Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to the impact of interest rate changes on our PJI Revolving Facility. We attempt to minimize interest rate risk exposure by fixing our interest rate through the utilization of interest rate swaps, which are derivative financial instruments. The interest rate swaps were eligible for hedge accounting for part of the period and were de-designated following the issuance of the Notes. Our swaps are entered into with financial institutions that participate in the PJI Revolving Facility. By using a derivative instrument to hedge exposures to changes in interest rates, we expose ourselves to credit risk due to the possible failure of the counterparty to perform under the terms of the derivative contract. We do not enter into contracts for trading purposes and do not use leveraged instruments. See “Note 12” of “Notes to Consolidated Financial Statements” for additional information on our debt obligations and derivative instruments.
Foreign Currency Exchange Rate Risk
We are exposed to foreign currency exchange rate fluctuations from our operations outside of the United States, which can adversely impact our revenues, net income and cash flows. Our international operations principally consist of distribution sales to franchised Papa John’s restaurants located in the United Kingdom and our franchise sales and support activities, which derive revenues from sales of franchise and development rights and the collection of royalties from our international franchisees. Approximately 7.3% of our 2021 revenues, 6.8% of our 2020 revenues and 7.8% of our 2019 revenues were derived from these international operations.
We have not historically hedged our exposure to foreign currency fluctuations. Foreign currency exchange rate fluctuations had a favorable impact of approximately $8.1 million on our consolidated revenues in 2021 compared to an unfavorable impact of approximately $600,000 in 2020. Foreign currency exchange rates had a favorable impact of $1.4 million on our operating income in 2021 compared to an unfavorable impact of $1.0 million in 2020. A 10% adverse change in the foreign currency rates for our international markets would result in an additional negative impact on annual revenue and operating income of approximately $15.6 million and $3.3 million, respectively.
Commodity Price Risk
In the ordinary course of business, the food and paper products we purchase, including cheese (our largest ingredient cost), are subject to seasonal fluctuations, weather, availability, demand and other factors that are beyond our control. We have pricing agreements with some of our vendors, including forward pricing agreements for a portion of our cheese purchases for our domestic Company-owned restaurants, which are accounted for as normal purchases; however, we still remain exposed to on-going commodity volatility.
The following table presents the actual average block price for cheese by quarter in 2021, 2020 and 2019. Also presented is the projected 2022 average block price by quarter (based on the February 17, 2022 Chicago Mercantile Exchange cheese futures prices):
2022
2021
2020
2019
Projected
Block
Block
Block
Market
Price
Price
Price
Quarter 1
$
1.956
$
1.676
$
1.857
$
1.490
Quarter 2
2.088
1.680
1.679
1.696
Quarter 3
2.095
1.676
2.262
1.898
Quarter 4
2.031
1.786
2.235
1.984
Full Year
$
2.043
$
1.705
$
2.008
$
1.767
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