filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Chipotle Mexican Grill, Inc.
We have audited the accompanying consolidated balance sheets of Chipotle Mexican Grill, Inc. (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of income and comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chipotle Mexican Grill, Inc. at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Chipotle Mexican Grill, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated February 4, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Denver, Colorado
February 4, 2014
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CHIPOTLE MEXICAN GRILL, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
| December 31 | ||||||||
| 2013 | 2012 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 323,203 | $ | 322,553 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $1,190 and $1,187 as of December 31, 2013 and 2012, respectively | 24,016 | 16,800 | ||||||
| Inventory | 13,044 | 11,096 | ||||||
| Current deferred tax asset | 13,212 | 8,862 | ||||||
| Prepaid expenses and other current assets | 34,204 | 27,378 | ||||||
| Income tax receivable | 3,657 | 9,612 | ||||||
| Investments | 254,971 | 150,306 | ||||||
| Total current assets | 666,307 | 546,607 | ||||||
| Leasehold improvements, property and equipment, net | 963,238 | 866,703 | ||||||
| Long term investments | 313,863 | 190,868 | ||||||
| Other assets | 43,933 | 42,550 | ||||||
| Goodwill | 21,939 | 21,939 | ||||||
| Total assets | $ | 2,009,280 | $ | 1,668,667 | ||||
| Liabilities and shareholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 59,022 | $ | 58,700 | ||||
| Accrued payroll and benefits | 67,195 | 71,731 | ||||||
| Accrued liabilities | 73,011 | 56,421 | ||||||
| Total current liabilities | 199,228 | 186,852 | ||||||
| Deferred rent | 192,739 | 167,057 | ||||||
| Deferred income tax liability | 55,434 | 48,947 | ||||||
| Other liabilities | 23,591 | 19,885 | ||||||
| Total liabilities | 470,992 | 422,741 | ||||||
| Shareholders’ equity: | ||||||||
| Preferred stock, $0.01 par value, 600,000 shares authorized, no shares issued as of December 31, 2013 and 2012, respectively | — | — | ||||||
| Common stock $0.01 par value, 230,000 shares authorized, and 35,245 and 34,912 shares issued as of December 31, 2013 and 2012, respectively | 352 | 349 | ||||||
| Additional paid-in capital | 919,840 | 816,612 | ||||||
| Treasury stock, at cost, 4,212 and 3,819 common shares at December 31, 2013 and 2012, respectively | (660,421 | ) | (521,518 | ) | ||||
| Accumulated other comprehensive income | 1,620 | 1,024 | ||||||
| Retained earnings | 1,276,897 | 949,459 | ||||||
| Total shareholders’ equity | 1,538,288 | 1,245,926 | ||||||
| Total liabilities and shareholders’ equity | $ | 2,009,280 | $ | 1,668,667 | ||||
See accompanying notes to consolidated financial statements.
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CHIPOTLE MEXICAN GRILL, INC.
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except per share data)
| Years ended December 31 | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Revenue | $ | 3,214,591 | $ | 2,731,224 | $ | 2,269,548 | ||||||
| Restaurant operating costs (exclusive of depreciation and amortization shown separately below): | ||||||||||||
| Food, beverage and packaging | 1,073,514 | 891,003 | 738,720 | |||||||||
| Labor | 739,800 | 641,836 | 543,119 | |||||||||
| Occupancy | 199,107 | 171,435 | 147,274 | |||||||||
| Other operating costs | 347,401 | 286,610 | 251,208 | |||||||||
| General and administrative expenses | 203,733 | 183,409 | 149,426 | |||||||||
| Depreciation and amortization | 96,054 | 84,130 | 74,938 | |||||||||
| Pre-opening costs | 15,511 | 11,909 | 8,495 | |||||||||
| Loss on disposal of assets | 6,751 | 5,027 | 5,806 | |||||||||
| Total operating expenses | 2,681,871 | 2,275,359 | 1,918,986 | |||||||||
| Income from operations | 532,720 | 455,865 | 350,562 | |||||||||
| Interest and other income (expense), net | 1,751 | 1,820 | (857 | ) | ||||||||
| Income before income taxes | 534,471 | 457,685 | 349,705 | |||||||||
| Provision for income taxes | (207,033 | ) | (179,685 | ) | (134,760 | ) | ||||||
| Net income | $ | 327,438 | $ | 278,000 | $ | 214,945 | ||||||
| Other comprehensive income: | ||||||||||||
| Foreign currency translation adjustments | 596 | 827 | (409 | ) | ||||||||
| Comprehensive income | $ | 328,034 | $ | 278,827 | $ | 214,536 | ||||||
| Earnings per share: | ||||||||||||
| Basic | $ | 10.58 | $ | 8.82 | $ | 6.89 | ||||||
| Diluted | $ | 10.47 | $ | 8.75 | $ | 6.76 | ||||||
| Weighted average common shares outstanding: | ||||||||||||
| Basic | 30,957 | 31,513 | 31,217 | |||||||||
| Diluted | 31,281 | 31,783 | 31,775 | |||||||||
See accompanying notes to consolidated financial statements.
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CHIPOTLE MEXICAN GRILL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(in thousands)
| Common Stock | Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||
| Balance, December 31, 2010 | 33,959 | 340 | 594,331 | 2,885 | (240,918 | ) | 456,514 | 606 | $ | 810,873 | ||||||||||||||||||||||
| Stock-based compensation | 42,965 | 42,965 | ||||||||||||||||||||||||||||||
| Stock plan transactions | 398 | 4 | 570 | 574 | ||||||||||||||||||||||||||||
| Excess tax benefit on stock-based compensation | 38,786 | 38,786 | ||||||||||||||||||||||||||||||
| Acquisition of treasury stock | 220 | (63,508 | ) | (63,508 | ) | |||||||||||||||||||||||||||
| Net income | 214,945 | 214,945 | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | (409 | ) | (409 | ) | ||||||||||||||||||||||||||||
| Balance, December 31, 2011 | 34,357 | 344 | 676,652 | 3,105 | (304,426 | ) | 671,459 | 197 | 1,044,226 | |||||||||||||||||||||||
| Stock-based compensation | 66,274 | 66,274 | ||||||||||||||||||||||||||||||
| Stock plan transactions | 555 | 5 | 476 | 481 | ||||||||||||||||||||||||||||
| Excess tax benefit on stock-based compensation | 73,210 | 73,210 | ||||||||||||||||||||||||||||||
| Acquisition of treasury stock | 714 | (217,092 | ) | (217,092 | ) | |||||||||||||||||||||||||||
| Net income | 278,000 | 278,000 | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | 827 | 827 | ||||||||||||||||||||||||||||||
| Balance, December 31, 2012 | 34,912 | 349 | 816,612 | 3,819 | (521,518 | ) | 949,459 | 1,024 | 1,245,926 | |||||||||||||||||||||||
| Stock-based compensation | 64,781 | 64,781 | ||||||||||||||||||||||||||||||
| Stock plan transactions | 333 | 3 | 97 | 100 | ||||||||||||||||||||||||||||
| Excess tax benefit on stock-based compensation, net of utilization of $29 | 38,350 | 38,350 | ||||||||||||||||||||||||||||||
| Acquisition of treasury stock | 393 | (138,903 | ) | (138,903 | ) | |||||||||||||||||||||||||||
| Net income | 327,438 | 327,438 | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | 596 | 596 | ||||||||||||||||||||||||||||||
| Balance, December 31, 2013 | 35,245 | $ | 352 | $ | 919,840 | 4,212 | $ | (660,421 | ) | $ | 1,276,897 | $ | 1,620 | $ | 1,538,288 | |||||||||||||||||
See accompanying notes to consolidated financial statements.
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CHIPOTLE MEXICAN GRILL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
| Years ended December 31 | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Operating activities | ||||||||||||
| Net income | $ | 327,438 | $ | 278,000 | $ | 214,945 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 96,054 | 84,130 | 74,938 | |||||||||
| Deferred income tax provision (benefit) | 2,103 | (18,057 | ) | 11,935 | ||||||||
| Loss on disposal of assets | 6,751 | 5,027 | 5,806 | |||||||||
| Bad debt allowance | 19 | 1,046 | 239 | |||||||||
| Stock-based compensation expense | 63,657 | 64,276 | 41,382 | |||||||||
| Excess tax benefit on stock-based compensation | (38,379 | ) | (73,210 | ) | (38,786 | ) | ||||||
| Other | 507 | 522 | 2,501 | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | (7,238 | ) | (9,438 | ) | (2,970 | ) | ||||||
| Inventory | (1,950 | ) | (2,180 | ) | (1,816 | ) | ||||||
| Prepaid expenses and other current assets | (6,806 | ) | (5,954 | ) | (5,399 | ) | ||||||
| Other assets | (1,354 | ) | (20,539 | ) | (7,350 | ) | ||||||
| Accounts payable | 2,052 | 7,849 | 9,432 | |||||||||
| Accrued liabilities | 12,020 | 21,307 | 17,451 | |||||||||
| Income tax payable/receivable | 44,334 | 59,357 | 66,555 | |||||||||
| Deferred rent | 25,715 | 23,765 | 19,624 | |||||||||
| Other long-term liabilities | 3,857 | 4,062 | 2,609 | |||||||||
| Net cash provided by operating activities | 528,780 | 419,963 | 411,096 | |||||||||
| Investing activities | ||||||||||||
| Purchases of leasehold improvements, property and equipment | (199,926 | ) | (197,037 | ) | (151,147 | ) | ||||||
| Acquisition of interests in equity method investment | — | — | (586 | ) | ||||||||
| Purchases of investments | (387,639 | ) | (213,462 | ) | (183,251 | ) | ||||||
| Maturities of investments | 159,250 | 55,000 | 124,766 | |||||||||
| Net cash used in investing activities | (428,315 | ) | (355,499 | ) | (210,218 | ) | ||||||
| Financing activities | ||||||||||||
| Acquisition of treasury stock | (138,903 | ) | (217,092 | ) | (63,508 | ) | ||||||
| Proceeds from employee stock plan transactions | 316 | 481 | 574 | |||||||||
| Excess tax benefit on stock-based compensation | 38,379 | 73,210 | 38,786 | |||||||||
| Other financing payments | (143 | ) | (133 | ) | (120 | ) | ||||||
| Net cash used in financing activities | (100,351 | ) | (143,534 | ) | (24,268 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 536 | 380 | (205 | ) | ||||||||
| Net change in cash and cash equivalents | 650 | (78,690 | ) | 176,405 | ||||||||
| Cash and cash equivalents at beginning of period | 322,553 | 401,243 | 224,838 | |||||||||
| Cash and cash equivalents at end of period | $ | 323,203 | $ | 322,553 | $ | 401,243 | ||||||
| Supplemental disclosures of cash flow information | ||||||||||||
| Income taxes paid | $ | 160,973 | $ | 138,385 | $ | 56,270 | ||||||
| Increase (decrease) in purchases of leasehold improvements, property and equipment accrued in accounts payable | $ | (1,736 | ) | $ | 4,455 | $ | 3,249 | |||||
See accompanying notes to consolidated financial statements.
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CHIPOTLE MEXICAN GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, unless otherwise specified)
1. Description of Business and Summary of Significant Accounting Policies
Chipotle Mexican Grill, Inc. (the “Company”), a Delaware corporation, develops and operates fast-casual, fresh Mexican food restaurants. As of December 31, 2013, the Company operated 1,572 Chipotle restaurants throughout the United States. The Company also has seven restaurants in Canada, six in England, two in France, and one in Germany. Further, the Company operates six ShopHouse Southeast Asian Kitchen restaurants, serving fast-casual, Asian inspired cuisine, as well as is an investor in a consolidated entity that owns and operates one Pizzeria Locale, a fast casual pizza concept. The Company manages its operations based on seven regions and has aggregated its operations to one reportable segment.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company, including wholly owned subsidiaries and investees that the Company controls. All intercompany balances and transactions have been eliminated.
Certain amounts in prior periods have been reclassified to conform to the current year presentation. During the first quarter of 2013, the Company reclassified amounts related to lease financing liabilities from deemed landlord financing to other liabilities, and from current portion of deemed landlord financing to accrued liabilities. Such reclassifications did not have a material effect on the Company’s consolidated financial position or results of operations.
Management Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates under different assumptions or conditions.
Revenue Recognition
Revenue from restaurant sales is recognized when food and beverage products are sold. The Company reports revenue net of sales and use taxes collected from customers and remitted to governmental taxing authorities.
The Company sells gift cards which do not have an expiration date and it does not deduct non-usage fees from outstanding gift card balances. The Company recognizes revenue from gift cards when: (i) the gift card is redeemed by the customer; or (ii) the Company determines the likelihood of the gift card being redeemed by the customer is remote (gift card breakage) and 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. During the fourth quarter of 2012, the Company revised its estimated breakage rate from 5% to 4% of gift card sales which did not have a material impact on revenue. Gift card breakage is recognized in revenue as the gift cards are used on a pro rata basis over a six month period beginning at the date of the gift card sale and is included in revenue in the consolidated statement of income and comprehensive income. Breakage recognized during the years ended December 31, 2013, 2012 and 2011 was $1,976, $2,070 and $1,524, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investment instruments purchased with an initial maturity of three months or less to be cash equivalents.
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Accounts Receivable
Accounts receivable primarily consists of receivables from third party gift card distributors, tenant improvement receivables, payroll-related tax receivables, vendor rebates, and receivables arising from the normal course of business. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable based on a specific review of account balances. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recoverability is considered remote.
Inventory
Inventory, consisting principally of food, beverages, and supplies, is valued at the lower of first-in, first-out cost or market. Certain key ingredients (beef, pork, chicken, beans, rice, sour cream, cheese, and tortillas) are purchased from a small number of suppliers.
Investments
The Company’s investments consist of U.S. treasury notes and CDARS, certificates of deposit placed through an account registry service, with maturities up to approximately two years and classified as held-to-maturity. Held-to-maturity securities are carried at amortized cost, which the Company has determined approximates fair value as of December 31, 2013 and 2012. Fair market value of U.S. treasury notes is measured on a recurring basis based on Level 1 inputs and fair market value of CDARS is measured on a recurring basis based on Level 2 inputs (level inputs are described below under “Fair Value Measurements”). The Company recognizes impairment charges on its investments in the consolidated statement of income and comprehensive income when management believes the decline in the fair value of the investment is other-than-temporary. No impairment charges were recognized on the Company’s investments for the years ended December 31, 2013, 2012 and 2011.
Leasehold Improvements, Property and Equipment
Leasehold improvements, property and equipment are recorded at cost. Internal costs directly associated with the acquisition, development and construction of a restaurant are capitalized and were $9,024, $10,038 and $9,616 for the years ended December 31, 2013, 2012 and 2011, respectively. Expenditures for major renewals and improvements are capitalized while expenditures for minor replacements, maintenance and repairs are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the lease term, which generally includes reasonably assured option periods, or the estimated useful lives of the assets. Upon retirement or disposal of assets, the accounts are relieved of cost and accumulated depreciation and the related gain or loss, if any, is reflected in loss on disposal of assets in the consolidated statement of income and comprehensive income.
At least annually, the Company evaluates, and adjusts when necessary, the estimated useful lives. The changes in estimated useful lives did not have a material impact on depreciation in any period. The estimated useful lives are:
| Leasehold improvements and buildings | 3-20 years | |||
| Furniture and fixtures | 4-10 years | |||
| Equipment | 3-7 years |
Goodwill
Goodwill represents the excess of cost over fair value of net assets of the business acquired. Goodwill is not subject to amortization, but instead is tested for impairment at least annually, and the Company is required to record any necessary impairment adjustments. Impairment is measured as the excess of the carrying value over the fair value of the goodwill. Based on the Company’s analysis, no impairment charges were recognized on goodwill for the years ended December 31, 2013, 2012 and 2011.
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Other Assets
Other assets consist primarily of restricted cash assets of $23,810 and $24,799 as of December 31, 2013 and 2012, respectively, a rabbi trust as described further in Note 6, transferable liquor licenses which are carried at the lower of fair value or cost, and a prepaid tax asset related to an intercompany transfer of international intellectual property. Restricted cash assets are primarily insurance related restricted trust assets.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For the purpose of reviewing restaurant assets to be held and used for potential impairment, assets are grouped together at the market level, or in the case of a potential relocation or closure, at the restaurant level. The Company manages its restaurants as a group with significant common costs and promotional activities; as such, an individual restaurant’s cash flows are not generally independent of the cash flows of others in a market. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset exceeds the fair value of the asset. During the years ended December 31, 2013, 2012 and 2011, an aggregate impairment charge of $1,220, $0 and $380, respectively, was recognized in loss on disposal of assets in the consolidated statement of income and comprehensive income. The impairment charges resulted primarily from potential restaurant relocations or office closures. Fair value of the restaurants was determined using Level 3 inputs (as described below under “Fair Value Measurements”) based on a discounted cash flows method through the estimated date of closure.
Income Taxes
The Company recognizes deferred tax assets and liabilities at enacted income tax rates for the temporary differences between the financial reporting bases and the tax bases of its assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. The deferred income tax impacts of investment tax credits are recognized as an immediate adjustment to income tax expense. When it is more likely than not that a portion or all of a deferred tax asset will not be realized in the future, the Company provides a corresponding valuation allowance against the deferred tax asset. When it is more likely than not that a position will be sustained upon examination by a tax authority that has full knowledge of all relevant information, the Company measures the amount of tax benefit from the position and records the largest amount of tax benefit that is greater than 50% likely of being realized after settlement with a tax authority. The Company’s policy is to recognize interest to be paid on an underpayment of income taxes in interest expense and any related statutory penalties in the provision for income taxes in the consolidated statement of income and comprehensive income.
Restaurant Pre-Opening Costs
Pre-opening costs, including rent, wages, benefits and travel for the training and opening teams, food and other restaurant operating costs, are expensed as incurred prior to a restaurant opening for business.
Insurance Liability
The Company maintains various insurance policies including workers’ compensation, employee health, general liability, automobile, and property damage. Pursuant to these policies, the Company is responsible for losses up to certain limits and is required to estimate a liability that represents the ultimate exposure for aggregate losses below those limits. This liability is based on management’s estimates of the ultimate costs to be incurred to settle known claims and, where applicable, claims not reported as of the balance sheet date. The estimated liability is not discounted and is based on a number of assumptions and factors, including historical trends, actuarial assumptions, and economic conditions. If actual trends differ from the estimates, the financial results could be impacted. As of December 31, 2013 and 2012, $24,819 and $22,540, respectively, of the estimated liability was included in accrued payroll and benefits and $6,749 and $5,220, respectively, was included in accrued liabilities in the consolidated balance sheet.
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Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred and totaled $44,389, $34,999 and $31,902 for the years ended December 31, 2013, 2012 and 2011, respectively. Advertising and marketing costs are included in other operating costs in the consolidated statement of income and comprehensive income.
Rent
Rent expense for the Company’s leases, which generally have escalating rentals over the term of the lease, is recorded on a straight-line basis over the lease term. The lease term is the lesser of 20 years inclusive of reasonably assured renewal periods, or the lease term. The lease term begins when the Company has the right to control the use of the property, which is typically before rent payments are due under the lease. The difference between the rent expense and rent paid is recorded as deferred rent in the consolidated balance sheet. Pre-opening rent is included in pre-opening costs in the consolidated income statement. Tenant incentives used to fund leasehold improvements are recorded in deferred rent and amortized as reductions of rent expense over the term of the lease.
Additionally, certain of the Company’s operating leases contain clauses that provide additional contingent rent based on a percentage of sales greater than certain specified target amounts. The Company recognizes contingent rent expense provided the achievement of that target is considered probable.
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.
Fair Value Measurements
Financial Accounting Standards Board Accounting Standard Codification 820, Fair Value of Measurements and Disclosures (“Topic 820”) defines fair value based on the price that would be received to sell an asset or the exit price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value. The fair value hierarchy consists of three broad levels, which are described below:
Level 1: Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
Level 2: Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Foreign Currency Translation
The Company’s international operations generally use the local currency as the functional currency. Assets and liabilities are translated at exchange rates in effect as of the balance sheet date. Income and expense accounts are translated at the average monthly exchange rates during the year. Resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income in the consolidated statement of shareholders’ equity.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and investments. Approximately one third of the Company’s cash and investment
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balances are held at three financial institutions and are not federally backed or federally insured. Credit card transactions at the Company’s restaurants are processed by four service providers, one each for the United States, Canada, and England, and one for France and Germany.
Subsequent Events
The Company evaluated subsequent events and transactions for potential recognition or disclosure in the consolidated financial statements through the date of issuance.
Recently Issued Accounting Standards
Effective January 1, 2013, the Company adopted Accounting Standards Update (“ASU”) No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The adoption of ASU 2013-02 concerns presentation and disclosure only and did not have an impact on the Company’s consolidated financial position or results of operations.
2. Supplemental Financial Information
Leasehold improvements, property and equipment were as follows:
| December 31 | ||||||||
| 2013 | 2012 | |||||||
| Land | $ | 11,062 | $ | 11,062 | ||||
| Leasehold improvements and buildings | 1,121,260 | 996,080 | ||||||
| Furniture and fixtures | 113,751 | 100,416 | ||||||
| Equipment | 244,562 | 204,062 | ||||||
| 1,490,635 | 1,311,620 | |||||||
| Accumulated depreciation | (527,397 | ) | (444,917 | ) | ||||
| $ | 963,238 | $ | 866,703 | |||||
Accrued liabilities were as follows:
| December 31 | ||||||||
| 2013 | 2012 | |||||||
| Gift card liability | $ | 31,508 | $ | 22,736 | ||||
| Transaction tax payable | 17,541 | 13,499 | ||||||
| Other accrued expenses | 23,962 | 20,186 | ||||||
| $ | 73,011 | $ | 56,421 | |||||
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3. Income Taxes
The components of the provision for income taxes are as follows:
| Years ended December 31 | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Current tax: | ||||||||||||
| U.S. Federal | $ | 165,731 | $ | 166,386 | $ | 100,983 | ||||||
| U.S. State | 39,136 | 31,231 | 21,848 | |||||||||
| Foreign | 63 | 125 | (6 | ) | ||||||||
| 204,930 | 197,742 | 122,825 | ||||||||||
| Deferred tax: | ||||||||||||
| U.S. Federal | 5,238 | (16,024 | ) | 12,080 | ||||||||
| U.S. State | (3,105 | ) | (2,013 | ) | (50 | ) | ||||||
| Foreign | (1,330 | ) | (1,578 | ) | (711 | ) | ||||||
| 803 | (19,615 | ) | 11,319 | |||||||||
| Valuation allowance | 1,300 | 1,558 | 616 | |||||||||
| Provision for income taxes | $ | 207,033 | $ | 179,685 | $ | 134,760 | ||||||
Actual taxes paid for each tax period were less than the current tax expense due to the excess tax benefit on stock-based compensation of $38,379, $73,210, and $38,786 during the years ended December 31 2013, 2012, and 2011, respectively.
The effective tax rate differs from the statutory tax rates as follows:
| Years ended December 31 | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Statutory U.S. federal income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
| State income tax, net of related federal income tax benefit | 4.2 | 4.1 | 4.1 | |||||||||
| Federal credits | (0.5 | ) | — | (0.8 | ) | |||||||
| Valuation allowance | 0.4 | 0.3 | 0.1 | |||||||||
| Prior period adjustments | (0.4 | ) | (0.1 | ) | 0.1 | |||||||
| Effective income tax rates | 38.7 | % | 39.3 | % | 38.5 | % | ||||||
In January 2013, the United States Congress authorized, and the President signed into law, certain federal tax credits that were reflected in the Company’s U.S. tax return for 2012; however, since this law was enacted in 2013, the financial statement benefit of such credits were reflected in 2013. The lack of availability of such credits caused the 2012 effective tax rate to be approximately 0.7% higher than it would have been had the credits been approved in 2012. Recognizing the 2012 credits during 2013 benefited the 2013 rate by 0.6%.
Deferred U.S. income taxes have not been recorded for temporary differences related to investments in certain foreign subsidiaries. These temporary differences consisted primarily of undistributed earnings considered permanently invested in operations outside the U.S. Determination of the deferred income tax liability on these unremitted earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.
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Deferred income tax liabilities are taxes the Company expects to pay in future periods. Similarly, deferred income tax assets are recorded for expected reductions in taxes payable in future periods. Deferred income taxes arise because of the differences in the book and tax bases of certain assets and liabilities. Deferred income tax liabilities and assets consist of the following:
| December 31 | ||||||||
| 2013 | 2012 | |||||||
| Long-term deferred income tax liability: | ||||||||
| Leasehold improvements, property and equipment | $ | 156,746 | $ | 136,040 | ||||
| Goodwill and other assets | 1,346 | 1,166 | ||||||
| Other | 1,591 | — | ||||||
| Total long-term deferred income tax liability | 159,683 | 137,206 | ||||||
| Long-term deferred income tax asset: | ||||||||
| Deferred rent | 47,127 | 41,041 | ||||||
| Gift card liability | 876 | 480 | ||||||
| Capitalized transaction costs | 506 | 505 | ||||||
| Stock-based compensation and other employee benefits | 53,622 | 46,515 | ||||||
| Foreign net operating loss carry-forwards | 5,598 | 2,992 | ||||||
| State credits | 1,300 | — | ||||||
| Other | — | 72 | ||||||
| Valuation allowance | (4,780 | ) | (3,346 | ) | ||||
| Total long-term deferred income tax asset | 104,249 | 88,259 | ||||||
| Net long-term deferred income tax liability | 55,434 | 48,947 | ||||||
| Current deferred income tax liability: | ||||||||
| Prepaid assets and other | 2,970 | 2,086 | ||||||
| Total current deferred income tax liability | 2,970 | 2,086 | ||||||
| Current deferred income tax asset: | ||||||||
| Allowances, reserves and other | 11,973 | 10,433 | ||||||
| Other employee benefits | 4,267 | 573 | ||||||
| Valuation allowance | (58 | ) | (58 | ) | ||||
| Total current deferred income tax asset | 16,182 | 10,948 | ||||||
| Net current deferred income tax asset | 13,212 | 8,862 | ||||||
| Total deferred income tax liability | $ | 42,222 | $ | 40,085 | ||||
As of December 31, 2013 and 2012, the Company had no unrecognized tax benefits. There was no change in the amount of unrecognized tax benefits as a result of tax positions taken during the year or in prior periods or due to settlements with taxing authorities or lapses of applicable statutes of limitations. The Company is open to federal and state tax audits until the applicable statutes of limitations expire. Tax audits by their very nature are often complex and can require several years to complete. The Company is no longer subject to U.S. federal tax examinations by tax authorities for tax years before 2010. For the majority of states where the Company has a significant presence, it is no longer subject to tax examinations by tax authorities for tax years before 2009. Some of the Company’s foreign net operating losses begin expiring in 2015.
4. Shareholders’ Equity
Through December 31, 2013, the Company announced authorizations by its Board of Directors of the expenditure of up to $700 million to repurchase shares of the Company’s common stock. Under the remaining repurchase authorization, shares may be purchased from time to time in open market transactions, subject to market conditions.
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On November 20, 2012 the Company entered into a privately negotiated accelerated share repurchase transaction (“ASR”) to repurchase $25,000 of its common stock. The Company advanced $25,000 on November 20, 2012 and received 65 shares, which represented 70% of the total number of shares to be repurchased calculated using the closing price on November 20, 2012. The agreement was settled in February 2013, and the Company received an additional 22 shares, resulting in a weighted-average price per share of $287.20 for the ASR.
The shares of common stock repurchased under authorized programs, including the ASR, were 336, 686 and 220 for a total cost of $109,987, $206,394 and $63,508 during 2013, 2012 and 2011, respectively. As of December 31, 2013, $90,202 was available to be repurchased under the authorized programs. The shares repurchased are being held in treasury until such time as they are reissued or retired, at the discretion of the Board of Directors.
During 2013 and 2012, shares of common stock were netted and surrendered as payment for minimum statutory tax withholding obligations in connection with the vesting of outstanding stock awards. Shares surrendered by the participants in accordance with the applicable award agreements and plan are deemed repurchased by the Company but are not part of publicly announced share repurchase programs. In the year ended 2013, the Company’s repurchases in connection with such netting and surrender totaled 57 shares for a total cost of $28,916, and in the year ended 2012, totaled 28 shares for a total cost of $10,698.
5. Stock Based Compensation
The Company issues shares pursuant to the Chipotle Mexican Grill, Inc. 2011 Stock Incentive Plan (the “2011 Incentive Plan”). Shares issued pursuant to awards granted prior to the 2011 Incentive Plan were issued subject to previous stock plans. For purposes of counting the shares remaining available under the 2011 Incentive Plan, each share issuable pursuant to outstanding full value awards, such as restricted stock units and performance shares, will count as two shares used, whereas each share underlying a stock appreciation right or stock option will count as one share used. Under the 2011 Incentive Plan, 3,360 shares of common stock have been authorized and reserved for issuances to eligible employees, of which 2,014 represent shares that were authorized for issuance but not issued at December 31, 2013. The 2011 Incentive Plan is administered by the Compensation Committee of the Board of Directors, which has the authority to select the individuals to whom awards will be granted, to determine the type of awards and when the awards are to be granted, the number of shares to be covered by each award, the vesting schedule and all other terms and conditions of the awards. The exercise price for stock awards granted under the 2011 Incentive Plan cannot be less than fair market value at the date of grant.
The Company granted stock options prior to 2008, and has granted stock only stock appreciation rights (“SOSARs”) since that time. SOSARs generally vest equally over two and three years and expire after seven years. Stock-based compensation expense is generally recognized on a straight-line basis for each separate vesting portion. Compensation expense related to employees eligible to retire and retain full rights to the awards is recognized over six months which coincides with the notice period. Compensation expense on performance shares, which is based on the quantity of awards the Company has determined are probable of vesting, is recognized over the longer of the estimated performance goal attainment period or time vesting period. Stock-based compensation expense, including SOSARs and stock awards, was $64,781 ($39,465 net of tax) in 2013, $66,274 ($40,361 net of tax) in 2012 and $42,965 ($26,166 net of tax) in 2011. During the first quarter of 2012, the Company increased its estimate of the number of non-vested stock awards subject to performance conditions that were probable of vesting, which resulted in a cumulative adjustment to expense of $5,578 ($3,397 net of tax and $0.11 impact to basic and diluted earnings per share for 2012). For the years ended December 31, 2013, 2012 and 2011, $1,124, $1,998 and $1,583, respectively, of stock-based compensation expense was recognized as capitalized development and is included in leasehold improvements, property and equipment in the consolidated balance sheet.
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The tables below summarize the option and SOSAR activity under the stock incentive plans (in thousands, except years and per share data):
| 2013 | 2012 | 2011 | ||||||||||||||||||||||
| Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | |||||||||||||||||||
| Outstanding, beginning of year | 1,449 | $ | 274.92 | 1,486 | $ | 157.07 | 1,451 | $ | 82.56 | |||||||||||||||
| Granted | 672 | $ | 320.21 | 617 | $ | 371.70 | 587 | $ | 268.73 | |||||||||||||||
| Exercised | (369 | ) | $ | 176.23 | (592 | ) | $ | 80.31 | (536 | ) | $ | 76.78 | ||||||||||||
| Forfeited | (62 | ) | $ | 329.76 | (62 | ) | $ | 274.25 | (16 | ) | $ | 173.05 | ||||||||||||
| Outstanding, end of year | 1,690 | $ | 312.44 | 1,449 | $ | 274.92 | 1,486 | $ | 157.07 | |||||||||||||||
| Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Years of Contractual Life | Aggregate Intrinsic Value | |||||||||||||
| Outstanding as of December 31, 2013 | 1,690 | $ | 312.44 | 5.1 | $ | 372,475 | ||||||||||
| Vested and expected to vest as of December 31, 2013 | 1,647 | $ | 312.04 | 5.1 | $ | 363,561 | ||||||||||
| Exercisable as of December 31, 2013 | 258 | $ | 210.85 | 3.8 | $ | 83,019 |
The SOSARs granted during 2013 include 191 SOSARs that contain performance conditions. The total intrinsic value of options and SOSARs exercised during the years ended December 31, 2013, 2012 and 2011 was $91,178, $183,097 and $113,752. Unearned compensation as of December 31, 2013 was $31,912 for SOSAR awards, and is expected to be recognized over a weighted average period of 1.3 years.
A summary of non-vested stock award activity under the stock incentive plans is as follows (in thousands, except per share data):
| 2013 | 2012 | 2011 | ||||||||||||||||||||||
| Shares | Grant Date Fair Value | Shares | Grant Date Fair Value | Shares | Grant Date Fair Value | |||||||||||||||||||
| Outstanding, beginning of year | 120 | $ | 218.34 | 207 | $ | 153.40 | 205 | $ | 148.22 | |||||||||||||||
| Granted | 68 | $ | 527.45 | 1 | $ | 401.56 | 6 | $ | 272.28 | |||||||||||||||
| Vested | (117 | ) | $ | 215.76 | (83 | ) | $ | 55.92 | (3 | ) | $ | 87.36 | ||||||||||||
| Forfeited | — | $ | — | (5 | ) | $ | 267.23 | (1 | ) | $ | 53.36 | |||||||||||||
| Outstanding, end of year | 71 | $ | 520.27 | 120 | $ | 218.34 | 207 | $ | 153.40 | |||||||||||||||
At December 31, 2013, 66 of the outstanding non-vested stock awards were subject to both service and performance vesting conditions. The quantity of shares that ultimately vest is determined based on the cumulative cash flow from operations reached during the three year period ending on September 30, 2016. If the cumulative cash flow from operations during the three year period does not reach a specified level, no shares will vest. Unearned compensation as of December 31, 2013 was $26,357 for non-vested stock awards the Company has determined are probable of vesting, and is expected to be recognized over a weighted average period of 2.7 years. The fair value of shares earned as of the vesting date during the year ended December 31, 2013, 2012, and 2011 was $58,941, $31,309, and $961, respectively.
The following table reflects the average assumptions utilized in the Black-Scholes option-pricing model to value SOSAR awards granted for each year:
| 2013 | 2012 | 2011 | ||||||||||
| Risk-free interest rate | 0.5 | % | 0.4 | % | 1.6 | % | ||||||
| Expected life (years) | 3.4 | 3.4 | 3.4 | |||||||||
| Expected dividend yield | 0.0 | % | 0.0 | % | 0.0 | % | ||||||
| Volatility | 35.4 | % | 39.1 | % | 51.0 | % | ||||||
| Weighted-average Black-Scholes fair value per share at date of grant | $ | 82.51 | $ | 104.97 | $ | 101.91 |
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The Company has not paid dividends to date and does not plan to pay dividends in the near future. The risk-free interest rate is based upon U.S. Treasury rates for instruments with similar terms. The volatility assumption was based on our historical data and implied volatility, and the expected life assumptions were based on our historical data.
6. Employee Benefit Plans
The Company maintains the Chipotle Mexican Grill 401(k) plan (the “401(k) Plan”). The Company matches 100% of the first 3% of pay contributed by each eligible employee and 50% on the next 2% of pay contributed. Employees become eligible to receive matching contributions after one year of service with the Company. For the years ended December 31, 2013, 2012, and 2011, Company matching contributions totaled approximately $2,644, $2,431 and $2,039, respectively.
In 2012, the Company began offering an employee stock purchase plan (“ESPP”). Under the ESPP, 250 shares of common stock have been authorized and reserved for issuances to eligible employees. Employees become eligible to contribute after one year of service with the Company and may contribute up to 15% of their base earnings, subject to an annual maximum dollar amount, toward the monthly purchase of the Company’s common stock. During the year ended 2013 there were 1 shares issued under the ESPP, and during the year ended 2012 there were 1 shares issued under the ESPP.
The Company also maintains the Chipotle Mexican Grill, Inc. Supplemental Deferred Investment Plan (the “Deferred Plan”) which covers eligible employees of the Company. The Deferred Plan is a non-qualified plan that allows participants to make tax-deferred contributions that cannot be made under the 401(k) Plan because of Internal Revenue Service limitations. Participants’ earnings on contributions made to the Deferred Plan fluctuate with the actual earnings and losses of a variety of available investment choices selected by the participant. Total liabilities under the Deferred Plan as of December 31, 2013 and 2012 were $13,397 and $10,037, respectively, and are included in other long-term liabilities in the consolidated balance sheet. The Company matches 100% of the first 3% of pay contributed by each eligible employee and 50% on the next 2% of pay contributed once the 401(k) contribution limits are reached. For the years ended December 31, 2013, 2012, and 2011, the Company made deferred compensation matches of $201, $213 and $179 respectively, to the Deferred Plan.
Prior to the first quarter of 2012, the Deferred Plan was unfunded, with all earnings and losses recorded in general and administrative expenses in the consolidated statement of income and comprehensive income. The total expense recognized related to the unfunded portion of the Deferred Plan including the matching contributions was $487 and $20 for the years ended December 31, 2012, and 2011, respectively. During the first quarter of 2012, the Company elected to fund its deferred compensation obligations through a rabbi trust. The rabbi trust is subject to creditor claims in the event of insolvency, but the assets held in the rabbi trust are not available for general corporate purposes. Amounts in the rabbi trust are invested in mutual funds, as selected by participants, which are designated as trading securities and carried at fair value, and are included in other assets in the consolidated balance sheet. Fair value of mutual funds is measured using Level 1 inputs (quoted prices for identical assets in active markets), and the fair value of the investments in the rabbi trust was $13,397 and $10,037 as of December 31, 2013 and 2012, respectively. The Company records trading gains and losses in general and administrative expenses in the consolidated statement of income and comprehensive income, along with the offsetting amount related to the increase or decrease in deferred compensation to reflect its exposure of the Deferred Plan liability. The Company recorded $722 and $240 of unrealized gains on investments held in the rabbi trust during twelve months ended December 31, 2013 and 2012, respectively.
7. Leases
The Company generally operates its restaurants in leased premises. Lease terms for traditional shopping center or building leases generally include combined initial and option terms of 20-25 years. Ground leases generally include combined initial and option terms of 30-40 years. The option terms in each of these leases are typically in five-year increments. Typically, the lease includes rent escalation terms every five years including fixed rent escalations, escalations based on inflation indexes, and fair market value adjustments. Certain leases contain contingent rental provisions based upon the sales of the underlying restaurants. The leases generally provide for the payment of common area maintenance, property taxes, insurance and various other use and occupancy costs by the Company. In addition,
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the Company is the lessee under non-cancelable leases covering certain offices.
Future minimum lease payments required under existing operating leases as of December 31, 2013 are as follows:
| 2014 | $ | 185,866 | ||
| 2015 | 189,474 | |||
| 2016 | 189,514 | |||
| 2017 | 190,256 | |||
| 2018 | 193,243 | |||
| Thereafter | 1,908,169 | |||
| Total minimum lease payments | $ | 2,856,522 | ||
Minimum lease payments have not been reduced by minimum sublease rentals of $6,355 due in the future under non-cancelable subleases.
Rental expense consists of the following:
| For the years ended December 31 | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Minimum rentals | $ | 178,395 | $ | 152,935 | $ | 130,827 | ||||||
| Contingent rentals | $ | 2,719 | $ | 1,917 | $ | 1,754 | ||||||
| Sublease rental income | $ | (1,726 | ) | $ | (1,623 | ) | $ | (1,390 | ) |
The Company has six sales and leaseback transactions. These transactions do not qualify for sale leaseback accounting because of the Company’s deemed continuing involvement with the buyer-lessor due to fixed price renewal options, which results in the transaction being recorded under the financing method. Under the financing method, the assets remain on the consolidated balance sheet and the proceeds from the transactions are recorded as a financing liability. A portion of lease payments are applied as payments of deemed principal and imputed interest. The deemed landlord financing liability was $3,386 and $3,529 as of December 31, 2013, and 2012, respectively, with the current portion of the liability included in accrued liabilities, and the remaining portion included in other liabilities in the consolidated balance sheet.
8. Earnings Per Share
Basic earnings per share is calculated by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share (“diluted EPS”) is calculated using income available to common shareholders divided by diluted weighted-average shares of common stock outstanding during each period. Potentially dilutive securities include shares of common stock underlying stock options, 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 anti-dilutive effect. Stock awards of 393, 360 and 240 were excluded from the calculation of 2013, 2012 and 2011 diluted EPS, respectively, because they were anti-dilutive. In addition, 381, 449 and 224 stock awards subject to performance conditions were excluded from the 2013, 2012 and 2011 calculations of diluted EPS. The following table sets forth the computations of basic and diluted earnings per share:
| Year ended December 31 | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Net income | $ | 327,438 | $ | 278,000 | $ | 214,945 | ||||||
| Shares: | ||||||||||||
| Weighted average number of common shares outstanding | 30,957 | 31,513 | 31,217 | |||||||||
| Dilutive stock awards | 324 | 270 | 558 | |||||||||
| Diluted weighted average number of common shares outstanding | 31,281 | 31,783 | 31,775 | |||||||||
| Basic earnings per share | $ | 10.58 | $ | 8.82 | $ | 6.89 | ||||||
| Diluted earnings per share | $ | 10.47 | $ | 8.75 | $ | 6.76 | ||||||
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9. Commitments and Contingencies
Purchase Obligations
The Company enters into various purchase obligations in the ordinary course of business, generally of short term nature. Those that are binding primarily relate to commitments for food purchases and supplies, amounts owed under contractor and subcontractor agreements, orders submitted for equipment for restaurants under construction, and marketing initiatives and corporate sponsorships.
Litigation
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, the Immigration and Customs Enforcement arm of DHS, or ICE, issued to the Company a Notice of Suspect Documents identifying a large number of employees who, according to ICE and notwithstanding the Company’s review of work authorization documents for each employee at the time they were hired, appeared not to be authorized to work in the U.S. The Company approached each of the named employees to explain ICE’s determination and afforded each employee an opportunity to confirm the validity of their original work eligibility documents, or provide valid work eligibility documents. Employees who were unable to provide valid work eligibility documents were terminated in accordance with the law. In December 2010, the Company was also requested by DHS to provide the work authorization documents of restaurant employees in the District of Columbia and Virginia, and the Company provided the requested documents in January 2011. The Company has subsequently received requests from the office of the U.S. Attorney for the District of Columbia for work authorization documents covering all of the Company’s employees since 2007, plus employee lists and other documents concerning work authorization. The Company believes its practices with regard to the work authorization of its employees, including the review and retention of work authorization documents, are in compliance with applicable law. However, the termination of large numbers of employees in a short period of time does disrupt restaurant operations and results in a temporary increase in labor costs as new employees are trained.
In May 2012, the U.S. Securities and Exchange Commission notified the Company that it is conducting a civil investigation of the Company’s compliance with employee work authorization verification requirements and its related disclosures and statements, and the office of the U.S. Attorney for the District of Columbia advised the Company that its investigation has broadened to include a parallel criminal and civil investigation of the Company’s compliance with federal securities laws. The Company intends to continue to fully cooperate in the government’s investigations. It is not possible at this time to determine whether the Company will incur, or to reasonably estimate the amount of, any fines, penalties or further liabilities in connection with these matters.
Shareholder Derivative Actions
On July 12, 2012, Ralph B. Richey filed a shareholder derivative action in the U.S. District Court for the District of Colorado alleging that the members of the Company’s Board of Directors breached their fiduciary duties in connection with employee work authorization compliance matters. On September 21, 2012, Joanne Nelson filed a shareholder derivative action in the same court alleging that the members of the Company’s Board of Directors and the Company’s Chief Financial Officer breached their fiduciary duties, caused waste of corporate assets, and were unjustly enriched in connection with employee work authorization compliance matters, as well as in connection with the Company’s alleged failure to disclose material information about the Company’s business results and prospects, and in connection with compensation paid to some of the Company’s officers. On October 4, 2012, Francis Schmitz filed a shareholder derivative action in the same court, making allegations substantially the same as those in the Nelson complaint. 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, in part regarding the matters described above under “—Notices of Inspection of Work Authorization Documents and Related Civil and Criminal Investigations.” On January 17, 2013, these three shareholder derivative actions were consolidated by the court
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and will proceed as a single action. On March 20, 2013, an amended and consolidated complaint for the cases was filed by plaintiff Saleem Mohammed. On May 22, 2013, the Company filed a motion to dismiss the consolidated cases, and a ruling on the motion remains pending. The Company has agreed to a proposed settlement of the consolidated cases the terms of which are subject to court approval and ratification by the Company’s Board of Directors. Under the proposed settlement agreement, the Company would pay the plaintiffs’ attorneys’ fees which have been accrued and agree to put in place additional oversight procedures related to employee work authorization compliance. In the event the settlement is not approved, the Company intends to continue to defend the cases vigorously, but it would not be possible at this time to reasonably estimate the outcome of or any potential liability from these cases.
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.
10. Quarterly Financial Data (Unaudited)
Summarized unaudited quarterly financial data:
| 2013 | ||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | |||||||||||||
| Revenue | $ | 726,751 | $ | 816,786 | $ | 826,907 | $ | 844,147 | ||||||||
| Operating income | $ | 120,044 | $ | 146,418 | $ | 137,154 | $ | 129,104 | ||||||||
| Net income | $ | 76,584 | $ | 87,853 | $ | 83,379 | $ | 79,622 | ||||||||
| Basic earnings per share | $ | 2.47 | $ | 2.84 | $ | 2.70 | $ | 2.57 | ||||||||
| Diluted earnings per share | $ | 2.45 | $ | 2.82 | $ | 2.66 | $ | 2.53 | ||||||||
| 2012 | ||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | |||||||||||||
| Revenue | $ | 640,603 | $ | 690,932 | $ | 700,528 | $ | 699,161 | ||||||||
| Operating income | $ | 102,224 | $ | 133,790 | $ | 117,663 | $ | 102,188 | ||||||||
| Net income | $ | 62,664 | $ | 81,683 | $ | 72,300 | $ | 61,353 | ||||||||
| Basic earnings per share | $ | 2.00 | $ | 2.58 | $ | 2.28 | $ | 1.96 | ||||||||
| Diluted earnings per share | $ | 1.97 | $ | 2.56 | $ | 2.27 | $ | 1.95 |
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