Chipotle 2012 Annual Report Download - page 38

Insurance Liability
We maintain various insurance policies for workers’ compensation, general liability and auto damage with
varying deductibles as high as $1 million, and for property which generally has a $1.5 million deductible. We are
self insured for employee health but have third party insurance coverage to limit exposure to these claims. We
record a liability that represents our estimated cost of claims incurred and unpaid as of the balance sheet date.
Our estimated liability is not discounted and is based on a number of assumptions and factors, including
historical trends, actuarial assumptions and economic conditions, and is closely monitored and adjusted when
warranted by changing circumstances. In addition, our history of claims experience is short and our significant
growth rate could affect the accuracy of estimates based on historical experience. Should a greater amount of
claims occur compared to what was estimated or medical costs increase beyond what was expected, our accrued
liabilities might not be sufficient and additional expenses may be recorded. Actual claims experience could also
be more favorable than estimated, which would result in expense reductions. Unanticipated changes may produce
materially different amounts of expense than that reported under these programs. The total estimated insurance
liabilities as of December 31, 2012 were $27.8 million.
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, 2012 and 2011. Although we have recorded liabilities
related to a number of legal actions, our estimates used to determine the amount of these liabilities may not be
accurate, and there are other legal actions for which we have not recorded a liability. As a result, in the event
legal actions for which we have not accrued a liability or for which our accrued liabilities are not accurate are
resolved, such resolution may affect our operating results and cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Changing Interest Rates
We are exposed to interest rate risk through fluctuations of interest rates on our investments. Changes in
interest rates affect the interest income we earn, and therefore impact our cash flows and results of operations. As
of December 31, 2012, we had $470.8 million in investments and interest-bearing cash accounts, including an
insurance related restricted trust account classified in other assets, and $199.4 million in accounts with an
earnings credit we classify as interest income, which combined earned a weighted average interest rate of 0.33%.
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 for competitive or other reasons not to increase menu prices at the same rate at
which ingredient costs increase, or if menu price increases result in customer resistance.
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Annual Report