Wendy's 2011 Annual Report Download - page 63

Interest Rate Risk
Our objective in managing our exposure to interest rate changes is to limit the impact on our earnings and cash
flows. Our policy is to maintain a target, over time and subject to market conditions, of between 50% and 75% of
“Long-term debt” as fixed rate debt. As of January 1, 2012, The Wendy’s Company and Wendy’s Restaurants long-term
debt, including current portion, aggregated $1,357.0 million and $1,345.7 million, respectively. Long-term debt
consisted of $874.2 million and $862.9 million of fixed-rate debt at The Wendy’s Company and Wendy’s Restaurants,
respectively; and $466.1 million of variable interest rate debt and $16.7 million of capitalized lease and sale-leaseback
obligations for both companies. The Companies variable interest rate debt consists of $466.1 million term loan
borrowings under a variable-rate senior secured term loan facility due through 2017 (the “Term Loan”). The interest rate
on the Term Loan is based on the Eurodollar rate, which has a floor of 1.50%, plus 3.50%, or a base rate, which has a
floor of 2.50%, plus 2.50%. Since the inception of the Term Loan, and as of January 1, 2012, we have elected to use the
Eurodollar rate which resulted in an interest rate on the Term Loan of 5.00% as of January1, 2012.
Consistent with our policy, we entered into several outstanding interest rate swap agreements (the “Interest
Rate Swaps”) during the third quarter of 2009 and the first quarter of 2010 with notional amounts totaling $186.0
million and $39.0 million, respectively, that swap the fixed rate interest rates on the Wendy’s 6.20% senior notes for
floating rates. The Interest Rate Swaps are accounted for as fair value hedges. At January 1, 2012, the fair value of our
Interest Rate Swaps was $11.7 million and was included in “Deferred costs and other assets” and as an adjustment to
the carrying amount of the Wendy’s 6.20% senior notes. Our policies prohibit the use of derivative instruments for
trading purposes, and we have procedures in place to monitor and control their use. If any portion of the hedge is
determined to be ineffective, any changes in fair value would be recognized in our results of operations.
Commodity Price Risk
We purchase certain food products, such as beef, chicken, corn, pork and cheese, that are affected by changes in
commodity prices and, as a result, we are subject to variability in our food costs. While price volatility can occur,
which would impact profit margins, there are generally alternative suppliers available. Our ability to recover increased
costs through higher pricing is, at times, limited by the competitive environment in which we operate. Management
monitors our exposure to commodity price risk.
In 2010, Wendy’s, along with our franchisees, became members of a purchasing cooperative established in
2009 that negotiates contracts with approved suppliers on behalf of the Wendy’s system in order to ensure favorable
pricing for its major food products, as well as maintain an adequate supply of fresh food products. The purchasing
contracts which established pricing arrangements, and historically have limited the variability of these commodity
costs but did not establish any firm purchase commitments by us or our franchisees, were transferred to the
purchasing cooperative in January 2010.
Foreign Currency Risk
Our exposures to foreign currency risk are primarily related to fluctuations in the Canadian dollar relative to the
United States (“U.S.”) dollar for our Canadian operations. Exposure outside of North America is limited to the effect
of rate fluctuations on royalties paid by franchisees. We monitor these exposures and periodically determine our need
for the use of strategies intended to lessen or limit our exposure to these fluctuations. We have exposure to (1) our
50% equity investment in a Canadian restaurant real estate joint venture (“TimWen”) with Tim Hortons Inc.,
(2) investments in a Canadian subsidiary, (3) our 49% equity investment in a Japanese restaurant joint venture and
(4) export revenues and related receivables denominated in foreign currencies which are subject to foreign currency
fluctuations. Our Canadian subsidiary exposures relate to its restaurants and administrative operations. The exposure
to Canadian dollar exchange rates on the Companies’ cash flows primarily includes imports paid for by Canadian
operations in U.S. dollars and payments from the Companies’ Canadian operations to the Companies’ U.S.
operations in U.S. dollars, and to a lesser extent royalties paid by Canadian franchisees. Revenues from foreign
operations for the years ended January 1, 2012 and January 2, 2011 represented 11% of our total franchise revenues
and 11% of our total revenues. Accordingly, an immediate 10% change in foreign currency exchange rates versus the
U.S. dollar from their levels at January 1, 2012 and January 2, 2011 would not have a material effect on our
consolidated financial position or results of operations.
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