El Pollo Loco 2015 Annual Report Download - page 66

Table of Contents
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to market risk from changes in interest rates on our debt, which bears interest at a USD LIBOR plus a margin between 1.75%
and 2.50%. As of December 31, 2014, we had outstanding borrowings of $165.0 million and another $7.4 million of letters of credit in support
of our insurance programs. A 1.00% increase in the effective interest rate applied to these borrowings would result in a pre-tax interest expense
increase of $1.7 million on an annualized basis.
We manage our interest rate risk through normal operating and financing activities and, when determined appropriate, through the use of
derivative financial instruments.
To mitigate exposure to fluctuations in interest rates, we entered into two interest rate caps, as discussed above under Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt and Other Obligations—
Hedging Arrangements.”
Inflation
Inflation has an impact on food, paper, construction, utility, labor and benefits, general and administrative, and other costs, all of which can
materially impact our operations. We have a substantial number of hourly employees who are paid wage rates at or based on the applicable
federal or state minimum wage, and increases in the minimum wage will increase our labor costs. Since July 1, 2014, the State of California
(where most of our restaurants are located) has had a minimum wage of $9.00 per hour. From January 1, 2008, to June 30, 2014, it had been
$8.00 per hour. It is scheduled to rise to $10.00 per hour on January 1, 2016. In general, we have been able to substantially offset costs increases
resulting from inflation by increasing menu prices, managing menu mix, improving productivity, or other adjustments. We may or may not be
able to offset cost increases in the future.
Commodity Price Risk
We are exposed to market price fluctuation in food product prices. Given the historical volatility of certain of our food product prices, including
chicken, other proteins, grains, produce, dairy products, and cooking oil, these fluctuations can materially impact our food and beverage costs.
While our purchasing commitments partially mitigate the risk of such fluctuations, there is no assurance that supply and demand factors such as
disease or inclement weather will not cause the prices of the commodities used in our restaurant operations to fluctuate. In a rapidly-fluctuating
commodities market, it may prove difficult for us to adjust our menu prices in accord with input price fluctuations. Therefore, to the extent that
we do not pass along cost increases to our customers, our results of operations may be adversely affected. At this time, we do not use financial
instruments to hedge our commodity risk. See Item 1A, “Risk Factors—Risks Related to Our Business and Industry—Changes in food and
supply costs, especially for chicken, could adversely affect our business, financial condition and results of operations,” and Note 14 to our
consolidated financial statements included elsewhere in this report.
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