Chipotle 2008 Annual Report Download - page 37

Adoption of New Accounting Standards
Effective January 1, 2008, we adopted Financial Accounting Standards Board Statement No. 157, Fair
Value Measurements, (“FAS 157”). FAS 157 defines fair value, establishes a framework for using fair value to
measure assets and liabilities, and expands disclosure about fair value measurements. FAS 157 applies whenever
other statements require or permit assets or liabilities to be measured at fair value. The adoption of FAS 157 did
not have an impact on the Company’s consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Changing Interest Rates
We’re exposed to interest rate risk through the investment of our cash, cash equivalents, and
available-for-sale securities. Changes in interest rates affect the interest income we earn, and therefore impact our
cash flows and results of operations. Our interest income decreased during 2008 due to a significant reduction in
interest rates. As of December 31, 2008, we had $188.2 million deposited in short-term investments and
available-for-sale securities bearing a weighted-average interest rate of 0.3% (approximately 0.4% tax
equivalent).
Commodity Price Risks
We are also exposed to commodity price risks. Many of the ingredients we use to prepare our food, as well
as our packaging materials, are commodities or ingredients that are affected by the price of other commodities,
exchange rates, foreign demand, weather, seasonality, production, availability and other factors outside our
control. We work closely with our suppliers and use a mix of forward pricing protocols under which we agree
with our supplier on fixed prices for deliveries at some time in the future, fixed pricing protocols under which we
agree on a fixed price with our supplier for the duration of that protocol, and formula pricing protocols under
which the prices we pay are based on a specified formula related to the prices of the goods, such as spot prices.
Substantial portions of the dollar value of goods purchased by us are effectively at spot prices. Though we
generally do not have long-term supply contracts or guaranteed purchase amounts, our pricing protocols with
suppliers can remain in effect for periods ranging from one month to a year, depending on the outlook for prices
of the particular ingredient. We’ve tried to increase, where necessary, the number of suppliers for our ingredients,
which we believe can help mitigate pricing volatility, and we follow industry news, trade issues, exchange rates,
foreign demand, weather, crises and other world events that may affect supply prices. Increases in ingredient
prices have, and could continue to, adversely affect our results if we choose not to increase menu prices at the
same pace for competitive or other reasons.
Counterparty Risks
Some of our suppliers and other vendors have been adversely impacted by tightening of the credit markets,
fluctuations in commodity prices and other consequences of the economic downturn. Some vendors have sought
to change the terms on which they do business with us in order to lessen the impact of the economic downturn on
their business. If we are forced to find alternative vendors for key services, whether due to demands from the
vendor or the vendor’s bankruptcy or ceasing operations, that could be a distraction to us and adversely impact
our business. Changing vendors could also result in our inability to obtain business terms as favorable to us as the
terms on which we currently operate.
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Annual Report