Wendy's 2013 Annual Report Download - page 96

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(In Thousands Except Per Share Amounts)
Derivative Instruments
The Company’s primary objective for entering into interest rate swap agreements is to manage its exposure to
changes in interest rates, as well as to maintain an appropriate mix of fixed and variable rate debt.
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 $350,000 and $100,000 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. See Note 10 for further
information on the Company’s interest payments under the Restated Credit Agreement. At inception, the forward
starting swap agreements were designated as cash flow hedges and will be evaluated for effectiveness quarterly.
As of December 29, 2013, the fair value of the cash flow hedges of $1,212 was included in “Deferred costs and
other assets” and as an adjustment to “Accumulated other comprehensive (loss) income.” Through December 29,
2013, no hedge ineffectiveness has occurred relating to these cash flow hedges.
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 $225,000 to swap the fixed rate interest payments
on the 6.20% Senior Notes for floating rate interest payments. In connection with the redemption of the
6.20% Senior Notes on October 24, 2013, we terminated these interest rate swaps and recognized a $4,063 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. See Note 10 for more information. Upon termination of the interest
rate swaps, we received a $5,708 cash payment, which was recorded against the derivative asset and the related
derivative interest receivable.
At December 30, 2012, the fair value of the interest rate swaps on the 6.20% Senior Notes was $8,169 and was
included in “Deferred costs and other assets” and as an adjustment to the carrying amount of the 6.20% Senior
Notes. Interest income on the fair value hedges was $4,319, $5,510 and $5,611 for the years ended December 29,
2013, December 30, 2012 and January 1, 2012, respectively. There was no ineffectiveness from these fair value
hedges through their termination in October 2013.
The Company may be exposed to credit losses in the event of nonperformance by the counterparties to its
derivative financial instrument contracts. We anticipate that the counterparties will be able to fully satisfy their
obligations under the contracts. We do not obtain collateral or other security to support derivative financial
instruments subject to credit risk and our interest rate swaps are not cleared through a central clearinghouse; however
we do monitor the credit standing of the counterparties. All of the Company’s financial instruments were in an asset
position as of December 30, 2012 and December 29, 2013 and therefore presented gross in the consolidated balance
sheets.
Non-Recurring Fair Value Measurements
The following tables present the fair values for those assets and liabilities measured at fair value on a
non-recurring basis during the year ended December 29, 2013 and December 30, 2012 and the resulting impact on
the consolidated statements of operations.
Total losses for the year ended December 29, 2013 reflect the impact of remeasuring long-lived assets
(including land, buildings, leasehold improvements and favorable lease assets) at certain company-owned restaurants
to fair value as a result of the Company’s decision to lease and/or sublease the land and/or buildings and sell certain
other restaurant assets to franchisees. Such losses totaling $20,506 have been presented as System Optimization
Remeasurement and included in “Facilities action charges, net” in our consolidated statement of operations for the
year ended December 29, 2013. The fair value of long-lived assets presented in the table below represents the
remaining carrying value of the long-lived assets discussed above and was based upon discounted cash flows of future
anticipated lease and sublease income. See Note 2 for more information on our system optimization initiative and the
related activity included in “Facilities action charges, net” including System Optimization Remeasurement.
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