Chili's 2015 Annual Report Download - page 48

(a) Long-term debt consists of principal amounts owed on the five-year revolver, 2.60% notes and 3.88% notes,
as well as remaining interest payments on the 2.60% and 3.88% notes totaling $112.5 million. Variable-rate
interest payments associated with the revolver are excluded.
(b) A “purchase obligation” is defined as an agreement to purchase goods or services that is enforceable and
legally binding on us and that specifies all significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our
purchase obligations primarily consist of long-term obligations for the purchase of fountain beverages and
professional services contracts, and exclude agreements that are cancelable without significant penalty.
In addition to the amounts shown in the table above, $6.1 million of unrecognized tax benefits have been
recorded as liabilities. The timing and amounts of future cash payments related to these liabilities are uncertain.
IMPACT OF INFLATION
We have experienced impact from inflation. Inflation has caused increased food, labor and benefits costs
and has increased our operating expenses. To the extent permitted by competition, increased costs are recovered
through a combination of menu price increases and reviewing, then implementing, alternative products or
processes, or by implementing other cost reduction procedures.
CRITICAL ACCOUNTING ESTIMATES
Our significant accounting policies are disclosed in Note 1 to our consolidated financial statements. The
following discussion addresses our most critical accounting estimates, which are those that are most important to
the portrayal of our financial condition and results, and that require significant judgment.
Stock-Based Compensation
We measure and recognize compensation cost at fair value for all share-based payments. We determine the
fair value of our performance shares using a Monte Carlo simulation model. The Monte Carlo method is a
statistical modeling technique that requires highly judgmental assumptions regarding our future operating
performance compared to our plan designated peer group in the future. The simulation is based on a probability
model and market-based inputs that are used to predict future stock returns. We use the historical operating
performance and correlation of stock performance to the S&P 500 composite index of us and our peer group as
inputs to the simulation model. These historical returns could differ significantly in the future and as a result, the
fair value assigned to the performance shares could vary significantly to the final payout. We believe the Monte
Carlo simulation model provides the best evidence of fair value at the grant date and is an appropriate technique
for valuing share-based awards. We determine the fair value of our stock option awards using the Black-Scholes
option valuation model. The Black-Scholes model requires judgmental assumptions including expected life and
stock price volatility. We base our expected life assumptions on historical experience regarding option life. Stock
price volatility is calculated based on historical prices and the expected life of the options. We recognize
compensation expense for only the portion of share-based awards that are expected to vest. Therefore, we apply
estimated forfeiture rates that are derived from our historical forfeitures of similar awards.
Income Taxes
We make certain estimates and judgments in the calculation of tax expense and the resulting tax liabilities
and in the recoverability of deferred tax assets that arise from temporary differences between the tax and
financial statement recognition of revenue and expense. When considered necessary, we record a valuation
allowance to reduce deferred tax assets to a balance that is more likely than not to be recognized. We use an
estimate of our annual effective tax rate at each interim period based on the facts and circumstances available at
that time while the actual effective tax rate is calculated at year-end.
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