Burger King 2012 Annual Report Download - page 65

Table of Contents
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We are exposed to changes in interest rates related to our 2012 Term Loan Facility and 2012 Revolving Credit Facility, which bear interest at
LIBOR/EURIBOR plus a spread, subject to a LIBOR/EURIBOR floor. Generally, interest rate changes could impact the amount of our interest paid and,
therefore, our future earnings and cash flows, assuming other factors are held constant. To mitigate the impact of changes in LIBOR/EURIBOR, we entered
into interest rate cap agreements. At December 31, 2012 and December 31, 2011, we had U.S. Dollar denominated interest rate cap agreements (notional
amount of $1.4 billion and $1.5 billion, respectively) (the “Cap Agreements”) to effectively cap the LIBOR applicable to our variable rate borrowings at a
weighted-average rate of 1.74% for U.S. Dollar denominated borrowings. The six year interest rate cap agreements are a series of individual caplets that reset
and settle quarterly consistent with the payment dates of our LIBOR-based term debt. Under the terms of the Cap Agreements, if LIBOR/EURIBOR resets
above the strike price, we will receive the net difference between the rate and the strike price. During 2012, we terminated our Euro denominated interest rate
cap agreements (notional amount of €193.6 million at December 31, 2011) which effectively capped the annual interest expense applicable to our borrowings
under the 2011 Amended Credit Agreement for Euro denominated borrowings. In connection with the termination of the Euro denominated interest rate cap
agreements, we recorded a charge of $8.4 million within other operating (income) expense, net related to realized losses reclassified from accumulated other
comprehensive income (“AOCI”).
At December 31, 2012, we had fixed rate debt of $1.23 billion and variable rate debt of $1.72 billion. Based on our variable rate debt balance and
LIBOR as of December 31, 2012, a hypothetical 1.00% increase in LIBOR would increase our annual interest expense by approximately $12.4 million.
We are also exposed to losses in the event of nonperformance by the counterparty to these Cap Agreements. We attempt to minimize this risk by selecting
a counterparty with investment grade credit ratings and regularly monitoring our market position with the counterparty.
During 2012, we entered into three forward-starting interest rate swaps to hedge the variability of forecasted interest payments associated with changes in
interest rates beginning in 2015 and 2016. The forward-starting interest rate swaps have a total notional value of $2.3 billion with terms calling for us to
receive interest quarterly at a variable rate equal to the forward 90-day LIBOR swap rate and to pay interest quarterly at a fixed rate. The forward-starting
interest rate swaps effectively fix the interest rate on $1.0 billion of floating-rate debt beginning 2015 and $1.3 billion of floating-rate debt starting 2016. At
December 31, 2012, the estimated fair value of our forward starting interest rate swaps was an asset of $0.8 million.
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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 occasionally take forward pricing positions through our suppliers to manage
commodity prices. 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 $38.2 million for 2012. 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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Source: Burger King Worldwide, Inc., 10-K, February 22, 2013 Powered by Morningstar® Document Research℠
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