IHOP 2011 Annual Report Download - page 78

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and cash equivalents, restricted cash and investments, and interest expense on our Senior Secured Credit Facility. Our future
investment income and interest expense may differ from expectations due to changes in interest rates.
Investments in fixed-interest-rate-earning instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates. We currently do not hold any fixed rate investments. As
of December 31, 2011, our long-term investments are comprised primarily of certificates of deposits, mutual funds invested in
auction rate securities and one auction rate security; these investments are included in restricted assets related to the captive
insurance subsidiary. We have classified these investments as available-for-sale. Due to the short time period between reset dates
of the interest rates, there are no unrealized gains or losses associated with the interest rate related to the auction rate securities.
The one auction rate security has a contractual maturity of December 2030. Based on our cash and cash equivalents, restricted
cash and long-term restricted investment holdings as of 2011, a 1% increase in interest rates would increase our annual interest
income by approximately $0.7 million. A 1% decline in interest rates would decrease our annual interest income by less than
$0.7 million as the majority of our cash and cash equivalents, restricted cash and long-term investment holdings are currently
yielding less than 1%.
At December 31, 2011, we had $682.5 million of variable rate debt (the New Term Loan under the Amendment to our Credit
Agreement). If the interest rate on the New Term Loan were to increase by 1% per annum, annual interest expense would increase
by approximately $6.8 million based on the outstanding New Term Loan balance at December 31, 2011. A decrease in interest
rates from December 31, 2011 rates would have no impact on interest expense as the current interest is at the floor rate as defined
in the Credit Agreement.
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. 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 February 2009, the Company and owners of Applebee's and IHOP franchise restaurants formed CSCS to manage
procurement activities for the Applebee's and IHOP restaurants choosing to join the Co-op. We believe the larger scale created by
combining the supply chain requirements of both brands under one organization can provide cost savings and efficiency in the
purchasing function. As of December 31, 2011, 100% of Applebee's franchise restaurants and over 96% of IHOP franchise
restaurants are members of CSCS. While the majority of the food products utilized by IHOP and Applebee's systems are sourced
through CSCS, in some instances, we enter into commitments to purchase food and other items on behalf of the IHOP and Applebee's
systems. None of these food product contracts or agreements is a derivative instrument. At December 31, 2011, our outstanding
purchase commitments for food products were $6.3 million.