Cracker Barrel 2008 Annual Report Download - page 46

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Quantitative and Qualitative Disclosures
about Market Risk
We are exposed to market risk, such as changes in
interest rates and commodity prices. We do not hold or
use derivative financial instruments for trading
purposes.
Interest Rate Risk. We have interest rate risk relative to
our outstanding borrowings under our 2006 Credit Facility.
At August 1, 2008, our outstanding borrowings under
our 2006 Credit Facility totaled $787,759 (see Note 8 to
our Consolidated Financial Statements). Loans under the
credit facility bear interest, at our election, either at the
prime rate or a percentage point spread from LIBOR
based on certain specified financial ratios.
Our policy has been to manage interest cost using a
mix of fixed and variable rate debt (see Notes 8, 14 and
16 to our Consolidated Financial Statements). To manage
this risk in a cost efficient manner, we entered into an
interest rate swap on May 4, 2006 in which we agreed to
exchange with a counterparty, at specified intervals
effective August 3, 2006, the difference between fixed
and variable interest amounts calculated by reference to
an agreed-upon notional principal amount. The swapped
portion of our outstanding debt is fixed at a rate of
5.57% plus our current credit spread, or 7.07% based on
today’s credit spread, over the 7-year life of the interest
rate swap. A discussion of our accounting policies for
derivative instruments is included in the summary of
significant accounting policies in Note 2 to our
Consolidated Financial Statements.
The impact on our annual results of operations of a
one-point interest rate change on the outstanding
balance of our unswapped outstanding debt as of August 1,
2008, would be approximately $1,739.
Commodity Price Risk. Many of the food products
that we purchase are affected by commodity pricing and
are, therefore, subject to price volatility caused by
market conditions, weather, production problems, delivery
difficulties and other factors which are outside our
control and which are generally unpredictable. Four food
categories (dairy (including eggs), beef, poultry and
pork) account for the largest shares of our food purchases
at approximately 15%, 12%, 11% and 10%, respectively.
Other categories affected by the commodities markets,
such as grains and seafood, may each account for as
much as 6% of our food purchases. While we have some
of our food items prepared to our specifications, our food
items are based on generally available products, and if
any existing suppliers fail, or are unable to deliver in
quantities required by us, we believe that there are
sufficient other quality suppliers in the marketplace that
our sources of supply can be replaced as necessary. We
also recognize, however, that commodity pricing is
extremely volatile and can change unpredictably and over
short periods of time. Changes in commodity prices would
affect us and our competitors generally, and depending
on the terms and duration of supply contracts, sometimes
simultaneously. We enter into supply contracts for certain
of our products in an effort to minimize volatility of
supply and pricing. In many cases, or over the longer
term, we believe we will be able to pass through some or
much of the increased commodity costs by adjusting our
menu pricing. From time to time, competitive
circumstances, or judgments about consumer acceptance
of price increases, may limit menu price flexibility, and in
those circumstances increases in commodity prices can
result in lower margins, as happened to us in 2008.
CRITICAL ACCOUNTING ESTIMATES
We prepare our Consolidated Financial Statements in
conformity with generally accepted accounting principles
in the United States (“GAAP”). The preparation of these
financial statements requires us to make estimates and
assumptions about future events and apply judgments
that affect the reported amounts of assets, liabilities,
revenue, expenses and related disclosures. We base our
estimates and judgments on historical experience, current
trends, outside advice from parties believed to be experts
in such matters and on various other assumptions that
are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments
about the carrying value of assets and liabilities that
are not readily apparent from other sources. However,
because future events and their effects cannot be