-current assets
Lease right of use asset, net	922,165	0	922,165
LIABILITIES AND EQUITY
Current liabilities
Operating lease liabilities	70,147	0	70,147
Non-current liabilities
Accrued payroll and other liabilities	23,497	41,084	(17,587)
Operating lease liabilities	861,582	0	861,582
EQUITY
Retained earnings	471,149	467,560	3,589
Accumulated other comprehensive loss	(519,505)	(523,939)	4,434

For the fiscal year ended December 31, 2019

Consolidated Statement of Income

As Reported

Balances Without Adoption of ASC 842

Effect of Change

Foreign currency exchange results

12,754

9,165

3,589

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 expanded components of fair value hedging, specifies the recognition and presentation of the effects of hedging instruments, and eliminates the separate measurement and presentation of hedge ineffectiveness. The Company adopted the new standard during this year and applied the presentation and disclosure guidance on a prospective basis. The adoption of the standard did not have a material impact on the ~~Company's~~Company’s consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, "Financial ~~Instruments -~~ Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", ~~that~~which modifies the measurement and recognition of expected credit losses on financial assets. The Company ~~will adopt~~adopted this guidance effective January 1, 2020, prospectively. The adoption of ~~this~~the new standard isdid not ~~expected to~~ have a material impact on the ~~Company's~~Company’s consolidated financial statements. The Company will continue to actively monitor the impact of the COVID-19 pandemic on expected losses.

F-20

Table of Contents

Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020

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)

No other 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~~

~~Table of Contents~~

~~Arcos Dorados Holdings Inc.~~

~~Notes to the Consolidated Financial Statements~~

~~As of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019~~

~~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.~~

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 iswas equal to 5% of the US dollar equivalent of the gross product sales of each of the franchised restaurants. This percentage ~~increases~~increased to 6% ~~and 7%~~ for the subsequent 2 5-year ~~periods~~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 in March, April, May and July 2020until 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-21

Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

4. Acquisition of businesses (continued)

Other acquisitions

During fiscal years 2020, 2019 ~~2018~~ and ~~2017,~~2018, the Company acquired certain franchised restaurants in certain territories. Presented below is supplemental information about these acquisitions:


Purchases of restaurant businesses:	2020		2019		2018
Property and equipment	$	16,756	$	1,471	$	413
Identifiable intangible assets	4,922		1,347		56
Goodwill	1,224		1,589		0
Assumed debt	0		(77)		0
Gain on purchase of franchised restaurants	(1,708)		(767)		0
Purchase price	21,194		3,563		469
Seller financing	(1,000)		0		0
Settlement of franchise receivables	(16,361)		(905)		(469)

Net cash paid at acquisition date	$	3,833	$	2,658	$	0

Purchases of restaurant businesses: 2019 2018 2017
Property and equipment $ 1,471
$ 413
$ 429
Identifiable intangible assets 1,347
56
5,346
Goodwill 1,589
—
200
Assumed debt (77 ) —
—
Gain on purchase of franchised restaurants (767 ) —
(4,808 )
Purchase price 3,563
469
1,167
Restaurants sold in exchange —
—
(261 )
Settlement of franchise receivables (905 ) (469 ) (36 )
Net cash paid at acquisition date $ 2,658
$ —
$ 870

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:


	2020		2019
Receivables from franchisees	$	45,427	$	63,618
Debit and credit card receivables	38,388		43,741

Meal voucher receivables	4,857		13,017
Notes receivable	6,163		1,928
Allowance for doubtful accounts	(586)		(22,442)
	$	94,249	$	99,862

6. Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following at year end:


	2020		2019
Prepaid taxes	$	48,781	$	73,932
Prepaid expenses	30,175		24,266

Promotion items and related advances	20,701		19,092
Others	812		322
	$	100,469	$	117,612

~~F- 20~~

F-22

Table of Contents

Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

7.Miscellaneous

Miscellaneous consist of the following at year end:


	2020		2019
Judicial deposits	$	36,943	$	46,148
Tax credits	10,365		21,067
Prepaid property and equipment	5,967		7,770
Notes receivable	4,484		5,876
Rent deposits	2,991		3,196
Others	11,899		11,757
	$	72,649	$	95,814

8. Property and equipment, net

Property and equipment, net consist of the following at year-end:


	2020		2019
Land	$	134,148	$	146,517
Buildings and leasehold improvements	657,652		710,046
Equipment	734,995		784,181
Total cost	1,526,795		1,640,744
Total accumulated depreciation	(730,263)		(679,758)
	$	796,532	$	960,986

Total depreciation expense for fiscal years 2020, 2019 and 2018 amounted to $115,031, $111,638 and $94,490, respectively.

9. Net intangible assets and goodwill

Net intangible assets and goodwill consist of the following at year-end:


	2020		2019
Net intangible assets (i)
Computer software cost	$	69,999	$	75,224
Initial franchise fees	14,223		16,146
Reacquired franchised rights	16,884		13,296
Letter of credit fees	940		940
Others	1,000		1,000
Total cost	103,046		106,606
Total accumulated amortization	(71,601)		(70,345)
Subtotal	31,445		36,261

F-23

Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2019

Amounts in thousands of US dollars, except for share data and as otherwise indicated

59. Net intangible assets and goodwill (continued).


Goodwill (ii)	2020		2019

Brazil	3,196		4,124
Argentina	1,276		1,585
Chile	1,047		988
Colombia	82		86


Subtotal	5,601		6,783
	$	37,046	$	43,044

~~Accounts and notes receivable, net~~

(i)Total amortization expense for fiscal years 2020, 2019 and 2018 amounted to $11,822, $11,580 and $11,310, respectively. The estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows: $12,581 for 2021, $8,017 for 2022; $2,714 for 2023; $1,768 for 2024; $1,739 for 2025; and thereafter $4,626.

~~Accounts~~(ii)Related to the acquisition of franchised restaurants (Brazil, Argentina, Chile and ~~notes receivable, net~~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:


	2020		2019
Current:
Accrued payroll	$	59,772	$	77,087




Accrued expenses	14,993		6,586

Other liabilities	4,453		2,706
	$	79,218	$	86,379
Non-current:
Phantom RSU award liability	$	2,730	$	2,102

Deferred revenues - Initial franchise fee	4,612		5,802
Deferred income	6,075		6,392
Security deposits	5,976		6,836
Other liabilities	2,491		2,365
	$	21,884	$	23,497

2019 2018
Receivables from franchisees $ 63,618
$ 55,672
Debit and credit card receivables 43,741
40,474
Meal voucher receivables 13,017
10,565
Notes receivable 1,928
2,575
Allowance for doubtful accounts (22,442 ) (24,999 )
$ 99,862
$ 84,287

11. Short-term debt

6.~~Prepaid expenses and other current assets~~

~~Prepaid expenses and other current assets consist~~Short-term debt consists of the ~~following at year end:~~following:





	2020		2019
Short-term bank loans (i)	0		10,794
Revolving Credit Facility (ii)	0		2,500
Bank overdrafts	0		2
	$	0	$	13,296

2019 2018
Prepaid taxes $ 73,932
$ 74,538
Prepaid expenses 24,266
21,868
Promotion items and related advances 19,092
12,417
Others 322
407
$ 117,612
$ 109,230

F-24

7.~~Miscellaneous~~

~~Miscellaneous consist of the following at year end:~~

2019 2018
Judicial deposits $ 46,148
$ 43,168
Tax credits 21,067
27,563
Prepaid property and equipment 7,770
9,775
Notes receivable 5,876
4,241
Rent deposits 3,196
2,908
Others 11,757
11,394
$ 95,814
$ 99,049

~~F- 21~~

Table of Contents

Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, ~~2019~~2020 and ~~2018~~2019 and for each of the three years in the period ended December 31, ~~2019~~2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

~~8. Property and equipment, net~~

~~Property and equipment, net consist of the following at year-end:~~

2019 2018
Land $ 146,517
$ 142,262
Buildings and leasehold improvements 710,046
623,612
Equipment 784,181
673,117
Total cost 1,640,744
1,438,991
Total accumulated depreciation (679,758 ) (582,799 )
$ 960,986
$ 856,192

11.~~Total depreciation expense for fiscal years 2019, 2018 and 2017 amounted to $111,638, $94,490 and $89,085, respectively.~~Short-term debt (continued)

~~9. Net intangible assets and goodwill~~

~~Net intangible assets and goodwill consist of the following at year-end:~~

2019 2018
Net intangible assets (i)
Computer software cost $ 75,224
$ 69,700
Initial franchise fees 16,146
14,614
Reacquired franchised rights 13,296
12,511
Letter of credit fees 940
940
Others 1,000
1,000
Total cost 106,606
98,765
Total accumulated amortization (70,345 ) (63,683 )
Subtotal 36,261
35,082
(i)Short-term bank loans

Goodwill (ii) 2019 2018
Brazil 4,124
4,280
Argentina 1,585
226
Chile 988
1,073
Colombia 86
87
Ecuador —
273
Subtotal 6,783
5,939
$ 43,044
$ 41,021


~~(i)~~	Total amortization expense for fiscal years 2019, 2018 and 2017 amounted to $11,580, $11,310 and $10,297, respectively. The estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows: $14,281 for 2020, $11,262 for 2021; $4,333 for 2022; $1,352 for 2023; $1,310 for 2024; and thereafter $3,723.


~~(ii)~~	~~Related to the acquisition of franchised restaurants (Brazil, Argentina, Chile and Colombia) and non-controlling interests in subsidiaries (Ecuador and Chile).~~

~~F- 22~~

~~Table of Contents~~

~~Arcos Dorados Holdings Inc.~~

~~Notes to the Consolidated Financial Statements~~

~~As of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019~~

~~Amounts in thousands of US dollars, except for share data and as otherwise indicated~~

~~10. Accrued payroll and other liabilities~~

~~Accrued payroll and other liabilities consist of the following at year end:~~

2019 2018
Current:
Accrued payroll $ 77,087
$ 77,286
Accrued expenses 6,586
10,330
Other liabilities 2,706
6,550
$ 86,379
$ 94,166
Non-current:

Phantom RSU award liability $ 2,102
$ —
Deferred rent —
16,404
Deferred revenues - Initial franchise fee 5,802
5,827
Deferred income 6,392
6,272
Security deposits 6,836
6,322
Other liabilities 2,365
497
$ 23,497
$ 35,322

~~11. Short-term debt~~

~~Short-term debt consists of the following:~~

2019 2018
Short-term bank loans (i) 10,794
—
Revolving Credit Facility (ii) 2,500
—
Bank overdrafts 2
356
$ 13,296
$ 356


~~(i)~~	~~Short-term bank loans~~

As of December 31, 2019, comprised ~~two~~2 loans. In Brazil, granted by Banco Bradesco S.A, amounting to $7,454, which ~~matures~~matured in February 2020 and the interest rate iswas the Interbank Market reference interest rate (known in Brazil as “CDI” Certificados de Depósitos Interbancários) plus 0.67% per year. In Argentina, granted by Banco de la Ciudad de Buenos Aires, amounting to $3,340 which ~~matures~~matured in January 2020 and the interest rate iswas 54% per year. Brazilian and Argentinian loans were renewed during 2020 and cancelled in September 2020 and October 2020, respectively.


~~(ii)~~	~~Revolving credit facilities~~

~~The~~(ii)Revolving credit facility

On December 11, 2020, the Company ~~entered into~~renewed its committed revolving credit ~~facilities in order~~facility with JPMorgan Chase Bank, N.A (JPMorgan), for up to $25 million maturing on December 11, 2021. This revolving credit facility will permit the Company to borrow money from time to time to cover its working capital needs and for other general corporate purposes.

~~On August 2, 2019, ADBV renewed its committed revolving credit facility with Bank of America, N.A. (BOFA), as lender, for up to $25 million maturing on August 2, 2020.~~ Principal is due upon maturity. However, prepayments are permitted without premium or penalty. Each loan made ~~to ADBV~~ under this agreement will bear interest annually at ~~an annual rate equal to~~ LIBOR plus ~~2.40%.~~

In addition, on December 11, 2019, the Company entered into a revolving credit facility with JPMorgan Chase Bank, N.A (JPMorgan), for up to $25 million maturing on December 11, 2020, with an annual interest rate equal to LIBOR plus 2.25%.

~~F- 23~~

~~Table of Contents~~

~~Arcos Dorados Holdings Inc.~~

~~Notes to the Consolidated Financial Statements~~

~~As of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019~~

~~Amounts in thousands of US dollars, except for share data and as otherwise indicated~~

~~11.Short-term debt (continued)~~

~~Revolving credit facilities (continued)~~

~~Interest on each loan~~3% that 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. Principal is due upon~~of any prepayment or at maturity.

The obligations of the Company ~~and ADBV~~ under the revolving credit ~~facilities~~facility are jointly and severally guaranteed by certain of the Company’s subsidiaries on an unconditional basis. ~~Furthermore, the agreements include~~The revolving credit facility includes customary covenants including, among others, restrictions on the ability of the Company, ~~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)~~laws. In addition, the Company is required, among others, to: maintain unrestricted cash, cash equivalents and/or marketable securities in a minimum aggregate amount equal to $50 million.; and (ii) comply, as of the last day of each quarter during the agreement, with a consolidated net indebtedness (including interest payable) to EBITDA ratio lower ~~than 3.0 as~~than:


As of December 31, 2020			9.5
As of March 31, 2021			15.25
As of June 30, 2021			5.25
As of September 30, 2021			4.25

As of ~~any last day of~~December 31, 2020, the ~~fiscal quarter of~~Company’s net indebtedness (including interest payable) to EBITDA ratio was 7.62 and thus it is currently in compliance with the ~~borrower.~~ ratio requirement.

The revolving credit ~~facilities provide~~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 ~~facilities~~facility and/or to declare all sums outstanding under the loan documents immediately due and payable.

NaN amounts are due at the date of issuance of these consolidated financial statements in connection with this revolving credit facility. As of December 31, 2019, there was $2.5 million related to a previous committed revolving credit facility between ADBV and Bank of America that was not renewed after its maturity.

F-25

Table of Contents

Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, 2020 and 2019 and for each of the ~~mentioned ratios were 0.95~~three years in the period ended December 31, 2020

Amounts in thousands of US dollars, except for share data and ~~1.66, for ADBV and the Company, respectively, and thus the Company is currently in compliance with the ratios requirements under both revolving credit facilities.~~as otherwise indicated

12. Long-term debt

Long-term debt consists of the following at year-end:


	2020		2019
2027 Notes	$	553,354	$	265,000
2023 Notes	216,593		348,069


Finance lease obligations	5,941		5,419
Other long-term borrowings	10,199		13,284
Subtotal	786,087		631,772
Discount on 2023 Notes	(1,147)		(2,504)
Discount on 2027 Notes	(7,358)		0
Premium on 2023 Notes	427		937
Premium on 2027 Notes	3,206		0

Deferred financing costs	(4,641)		(3,397)
Total	776,574		626,808
Current portion of long-term debt	3,129		3,233
Long-term debt, excluding current portion	$	773,445	$	623,575

2019 2018
2027 Notes $ 265,000
$ 265,000
2023 Notes 348,069
348,069
Finance lease obligations 5,419
6,503
Other long-term borrowings 13,284
16,676
Subtotal 631,772
636,248
Discount on 2023 Notes (2,504 ) (3,156 )
Premium on 2023 Notes 937
1,187
Deferred financing costs (3,397 ) (4,019 )
Total 626,808
630,260
Current portion of long-term debt 3,233
3,836
Long-term debt, excluding current portion $ 623,575
$ 626,424

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	2020		2019		Maturity
2027 Notes	5.875	%	USD	$	553,354	$	265,000	April 4, 2027
2023 Notes	6.625	%	USD	216,593		348,069		September 27, 2023

Principal as of December 31,
Annual interest rate Currency 2019 2018 Maturity
2027 Notes 5.875 % USD $ 265,000
$ 265,000
April 4, 2027
2023 Notes 6.625 % USD 348,069
348,069
September 27, 2023


	Interest Expense (i)						DFC Amortization (i)						Amortization of Premium/Discount, net (i)
	2020		2019		2018		2020		2019		2018		2020		2019		2018
2027 Notes	$	20,269	$	15,569	$	15,569	$	402	$	299	$	299	$	133	$	0	$	0
2023 Notes	20,882		23,060		23,060		294		323		323		371		402		397

~~F- 24~~

~~Table of Contents~~(i)

~~Arcos Dorados Holdings Inc.~~

~~Notes to the Consolidated Financial Statements~~

~~As of December 31, 2019 and 2018 and for each of the three years~~These charges are included within "Net interest expense" in the ~~period ended December 31, 2019~~

~~Amounts in thousands~~consolidated statements of ~~US dollars, except for share data and as otherwise indicated~~

income.

~~12. Long-term debt~~
~~(continued)~~

~~2027 and 2023 Notes (continued)~~

Interest Expense (i) DFC Amortization (i) Amortization of Discount, net (i)
2019 2018 2017 2019 2018 2017 2019 2018 2017
2027 Notes $ 15,569
$ 15,569
$ 11,547
$ 299
$ 299
$ 224
$ —
$ —
$ —
2023 Notes 23,060
23,060
23,885
323
323
610
402
397
752


~~(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-26

Table of Contents

Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020

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 ~~another~~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.

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 proceeds from the issuance of the 2027 Notes were used to repay the Secured Loan Agreement, unwind the related derivative instruments (described in Note 13), pay the principal and premium on the 2023 Notes (in connection with the aforementioned tender offer) and for general purposes. 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.

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;

F-27

Table of Contents

Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

12. Long-term debt(continued)

2027 and 2023 Notes (continued)

(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.

~~F- 25~~

~~Table of Contents~~

~~Arcos Dorados Holdings Inc.~~

~~Notes to the Consolidated Financial Statements~~

~~As of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019~~

~~Amounts in thousands of US dollars, except for share data and as otherwise indicated~~

~~12. Long-term debt(continued)~~

~~Secured Loan Agreement~~

On March 29, 2016, the Company’s Brazilian subsidiary signed a $167,262 Secured Loan Agreement (the "Loan") with 5 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 bore 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 5 cross-currency interest rate swap agreements with the local subsidiaries of the same lenders. Consequently, the loans were fully converted into BRL amounting to BRL 613,850. Refer to Note 13 for more details.

Considering the cross-currency interest rate swap agreements, the final interest rate of the Loan was the Interbank Market reference interest rate (known in Brazil as “CDI”) plus 4.50% per year. Interest payments were made quarterly, beginning June 2016 and principal payments were made semi-annually, beginning September 2017.

The Loan would have matured on March 30, 2020 and periodic payments of principal were required. Prepayments were allowed without penalty. On April 11, 2017, the Company repaid the Loan with a total payment of $169.7 million including the outstanding principal, plus accrued and unpaid interest and certain transaction costs.

The Company incurred $3,243 of financing costs related to the issuance of the Loan, which were capitalized as DFC and were amortized over the life of the Loan. As a consequence of the repayment, the remaining DFC were recognized as interest expense in the consolidated statement of income.

~~The following table presents information related to the Secured Loan Agreement:~~

Interest Expense (i) (ii) DFC Amortization (ii) Other Costs (ii) (iii)
2019 2018 2017 2019 2018 2017 2019 2018 2017
$ —
$ —
$ 2,570
$ —
$ —
$ 3,251
$ —
$ —
$ 2,249


~~(i)~~	This charge do not include the effect of the cross-currency interest rate swap agreements mentioned in Note 13, amounting to a loss of $6,921, during fiscal year 2017. Including this effect the total interest cost amounts to $9,491.


~~(ii)~~	~~This charge is included within "Net interest expense" in the consolidated statement of income.~~


~~(iii)~~	~~Transaction costs related to the repayment of the Loan.~~

Other required disclosure

~~Table of Contents~~

~~Arcos Dorados Holdings Inc.~~

~~Notes to the Consolidated Financial Statements~~

~~As of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019~~

~~Amounts in thousands of US dollars, except for share data and as otherwise indicated~~

~~12. Long-term debt(continued)~~

At December 31, ~~2019,~~2020, future payments related to the Company’s long-term debt are as follows:


	Principal		Interest		Total
2021	$	3,129	$	47,999	$	51,128
2022	4,126		47,796		51,922
2023	219,204		47,527		266,731
2024	2,204		32,949		35,153
2025	553		32,832		33,385
Thereafter	556,871		50,632		607,503
Total payments	786,087		259,735		1,045,822
Interest	—		(259,735)		(259,735)
Discount on 2023 Notes	(1,147)		—		(1,147)
Discount on 2027 Notes	(7,358)		—		(7,358)
Premium on 2023 Notes	427		—		427
Premium on 2027 Notes	3,206		—		3,206

Deferred financing cost	(4,641)		—		(4,641)
Long-term debt	$	776,574	$	—	$	776,574

Principal Interest Total
2020 $ 3,233
$ 40,190
$ 43,423
2021 3,173
39,896
43,069
2022 3,370
39,568
42,938
2023 350,959
39,292
390,251
2024 2,307
15,974
18,281
Thereafter 268,730
41,151
309,881
Total payments 631,772
216,071
847,843
Interest —
(216,071 ) (216,071 )
Discount on 2023 Notes (2,504 ) —
(2,504 )
Premium on 2023 Notes 937
—
937
Deferred financing cost (3,397 ) —
(3,397 )
Long-term debt $ 626,808
$ —
$ 626,808

13. Derivative instruments

The following table presents the fair values of derivative instruments included in the consolidated balance sheets as of December 31, ~~2019~~2020 and ~~2018:~~2019:

F-28

Assets
Liabilities
Type of Derivative Balance Sheets Location 2019 2018 Balance Sheets Location 2019 2018
Derivatives designated as hedging instruments

Cash Flow hedge

Forward contracts Other receivables $ 259
$ 628
Accrued payroll and other liabilities $ (532 ) $ (180 )
Cross-currency interest rate swap Derivative instruments 37,219
37,869
Derivative instruments (8,179 ) (8,728 )
Call spread Derivative instruments 20,609
16,867
Derivative instruments —
—
Coupon-only swap Derivative instruments —
—
Derivative instruments (5,326 ) (5,152 )
Subtotal
58,087
55,364

(14,037 ) (14,060 )
Derivatives not designated as hedging instruments

Forward contracts Other receivables 20
99
Accrued payroll and other liabilities —
(144 )
Subtotal
20
99

—
(144 )
Total derivative instruments $ 58,107
$ 55,463

$ (14,037 ) $ (14,204 )

~~F- 27~~

Table of Contents

Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, ~~2019~~2020 and ~~2018~~2019 and for each of the three years in the period ended December 31, ~~2019~~2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

13. Derivative instruments (continued)


		Assets					Liabilities
Type of Derivative	Balance Sheets Location	2020		2019		Balance Sheets Location	2020		2019
Derivatives designated as hedging instruments
Cash Flow hedge
Forward contracts	Other receivables	$	0	$	259	Accrued payroll and other liabilities	$	(1,264)	$	(532)
Cross-currency interest rate swap	Derivative instruments	86,534		37,219		Derivative instruments	(6,194)		(8,179)
Call spread	Derivative instruments	21,858		20,609		Derivative instruments	0		0
Coupon-only swap	Derivative instruments	3,591		0		Derivative instruments	0		(5,326)



Subtotal		111,983		58,087			(7,458)		(14,037)
Derivatives not designated as hedging instruments
Forward contracts	Other receivables	0		20		Accrued payroll and other liabilities	0		0
Call spread	Derivative instruments	3,798		0		Derivative instruments	0		0
Coupon-only swap	Derivative instruments	202		0		Derivative instruments	(5,017)		0
Call Spread + Coupon-only swap	Derivative instruments	6,620		0		Derivative instruments	(8,050)		0
Subtotal		10,620		20			(13,067)		0
Total derivative instruments		$	122,603	$	58,107		$	(20,525)	$	(14,037)

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, ~~2019,~~2020, the Company ~~has~~had forward contracts outstanding with a notional amount of ~~$25,700~~$20,276 that mature during ~~2020.~~2021.

The Company made net collections ~~(payments)~~ totaling $1,757, $711 ~~$75~~ and ~~$(1,236)~~$75 during fiscal years 2020, 2019 ~~2018~~ and ~~2017,~~2018, respectively, as a result of the net settlements of these derivatives.

Cross-currency interest rate swap

The Company entered into 34 cross-currency interest rate swap agreements to hedge all the variability ~~in a portion (73%)~~ of the principal and interest collections of its BRL intercompany loan receivables with ADBV. The agreements were signed during November 2013 (amended in February 2017), June and July ~~2017.~~2017 and October 2020. The following table presents information related to the terms of the agreements:

F-29

Table of Contents

Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

13. Derivative instruments (continued)

Bank Payable Receivable Interest payment dates Maturity
Currency Amount Interest rate Currency Amount Interest rate
JP Morgan Chase Bank, N.A. (i) BRL 108,000
13 % $ 35,400
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
Derivatives designated as hedging instruments (continued)

~~(i)~~

During the fiscal year ended December 31, 2017, the agreement was amended twice: on February 9, 2017 and February 22, 2017. All the terms of the swap agreement match the terms of the BRL intercompany loan receivable. As a result of the amendments the Company paid $2,689. According to ASC 815-30-40, the amount deferred in accumulated other comprehensive loss until the date of the last amendment, amounting to $677 as of December 31, 2017, will be amortized to earnings as the originally hedged cash flows affects the statement of income.

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	%	$	35,400	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.~~

~~F- 28~~

~~Table~~(i)Bank of ~~Contents~~America Merrill Lynch Banco Múltiplo S.A.

~~Arcos Dorados Holdings Inc.~~

~~Notes to the Consolidated Financial Statements~~

~~As of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019~~

~~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)~~

The Company paid $4,031, $8,692 ~~$10,671~~ and ~~$6,163~~$10,671 of net interest during the fiscal years ended December 31, 2020, 2019 ~~2018~~ and ~~2017,~~2018, respectively.

Call spread

During April 2017, the Company’s Brazilian subsidiary entered into 2 call spread agreements in order to hedge ~~the~~all 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-30

Table of Contents

Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020

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

Coupon-only swap

During April 2017, the Company’s Brazilian subsidiary entered into 2 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


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

The Company paid $197, $2,036 ~~$2,900~~ and ~~$1,390~~$2,900 of net interest during the fiscal years ended December 31, 2020, 2019 ~~2018~~ and ~~2017,~~2018, respectively, related to these agreements.

~~F- 29~~

~~Table of Contents~~

~~Arcos Dorados Holdings Inc.~~

~~Notes to the Consolidated Financial Statements~~

~~As of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019~~

~~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, 2020, 2019 ~~2018~~ and ~~2017~~2018 for each type of derivative relationship:

F-31

Table of Contents

Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

13. Derivative instruments (continued)

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)
2019 2018 2017 2019 2018 2017
Forward contracts $ (10 ) $ 731
$ (1,344 ) $ (711 ) $ (75 ) $ 1,236
Cross-currency interest rate swaps (8,506 ) 11,279
5,828
2,056
(18,888 ) 1,965
Call Spread 4,377
4,034
21,047
(3,561 ) (15,421 ) 2,791
Coupon-only swap (1,889 ) 1,864
(13,598 ) 1,860
2,415
(5,933 )
Total $ (6,028 ) $ 17,908
$ 11,933
$ (356 ) $ (31,969 ) $ 59
Derivatives designated as hedging instruments (continued)


~~(i)~~	The results recognized in income related to forward contracts were recorded as an adjustment to food and paper. The net gain (loss) recognized in income, related to cross-currency interest rate swaps is presented as follows:

Cash flow hedge (continued)

Adjustment to: 2019 2018 2017
Foreign currency exchange results $ 6,346
$ 28,588
$ 7,532
Net interest expense (8,402 ) (9,700 ) (9,497 )
Total $ (2,056 ) $ 18,888
$ (1,965 )
Additional disclosures (continued)


Derivatives in Cash Flow Hedging Relationships	Gain (Loss) Recognized in Accumulated OCI on Derivative						(Gain) Loss Reclassified from Accumulated OCI into (loss) income (i)
	2020		2019		2018		2020		2019		2018
Forward contracts	$	904	$	(10)	$	731	$	(1,895)	$	(711)	$	(75)
Cross-currency interest rate swaps	55,124		(8,506)		11,279		(37,376)		2,056		(18,888)
Call Spread	6,758		4,377		4,034		(18,153)		(3,561)		(15,421)
Coupon-only swap	8,604		(1,889)		1,864		(421)		1,860		2,415
Total	$	71,390	$	(6,028)	$	17,908	$	(57,845)	$	(356)	$	(31,969)

(i)The results recognized in income related to forward contracts were recorded as an adjustment to food and paper. The net gain (loss) recognized in income, related to cross-currency interest rate swaps is presented as follows:


Adjustment to:	2020		2019		2018
Foreign currency exchange results	$	40,353	$	6,346	$	28,588
Net interest expense	(2,977)		(8,402)		(9,700)
Total	$	37,376	$	(2,056)	$	18,888

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.

~~Fair value hedge~~

~~Cross-currency interest rate swaps~~

On March 29, 2016, the Company entered into 5 cross-currency interest rate swap agreements to fully hedge the principal and interest cash flows of the Secured Loan Agreement described in Note 12, 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 matched the terms of the Secured Loan Agreement. Pursuant to these agreements, the Company received interest in US dollar at an interest rate equal to the one it had to pay to the off-shore lenders over a notional amount of $167.3 million and paid interest in BRL at CDI plus 4.50% per year, over a notional amount of BRL 613.9 million quarterly, beginning June 2016.

During April 2017, the Company unwound these agreements as a consequence of the repayment of the Secured Loan Agreement mentioned in Note 12. The total payment amounted to $39.1 million (BRL122.7 million), including $0.9 million of accrued and unpaid interest.

~~F- 30~~

~~Table of Contents~~

~~Arcos Dorados Holdings Inc.~~

~~Notes to the Consolidated Financial Statements~~

~~As of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019~~

~~Amounts in thousands of US dollars, except for share data and as otherwise indicated~~

~~13. Derivative instruments (continued)~~

~~Derivatives designated as hedging instruments (continued)~~

During fiscal year 2017, the accrued interest amounted to $6,921. This charge do not include the effect of the Secured Loan Agreement mentioned in Note 12, amounting to a loss of $2,570. Including this effect the total interest cost amounts to $9,491.

These amounts were recorded within “Net interest expense” in the Company’s consolidated statement of income. According to ASC 815-25-35, the change in the fair value of the hedging instrument and the change in the fair value of the hedged item shall be recognized in earnings. If those results are not perfectly offset, the difference shall be considered as hedge ineffectiveness.

~~The following table presents the pretax amounts affecting income for the fiscal year ended December 31, 2017:~~



	~~Cross-currency swaps (i)~~
~~Derivatives in Fair Value Hedging Relationships~~	~~2017~~

~~Loss recognized in Income on hedging derivatives~~	~~(9,599~~	)
~~Gain recognized in Income on hedging items~~	~~4,118~~


~~(i)~~	The loss amounting to $5,481 in 2017, related to the ineffective portion of derivatives, was recorded within “Gain (loss) from derivative instruments” in the Company’s consolidated statement of income.

Derivatives not designated as hedging instruments

~~The Company~~In October 2020, the Company’s Brazilian subsidiary enters into certain derivatives that are not designated ~~for~~as hedge accounting, therefore the changes in the fair value of these derivatives are recognized immediately in earnings, ~~together with the gain or loss from the hedged balance sheet position~~ within "Gain (loss) from derivative instruments". These agreements are:

–A call spread with JPMorgan. It consists of a combination of two call options likewise the ones previously mention. This agreement matures in April 2027.

The ~~Company collected (paid) $787, ($81) and ($1,156) during the fiscal years ended December 31, 2019, 2018 and 2017, respectively,~~following table presents information related to ~~those forward contracts.~~

the terms of the agreements:

~~F- 31~~

F-32

Table of Contents

Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, ~~2019~~2020 and ~~2018~~2019 and for each of the three years in the period ended December 31, 2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

13. Derivative instruments (continued)

Derivatives not designated as hedging instruments (continued)


Nominal Amount		Strike price
Currency	Amount	Call option written	Call option bought
$	30,000	8.20	5.62

–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

–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

In addition, during the fiscal years ended December 31, 2020, 2019 and 2018, the Company entered into certain forward contracts that generated net (payments) and collections for $(39), $787 and ($81).

F-33

Table of Contents

Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020

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 24^th 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, ~~2019, future minimum payments required~~2020, maturities of lease liabilities under existing operating leases are:


	Restaurant		Other		Total (i)
2021	$	122,497	$	5,705	$	128,202
2022	117,025		4,221		121,246
2023	112,715		3,199		115,914
2024	109,398		2,747		112,145
2025	104,984		2,601		107,585
Thereafter	822,563		7,667		830,230
Total lease payments	$	1,389,182	$	26,140	$	1,415,322
Lease discount					(605,881)
Operating lease liability					$	809,441

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Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

14. Leases (continued)

Restaurant Other Total (i)
2020 $ 143,982
$ 5,387
$ 149,369
2021 136,699
3,968
140,667
2022 130,637
2,822
133,459
2023 125,830
2,383
128,213
2024 121,880
2,258
124,138
Thereafter 976,397
8,017
984,414
Total minimum payment $ 1,635,425
$ 24,835
$ 1,660,260
Lease discount (728,531 )
Operating lease liability $ 931,729

(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.

~~(i)~~

The Company has certain leases subject to index adjustments. Historically, the Company has calculated and disclosed future minimum payments for these leases using the inflation index rate as of the end of the reporting period. 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, ~~2019~~2020 and ~~2018~~2019 the obligation amounts to ~~$5,419~~$5,941 and ~~$6,503~~$5,419 respectively, included within "Long-term debt" in the Consolidated Balance Sheet.

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~~Arcos Dorados Holdings Inc.~~

~~Notes to the Consolidated Financial Statements~~

~~As of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019~~

~~Amounts in thousands of US dollars, except for share data and as otherwise indicated~~

~~14. Leases (continued)~~

The following table is a summary of the Company´s components of lease cost for fiscal years 2020, 2019 ~~2018~~ and ~~2017:~~2018:

Lease Expense Statements of Income Location 2019 2018 2017
Operating lease expense - Minimum rentals:

Company-operated restaurants
Occupancy and other operating expenses $ (104,236 ) $ (105,358 ) $ (107,006 )
Franchised restaurants
Franchised restaurants - occupancy expenses (34,727 ) (30,970 ) (31,490 )
General and administrative
General and administrative expenses (7,614 ) (7,610 ) (9,319 )
Subtotal

(146,577 ) (143,938 ) (147,815 )
Variable lease expense - Contingent rentals based on sales:

Company-operated restaurants
Occupancy and other operating expenses (29,562 ) (33,921 ) (41,499 )
Franchised restaurants
Franchised restaurants - occupancy expenses (12,878 ) (14,595 ) (23,221 )
Subtotal

(42,440 ) (48,516 ) (64,720 )
Total lease expense
$ (189,017 ) $ (192,454 ) $ (212,535 )


Lease Expense	Statements of Income Location	2020		2019		2018
Operating lease expense - Minimum rentals:
Company-operated restaurants	Occupancy and other operating expenses	$	(69,151)	$	(104,236)	$	(105,358)
Franchised restaurants	Franchised restaurants - occupancy expenses	(23,510)		(34,727)		(30,970)
General and administrative	General and administrative expenses	(7,062)		(7,614)		(7,610)
Subtotal		(99,723)		(146,577)		(143,938)
Variable lease expense - Contingent rentals based on sales:
Company-operated restaurants	Occupancy and other operating expenses	(26,153)		(29,562)		(33,921)
Franchised restaurants	Franchised restaurants - occupancy expenses	(13,248)		(12,878)		(14,595)
Subtotal		(39,401)		(42,440)		(48,516)
Total lease expense		$	(139,124)	$	(189,017)	$	(192,454)

Other information 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases $ 135,788
Right-of-use assets obtained in exchange for new lease liabilities
Operating leases 118,285
Weighted-average remaining lease term (years)
Operating leases 8
Weighted-average discount rate
Operating leases 5 %


Other information	2020
Weighted-average remaining lease term (years)
Operating leases	8
Weighted-average discount rate
Operating leases	6.6	%

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).

~~At December 31, 2019 and 2018, net property and equipment under franchise arrangements totaled $123,832 and $124,039, respectively (including land for $32,373 and $34,109, respectively).~~

~~Revenues from franchised restaurants for fiscal years 2019, 2018 and 2017 consisted of:~~

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Notes to the Consolidated Financial Statements

As of December 31, ~~2019~~2020 and ~~2018~~2019 and for each of the three years in the period ended December 31, ~~2019~~2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

15. Franchise arrangements (continued)

At December 31, 2020 and 2019, net property and equipment under franchise arrangements totaled $92,354 and $123,832, respectively (including land for $24,661 and $32,373, respectively).

2019 2018 2017
Rent (i) $ 145,860
$ 148,094
$ 155,405
Initial fees (ii) (iii) 287
195
1,205
Royalty fees (iv) 643
673
659
Total $ 146,790
$ 148,962
$ 157,269
Revenues from franchised restaurants for fiscal years 2020, 2019 and 2018 consisted of:


~~(i)~~	~~Includes rental income of own buildings and subleases. As of December 31, 2019 the subleases rental income amounted to $114,459.~~


~~(ii)~~	~~Presented net of initial fees paid to McDonald’s Corporation for $1,456, $1,323 and $1,417 in 2019, 2018 and 2017, respectively.~~


~~(iii)~~	On January 1, 2018, the Company adopted ASC 606 “Revenue Recognition - Revenue from Contracts with Customers”. As such, initial franchise fees received are deferred over the term of the franchise agreement. See Note 3 Revenue Recognition, for details.


~~(iv)~~	~~Presented net of royalties fees paid to McDonald’s Corporation for $57,709, $57,733 and $64,806 in 2019, 2018 and 2017, respectively.~~


	2020		2019		2018
Rent (i)	$	89,123	$	145,860	$	148,094
Initial fees (ii) (iii)	203		287		195
Royalty fees (iv)	275		643		673
Total	$	89,601	$	146,790	$	148,962

(i)Includes rental income of own buildings and subleases. As of December 31, 2020 and 2019 the subleases rental income amounted to $74,723 and $114,459, respectively.

(ii)Presented net of initial fees owed to McDonald’s Corporation for $493, $1,456 and $1,323 in 2020, 2019 and 2018, respectively.

(iii)On January 1, 2018, the Company adopted ASC 606 “Revenue Recognition - Revenue from Contracts with Customers”. As such, initial franchise fees received are deferred over the term of the franchise agreement. See Note 3 Revenue Recognition, for details.

(iv)Presented net of royalties fees owed to McDonald’s Corporation for $36,554, $57,709 and $57,733 in 2020, 2019 and 2018, 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 until the first half of 2021.

At December 31, ~~2019,~~2020, future minimum rent payments due to the Company under existing franchised agreements are:


	Owned sites		Leased sites		Total
2021	$	3,312	$	47,661	$	50,973
2022	2,648		42,458		45,106
2023	2,413		36,985		39,398
2024	2,321		31,915		34,236
2025	2,315		28,547		30,862
Thereafter	9,754		135,349		145,103
Total	$	22,763	$	322,915	$	345,678

Owned sites Leased sites Total
2020 $ 4,063
$ 59,424
$ 63,487
2021 3,220
54,161
57,381
2022 2,391
48,699
51,090
2023 2,154
41,998
44,152
2024 2,048
35,618
37,666
Thereafter 9,938
173,639
183,577
Total $ 23,814
$ 413,539
$ 437,353

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.

Statutory tax rates in the countries in which the Company operates for fiscal years 2020, 2019 ~~2018~~ and ~~2017~~2018 were as follows:

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Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, ~~2019~~2020 and ~~2018~~2019 and for each of the three years in the period ended December 31, ~~2019~~2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

16. Income taxes (continued)


	2020	2019	2018
Puerto Rico	18.5%	18.5%	20.0%
Curacao	22.0%	22.0%	22.0%
USVI	22.5%	22.5%	22.5%
Aruba, Panama, Uruguay and Netherlands	25.0%	25.0%	25.0%
Ecuador	25.0%	25.0%	28.0%
Chile	27.0%	27.0%	27.0%
Martinique, French Guyana and Guadeloupe	28.0%	31.0%	33.3%
Peru	29.5%	29.5%	29.5%
Trinidad and Tobago	30.0%	25.0%	25.0%
Argentina Costa Rica and México	30.0%	30.0%	30.0%
Colombia	32.0%	33.0%	37.0%
Brazil and Venezuela	34.0%	34.0%	34.0%

2019 2018 2017
Puerto Rico 18.5% 20.0% 20.0%
Curacao 22.0% 22.0% 35.0%
USVI 22.5% 22.5% 35.0%
Aruba 25.0% 25.0% 35.0%
Panamá, Uruguay, Trinidad and Tobago and Netherlands 25.0% 25.0% 25.0%
Ecuador 25.0% 28.0% 25.0%
Chile 27.0% 27.0% 25.5%
Peru 29.5% 29.5% 29.5%
Argentina 30.0% 30.0% 35.0%
Costa Rica and Mexico 30.0% 30.0% 30.0%
Martinique, French Guyana and Guadeloupe 31.0% 33.3% 35.0%
Colombia 33.0% 37.0% 40.0%
Brazil and Venezuela 34.0% 34.0% 34.0%

Income tax expense for fiscal years 2020, 2019 ~~2018~~ and ~~2017~~2018 consisted of the following:


	2020		2019		2018
Current income tax expense	$	17,061	$	46,811	$	47,488
Deferred income tax expense	471		(7,974)		648
Income tax expense	$	17,532	$	38,837	$	48,136

2019 2018 2017
Current income tax expense $ 46,811
$ 47,488
$ 51,215
Deferred income tax expense (7,974 ) 648
2,099
Income tax expense $ 38,837
$ 48,136
$ 53,314

Income tax expense for fiscal years 2020, 2019 ~~2018~~ and ~~2017,~~2018, 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:


	2020			2019			2018
Pre-tax (loss) income	$	(131,854)		$	118,953		$	85,169
Weighted-average statutory income tax rate (i)	22.9		%	36.6		%	42.7		%
Income tax (benefit) expense at weighted-average statutory tax rate on pre-tax income (loss)	(30,226)			43,488			36,354
Permanent differences:
Change in valuation allowance (ii)	2,958			(24,864)			(24,307)
Expiration and changes in tax loss carryforwards (iii)	13,820			17,799			18,599
Venezuelan remeasurement and inflationary impacts (iv)	1,682			1,743			16,857
Non-taxable income and non-deductible expenses	12,092			7,545			10,085
Tax benefits	(1,701)			(9,667)			(11,403)
Income taxes withholdings on intercompany transactions (v)	6,515			5,005			7,723
Differences including exchange rate, inflation adjustment and filing differences	6,684			(5,291)			(2,574)
Alternative Taxes	2,054			658			(1,283)
Others (vi)	3,654			2,421			(1,915)
Income tax expense	$	17,532		$	38,837		$	48,136

2019 2018 2017
Pre-tax income $ 118,953
$ 85,169
$ 182,813
Weighted-average statutory income tax rate (i) 36.6 % 42.7 % 35.5 %
Income tax expense at weighted-average statutory tax rate on pre-tax income 43,488
36,354
64,901
Permanent differences:

Change in valuation allowance (ii) (24,864 ) (24,307 ) (21,241 )
Expiration and changes in tax loss carryforwards (iii) 17,799
18,599
12,785
Venezuelan remeasurement and inflationary impacts (iv) 1,743
16,857
2,683
Non-taxable income and non-deductible expenses 7,667
8,406
10,157
Tax benefits (9,667 ) (11,403 ) (10,744 )
Income taxes withholdings on intercompany transactions (v) 5,005
7,723
6,804
Differences including exchange rate, inflation adjustment and filing differences (2,647 ) (2,815 ) (11,909 )
Alternative Taxes 658
(1,283 ) 156
Others (345 ) 5
(278 )
Income tax expense $ 38,837
$ 48,136
$ 53,314

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Notes to the Consolidated Financial Statements

As of December 31, ~~2019~~2020 and ~~2018~~2019 and for each of the three years in the period ended December 31, ~~2019~~2020

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)Expiration of loss tax carryforwards are mainly generated by Caribbean division.

(iv)Comprises changes in valuation allowance during 2020, 2019 and 2018 for $43,249, $983 and $(304), respectively.

(v)Comprises income tax withheld on the payment of interest on intercompany loans.

(vi)Mainly comprises income tax effects over intercompany transactions which are eliminated for consolidation purposes.


~~(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)~~	~~Expiration of loss tax carryforwards are mainly generated by holding legal entities and the Caribbean division.~~


~~(iv)~~	~~Comprises changes in valuation allowance during 2019, 2018 and 2017 for $983, $(304) and $2,108, respectively.~~


~~(v)~~	~~Comprises income tax withheld on the payment of interest on intercompany loans.~~

The tax effects of temporary differences and carryforwards that comprise significant portions of deferred tax assets and liabilities atas of December 31, ~~2019~~2020 and ~~2018~~2019 are presented below:


	2020		2019
Tax loss carryforwards (i)	$	186,781	$	144,759
Purchase price allocation adjustment	12,247		15,158
Property and equipment, tax inflation	31,080		36,690
Other accrued payroll and other liabilities	29,622		33,065
Share-based compensation	1,719		2,062
Provision for contingencies, bad debts and obsolescence	4,621		2,534
Other deferred tax assets (ii)	75,121		56,927
Other deferred tax liabilities (iii)	(47,593)		(32,280)
Property and equipment - difference in depreciation rates	(7,902)		(418)
Valuation allowance (iv)	(235,196)		(194,426)
Net deferred tax asset	$	50,500	$	64,071

2019 2018
Tax loss carryforwards (i) $ 144,759
$ 178,993
Purchase price allocation adjustment 15,158
17,006
Property and equipment, tax inflation 36,690
38,588
Other accrued payroll and other liabilities 33,065
30,300
Share-based compensation 2,062
2,591
Provision for contingencies 2,534
2,708
Other deferred tax assets (ii) 56,927
26,193
Other deferred tax liabilities (iii) (32,280 ) (7,979 )
Property and equipment - difference in depreciation rates (418 ) (11,103 )
Valuation allowance (iv) (194,426 ) (219,920 )
Net deferred tax asset $ 64,071
$ 57,377

(i)As of December 31, 2020, the Company and its subsidiaries has accumulated net operating losses amounting to $656,119. The Company has net operating losses amounting to $145,127, expiring between 2021 and 2025. In addition, the Company has net operating losses amounting to $317,650 expiring after 2025 and net operating losses amounting to $193,342 that do not expire. Changes in tax loss carryforwards for the year relate to the creation of NOLs, mainly in Venezuela.

(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, 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. For the Fiscal year ended December 31, 2019 this item includes difference in depreciation of leases in Brazil for $30,524, provision for regular expenses for $10,376, in Brazil, Mexico and Colombia and bad debt reserve in Puerto Rico for $4,218.

(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.

~~(i)~~

As of December 31, 2019, the Company and its subsidiaries has accumulated net operating losses amounting to $540,231. The Company has net operating losses amounting to $192,736, expiring between 2020 and 2024. In addition, the Company has net operating losses amounting to $122,109 expiring after 2024 and net operating losses amounting to $225,386 that do not expire. Changes in tax loss carryforwards for the year relate to expiration of net operating losses (NOLs), mainly in holding legal entities and uses of NOLs, mainly in Brazil and Chile.

~~(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, 2019, this item includes: difference in depreciation of leases (related to differences between ASC842 and local tax regulation) for $30,524 mainly in Brazil; provision for regular expenses for $10,376 mainly Brazil, Mexico and Colombia; and bad debt reserve in Puerto Rico for $4,218.

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.

For the fiscal year ended December 31, 2018 this item includes bad debt reserve in Puerto Rico for $4,967, provision for regular expenses for $10,458, mainly corresponding to Brazil, Mexico and Colombia; and foreign currency exchange differences in Argentina and Brazil for $4,736.


~~(iii)~~	~~Primarily related to leases contracts (related to differences between ASC842 and local tax regulation) and accelerated depreciation of fixed assets.~~


~~(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 $64,071 for the year ended December 31, 2019, is presented in the consolidated balance sheet as non-current asset and non-current liability amounting to $68,368 and $4,297, respectively.

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Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, ~~2019~~2020 and ~~2018~~2019 and for each of the three years in the period ended December 31, ~~2019~~2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

16. Income taxes (continued)

The total amount of $57,377 for the year ended December 31, 2018, is presented in the consolidated balance sheet as non-current asset and non-current liability amounting to $58,334 and $957, 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 ~~$188,232 at~~ $187,215 at December 31, ~~2019.~~2020. 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, ~~2019,~~2020, and ~~2018,~~2019, 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 ~~2013.~~2014.

As of December 31, ~~2019,~~2020, there are certain matters related to the interpretation of income tax laws which could be challenged by tax authorities in an amount of ~~$183~~$169 million, related to assessments for the fiscal years 2009 to ~~2014.~~2015. 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.~~offering 2011.

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 2019 (from 2015 to 2019 only restricted share units). From 2011 to 2018, 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. The 2019 award ~~vests~~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. 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 grant date. 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.

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Notes to the Consolidated Financial Statements

As of December 31, ~~2019~~2020 and ~~2018~~2019 and for each of the three years in the period ended December 31, ~~2019~~2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

17. Share-based compensation (continued)

2011 Equity Incentive Plan (continued)

On June 28, 2016, 1,117,380 stock options were converted to a liability award maintaining the original conditions of the 2011 Plan. There were not incremental compensation costs resulting from the modification. The employees affected by this modification were 104. The accrued liability iswas remeasured on a monthly basis until settlement.

This liability award plan expired on May 2020.

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 ~~$1,884,~~$1,564, $1,884 and $3,661 ~~and $3,267~~ during fiscal years 2020, 2019 ~~2018~~ and ~~2017,~~2018, respectively. Stock-based compensation expense is included within “General and administrative expenses” in the consolidated statements of income.

The Company recognized ~~$(422)~~$(244), ~~$(175)~~$(422) and ~~$151~~$(175) of related income tax ~~(expense) benefit~~expense during fiscal years 2020, 2019 ~~2018~~ and ~~2017,~~2018, respectively.

Stock Options

The following table summarizes the activity of stock options during fiscal years 2020, 2019 ~~2018~~ and ~~2017:~~2018:


	Units	Weighted-average strike price	Weighted-average grant-date fair value
Outstanding at December 31, 2017	634,489	14.28	4.28

Expired (i)	(143,416)	21.20	5.89

Outstanding at December 31, 2018	491,073	12.26	3.81

Expired (i)	(216,633)	14.35	5.13

Outstanding at December 31, 2019	274,440	10.62	2.77

Expired (i)	(97,672)	14.31	4.19

Outstanding at December 31, 2020	176,768	8.58	1.98
Exercisable at December 31, 2020	176,768	8.58	1.98

Units Weighted-average strike price Weighted-average grant-date fair value
Outstanding at December 31, 2016 776,475
15.55
4.46
Expired (i) (141,986 ) 21.20
5.28
Outstanding at December 31, 2017 634,489
14.28
4.28
Expired (i) (143,416 ) 21.20
5.89
Outstanding at December 31, 2018 491,073
12.26
3.81
Expired (i) (216,633 ) 14.35
5.13
Outstanding at December 31, 2019 274,440
10.62
2.77
Exercisable at December 31, 2019 274,440
10.62
2.77

(i)As of December 31, 2020, 2019 and 2018, additional paid-in capital included $409, $1,111 and $844, respectively, related to expired stock options.


~~(i)~~	~~As of December 31, 2019, 2018 and 2017, additional paid-in capital included $1,111, $844 and $750, respectively, related to expired stock options.~~

The following table provides a summary of outstanding stock options at December 31, ~~2019:~~2020:

Vested (i)

Number of units outstanding

~~274,440~~176,768

Weighted-average grant-date fair market value per unit

~~2.77~~1.98

Total grant-date fair value

~~760~~350

Weighted-average accumulated percentage of service

100

Stock-based compensation recognized in Additional paid-in capital

~~760~~350

(i)Related to exercisable awards.

~~F- 38~~

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Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, ~~2019~~2020 and ~~2018~~2019 and for each of the three years in the period ended December 31, ~~2019~~2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

17. Share-based compensation (continued)

Restricted Share Units

The following table summarizes the activity of restricted share units during fiscal years 2020, 2019 ~~2018~~ and ~~2017:~~2018:

Units Weighted-average grant-date fair value
Outstanding at December 31, 2016 1,780,997
6.07
2017 annual grant 497,960
9.20
Partial vesting (361,284 ) 7.65
Forfeitures (180,828 ) 5.99
Outstanding at December 31, 2017 1,736,845
6.65
2018 annual grant 520,393
8.50
Partial vesting (534,589 ) 6.01
Forfeitures (117,600 ) 7.24
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
Exercisable at December 31, 2019 —
—


	Units	Weighted-average grant-date fair value
Outstanding at December 31, 2017	1,736,845	6.65
2018 annual grant	520,393	8.50
Partial vesting	(534,589)	6.01



Forfeitures	(117,600)	7.24
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 grant	(101,928)	6.33
Partial vesting of 2016 grant	(114,045)	4.70
Partial vesting of 2017 grant	(67,606)	9.20
Partial vesting of 2018 grant	(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
Exercisable at December 31, 2020	0	0

The total fair value of restricted share units vested during 2020, 2019 and 2018 was $3,475, $3,295 and ~~2017 was $3,295,~~ $3,214, ~~and $2,763,~~ respectively. As of December 31, ~~2019~~2020 the Company issued ~~470,558~~472,130 Class A ~~shares, of which 10,870 are related to the 2018 partial vesting.~~shares. Therefore, accumulated recorded compensation expense totaling ~~$3,359 was~~ $3,399 was reclassified from “Additional paid-in capital” to “Common Stock” upon issuance. As of December 31, ~~2019,~~2020, there were ~~3,154~~10,392, 3,032 and ~~2,901~~$2,775 Class A shares, amounting to ~~$18~~$76, $19 and ~~$20,~~$17, pending of issuance in connection with the partial vestings 2020, 2019 and 2018, respectively.

The following table provides a summary of outstanding restricted share units at December 31, ~~2019:~~2020:

F-41



~~Number of units outstanding (i)~~	~~937,839~~
~~Weighted-average grant-date fair market value per unit~~	~~7.50~~
~~Total grant-date fair value~~	~~7,034~~
~~Weighted-average accumulated percentage of service~~	~~67.40~~	%
~~Stock-based compensation recognized in Additional paid-in capital~~	~~4,741~~
~~Compensation expense not yet recognized (ii)~~	~~2,293~~


~~(i)~~	~~Related to awards that will vest between fiscal years 2020 and 2023.~~


~~(ii)~~	~~Expected to be recognized in a weighted-average period of 1.2 years.~~

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Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, ~~2019~~2020 and ~~2018~~2019 and for each of the three years in the period ended December 31, ~~2019~~2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

17. Share-based compensation (continued)

Restricted Share Units (continued)


Number of units outstanding (i)	451,198
Weighted-average grant-date fair market value per unit	7.80
Total grant-date fair value	3,519
Weighted-average accumulated percentage of service	80.44	%
Stock-based compensation recognized in Additional paid-in capital	2,831
Compensation expense not yet recognized (ii)	688

(i)Related to awards that will vest between fiscal years 2021 and 2023.

(ii)Expected to be recognized in a weighted-average period of 0.7 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.

The award has ~~two~~2 types of grant. Phantom RSU type one has 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. Phantom RSU type two has 1,207,455 units which vest 100% at the fifth anniversary from the date of grant. However, in the event of death, disability or retirement of the employee, any unvested portion of the annual award will be fully vested. The Company recognizes compensation expense related to these benefits 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. ~~Phantom RSU type two has 1,207,455 units which vest 100% at the fifth aniversary from the date of grant.~~ The grant-date stock price of both types of grants was $6.78. On December 2020, the Company implemented a new Phantom RSU type two with 65,440 units at a price of $4.89 that vest 100% at May 2021.

The total compensation cost as of December 31, 2020 and 2019, amounts to $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.

The following table summarizes the activity under the plan as of December 31, ~~2019:~~

2020:

Units

~~Grant 2019~~

~~1,672,657~~

~~Forfeited~~

~~(10,837~~

)

Outstanding at December 31, 2019

~~1,661,820~~1661820



Grant 2020			~~Total Non-vested (i)~~
~~Number of units outstanding~~	~~1,661,820~~65,440
~~Current share price~~	~~8.10~~
~~Total fair value of the plan~~	~~13,461~~
~~Weighted-average accumulated percentage of service~~	~~15.62~~	%
~~Accrued liability (ii)~~	~~2,102~~
~~Compensation expense not yet recognized (iii)~~	~~11,359~~


~~(i)~~Partial vesting of 2019 Grant			~~Related to awards that will vest between May 2021 and May 2024.~~

(5,162)

~~(ii)~~Forfeitures

~~Presented within “Accrued payroll and other liabilities” in the Company’s non current liabilities balance sheet.~~

(31,614)
~~(iii)~~Outstanding at December 31, 2020	~~Expected to be recognized in a weighted-average period of 3.97 years.~~	1,690,484
Exercisable at December 31, 2020		0

~~F- 40~~

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Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, ~~2019~~2020 and ~~2018~~2019 and for each of the three years in the period ended December 31, ~~2019~~2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

17.Share-based compensation (continued)

Phantom RSU Award (continued)


	Total Non-vested (i)
Number of units outstanding	1,690,484
Current share price	5.03
Total fair value of the plan	8,503
Weighted-average accumulated percentage of service	39.00	%
Accrued liability (ii)	3,316
Compensation expense not yet recognized (iii)	5,187

(i)Related to awards that will vest between May 2021 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 2.93 years.

18. Commitments and contingencies

Commitments

The MFAs require the Company and its MF subsidiaries, among other obligations:


~~(i)~~	~~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;~~

~~(ii)~~

(i)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;

(ii)to pay monthly royalties commencing at a rate of approximately 5% of gross sales of the restaurants, during the first 10 years, substantially consistent with market. This percentage increases to 6% and 7% for the subsequent 2 5-year periods of the agreement. Nevertheless, on occasions McDonald’s provides support in royalties in order to encourage the Company´s growth plan;

(iii)to commit to funding a specified Strategic Marketing Plan; that includes the expenditure of 5% of gross sales of the restaurants, during the first 10 years, substantially consistent with market. This percentage increases to 6% and 7% for the subsequent 2 5-year periods of the agreement. Nevertheless, on occasions McDonald’s provides the Company with support in order to encourage the Company growth plan;


~~(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.~~

If the Company ~~would~~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.

As a consequence of the negative impacts of the spread of COVID-19 on the Company’s operations, during 2020, McDonald’s granted the Company a deferral of all the royalty payments due related to sales in March, April, May, June and July 2020 until 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-approved 2020-2022 restaurant opening plan and reinvestment plan, agreeing in place of this obligation a plan for 2021 only. In addition, McDonald’s provided the Company with a growth support which is expected to result in a consolidated royalty effective rate of about 5.3% in 2021.

For the three-month periods ended from March 31, 2020 to December 31, 2020, the Company was not be in compliance with ~~these~~the ratio requirements mentioned in point (v) above. The ratios for the period mentioned, were as follows:

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Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

18.Commitments and contingencies (continued)

Commitments (continued)


	Fixed Charge Coverage Ratio	Leverage Ratio
March 31, 2020	1.74	4.15
June 30, 2020	1.35	5.37
September 30, 2020	1.15	6.31
December 31, 2020	0.96	7.71

However, McDonald’s Corporation granted the Company limited waivers from June 30, 2020 through and including December 31, 2021, during which time the Company is not required to comply with the financial ratios set forth in the MFA. After December 31, 2021, 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.

~~The following table summarize Company’s ratios requirements for~~ Notwithstanding the ~~three-month periods ended from March 31, 2019 to December 31, 2019, for which~~foregoing, the Company ~~is in compliance:~~does not expect any material adverse effect to its business, results of operations, financial condition or cash flows as a result of this situation.

Fixed Charge Coverage Ratio Leverage Ratio
March 31, 2019 1.83
3.83

June 30, 2019 1.86
3.76

September 30, 2019 1.80
3.83

December 31, 2019 1.86
3.77

In addition, ~~the Company~~ADBV 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 were issued by Credit Suisse amounting to $45 million, Itaú Unibanco S.A. (Itaú) amounting to $15 million and JPMorgan amounting to $20 million. They can be drawn if certain events occur, including the failure to pay royalties. ~~NaN~~No amounts have been drawn at the date of issuance of these financial statements.

~~F- 41~~

~~Table~~ The letters of ~~Contents~~

~~Arcos Dorados Holdings Inc.~~

~~Notes~~credit contain a limited number of customary affirmative and negative covenants, including a maximum indebtedness to ~~the Consolidated Financial Statements~~

EBITDA ratio of 4.0 for Credit Suisse and Itaú letters and 4.5 for JPMorgan letter. As of December 31, ~~2019 and 2018 and for~~2020, ADBV was not in compliance with these ratios. However, ADBV received waivers from each of its lenders under these letters of credit if any event of default occurs for compliance with the ~~three years~~applicable ratios. If ADBV is unable to comply with the conditions of the waivers or to obtain further waivers for future non-compliance with any terms of the letters of credit and its lenders terminate the letters of credit, we would be in breach of our obligations under the ~~period ended December 31, 2019~~

~~Amounts in thousands of US dollars, except for share data and~~MFAs, if ADBV cannot replace the instrument or use cash as ~~otherwise indicated~~

collateral.

~~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, ~~2019~~2020 and ~~2018,~~2019, the Company maintains a provision for contingencies, net of judicial deposits, amounting to ~~$26,158~~$26,948 and ~~$28,509,~~$26,158, respectively, presented as follow: ~~$2,035~~$2,024 and ~~$2,436~~$2,035 as a current liability and ~~$24,123~~$24,924 and ~~$26,073~~$24,123 as a non-current liability, respectively. The breakdown of the provision for contingencies is as follows:

F-44

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, 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

Year ended December 31, 2018:

Tax contingencies in Brazil (i) $ 9,324
$ 1,805
$ —
$ —
$ (1,632 ) $ 9,497
Labor contingencies in Brazil (ii) 21,061
20,785
(17,718 ) —
(3,020 ) 21,108
Other (iii) 15,646
1,405
(1,984 ) —
(3,605 ) 11,462
Subtotal 46,031
23,995
(19,702 ) —
(8,257 ) 42,067
Judicial deposits (iv) (18,075 ) —

—

1,843

2,674
(13,558 )
Provision for contingencies $ 27,956
$ 23,995
$ (19,702 ) $ 1,843
$ (5,583 ) $ 28,509

Year ended December 31, 2017:

Tax contingencies in Brazil (i) $ 13,312
$ (2,599 ) $ (337 ) $ (667 ) $ (385 ) $ 9,324
Labor contingencies in Brazil (ii) 11,150
31,448
(21,130 ) —
(407 ) 21,061
Other (iii) 12,222
7,150
(3,960 ) 17
217
15,646
Subtotal 36,684
35,999
(25,427 ) (650 ) (575 ) 46,031
Judicial deposits (iv) (18,572 ) 161
—
(60 ) 396
(18,075 )
Provision for contingencies $ 18,112
$ 36,160
$ (25,427 ) $ (710 ) $ (179 ) $ 27,956

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Arcos Dorados Holdings Inc.


~~(i)~~	~~In 2019, 2018 and 2017, 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.~~

Notes to the Consolidated Financial Statements

As of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

18.Commitments and contingencies (continued)

Provision for contingencies (continued)


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, 2020:
Tax contingencies in Brazil (i)	$	10,595	$	2,040	$	0	$	435	$	(2,408)	$	10,662
Labor contingencies in Brazil (ii)	16,839		12,087		(10,499)		0		(3,913)		14,514
Other (iii)	11,404		1,203		(1,421)		0		(1,279)		9,907
Subtotal	38,838		15,330		(11,920)		435		(7,600)		35,083
Judicial deposits (iv)	(12,680)		0		0		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	$	0	$	0	$	(357)	$	10,595
Labor contingencies in Brazil (ii)	21,108		12,916		(16,068)		0		(1,117)		16,839
Other (iii)	11,462		3,070		(1,700)		0		(1,428)		11,404
Subtotal	42,067		17,441		(17,768)		0		(2,902)		38,838
Judicial deposits (iv)	(13,558)		0		0		354		524		(12,680)
Provision for contingencies	$	28,509	$	17,441	$	(17,768)	$	354	$	(2,378)	$	26,158

Year ended December 31, 2018:
Tax contingencies in Brazil (i)	$	9,324	$	1,805	$	0	$	0	$	(1,632)	$	9,497
Labor contingencies in Brazil (ii)	21,061		20,785		(17,718)		0		(3,020)		21,108
Other (iii)	15,646		1,405		(1,984)		0		(3,605)		11,462
Subtotal	46,031		23,995		(19,702)		0		(8,257)		42,067
Judicial deposits (iv)	(18,075)		0		0		1,843		2,674		(13,558)
Provision for contingencies	$	27,956	$	23,995	$	(19,702)	$	1,843	$	(5,583)	$	28,509

(i)In 2020, 2019 and 2018, 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, 2020, 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 ~~$210~~$226 million and ~~$227~~$249 million.

~~F- 42~~

~~Table of Contents~~

~~Arcos Dorados Holdings Inc.~~

~~Notes to the Consolidated Financial Statements~~

~~As of December 31, 2019 and 2018 and for each of the three~~During previous years, ~~in the period ended December 31, 2019~~

~~Amounts in thousands of US dollars, except for share data and as otherwise indicated~~

~~18.Commitments and contingencies (continued)~~

~~Provision for contingencies (continued)~~

~~Additionally,~~ there iswas 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~~sought declaratory judgment and damages in the aggregate amount of $66.7 million plus plaintiffs’ attorney fees. AtDuring the ~~end of 2014~~years the ~~plaintiffs finalized their presentation of evidence whereas~~lawsuit was in force, the Company has not started yet. At that time, the Company filed a Motion of Non Suit. As of today, the Company has not been notified of any resolution made by the Commissioner assigned to this case. The Company believesbelieved that the probability of a loss iswas remote. ~~Nevertheless, during~~On December 28, 2019 ~~some of~~and March 31, 2020, the Company reached confidential settlement agreements with Puerto Rican franchisees ~~reached a Confidential Settlement Agreement with the Company~~ finalizing all controversies and disputes among ~~such~~the parties. All corresponding judicial documentation was filed to end the proceedings and the case was successfully dismissed by the Court, finalizing all controversies and disputes among the parties.

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Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As ~~a consequence~~ of ~~this agreement,~~December 31, 2020 and 2019 and for each of the ~~aggregate amount will be reduced.~~three years in the period ended December 31, 2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

~~During~~

18.Commitments and contingencies (continued)

Provision for contingencies (continued)

Additionally, 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~~sought declaratory judgment and damages in the amount of $30 million plus plaintiffs’ attorney fees. During December 2019, the franchisee reached a Confidential Settlement Agreement with the Company finalizing all controversies and disputes among them.

Furthermore, the Puerto Rico Owner Operator’s Association (“PROA”), an association integrated by the Company’s franchisees that ~~meets~~met 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. ~~On June 9, 2014, after several motions for summary judgment duly filed and opposed by~~During the ~~parties,~~years the ~~First Instance Court entered a “Partial Summary Judgment and Resolution”~~lawsuit was in ~~favor of PROA, before initiating the discovery phase, finding that~~force, the Company must participate and contribute funds to the association. However, the Court did not specify any amount for which the Company should be held liable, due to its preliminary and interlocutory nature, and the lack of discovery conducted regarding the amounts claimed by the plaintiffs. By means of a Motion to Reconsider, the Company opposed such determination. In December 2018, the First Instance Court confirmed his determination and the Company filed a Certiorari in the Court of Appeals. In July 2019, the Court of Appeals issued Judgment revoking the Court of First Instance’s summary judgment in favor of PROA. PROA filed in the Puerto Rico Supreme Court an appeal of such determination, which was denied by the Court and PROA filed a reconsideration.

~~The Company believes~~believed that the probability of a loss ~~is remote, considering: (i)~~was remote. On December 28, 2019 and March 31, 2020 the ~~obligation~~Company reached confidential settlement agreements with Puerto Rican franchisees, sole members of PROA, finalizing all controversies and disputes among the parties. All corresponding judicial documentation was filed to ~~contribute is not directed towards a cooperative, (ii)~~end this proceeding and the ~~franchise agreement does not contain a provision that makes it mandatory to participate in~~case was successfully dismissed by the ~~cooperative, and (iii) PROA’s by-laws state that participation in the cooperative is voluntary, among other arguments. Therefore, no provision has been recorded.~~Court.

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 PROA~~ claim.

At December 31, ~~2019,~~2020, the provision for contingencies includes ~~$1,612~~$1,259 ($~~3,970~~1,612 at December 31, ~~2018)~~2019), related to ~~Brazilian claims that are covered by the indemnification agreement.~~this claim. As a result, the Company has recorded a non-current asset in respect of McDonald’s Corporation’s indemnity in the consolidated balance sheet. ~~The asset in respect of McDonald’s Corporation’s indemnity represents the amount of cash to be received as a result of settling certain Brazilian labor and tax contingencies.~~

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~~Arcos Dorados Holdings Inc.~~

~~Notes to the Consolidated Financial Statements~~

~~As of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019~~

~~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.

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Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

19.Disclosures about fair value of financial instruments (continued)

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.

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, ~~2019~~2020 and ~~2018:~~2019:

~~F- 44~~

~~Table of Contents~~

~~Arcos Dorados Holdings Inc.~~

~~Notes to the Consolidated Financial Statements~~

~~As of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019~~

~~Amounts in thousands of US dollars, except for share data and as otherwise indicated~~


	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,
	2020		2019		2020		2019		2020		2019		2020		2019
Assets
Cash equivalents	$	106,856	$	49,038	$	0	$	0	$	0	$	0	$	106,856	$	49,038
Short-term Investments	0		25		0		0		0		0		0		25
Derivatives	0		0		122,603		58,107		0		0		122,603		58,107
Total Assets	$	106,856	$	49,063	$	122,603	$	58,107	$	0	$	0	$	229,459	$	107,170
Liabilities
Derivatives	$	0	0		20,525		$	14,037	$	0	$	0	20,525		14,037



Total Liabilities	$	0	$	0	$	20,525	$	14,037	$	0	$	0	$	20,525	$	14,037

~~19.Disclosures about fair value of financial instruments (continued)~~

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,
2019 2018 2019 2018 2019 2018 2019 2018
Assets
Cash equivalents $ 49,038
$ 118,948
$ —
$ —
$ —
$ —
$ 49,038
$ 118,948
Short-term Investments 25
—
—
—
—
—
25
—
Derivatives —
—
58,107
55,463
—
—
58,107
55,463
Total Assets $ 49,063
$ 118,948
$ 58,107
$ 55,463
$ —
$ —
$ 107,170
$ 174,411
Liabilities

Derivatives $ —
—
14,037
$ 14,203
$ —
$ —
14,037
14,203
Total Liabilities $ —
$ —
$ 14,037
$ 14,203
$ —
$ —
$ 14,037
$ 14,203

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, ~~2019,~~2020, the fair value of the Company’s ~~short-term and~~ long-term debt was estimated at ~~$701,538,~~$832,753, compared to a carrying amount of ~~$650,040.~~$788,521. 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.

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Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

19.Disclosures about fair value of financial instruments (continued)

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, ~~2019,~~2020, 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- 45~~

~~Table of Contents~~

~~Arcos Dorados Holdings Inc.~~

~~Notes to the Consolidated Financial Statements~~

~~As of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019~~

~~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, 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 4 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 described in Note 3.

The following table presents information about profit or loss and assets for each reportable segment:

F-48

For the fiscal years ended December 31,
2019 2018 2017
Revenues:
Brazil $ 1,385,566
$ 1,345,453
$ 1,496,573
Caribbean division 399,251
483,743
474,822
NOLAD 431,266
406,848
386,874
SLAD 742,994
845,527
961,256
Total revenues $ 2,959,077
$ 3,081,571
$ 3,319,525

Adjusted EBITDA:
Brazil $ 227,844
$ 218,391
$ 218,172
Caribbean division 24,955
(8,281 ) 40,844
NOLAD 39,027
32,313
33,717
SLAD 63,120
73,670
87,083
Total reportable segments 354,946
316,093
379,816
Corporate and others (i) (63,171 ) (58,096 ) (74,879 )
Total adjusted EBITDA $ 291,775
$ 257,997
$ 304,937

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Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, ~~2019~~2020 and ~~2018~~2019 and for each of the three years in the period ended December 31, ~~2019~~2020

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,
	2020		2019		2018
Revenues:
Brazil	$	862,748	$	1,385,566	$	1,345,453
Caribbean division	381,090		399,251		483,743
NOLAD	311,887		431,266		406,848
SLAD	428,494		742,994		845,527
Total revenues	$	1,984,219	$	2,959,077	$	3,081,571

Adjusted EBITDA:
Brazil	$	76,155	$	227,844	$	218,391
Caribbean division	28,847		24,955		(8,281)
NOLAD	10,207		39,027		32,313
SLAD	3,272		63,120		73,670
Total reportable segments	118,481		354,946		316,093
Corporate and others (i)	(50,370)		(63,171)		(58,096)
Total adjusted EBITDA	$	68,111	$	291,775	$	257,997


	For the fiscal years ended December 31,
	2020		2019		2018
Adjusted EBITDA reconciliation:

Total Adjusted EBITDA	$	68,111	$	291,775	$	257,997

(Less) Plus items excluded from computation that affect operating (loss) income:
Depreciation and amortization	(126,853)		(123,218)		(105,800)
Gains from sale or insurance recovery of property and equipment	4,210		5,175		4,973
Write-offs of property and equipment	(4,501)		(4,733)		(4,167)
Impairment of long-lived assets	(6,636)		(8,790)		(18,950)
Impairment of goodwill	(1,085)		(273)		(167)

Reorganization and optimization plan expenses	0		0		(11,003)
2008 Long-Term Incentive Plan incremental compensation from modification	0		0		575
Operating (loss) income	(66,754)		159,936		123,458
(Less) Plus:
Net interest expense	(59,068)		(52,079)		(52,868)
(Loss) gain from derivative instruments	(2,297)		439		(565)
Gain from securities	25,676		0		0
Foreign currency exchange results	(31,707)		12,754		14,874
Other non-operating income (expenses), net	2,296		(2,097)		270
Income tax expense	(17,532)		(38,837)		(48,136)
Net income attributable to non-controlling interests	(65)		(220)		(186)
Net (loss) income attributable to Arcos Dorados Holdings Inc.	$	(149,451)	$	79,896	$	36,847

F-49

For the fiscal years ended December 31,
2019 2018 2017
Adjusted EBITDA reconciliation:

Total Adjusted EBITDA $ 291,775
$ 257,997
$ 304,937

(Less) Plus items excluded from computation that affect operating income:

Depreciation and amortization (123,218 ) (105,800 ) (99,382 )
Gains from sale or insurance recovery of property and equipment 5,175
4,973
95,081
Write-offs of property and equipment (4,733 ) (4,167 ) (8,528 )
Impairment of long-lived assets (8,790 ) (18,950 ) (17,564 )
Impairment of goodwill (273 ) (167 ) (200 )
Reorganization and optimization plan expenses —
(11,003 ) —
2008 Long-Term Incentive Plan incremental compensation from modification —
575
(1,409 )
Operating income 159,936
123,458
272,935
(Less) Plus:

Net interest expense (52,079 ) (52,868 ) (68,357 )
Gain (loss) from derivative instruments 439
(565 ) (7,065 )
Foreign currency exchange results 12,754
14,874
(14,265 )
Other non-operating (expenses) income, net (2,097 ) 270
(435 )
Income tax expense (38,837 ) (48,136 ) (53,314 )
Net income attributable to non-controlling interests (220 ) (186 ) (333 )
Net income attributable to Arcos Dorados Holdings Inc. $ 79,896
$ 36,847
$ 129,166

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Table of Contents

Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, ~~2019~~2020 and ~~2018~~2019 and for each of the three years in the period ended December 31, ~~2019~~2020

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,
	2020		2019		2018
Depreciation and amortization:
Brazil	$	59,466	$	63,467	$	52,632
Caribbean division	20,742		18,481		22,835
NOLAD	22,200		21,422		20,829
SLAD	20,329		20,713		19,293
Total reportable segments	122,737		124,083		115,589
Corporate and others (i)	5,288		4,894		5,696
Purchase price allocation (ii)	(1,172)		(5,759)		(15,485)
Total depreciation and amortization	$	126,853	$	123,218	$	105,800

Property and equipment expenditures:
Brazil	$	39,127	$	146,322	$	100,926
Caribbean division	9,582		15,934		18,640
NOLAD	9,627		32,662		24,145
SLAD	27,975		70,280		53,300
Others	0		37		30
Total property and equipment expenditures	$	86,311	$	265,235	$	197,041


											As of December 31,
	For the fiscal years ended December 31,										2020		2019
	2019			2018			2017
Depreciation and amortization:
Total assets:										Total assets:
Brazil	$	63,467		$	52,632		$	52,442		Brazil	$	1,102,009	$	1,328,984
Caribbean division	18,481			22,835			25,210			Caribbean division	420,481		429,170
NOLAD	21,422			20,829			20,635			NOLAD	412,045		458,235
SLAD	20,713			19,293			15,292			SLAD	372,974		389,976
Total reportable segments	124,083			115,589			113,579			Total reportable segments	2,307,509		2,606,365
Corporate and others (i)	4,894			5,696			5,978			Corporate and others (i)	95,802		67,195
Purchase price allocation (ii)	(5,759		)	(15,485		)	(20,175		)	Purchase price allocation (ii)	(109,357)		(115,875)
Total depreciation and amortization	$	123,218		$	105,800		$	99,382

Property and equipment expenditures:
Brazil	$	146,322		$	100,926		$	91,769
Caribbean division	15,934			18,640			16,759
NOLAD	32,662			24,145			17,565
SLAD	70,280			53,300			48,621
Others	37			30			52
Total property and equipment expenditures	$	265,235		$	197,041		$	174,766
Total assets										Total assets	$	2,293,954	$	2,557,685

As of December 31,
2019 2018
Total assets:
Brazil $ 1,328,984
$ 751,550
Caribbean division 429,170
303,467
NOLAD 458,235
247,697
SLAD 389,976
291,300
Total reportable segments 2,606,365
1,594,014
Corporate and others (i) 67,195
105,835
Purchase price allocation (ii) (115,875 ) (121,810 )
Total assets $ 2,557,685
$ 1,578,039
(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 31,2020 and 2019, corporate assets primarily include corporate derivatives, cash and cash equivalents 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 31,2020 and 2019 primarily related with the reduction of goodwill.

~~(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, 2019 and 2018, corporate assets primarily includes corporate cash and cash equivalents, lease right of use and derivatives.


~~(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 2 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 $960,986 and $856,192 at December 31, 2019 and 2018, respectively. All of the Company’s long-lived assets are related to foreign operations.

~~F- 48~~

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Table of Contents

Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, ~~2019~~2020 and ~~2018~~2019 and for each of the three years in the period ended December 31, ~~2019~~2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

21. Segment and geographic information (continued)

Long-lived assets consisting of property and equipment totaled $796,532 and $960,986 at December 31, 2020 and 2019, 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 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 or VES) 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.

Since February 2013, the Venezuelan government has announced several changes in the currency exchange ~~regulations. The last modification~~regulations, including different mechanisms to access foreign currency. During 2018, the applicable system was ~~in February 2018, when the Venezuelan government announced the unification of the formerly exchange rate systems into a sole foreign exchange mechanism called DICOM. The unified system operates~~DICOM that operated through an auction mechanism. ~~During 2018, the~~The Company ~~accessed~~had access to DICOM at an exchange rate greater than the one published by the governmental authorities. Considering that under ASC 830, foreign currency transactions are required to be remeasured at the applicable rate at which a particular transaction could be settled, each time the Company ~~access~~accessed to ~~NEW~~ DICOM at an exchange rate greater than the one published, this rate iswas considered for remeasurements purposes. Moreover, during 2019, the Central Bank of Venezuela permitted financial institution to participate as intermediaries in foreign currency operations.

On August 20, 2018, the Government announced the removal of five zeros from the Venezuelan currency and renamed it as “Sovereign Bolivar” (VES). In addition, the new currency devaluated from 2.48 to 59.93 VES per US dollar. Since that moment, the Sovereign Bolivar has been depreciating its value against ~~US dollar. As of December 31, 2019, the exchange rate was 44,080.58 VES per~~ US dollar.

The consequence of several reassessment of the exchange rate used for remeasurement purposes, the Company recognized negative impacts within the Consolidated Statement of Income, mainly related to the write down of certain inventories due to the impact on their net recoverable value, impairment of long-lived assets and foreign currency exchange results. The following table summarizes the impacts during fiscal years 2020, 2019 ~~2018~~ and ~~2017:~~2018:



	2020		2019		2018




Write down of inventories (i)	$	(1,625)	$	(4,468)	$	(61,007)
Impairment of long-lived assets (i)	(904)		(2,123)		(12,089)
Foreign currency exchange income (loss) (ii)	27		(583)		5,061

2019 2018 2017
Write down of inventories (i) $ (4,468 ) $ (61,007 ) $ (4,079 )
Impairment of long-lived assets (i) (2,123 ) (12,089 ) (8,563 )
Foreign currency exchange (loss) income (ii) (583 ) 5,061
(4,269 )

(i)Presented within Other operating income (expenses), net.

(ii)Presented within Foreign currency exchange results.


~~(i)~~	~~Presented within Other operating income (expenses), net.~~


~~(ii)~~	~~Presented within Foreign currency exchange results.~~

Revenues and operating (loss) income of the Venezuelan operations were $4,494 and $(7,712), respectively, for fiscal year 2020; $10,184 and $(8,240), respectively, for fiscal year 2019; and $78,859 and $(52,054), respectively, for fiscal year ~~2018; and $101,477 and $6,804, respectively, for fiscal year 2017.~~2018.

As of December 31, ~~2019,~~2020, the ~~Company’s local currency denominated net~~Company did not have a material monetary position, which would be subject to remeasurement in the event of further changes in the exchange ~~rate, was net asset $0.2 million (including $0.4 million of cash and cash equivalents).~~rate. In addition, Venezuela’s non-monetary assets were ~~$13.6~~$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. ~~Although these regulations caused a delay in the pricing plan,~~However, the Company was able to increase prices during the fiscal year ended December 31, ~~2019.~~2020.

The Company’s Venezuelan operations, ~~and the Company’s ability to repatriate its earnings,~~ continue to be ~~negatively affected~~impacted by ~~these difficult conditions and~~the country’s macroeconomic volatility, including the ongoing highly inflationaryenvironment. Additionally, the operations would be further ~~negatively~~ affected by ~~additional devaluations or~~more

F-51

Arcos Dorados Holdings Inc.

Notes to the ~~imposition~~Consolidated Financial Statements

As of ~~additional or more~~ December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

22.Venezuelan operations (continued)

stringent controls on foreign currency exchange, pricing, payments, profits or ~~imports~~imports; the continued migration or ~~other governmental actions or continued or increased labor unrest.~~the high levels 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.

~~F- 49~~

~~Table of Contents~~

~~Arcos Dorados Holdings Inc.~~

~~Notes to the Consolidated Financial Statements~~

~~As of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019~~

~~Amounts in thousands of US dollars, except for share data and as otherwise indicated~~

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 no0 par value each.

Issued and outstanding capital

At December 31, ~~2016,~~2017, the Company had ~~210,711,224~~211,072,508 shares issued and outstanding with no0 par value, consisting of ~~130,711,224~~131,072,508 class A shares and 80,000,000 class B shares.

During fiscal years 2020, 2019 ~~2018~~ and ~~2017,~~2018, the Company issued 472,130, 470,558 ~~520,565~~ and ~~361,284~~520,565 Class A shares, respectively, in connection with the partial vesting of restricted share units under the 2011 Equity Incentive Plan.

~~In addition, on~~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 no0 par value of the ~~Company (“The Repurchase Program”).~~Company.

~~The Repurchase Program began on May 22, 2018 and would expire at the close of business on May 22, 2019. However, it could terminate prior to such date.~~ As of February 15, 2019, the Company purchased 7,993,602 shares amounting to ~~$60,000.~~$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 stock dividend distribution.

As ~~a result the Repurchase Program concluded.~~

~~Therefore, at~~of December 31, 2020, 2019 ~~2018~~ and ~~2017~~2018 the Company had ~~212,063,631; 211,593,073~~207,265,773; 204,070,029 and ~~211,072,508~~205,232,247 outstanding shares, ~~issued with no par value,~~ consisting of ~~132,063,631; 131,593,073~~127,265,773; 124,070,029 and ~~131,072,508~~125,232,247 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 1 vote per share and holders of Class B shares are entitled to 5 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 March ~~26, 2019,~~3, 2020, the Company approved a cash dividend distribution to all Class A and Class B shareholders of $0.11 per share, to be paid in 3 installments, as follows: $0.05 per share on April ~~12, 2019,~~10, 2020, $0.03 per share on August ~~14, 2019~~13, 2020 and $0.03 per share on December 10, 2020. On July 6, 2020, the Company cancelled the 2 remaining cash dividend payments of $0.03 cents per share each, scheduled for August 13 and December 10, 2020. As of December 31, 2020 the cash dividend paid was $10,204.

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Table of Contents

Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020

Amounts in thousands of US dollars, except for share data and as otherwise indicated

23.Shareholders’ equity (continued)

Distribution of dividends (continued)

On July 6, 2020, the Company approved a stock dividend to all Class A and Class B shareholders to be distributed on August 12, ~~2019, amounting to $22,425.~~2020. The Company distributed a dividend of one share for every seventy-five shares held by its shareholders and paid cash in lieu of fractional shares. Therefore, the Company distributed 2,723,614 repurchased shares, and paid cash $16 for fractional shares.

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, ~~2019~~2020 and their related activity during the three-years in the period then ended:

~~F- 50~~

~~Table of Contents~~

~~Arcos Dorados Holdings Inc.~~

~~Notes to the Consolidated Financial Statements~~

~~As of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019~~

~~Amounts in thousands of US dollars, except for share data and as otherwise indicated~~


	Foreign currency translation		Cash flow hedges		Post-employment benefits (i)		Total Accumulated other comprehensive loss
Balances at December 31, 2017	$	(436,281)	$	8,359	$	(1,425)	$	(429,347)
Other comprehensive (loss) income before reclassifications	(62,996)		13,888		(418)		(49,526)
Net (income) loss reclassified from accumulated other comprehensive loss to consolidated statement of income	0		(23,887)		494		(23,393)
Net current-period other comprehensive (loss) income	(62,996)		(9,999)		76		(72,919)
Balances at December 31, 2018	(499,277)		(1,640)		(1,349)		(502,266)
Other comprehensive (loss) income before reclassifications	(12,168)		(5,185)		(55)		(17,408)
Net (income) loss reclassified from accumulated other comprehensive income to consolidated statement of income	0		85		864		949
Adoption of ASU 2017-12	0		(780)		0		(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 before reclassifications	(76,359)		54,287		(195)		(22,267)
Net loss reclassified from accumulated other comprehensive loss to consolidated statement income	0		(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)

~~23.~~
~~Shareholders’ equity (continued)~~

(i)~~Accumulated other comprehensive income (loss) (continued)~~

Foreign currency translation

Cash flow hedges
Post-employment benefits (i) Total Accumulated other comprehensive loss
Balances at December 31, 2016 $ (441,081 ) $ 305
$ (873 ) $ (441,649 )
Other comprehensive income (loss) before reclassifications 4,800
6,462
(938 ) 10,324
Net loss reclassified from accumulated other comprehensive loss to consolidated statement of income —
1,592
386
1,978
Net current-period other comprehensive income (loss) 4,800
8,054
(552 ) 12,302
Balances at December 31, 2017 (436,281 ) 8,359
(1,425 ) (429,347 )
Other comprehensive (loss) income before reclassifications (62,996 ) 13,888
(418 ) (49,526 )
Net (income) loss reclassified from accumulated other comprehensive income to consolidated statement of income —
(23,887 ) 494
(23,393 )
Net current-period other comprehensive (loss) income (62,996 ) (9,999 ) 76
(72,919 )
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 loss to consolidated statement 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 )

~~(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 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.

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Table of Contents

Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020

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,
	2020		2019		2018
Net (loss) income attributable to Arcos Dorados Holdings Inc. available to common shareholders	$	(149,451)	$	79,896	$	36,847
Weighted-average number of common shares outstanding - Basic	205,417,516		204,003,977		209,136,832
Incremental shares from assumed exercise of stock options (i)	0		0		0
Incremental shares from vesting of restricted share units	287,965		664,375		983,634
Weighted-average number of common shares outstanding - Diluted	205,705,481		204,668,352		210,120,466

Basic net (loss) income per common share attributable to Arcos Dorados Holdings Inc.	$	(0.73)	$	0.39	$	0.18
Diluted net (loss) income per common share attributable to Arcos Dorados Holdings Inc.	$	(0.73)	$	0.39	$	0.18

~~F- 51~~

~~Table~~(i)Options to purchase shares of ~~Contents~~

~~Arcos Dorados Holdings Inc.~~

~~Notes to the Consolidated Financial Statements~~

~~As of December 31, 2015~~common stock were outstanding during fiscal years 2020, 2019 and ~~2014 and~~2018. See Note 17 for ~~each of the three years~~details. These options were not included in the ~~period ended December 31, 2015~~

~~Amounts in thousands~~computation of ~~US dollars, except for share data and as otherwise indicated~~

~~24. Earnings~~diluted earnings per share ~~(continued)~~

because their inclusion would have been anti-dilutive.

For the fiscal years ended December 31,
2019 2018 2017
Net income attributable to Arcos Dorados Holdings Inc. available to common shareholders $ 79,896
$ 36,847
$ 129,166
Weighted-average number of common shares outstanding - Basic 204,003,977
209,136,832
210,935,685
Incremental shares from assumed exercise of stock options (i) —
—
—
Incremental shares from vesting of restricted share units 664,375
983,634
1,060,726
Weighted-average number of common shares outstanding - Diluted 204,668,352
210,120,466
211,996,411

Basic net income per common share attributable to Arcos Dorados Holdings Inc. $ 0.39
$ 0.18
$ 0.61
Diluted net income per common share attributable to Arcos Dorados Holdings Inc. $ 0.39
$ 0.18
$ 0.61


~~(i)~~	Options to purchase shares of common stock were outstanding during fiscal years 2019, 2018 and 2017. See Note 17 for details. These options were not included in the computation of diluted earnings per share because their inclusion would have been anti-dilutive.

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 and Venezuela (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, ~~2019~~2020 and ~~2018:~~2019:


	As of December 31,
	2020		2019
Accounts and notes receivable, net	$	272	$	177
Other receivables	2,392		2,201
Miscellaneous	3,665		3,719
Accounts payable	(6,378)		(8,747)

As of December 31,
2019 2018
Accounts and notes receivable, net $ 177
$ 860
Other receivables 2,201
1,676
Miscellaneous 3,719
2,963
Accounts payable (8,747 ) (14,984 )

F-54

Table of Contents

Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial Statements

As of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020

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, 2020, 2019 ~~2018~~ and ~~2017:~~2018:


	Fiscal years ended December 31,
	2020		2019		2018
Food and paper (i)	$	(124,416)	$	(188,276)	$	(177,356)
Occupancy and other operating expenses	(3,667)		(7,252)		(5,322)

Fiscal years ended December 31,
2019 2018 2017
Food and paper (i) $ (188,276 ) $ (177,356 ) $ (173,387 )
Occupancy and other operating expenses (7,252 ) (5,322 ) (4,281 )


~~(i)~~	Includes $38,658 of distribution fees and $149,618 of suppliers purchases managed through the Axionlog Business for the fiscal year ended December 31, 2019; $41,633 and $135,723, respectively, for the fiscal year ended December 31, 2018; and $48,773 and $124,614, respectively, for the fiscal year ended December 31, 2017.

(i)Includes $24,303 of distribution fees and $100,114 of suppliers purchases managed through the Axionlog Business for the fiscal year ended December 31, 2020; $38,658 and $149,618, respectively, for the fiscal year ended December 31, 2019; and $41,633 and $135,723, respectively, for the fiscal year ended December 31, 2018.

~~F- 52~~

~~Table of Contents~~

~~Arcos Dorados Holdings Inc.~~

~~Notes to the Consolidated Financial Statements~~

As of December 31, ~~2019~~2020 and ~~2018 and for each of the three years in the period ended December 31,~~ 2019,

~~Amounts in thousands of US dollars, except for share data and as otherwise indicated~~

~~25.Related party transactions (continued)~~

~~As of December 31, 2019 and 2018,~~ the Company had other receivables totaling ~~$2,325~~$1,761 and ~~$2,692,~~$2,325, respectively, and accounts payable with Lacoop, A.C. and Lacoop II, S.C. totaling ~~$NaN~~$(508) and ~~$1,634,~~NaN, respectively.

26. Valuation and qualifying accounts

The following table presents the information required by Rule 12-09 of Regulation S-X in regards to 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, 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
Year ended December 31, 2018:
Deducted from assets accounts:
Allowance for doubtful accounts (iii)	$	21,467	$	6,064	$	(1,860)	$	(132)	$	25,539
Valuation allowance on deferred tax assets	271,651		13,107		(37,718)		(27,120)		219,920
Reported as liabilities:
Provision for contingencies	27,956		25,838		(19,702)		(5,583)		28,509
Total	$	321,074	$	45,009	$	(59,280)	$	(32,835)	$	273,968

Description Balance at beginning of period Additions (i) Deductions (ii) Translation Balance at end of period
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
Year ended December 31, 2018:

Deducted from assets accounts:

Allowance for doubtful accounts (iii) $ 21,467
$ 6,064
$ (1,860 ) $ (132 ) $ 25,539
Valuation allowance on deferred tax assets 271,651
13,107
(37,718 ) (27,120 ) 219,920
Reported as liabilities:

Provision for contingencies 27,956
25,838
(19,702 ) (5,583 ) 28,509
Total $ 321,074
$ 45,009
$ (59,280 ) $ (32,835 ) $ 273,968
Year ended December 31, 2017:

Deducted from assets accounts:

Allowance for doubtful accounts (iii) $ 16,367
$ 6,386
$ (1,244 ) $ (42 ) $ 21,467
Valuation allowance on deferred tax assets 290,620
8,382
(27,515 ) 164
271,651
Reported as liabilities:

Provision for contingencies 18,112
36,160
(26,137 ) (179 ) 27,956
Total $ 325,099
$ 50,928
$ (54,896 ) $ (57 ) $ 321,074


~~(i)~~	~~Additions in valuation allowance on deferred tax assets are charged to income tax expense.~~

(i)Additions in ~~provision for contingencies~~valuation allowance on deferred tax assets are ~~explained as follows:~~charged to income tax expense.

Fiscal years 2019, 2018 and 2017 – Relate to the accrual of $17,441, $23,995 and $36,160, respectively, and a reclassification of $354 and $1,843, during fiscal years 2019 and 2018, 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 and reclassifications amounting to $17,768 and $NaN, respectively, during fiscal year 2019; $19,702 and $NaN, respectively, during fiscal year 2018; and $25,427 and $710, respectively, during fiscal year 2017; as discussed in Note 18.

~~F- 53~~

F-55

Table of Contents

Arcos Dorados Holdings Inc.

Notes to the Consolidated Financial ~~Statements~~

As of December 31, ~~2019~~2020 and ~~2018~~2019 and for each of the three years in the period ended December 31, ~~2019~~2020

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: $22,442 and $24,999 at December 31, 2019 and 2018, respectively, within Accounts and notes receivable, net and $634 and $540 at December 31, 2019 and 2018, respectively, within Other receivables.

~~27. Subsequent events~~


a.	~~Dividend distribution~~

~~On March 03, 2020, the Company approved a dividend distribution to all Class A and Class B shareholders of $0.11 per share to be paid~~Additions in ~~3 installments,~~provision for contingencies are explained as follows: ~~$0.05 per share on April 10,~~

Fiscal years 2020, ~~$0.03 per share on August 13,~~2019 and 2018 – Relate to the accrual of $15,330, $17,441 and $23,995, respectively, and a reclassification of $2,061 and $354, during fiscal years 2020 and ~~$0.03 per share~~2019, respectively. See Note 18 for details.

(ii)Deductions in valuation allowance on ~~December 10, 2020.~~


b.	~~Effects of Covid-19 on operations~~

deferred tax assets are charged to income tax expense.

~~In March 11,~~

Deductions in provision for contingencies are explained as follows:

Corresponds to the settlements amounting to $11,920; $17,768 and $19,702 during fiscal years 2020, ~~a novel virus known~~2019 and 2018, respectively. as ~~COVID-19 was declared by~~discussed in Note 18.

Deductions in allowance for doubtful accounts during fiscal years 2020 and 2019 mainly relate to reductions in the ~~World Health Organization’s (WHO)~~accrual and the write-off of some receivables from franchisees in Puerto Rico as a pandemic, resulting in federal, state and local governments mandating various restrictions, including travel restrictions, restrictions on public gatherings, stay at home orders and advisories and quarantining of people who may have been exposed to the virus. As a result, since mid-March 2020 the business operationsconsequence of the ~~Company were disrupted by~~confidential settlement agreements reached in December 2020 and March 2021 with Puerto Rican franchisees. For details see note 18.

(iii)Presented in the ~~spread of the virus. The disruption has negatively impacted the Company~~consolidated balance sheet as follow: $585 and such impact could be material to our financial results, condition and outlook. The Company has experienced a decline in revenues as well as cash from operations. In addition, the Latin America markets may continue to experience adverse economic conditions, therefore could impact the Company business, financial conditions and results of operations. Consequently, several measures have been taking to mitigate the potential effects from the pandemic by preserving cash and reducing expenses, as well as capital expenditures and renegotiating terms and conditions with lessors and other suppliers.

~~As of March~~$22,442 at December 31, 2020 ~~the Company drew $136 million~~ ~~in short-term debt to maintain liquidity~~ and is expected to continue relying on short-term funding as long as COVID-19 pandemic is not brought under control. The Company expects to be in compliance with its financial ratios related with revolving credit facilities2019, respectively, within Accounts and ~~Master Franchise Agreements by March~~notes receivable, net and $358 and $634 at December 31, 2020 ~~however due to the COVID-19 pandemic effects, compliance in the following periods may be affected in the future.~~and 2019, respectively, within Other receivables.

Moreover, if the impacts of the COVID-19 pandemic become other than temporary, the Company may also need to consider it as an indicator of impairment. The significance and duration of the disruption will continue to be closely monitored.

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 believe 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.

~~F- 54~~

F-56



	Page
PRESENTATION OF FINANCIAL AND OTHER INFORMATION		iv
FORWARD-LOOKING STATEMENTS		v
ENFORCEMENT OF JUDGMENTS		vivii
PART I		1
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS		1
A. Directors and Senior Management		1
B. Advisers		1
C. Auditors		1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE		1
A. Offer Statistics		1
B. Method and Expected Timetable		1
ITEM 3. KEY INFORMATION		1
A. Selected Financial Data		1
B. Capitalization and Indebtedness		1011
C. Reasons for the Offer and Use of Proceeds		1011
D. Risk Factors		1011
ITEM 4. INFORMATION ON THE COMPANY		3033
A. History and Development of the Company		3033
B. Business Overview		3235
C. Organizational Structure		5156
D. Property, Plants and Equipment		5257
ITEM 4A. UNRESOLVED STAFF COMMENTS		5358
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS		5358
A. Operating Results		5358
B. Liquidity and Capital Resources		6975
C. Research and Development, Patents and Licenses, etc.		7581
D. Trend Information		7581
E. Off-Balance Sheet Arrangements		7782
F. Tabular Disclosure of Contractual Obligations		7782
G. Safe Harbor		7783
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES		7783
A. Directors and Senior Management		7783
B. Compensation		8389
C. Board Practices		8490
D. Employees		8591
E. Share Ownership		8793


ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS			8894



~~A. Major Shareholders~~	88
A. Major Shareholders		94
B. Related Party Transactions		8995
C. Interests of Experts and Counsel		9095
ITEM 8. FINANCIAL INFORMATION		9096
A. Consolidated Statements and Other Financial Information		9096
B. Significant Changes		9499
ITEM 9. THE OFFER AND LISTING		9499
A. Offering and Listing Details		9499
B. Plan of Distribution		9499
C. Markets		9499
D. Selling Shareholders		9499
E. Dilution		94100
F. Expenses of the Issue		94100
ITEM 10. ADDITIONAL INFORMATION		94100
A. Share Capital		94100
B. Memorandum and Articles of Association		94100
C. Material Contracts		~~103~~109
D. Exchange Controls		~~109~~115
E. Taxation		~~109~~116
F. Dividends and Paying Agents		~~112~~119
G. Statement by Experts		~~112~~119
H. Documents on Display		~~112~~119
I. Subsidiary Information		~~113~~119
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		~~113~~120
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES		~~115~~122
A. Debt Securities		~~115~~122
B. Warrants and Rights		~~115~~122
C. Other Securities		~~115~~122
D. American Depositary Shares		~~115~~122
PART II		~~116~~123
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES		~~116~~123
A. Defaults		~~116~~123
B. Arrears and Delinquencies		~~116~~123
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS		~~116~~123
A. Material Modifications to Instruments		~~116~~123
B. Material Modifications to Rights		~~116~~123
C. Withdrawal or Substitution of Assets		~~116~~123
D. Change in Trustees or Paying Agents		~~116~~123
E. Use of Proceeds		~~116~~123
~~ITEM 15. CONTROLS AND PROCEDURES~~	~~116~~
~~A. Disclosure Controls and Procedures~~	~~116~~



	Ownership					Store Type⁽¹⁾						Real Property⁽²⁾
Portfolio by Division	Company-Operated	Joint Venture	Franchised	Developmental License	Total	Freestanding	Food Court	In-Store	Mall Store	Dessert Centers	McCafé Locations	Owned	Leased
Brazil	612	0	411	0	1,023	462	350	92	119	2,000	81	108	915
Caribbean Division	251	0	84	1	336	224	21	36	55	311	36	128	207
NOLAD	364	0	156	10	530	273	146	51	59	626	13	160	360
SLAD	338	15	51	0	404	124	77	115	87	389	128	98	306
Total	1,565	15	702	11	2,293	1,083	594	294	320	3,326	258	494	1,788



	Quarter ended
	December 31, 2018	March 31, 2019	June 30, 2019	September 30, 2019	December 31, 2019
Leverage Ratio	4.07	3.83	3.76	3.83	3.77
Fixed Charge Coverage Ratio	1.70	1.83	1.86	1.80	1.86



Month of repurchase	Total number of Class A shares purchased	Average price paid per Class A share	Total number of Class A shares purchased as part of publicly announced plans or program	Approximate dollar value of Class A shares that may be purchased under the program
January, 2019	1,197,286	$8.48	1,197,286	$3,791,217
February, 2019	435,490	$8.68	435,490	$0
Total at end of period	1,632,776	$8.58	1,632,776	$0



	Interest Expense (i)						DFC Amortization (i)						Amortization of Discount, net (i)
	2019		2018		2017		2019		2018		2017		2019		2018		2017
2027 Notes	$	15,569	$	15,569	$	11,547	$	299	$	299	$	224	$	—	$	—	$	—
2023 Notes	23,060		23,060		23,885		323		323		610		402		397		752



Interest Expense (i) (ii)						DFC Amortization (ii)						Other Costs (ii) (iii)
2019		2018		2017		2019		2018		2017		2019		2018		2017
$	—	$	—	$	2,570	$	—	$	—	$	3,251	$	—	$	—	$	2,249



Other information	2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	135,788
Right-of-use assets obtained in exchange for new lease liabilities
Operating leases	118,285
Weighted-average remaining lease term (years)
Operating leases	8
Weighted-average discount rate
Operating leases	5		%



	Units		Weighted-average grant-date fair value
Outstanding at December 31, 2016	1,780,997		6.07
2017 annual grant	497,960		9.20
Partial vesting	(361,284	)	7.65
Forfeitures	(180,828	)	5.99
Outstanding at December 31, 2017	1,736,845		6.65
2018 annual grant	520,393		8.50
Partial vesting	(534,589	)	6.01
Forfeitures	(117,600	)	7.24
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
Exercisable at December 31, 2019	—		—



	Fixed Charge Coverage Ratio	Leverage Ratio
March 31, 2019	1.83	3.83
June 30, 2019	1.86	3.76
September 30, 2019	1.80	3.83
December 31, 2019	1.86	3.77