Wendy's 2014 Annual Report Download - page 94

THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(In Thousands Except Per Share Amounts)
of our indirect investment in Arby’s was reduced to zero during 2013 in connection with the receipt of a
dividend. See Note 6 for more information. The fair values of our remaining investments are not significant and
are based on our review of information provided by the investment managers or investees which was based on
(1) valuations performed by the investment managers or investees, (2) quoted market or broker/dealer prices for
similar investments and (3) quoted market or broker/ dealer prices adjusted by the investment managers for legal
or contractual restrictions, risk of nonperformance or lack of marketability, depending upon the underlying
investments.
(b) The fair values were developed using market observable data for all significant inputs.
(c) The fair values were based on quoted market prices in markets that are not considered active markets.
(d) Wendy’s has provided loan guarantees to various lenders on behalf of franchisees entering into debt arrangements
for new restaurant development and equipment financing. In addition during 2012, Wendy’s provided a
guarantee to a lender for a franchisee in connection with the refinancing of the franchisee’s debt. We have
accrued a liability for the fair value of these guarantees, the calculation of which was based upon a weighted
average risk percentage established at inception adjusted for a history of defaults.
The carrying amounts of cash, accounts payable and accrued expenses approximated fair value due to the
short-term nature of those items. The carrying amounts of accounts and notes receivable (both current and non-current)
approximated fair value due to the effect of the related allowance for doubtful accounts. Our derivative instruments, cash
and cash equivalents and guarantees are the only financial assets and liabilities measured and recorded at fair value on a
recurring basis.
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.
Our derivative instruments as of December 28, 2014 and December 29, 2013 consist of 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 and maturing on December 31, 2017. At inception, the forward starting
swap agreements were designated as cash flow hedges and are evaluated for effectiveness quarterly. See Note 10 for
further information on the Company’s interest payments under the Restated Credit Agreement.
As of December 28, 2014 and December 29, 2013, the fair value of the cash flow hedges resulted in a liability
of $3,343 and an asset of $1,212, respectively, which was included in “Other liabilities” and “Other assets,”
respectively, and as an adjustment to “Accumulated other comprehensive loss.” Through December 28, 2014, no
hedge ineffectiveness has occurred relating to these cash flow hedges. A pre-tax derivative loss of $586 based upon
interest rates at December 28, 2014 is expected to be recognized in “Interest expense” in the next 12 months.
Our derivative instruments for year ended December 29, 2013 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 was 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.
Interest income on the fair value hedges was $4,319 and $5,510 for the years ended December 29, 2013 and
December 30, 2012, respectively. There was no ineffectiveness from these fair value hedges through their termination
in October 2013.
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