Burger King 2010 Annual Report Download - page 69

Table of Contents
provided to illustrate a hypothetical scenario and related effect on operating income. Actual results will differ as foreign currencies may
move in uniform or different directions and in different magnitudes.
From time to time we have entered into foreign currency forward contracts to hedge our exposure to fluctuations in exchange rates
associated with the receipt of forecasted foreign−denominated royalty cash flows. These forward contracts are denominated in Canadian
dollars and Australian dollars. We have designated these forward contracts as cash flow hedges; as a result, the change in fair value of
these forward contracts are recognized in stockholders’ equity until the forecasted foreign−denominated royalties are recognized as
income in our consolidated statements of income, and the related foreign−denominated royalty receivable is settled in the following
month, at which time the applicable portion of the fair value of the forward contract is reclassified from stockholders’ equity to our
consolidated statements of income. At June 30, 2010, we had no foreign currency forward contracts to hedge the U.S. dollar equivalent
in Australian dollars and in Canadian dollars of forecasted foreign−denominated royalty cash flows.
We have entered into foreign currency forward contracts intended to economically hedge our income statement exposure to
fluctuations in exchange rates associated with our intercompany loans denominated in foreign currencies and certain foreign
currency−denominated assets. These forward contracts are primarily denominated in euros but are also denominated in British pounds,
Canadian dollars and Singapore dollars. Fluctuations in the value of these forward contracts are recognized in our consolidated
statements of income as incurred. However, the fluctuations in the value of these forward contracts largely offset the impact of changes
in the value of the underlying risk that they are intended to hedge, which is also reflected in our consolidated statements of income. As
of June 30, 2010, we had foreign currency forward contracts to hedge the net U.S. dollar equivalent of $391.2 million of intercompany
loans and foreign currency−denominated assets. This U.S. dollar equivalent by currency is as follows: $293.6 million in euros;
$59.3 million in British pounds; $24.3 million in Canadian dollars; and $14.0 million in Singapore dollars.
We are exposed to losses in the event of nonperformance by counterparties on these forward contracts. We attempt to minimize
this risk by selecting counterparties with investment grade credit ratings, limiting our exposure to any single counterparty and regularly
monitoring our market position with each counterparty.
Interest Rate Risk
We have a market risk exposure to changes in interest rates, principally in the United States. We attempt to minimize this risk
through the utilization of interest rate swaps. These swaps are entered into with financial institutions and have reset dates and key terms
that match those of the underlying debt. Accordingly, any change in market value associated with interest rate swaps is offset by the
opposite market impact on the related debt.
As of June 30, 2010, we had interest rate swaps with a notional value of $575.0 million that qualify as cash flow hedges. These
interest rate swaps help us manage exposure to changes in forecasted LIBOR−based interest payments made on variable−rate debt. A
1% change in interest rates on our existing senior term debt of $753.7 million would have resulted in an increase or decrease in interest
expense of approximately $2.0 million for fiscal year 2010.
Commodity Price Risk
We purchase certain products, including beef, chicken, cheese, french fries, tomatoes and other commodities which are subject to
price volatility that is caused by weather, market conditions and other factors that are not considered predictable or within our control.
Additionally, our ability to recover increased costs is typically limited by the competitive environment in which we operate. We do not
utilize commodity option or future contracts to hedge commodity prices and do not have long−term pricing arrangements other than for
chicken, which expires in December 2010. As a result, we purchase beef and other commodities at market prices, which fluctuate on a
daily basis and may differ between different geographic regions, where local regulations may affect the volatility of commodity prices.
The estimated change in Company restaurant food, paper and product costs from a hypothetical 10% change in average prices of
our commodities would have been approximately $58.5 million for fiscal 2010. The hypothetical change in food, paper and product
costs could be positively or negatively affected by changes in prices or product sales mix.
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