Notes to Condensed Consolidated Financial Statements
(unaudited)
(dollar and share amounts in thousands, unless otherwise specified)
1. Basis of Presentation
Chipotle Mexican Grill, Inc., a Delaware corporation, together with its subsidiaries (collectively the “Company”), develops and operates restaurants that serve a focused menu of burritos, tacos, burrito bowls and salads, made using fresh, high-quality ingredients. As of March 31, 2017, the Company operated 2,249 Chipotle restaurants throughout the United States as well as 34 international Chipotle restaurants and 8 non-Chipotle restaurants.
During the three months ended March 31, 2017, the Company closed its 15 ShopHouse Southeast Asian Kitchen restaurants.
The Company
managed its operations based on
11 regions during the first quarter 2017
and has aggregated its operations to one reportable segment.
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of its financial position and results of operations. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year. The financial statements and related notes do not include all information and footnotes required by U.S. generally accepted accounting principles for annual reports. This quarterly report should be read in conjunction with the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2016.
2. Recent Accounting Standards
Recently Issued Accounting Standards
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842).” The pronouncement requires the recognition of a liability for lease obligations which represent the discounted obligation to make future minimum lease payments and a corresponding right-of-use asset on the balance sheet and disclosure of key information about leasing arrangements which are intended to give financial statement users the ability to assess the amount, timing, and potential uncertainty of cash flows related to leases. This pronouncement is effective for reporting periods beginning after December 15, 2018 using a modified retrospective adoption method. The Company’s adoption of ASU No. 2016-02 will have a significant impact on its consolidated balance sheet as it will record material assets and obligations for current operating leases. The Company is evaluating the impact that adoption will have on its consolidated statement of income.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” as amended by multiple standards updates.
This guidance requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, this guidance expands related disclosure requirements.
The pronouncement is effective for reporting periods beginning after December 15, 2017. The adoption is not expected to have an impact on the Company’s consolidated financial position or results of operations.
Recently Adopted Accounting Standards
In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718).” The pronouncement was issued to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows.
The Company adopted ASU 2016-09
on
January 1, 2017
prospectively (prior periods have not been restated)
. The primary impact of adoption was the recognition during the three months ended March 31, 2017
,
of excess tax benefits of $242 as a reduction to the provision for income taxes and the classification of these excess tax benefits in operating activities in the consolidated statement of cash flows instead of financing activities.
The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presented in the consolidated statement of cash flows, since such cash flows have historically been presented in financing activities. The Company also elected to continue estimating forfeitures when determining the amount of stock-based compensation costs to be recognized in each period. No other provisions of ASU 2016-0
9 had a material impact on the C
ompany’s financial statements or disclosures.
The Company reviewed all other recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact
on
the consolidated financial statements.
3. Fair Value of Financial Instruments
The carrying
value of the Company’s cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of their short-term nature. Investments are carried at fair market value and are classified as available-for-sale. Investments consist of U.S. treasury notes with maturities up to approximately
12 months
. Fair value of investments is measured using Level 1 inputs (quoted prices for identical assets in active markets).
The following is a summary of available-for-sale securities:
|
|
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|
|
|
|
|
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|
March 31,
|
|
December 31,
|
|
2017
|
|
2016
|
Amortized cost
|
$
|
455,121
|
|
$
|
455,109
|
Unrealized gains (losses)
|
|
(494)
|
|
|
(218)
|
Fair market value
|
$
|
454,627
|
|
$
|
454,891
|
The following is a summary of unrealized gains (losses) of available-for-sale securities recorded in other comprehensive income (loss):
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|
|
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|
Three months ended March 31,
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|
2017
|
|
2016
|
Unrealized gains (losses) on available-for-sale securities
|
$
|
(276)
|
|
$
|
3,075
|
Unrealized gains (losses) on available-for-sale securities, net of tax
|
$
|
(182)
|
|
$
|
1,893
|
The following is a summary of available-for-sale securities activity recorded in interest and other income
, net
in the
condensed
consolidated statement of
operations
and comprehensive income (loss):
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|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2017
|
|
2016
|
Realized gains (losses) from sale of available-for-sale securities
|
$
|
0
|
|
$
|
547
|
The Company also maintains a rabbi trust to fund obligations under a deferred compensation plan. Amounts in the rabbi trust are invested in mutual funds, which are designated as trading securities and carried at fair value, and are included in other assets in the consolidated balance sheet. Fair market value of mutual funds is measured using Level 1 inputs. The fair value of the investments in the rabbi trust was $17,956 and $17,843 as of March 31, 2017 and December 31, 2016, respectively. The Company records trading gains and losses in general and administrative expenses in the consolidated statement of operations, along with the offsetting amount related to the increase or decrease in deferred compensation to reflect its exposure to liabilities for payment under the deferred plan.
The following table sets forth unrealized gains (losses) on
trading securities
held in the rabbi trust:
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|
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Three months ended March 31,
|
|
2017
|
|
2016
|
Unrealized gains (losses) on trading securities held in rabbi trust
|
$
|
463
|
|
$
|
102
|
4. Shareholders’ Equity
On January 10, 2017, the Company announced that its Board of Directors authorized the expenditure of up to an additional $100,000 to repurchase shares of common stock, bringing the aggregate authorized amount to $2.2 billion. Under the remaining repurchase authorizations, shares may be purchased from time to time in open market transactions, subject to market conditions.
During the three months ended March 31, 2017, the Company repurchased 141 shares of common stock under authorized programs, for a total cost of $57,959. The cumulative shares repurchased under authorized programs as of March 31, 2017, were 7,004 for a total cost of $2,055,767. As of March 31, 2017, $144,613 was available to repurchase shares under the current repurchase authorizations.
S
hares repurchased are being held in treasury stock until they are reissued or retired at the discretion of the Board of Directors.
5. Stock-based Compensation
During the three months ended March 31, 2017, the Company granted stock only stock
appreciation rights (“SOSARs”) on
288
shares o
f its common stock to eligible employees. The weighted average grant date fair value of the SOSARs was $
106.13
per share with a weighted average exercise price of $
427.38
per share based on the closing price of common stock on the date of grant. The SOSARs vest in two equal installments on the
second
and
third
anniversary of the grant date. During the three months ended March 31, 2017,
11
SOSARs were exercised and
39
SOSARs were forfeited.
During the three months ended March 31, 2017, the Company granted restricted stock units (“RSUs”) on
81
shares of its common stock to eligible employees. The weighted average grant date fair value of the RSUs was $
427.47
per share.
The RSUs
generally
vest in two equal installments on the
second
and
third
anniversary of the grant date.
During the three months ended March 31, 2017, the Company awarded
36
performance shares (“PSUs”) that are subject to service, market and performance vesting conditions
.
Two-thirds
of
the PSUs
had
a grant date fair value
of $485.53 per
share and
vest based on the price of the Company’s common stock reaching certain targets for a consecutive number of days during the
three
-year period starting on the grant date and the quantity of shares that will vest range from
0%
to
350%
o
f the targeted number of shares. The remaining
one-third
of PSUs
had a grant date fair value of
$427.61
and
vest based on reaching certain comparable restaurant sales increases during the
three
-year period starting on January 1, 2017, and the quantity of shares that will vest range from
0%
to
300%
o
f the targeted number of shares. If the defined minimum targets are not met, then no shares will vest.
The following table sets forth total stock based compensation expense:
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Three months ended March 31,
|
|
2017
|
|
2016
|
Stock based compensation expense
|
$
|
16,693
|
|
$
|
10,847
|
Stock based compensation expense (net of tax)
|
|
10,350
|
|
|
6,632
|
Stock based compensation expense recognized as capitalized development
|
|
237
|
|
|
342
|
6. Earnings (Loss) Per Share
Basic earnings (loss) per share is calculated by dividing income (loss) available to common shareholders by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share (“diluted EPS”) is calculated using income (loss) available to common shareholders divided by diluted weighted-average shares of common stock outstanding during each period. Potentially dilutive securities include common shares related to SOSARs and non-vested stock awards (collectively “stock awards”). Diluted EPS considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an antidilutive effect. Stock awards are excluded from the calculation of diluted EPS in the event they are subject to performance conditions or are antidilutive.
The following stock awards were excluded from the calculation of diluted earnings (loss) per share:
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Three months ended March 31,
|
|
2017
|
|
2016
|
Stock awards subject to performance conditions
|
|
241
|
|
|
312
|
Stock awards that were antidilutive
|
|
1,459
|
|
|
1,367
|
Total stock awards excluded from diluted earnings (loss) per share
|
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1,700
|
|
|
1,679
|
The following table sets forth the computations of basic and diluted earnings (loss) per share:
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Three months ended March 31,
|
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2017
|
|
2016
|
Net income (loss)
|
$
|
46,120
|
|
$
|
(26,432)
|
Shares:
|
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|
|
|
|
Weighted average number of common shares outstanding
|
|
28,750
|
|
|
29,893
|
Dilutive stock awards
|
|
100
|
|
|
-
|
Diluted weighted average number of common shares outstanding
|
|
28,850
|
|
|
29,893
|
Basic earnings (loss) per share
|
$
|
1.60
|
|
$
|
(0.88)
|
Diluted earnings (loss) per share
|
$
|
1.60
|
|
$
|
(0.88)
|
7. Commitments and Contingencies
Data Security Investigation
In April 2017, the Company’s information security team detected unauthorized activity on the network that supports payment processing for the Company’s restaurants, and immediately began an investigation with the help of leading computer security firms. The Company self-reported the issue to payment card processors and law enforcement agencies and the investigation is continuing. The Company has taken actions that it believes have contained the issue and has implemented additional security enhancements, and will continue to work vigilantly to pursue this matter to resolution. The Company’s investigation is focused on card transactions in the Company’s restaurants for the period from March 24, 2017 to April 18, 2017. The Company expects that substantially all of the investigation costs will be covered by insurance. It is not possible at this time to determine whether the Company will incur, or to reasonably estimate the amount of, any card assessments, fines or penalties, or other liabilities, for which the Company’s insurance coverage is limited, in connection with the investigation.
Receipt of Grand Jury Subpoenas
On January 28, 2016
, the Company was served with a Federal Grand Jury Subpoena from the U.S. District Court for the Central District of California in connection with an official criminal investigation being conducted by the U.S. Attorney’s Office for the Central District of California, in conjunction with the U.S. Food and Drug Administration’s Office of Criminal Investigations. The subpoena requires the production of documents and information related to company-wide food safety matters dating back to January 1, 2013. The Company intends to continue to fully cooperate in the investigation. It is not possible at this time to determine whether the Company will incur, or to reasonably estimate the amount of, any fines or penalties in connection with the investigation pursuant to which the subpoena was issued.
Shareholder Derivative Actions
On March 21, 2016, Jessica Oldfather filed a shareholder derivative action in the Court of Chancery of the State of Delaware alleging that the Company’s Board of Directors and officers breached their fiduciary duties in connection with allegedly excessive compensation awarded from 2011 to 2015 under the Company’s stock incentive plan. On December 8, 2016, the Court of Chancery dismissed the complaint, with prejudice.
On April 6, 2016, Uri Skorski filed a shareholder derivative action in Colorado state court in Denver, Colorado, making largely the same allegations as the Oldfather complaint and also alleging that the Company’s Board of Directors and officers breached their fiduciary duties in connection with the Company’s alleged failure to disclose material information about the Company’s food safety policies and procedures. On April 14, 2016, Mark Arnold and Zachary Arata filed a shareholder derivative action in Colorado state court in Denver, Colorado, making largely the same allegations as the Skorski complaint.
On May 26, 2016, the court issued an order consolidating the Skorski and Arnold/Arata actions into a single case. On August 8, 2016, Sean Gubricky filed a shareholder derivative action
in
the U.S. District Court for the District of Colorado, alleging that the Company’s Board of Directors and certain officers failed to institute proper food safety controls and policies, issued materially false and misleading statements in violation of federal securities laws, and otherwise breached their fiduciary duties to the Company. On September 1, 2016, Ross Weintraub filed a shareholder derivative action in Colorado state court in Denver, Colorado, making largely the same allegations as the Gubricky complaint.
On March 27, 2017, the Weintraub case was consolidated with the Skorski and Arnold/Arata action into a single case
.
On December 27, 2016, Cyrus Lashkari filed a shareholder derivative action
in
the U.S. District Court for the District of Colorado, making largely the same allegations as the foregoing shareholder derivative complaints. Each of these actions purports to state a claim for damages on behalf of the Company, and is based on statements in the Company’s SEC filings and related public disclosures, as well as media reports and Company records. The Company intends to defend these cases vigorously, but it is not possible at this time to reasonably estimate the outcome of or any potential liability from these cases.
Shareholder Class Action
On
January 8, 2016, Susie Ong filed a complaint in the U.S. District Court for the Southern District of New York on behalf of a purported class of purchasers of shares of the Company’s common stock between February 4, 2015 and January 5, 2016. The complaint purports to state claims against the Company, each of
the
co-Chief Executive Officers
serving during the claimed class period
and
the
Chief Financial Officer under Sections 10(b) and 20(a) of the Exchange Act and related rules, based on the Company’s alleged failure during the claimed class period to disclose material information about the Company’s quality controls and safeguards in relation to consumer and employee health. The complaint asserts that those failures and related public statements were false and misleading and that, as a result, the market price of the Company’s stock was artificially inflated during the claimed class period. The complaint seeks damages on behalf of the purported class in an unspecified amount, interest, and an award of reasonable attorneys’ fees, expert fees and other costs.
On March 8, 2017, the court granted the Company’s motion to dismiss the complaint, with leave to amend. The plaintiff filed an amended complaint on April 7, 2017.
The Company intends to defend this case vigorously, but it is not possible at this time to reasonably estimate the outcome of or any potential liability from the case.
Notices
of Inspection of Work Authorization Documents and Related Civil and Criminal Investigations
Following an inspection during 2010 by the U.S. Department of Homeland Security, or DHS, of the work authorization documents of the Company’s restaurant employees in Minnesota, and subsequent company-wide investigations by the Immigration and Customs Enforcement arm of DHS, or ICE, as well as the U.S. Attorney for the District of Columbia and the U.S. Securities and Exchange Commission, or SEC, the Company entered into an agreement during the fourth quarter of 2016 with the office of the U.S. Attorney for the District of Columbia to resolve the DHS and ICE investigations. In the first quarter of 2017, the staff of the enforcement division of the SEC notified the Company that it did not intend to recommend that the SEC take enforcement action against the Company in relation to its investigation.
Miscellaneous
The Company is involved in various other claims and legal actions that arise in the ordinary course of business. The Company does not believe that the ultimate resolution of these actions will have a material adverse effect on the Company’s financial position, results of operations, liquidity or capital resources. However, a significant increase in the number of these claims, or one or more successful claims under which the Company incurs greater liabilities than the Company currently anticipates, could materially and adversely affect the Company’s business, financial condition, results of operations and cash flows.