Wendy's 2009 Annual Report Download - page 67

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 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 3, 2010 our long-term debt, including current
portion and excluding the effect of interest rate swaps discussed below, aggregated $1,522.9 million and
consisted of $1,056.3 million of fixed-rate debt, $251.5 million of variable-rate debt, and $215.1 million of
capitalized lease and sale-leaseback obligations. Our variable interest rate debt consists of term loan borrowings
under a variable-rate senior secured term loan facility due through 2012 (the “Credit Agreement”). The term
loan borrowings under the Credit Agreement and amounts borrowed under the revolving credit facility
included in the Credit Agreement bear interest at the borrowers’ option at either (1) LIBOR (0.25% at
January 3, 2010) of not less than 2.75% plus an interest rate margin of 4.5% 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 an interest rate margin of 3.5%. The Base Rate option was chosen as of
January 3, 2010 with a resulting 7.25% interest rate. Consistent with our policy, we entered into several
outstanding interest rate swap agreements (the “Interest Rate Swaps”) during the third quarter of 2009 with
notional amounts totaling $361.0 million that swap the fixed rate interest rates on our 6.20% and 6.25%
Wendy’s senior notes for floating rates. The Interest Rate Swaps are accounted for as fair value hedges and
qualify for the short-cut method under the applicable guidance. At January 3, 2010, the fair value of our
Interest Rate Swaps was $1.6 million and was included in “Deferred costs and other assets” and as an
adjustment to the carrying amount of the 6.20% and 6.25% Wendy’s 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
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.
During 2009, Wendy’s employed various purchasing and pricing contract techniques in an effort to
minimize volatility. Generally these techniques included 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”).” In 2010, Wendy’s, along with
our franchisees, became members of a purchasing cooperative established in the fourth quarter of 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
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