IHOP 2008 Annual Report Download - page 84

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fixed rate of 5.694%. On November 29, 2007, we terminated the Swap upon the consummation of the
Applebee’s acquisition. The fair value of the Swap was $124.0 million. The fair value of the designated
portion of the Swap amounted to $61.9 million ($38.0 million net of tax effect) and is included as
‘‘Accumulated other comprehensive loss’’ in our consolidated balance sheet. The fair value of the
undesignated portion of the Swap resulted in additional interest expense of $62.1 million for the year
ended December 31, 2007, which was included in our consolidated statement of operations.
At December 31, 2008, we had approximately $115 million of variable rate debt. If the interest on
our variable rate debt were to increase or decrease by 1% for the year, annual interest expense would
increase or decrease by approximately $1.1 million based on the amount of outstanding variable rate
debt at December 31, 2008.
Commodity Prices
Many of the food products purchased by us and our franchisees and area licensees are affected by
commodity pricing and are, therefore, subject to unpredictable price volatility. To moderate the
volatility, Applebee’s enters into fixed price purchase commitments. IHOP attempts to mitigate price
fluctuations by entering into forward purchase agreements on all our major products. None of these
food product contracts or agreements is a derivative instrument. Extreme changes in commodity prices
and/or long-term changes could affect our franchisees, area licensees and company-operated restaurants
adversely. We expect that, in most cases, the IHOP and Applebee’s systems would be able to pass
increased commodity prices through to our consumers via increases in menu prices. From time to time,
competitive circumstances could limit short-term menu price flexibility, and in those cases, margins
would be negatively impacted by increased commodity prices. We believe that any changes in
commodity pricing that cannot be adjusted for by changes in menu pricing or other strategies would
not be material to our financial condition, results of operations or cash flows.
In some instances, we enter into commitments to purchase food and other items on behalf of the
IHOP and Applebee’s systems. At December 31, 2008, our outstanding purchase commitments for food
products were $123.1 million. The Company has developed processes to facilitate the liquidation of
these commitments to minimize financial exposure.
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