Burger King 2012 Annual Report Download - page 64

Table of Contents
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See Note 2, “Summary of Significant Accounting Policies — New Accounting Pronouncements,” in the Notes to Consolidated Financial Statements for
a discussion of new accounting pronouncements.
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We are exposed to market risks associated with currency exchange rates, interest rates and commodity prices. In the normal course of business and in
accordance with our policies, we manage these risks through a variety of strategies, which may include the use of derivative financial instruments to hedge our
underlying exposures. Our policies prohibit the use of derivative instruments for speculative purposes, and we have procedures in place to monitor and control
their use.
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Movements in currency exchange rates may affect the translated value of our earnings and cash flow associated with our foreign operations, as well as
the translation of net asset or liability positions that are denominated in foreign currencies. In countries outside of the United States where we operate Company
restaurants, we generally generate revenues and incur operating expenses and selling, general and administrative expenses denominated in local currencies.
These revenues and expenses are translated using the average rates during the period in which they are recognized and are impacted by changes in currency
exchange rates. In many countries where we do not have Company restaurants our franchisees pay royalties to us in currencies other than the local currency in
which they operate. However, as the royalties are calculated based on local currency sales, our revenues are still impacted by fluctuations in exchange rates.
During 2012, we entered into cross-currency rate swaps with an aggregate notional value of $430 million to hedge a portion of the net investment in a
Swiss subsidiary, Burger King Europe GmbH. A total notional value of $230 million of these swaps are contracts to exchange quarterly fixed-rate payments
we make in Euros for quarterly fixed-rate payments we receive in US dollars and mature on October 19, 2016. A total notional value of $200 million of these
swaps are contracts to exchange quarterly floating-rate payments we make in Euros for quarterly floating-rate payments we receive in U.S. Dollars and mature
on September 28, 2017. Changes in the fair value of these instruments are immediately recognized in accumulated other comprehensive income (loss) to offset
the change in the value of the net investment being hedged. At December 31, 2012, the estimated fair value of our cross-currency rate swaps was a liability of
$11.0 million. A hypothetical 10% strengthening of the Euro relative to the U.S. dollar as of December 31, 2012, would have resulted in an after-tax translation
loss of $28.5 million within accumulated other comprehensive income (loss). A hypothetical 10% weakening of the Euro relative to the U.S. dollar as of
December 31, 2012, would have resulted in an after-tax translation gain of $28.5 million within accumulated other comprehensive income (loss). Gains
(losses) on the net investment hedge recorded in accumulated other comprehensive income (loss) are offset by a corresponding decrease (increase) in the
carrying amount of our net investment in Burger King Europe GmbH.
From time to time, 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. 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 and regularly
monitoring our market position with each counterparty.
During 2012, income from operations would have decreased or increased $23.8 million if all foreign currencies uniformly weakened or strengthened
10% relative to the U.S. dollar, holding other variables constant, including sales volumes. The effect of a uniform movement of all currencies by 10% is
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.
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Source: Burger King Worldwide, Inc., 10-K, February 22, 2013 Powered by Morningstar® Document Research℠
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