Commitments and contingencies

12 Months Ended

Dec. 31, 2019

Commitments and Contingencies Disclosure [Abstract]

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)	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 two 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 not be in compliance with these commitments under the MFA, it could be in material breach. A breach of the MFA would give McDonald’s Corporation certain rights, including the ability to acquire all or portions of the business.

The following table summarize Company’s ratios requirements for the three-month periods ended from March 31, 2019 to December 31, 2019, for which the Company is in compliance:



	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 maintains standby letters of credit with an aggregate drawing amount of $80 million in favor of McDonald’s Corporation as collateral for the obligations assumed under the MFAs. The letters of credit can be drawn if certain events occur, including the failure to pay royalties. No amounts have been drawn at the date of issuance of these financial statements.

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 and 2018, the Company maintains a provision for contingencies, net of judicial deposits, amounting to $26,158 and $28,509, respectively, presented as follow: $2,035 and $2,436 as a current liability and $24,123 and $26,073 as a non-current liability, respectively. The breakdown of the provision for contingencies is as follows:



Description	Balance at beginning of period			Accruals, net			Settlements			Reclassifications and increase of judicial deposits			Translation			Balance at end of period
Year ended December 31, 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


(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.

As of December 31, 2019, 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 million and $227 million.

Provision for contingencies (continued)

Additionally, there is a lawsuit filed by several Puerto Rican franchisees against McDonald’s Corporation and certain subsidiaries purchased by the Company during the acquisition of the LatAm business (“the Puerto Rican franchisees lawsuit”).

The claim seeks declaratory judgment and damages in the aggregate amount of $66.7 million plus plaintiffs’ attorney fees. At the end of 2014 the plaintiffs finalized their presentation of evidence whereas the Company has not started yet. 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 believes that the probability of a loss is remote. Nevertheless, during December 2019, some of the Puerto Rican franchisees reached a Confidential Settlement Agreement with the Company finalizing all controversies and disputes among such parties. As a consequence of this agreement, the aggregate amount will be reduced.

During 2014, another franchisee filed a complaint (“the related Puerto Rican franchisee lawsuit”) against the Company and McDonald’s USA, LLC (a wholly owned subsidiary of McDonald’s Corporation), asserting a very similar claim to the one filed in the Puerto Rican franchisees lawsuit. The claim seeks declaratory judgment and damages in the amount of $30 million plus plaintiffs’ attorney fees. 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 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 the parties, the First Instance Court entered a “Partial Summary Judgment and Resolution” in favor of PROA, before initiating the discovery phase, finding that 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 that the probability of a loss is remote, considering: (i) the obligation to contribute is not directed towards a cooperative, (ii) the franchise agreement does not contain a provision that makes it mandatory to participate in 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.

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, the provision for contingencies includes $1,612 ($3,970 at December 31, 2018), related to Brazilian claims that are covered by the indemnification agreement. As a result, the Company has recorded a non-current asset in respect of McDonald’s Corporation’s indemnity in the consolidated balance sheet. 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.