IHOP 2015 Annual Report Download - page 71

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51
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to financial market risk, including interest rates and commodity prices. We address these risks through
controlled risk management that may include the use of derivative financial instruments to economically hedge or reduce these
exposures. We do not enter into financial instruments for trading or speculative purposes.
Interest Rate Risk
All of our long-term debt outstanding at December 31, 2015 was issued at a fixed interest rate (see Note 7 of Notes to
Consolidated Financial Statements). We are only exposed to interest rate risk on borrowings under our Class A-1 Variable
Funding Notes (the “Class A-1 Notes”). We did not borrow under the Class A-1 Notes during fiscal 2015, and as of December
31, 2015, we had no outstanding borrowings under the Class A-1 Notes. We do not engage in speculative transactions nor do
we hold or issue financial instruments for trading purposes. We had no outstanding derivative instruments as of December 31,
2015 and did not hold any derivative instruments during the year ended December 31, 2015.
Investments in instruments earning a fixed rate of interest 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.
Based on our cash and cash equivalents and restricted cash, as of 2015, a 1% increase in interest rates would increase our
annual interest income by approximately $0.5 million. A 1% decline in interest rates would decrease our annual interest income
by less than $0.5 million as the majority of our cash and cash equivalents and restricted cash are currently yielding less than
1%.
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 increases 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. Since only 11 of our 3,716 restaurants as of December 31, 2015 are
company-operated, 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.
The Company and owners of Applebee's and IHOP franchise restaurants are members of CSCS, a Co-op that manages
procurement activities for the Applebee's and IHOP restaurants that belong to 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, 2015, 100% of Applebee's domestic franchise restaurants and 99% of IHOP domestic
franchise restaurants are members of CSCS. In some instances, IHOP and Applebee's may be required to guarantee their
purchase of any remaining inventory of certain food and other items purchased by CSCS for the purpose of supplying limited
time promotions on behalf of the Applebee's and IHOP systems as a whole. None of these food product guarantees is a
derivative instrument. At December 31, 2015, our outstanding guarantees for food product purchases were $16.3 million.
International Currency Exchange Rate Risk
We have minimal exposure to international currency exchange rate fluctuations. Revenue derived from all international
country operations comprised less than 3% of total consolidated revenue for the year ended December 31, 2015, such that a
hypothetical 10% adverse change in the currency of every international country in which our franchisees operate restaurants
would have a negative impact of less than 0.3% of our consolidated revenue.