Wendy's 2012 Annual Report Download - page 56

• Legal and environmental reserves:
We are involved in litigation and claims incidental to our current and prior businesses. We provide reserves
for such litigation and claims when payment is probable and reasonably estimable. Most proceedings are in
preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur and
significant factual matters unresolved. In addition, most cases seek an indeterminate amount of damages
and many involve multiple parties. Predicting the outcomes of settlement discussions or judicial or arbitral
decisions are thus inherently difficult. We review our assumptions and estimates each quarter based on new
developments, changes in applicable law and other relevant factors and revise our reserves accordingly.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Certain statements the Company makes 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 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 practice is to maintain a target, over time and subject to market conditions, of between 25% and 50% of
“Long-term debt” as fixed, or effectively fixed, rate debt. As of December 30, 2012, our long-term debt, including
current portion, aggregated $1,457.6 million. Long-term debt consisted of $310.2 million of fixed-rate debt,
$1,114.8 million of variable interest rate debt and $32.6 million of capital lease obligations. The Company’s variable
interest rate debt consists of $1,114.8 million of borrowings under our Term Loan. The interest rate on the Term
Loan is based on the Eurodollar Rate as defined in the Credit Agreement (but not less than 1.25%), plus 3.50%, or a
Base Rate, as defined in the Credit Agreement, plus 2.50%. Since the inception of the Term Loan, we have elected to
use the Eurodollar Rate which resulted in an interest rate on the Term Loan of 4.75% as of December 30, 2012.
Consistent with our policy, we entered into several outstanding interest rate swap agreements (the “Interest
Rate Swaps”) during 2009 and 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 December 30, 2012, the fair value of our Interest Rate Swaps was
$8.2 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 a portion of the hedge is 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. During the fourth quarter of 2009,
Wendy’s entered into a purchasing co-op relationship agreement with its franchisees to establish QSCC. QSCC
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
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