Wendy's 2008 Annual Report Download - page 78

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Certain statements we make under this Item 7A constitute “forward-looking statements” under the
Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements
and Projections” in “Part I” preceding “Item 1.”
We are exposed to the impact of interest rate changes, changes in commodity prices, changes in the
market value of our investments and foreign currency fluctuations primarily related to the Canadian dollar. In
the normal course of business, we employ established policies and procedures to manage our exposure to these
changes using financial instruments we deem appropriate.
Interest Rate Risk
Our objective in managing our exposure to interest rate changes is to limit its impact on our earnings and
cash flows. Through October 2008, we had used interest rate caps and/or interest rate swap agreements on a
portion of our variable-rate debt to limit our exposure to the effects of increases in short-term interest rates on
our earnings and cash flows. Due to decreases in the applicable interest rates on our variable-rate debt, we have
not utilized any interest rate protection vehicles since that time. As of December 28, 2008 our long-term debt,
including current portion, aggregated $1,111.6 million and consisted of $495.9 million of fixed-rate debt,
$385.0 million of variable-rate debt, and $230.7 million of capitalized lease and sale-leaseback obligations.
Our variable interest rate debt primarily consists of $385.0 million of Arby’s term loan borrowings under a
variable-rate senior secured term loan facility due through 2012. The Amended Arby’s Term Loan and amounts
borrowed under the revolving credit facility bear interest at the borrowers’ option at either (1) LIBOR of not
less than 2.75% plus 4.0% or (2) the higher of a base rate determined by the administrative agent for the
Credit Agreement or the Federal funds rate plus 0.5% (but not less than 3.75%), in either case plus 3.0%. We
added $467.0 million of debt as a result of the Wendy’s Merger. We do not currently plan to enter into future
swap agreements. The fair value of our fixed-rate debt will increase if interest rates decrease. The fair market
value of our investments in fixed-rate debt securities will decline if interest rates increase. See below for a
discussion of how we manage this risk.
Commodity Price Risk
In our restaurants segments, we purchase certain food products, such as beef, poultry, 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.
Arby’s does not enter into financial instruments to hedge commodity prices or hold any significant
inventories of these commodities. In order to ensure favorable pricing for its major food products, as well as
maintain an adequate supply of fresh food products, we are members of a purchasing cooperative along with
our franchisees that negotiates contracts with approved suppliers on behalf of the Arby’s system. These
contracts establish pricing arrangements, and historically have limited the variability of these commodity costs,
but do not establish any firm purchase commitments by us or our franchisees.
Wendy’s employs various purchasing and pricing contract techniques in an effort to minimize volatility.
Generally these techniques can include setting fixed prices with suppliers generally for one year or less, and
setting in advance the price for products to be delivered in the future by having the supplier enter into forward
arrangements (sometimes referred to as “buying forward”).
Equity Market Risk
Our objective in managing our exposure to changes in the market value of our equity investments is to
balance the risk of the impact of these changes on our earnings and cash flows with our expectations for long-
term investment returns. One significant exposure to equity price risk relates to our investments (the “Equities
Account”) that are managed by a management company formed by certain former executives (the “Management
Company”), which are discussed in more detail below.
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