Wendy's 2013 Annual Report Download - page 59

During the fourth quarter of 2013, the Company entered into seven forward starting interest rate swap
agreements to change the floating rate interest payments associated with $350.0 million and $100.0 million in
borrowings expected to be outstanding under our Term A Loans and Term B Loans, respectively, to fixed interest rate
obligations beginning on June 30, 2015. These forward starting swaps mature on December 31, 2017 and are
accounted for as cash flow hedges (“Cash flow hedges”). As of December 29, 2013, the fair value of the Cash flow
hedges of $1.2 million was included in “Deferred costs and other assets” and as an adjustment to “Accumulated other
comprehensive (loss) income.”
Our derivative instruments for the periods presented also included interest rate swaps designated as fair value
hedges on our 6.20% Senior Notes with notional amounts totaling $225.0 million to swap the fixed rate interest
payments on the 6.20% Senior Notes for floating rate interest payments (“Fair value hedges”). In connection with the
redemption of the 6.20% Senior Notes on October 24, 2013, we terminated these Fair value hedges and recognized a
$4.1 million benefit from the cumulative effect of our fair value hedges, which has been included in “Loss on early
extinguishment of debt” for the year ended December 29, 2013.
Our policies prohibit the use of derivative instruments for trading purposes and we have procedures in place to
monitor and control their use. If a portion of the hedging instruments are determined to be ineffective, the ineffective
portion of 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. QSCC, a purchasing co-op
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. While price volatility can
occur, which would impact profit margins, the purchasing contracts may limit the variability of these commodity
costs without establishing any firm purchase commitments by us or our franchisees. In addition, 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.
Foreign Currency Risk
Our exposures to foreign currency risk are primarily related to fluctuations in the Canadian dollar relative to the
U.S. dollar for our Canadian operations. 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 related to our investment
in a Canadian subsidiary which is 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 Company’s
cash flows primarily includes imports paid for by Canadian operations in U.S. dollars and payments from the
Company’s Canadian operations to the Company’s U.S. operations in U.S. dollars. Revenues from our Canadian
franchise operations for both the years ended December 29, 2013 and December 30, 2012 represented 6% of our
total franchise revenues. Revenues from our Canadian operations for both the years ended December 29, 2013 and
December 30, 2012 represented 10% of our total revenues. Accordingly, an immediate 10% change in Canadian
dollar exchange rates versus the U.S. dollar from their levels at December 29, 2013 and December 30, 2012 would
not have a material effect on our consolidated financial position or results of operations.
Sensitivity Analysis
Market risk exposure for the Company is presented for each class of financial instruments held by the Company
at December 29, 2013 and December 30, 2012 for which an immediate adverse market movement would cause a
potentially material impact on its financial position or results of operations. We believe that the adverse market
movements described below represent the hypothetical loss to our financial position or our results of operations and
do not represent the maximum possible loss nor any expected actual loss, even under adverse conditions, because
actual adverse fluctuations would likely differ. As of December 29, 2013, we did not hold any market-risk sensitive
instruments, which were entered into for trading purposes.
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