Chipotle 2009 Annual Report Download - page 36

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Reserves/Contingencies for Litigation and Other Matters
We are involved in various claims and legal actions that arise in the ordinary course of business. These
actions are subject to many uncertainties, and we cannot predict the outcomes with any degree of certainty.
Consequently, we were unable to ascertain the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters as of December 31, 2009 and 2008. Once resolved, however, these actions
may affect our operating results and cash flows.
Sabbatical Liability
We offer our employees a sabbatical leave after each ten years of service they complete. We record a
liability for our estimate of the accumulated sabbatical expense as of the balance sheet date. Our estimated
liability is based on a number of factors including actuarial assumptions and historical trends. Changes in
assumptions and trends could result in a materially different liability and expense.
Unredeemed Gift Card Balances
We sell gift cards which do not have an expiration date and from which we do not deduct non-usage fees.
We recognize revenue from gift cards when: (i) the gift card is redeemed by the customer; or (ii) the likelihood of
the gift card being redeemed by the customer is remote (gift card breakage) and we determine that there is not a
legal obligation to remit the unredeemed gift cards to the relevant jurisdiction. The determination of the gift card
breakage rate is based upon company specific historical redemption patterns. Gift card breakage is recognized in
revenue as the gift cards are used on a pro rata basis over a period of six months beginning at the date of the gift
card sale. We have determined 5% of gift card sales will not be redeemed and will be retained by us. Any future
revisions to the estimated breakage rate may result in changes in the amount of breakage revenue recognized in
future periods.
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. As of December 31, 2009, we had $236.3 million deposited in short-term
investments and available-for-sale securities, and $30.8 million in FDIC insured accounts with an earnings credit
we classify as interest income, which combined earned a weighted average interest rate of 0.38% (approximately
0.40% 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.
However, a portion of the dollar value of goods purchased by us is effectively at spot prices. Generally our
pricing protocols with suppliers can remain in effect for periods ranging from one to 18 months, depending on
the outlook for prices of the particular ingredient. In several cases, we have minimum purchase obligations.
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 our ingredient prices. Increases in ingredient prices could adversely
affect our results if we choose not to increase menu prices at the same pace for competitive or other reasons.
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Annual Report