Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm	40
Consolidated Balance Sheet as of December 31, 2017 and 2016	42
Consolidated Statement of Income and Consolidated Statement of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015	43
Consolidated Statement of Shareholders’ Equity for the years ended December 31, 2017, 2016 and 2015	44
Consolidated Statement of Cash Flows for the years ended December 31, 2017, 2016 and 2015	45
Notes to Consolidated Financial Statements	46

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Chipotle Mexican Grill, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Chipotle Mexican Grill, Inc. (the Company), as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United Stated) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 8, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1997.

Denver, Colorado

February 8, 2018

CHIPOTLE MEXICAN GRILL, INC.

CONSOLIDATED BALANCE SHEET

(in thousands, except per share data)

	December 31,
	2017			2016
Assets
Current assets:
Cash and cash equivalents	$	184,569		$	87,880
Accounts receivable, net of allowance for doubtful accounts of $0 and $259 as of December 31, 2017 and 2016, respectively		40,453			40,451
Inventory		19,860			15,019
Prepaid expenses and other current assets		50,918			44,080
Income tax receivable		9,353			5,108
Investments		324,382			329,836
Total current assets		629,535			522,374
Leasehold improvements, property and equipment, net		1,338,366			1,303,558
Long term investments		-			125,055
Other assets		55,852			53,177
Goodwill		21,939			21,939
Total assets	$	2,045,692		$	2,026,103
Liabilities and shareholders' equity
Current liabilities:
Accounts payable	$	82,028		$	78,363
Accrued payroll and benefits		82,541			76,301
Accrued liabilities		159,324			127,129
Total current liabilities		323,893			281,793
Deferred rent		316,498			288,927
Deferred income tax liability		814			18,944
Other liabilities		40,042			33,946
Total liabilities		681,247			623,610
Shareholders' equity:
Preferred stock, $0.01 par value, 600,000 shares authorized, no shares issued as of December 31, 2017 and 2016, respectively		-			-
Common stock $0.01 par value, 230,000 shares authorized, and 35,852 and 35,833 shares issued as of December 31, 2017 and 2016, respectively		359			358
Additional paid-in capital		1,305,090			1,238,875
Treasury stock, at cost, 7,826 and 7,019 common shares at December 31, 2017 and 2016, respectively		(2,334,409)			(2,049,389)
Accumulated other comprehensive income (loss)		(3,659)			(8,162)
Retained earnings		2,397,064			2,220,811
Total shareholders' equity		1,364,445			1,402,493
Total liabilities and shareholders' equity	$	2,045,692		$	2,026,103

See accompanying notes to consolidated financial statements.

CHIPOTLE MEXICAN GRILL, INC.

CONSOLIDATED STATEMENT OF INCOME

(in thousands, except per share data)

	Year ended December 31,
	2017			2016			2015
Revenue	$	4,476,412		$	3,904,384		$	4,501,223
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Food, beverage and packaging		1,535,428			1,365,580			1,503,835
Labor		1,205,992			1,105,001			1,045,726
Occupancy		327,132			293,636			262,412
Other operating costs		651,644			641,953			514,963
General and administrative expenses		296,388			276,240			250,214
Depreciation and amortization		163,348			146,368			130,368
Pre-opening costs		12,341			17,162			16,922
Loss on disposal and impairment of assets		13,345			23,877			13,194
Total operating expenses		4,205,618			3,869,817			3,737,634
Income from operations		270,794			34,567			763,589
Interest and other income, net		4,949			4,172			6,278
Income before income taxes		275,743			38,739			769,867
Provision for income taxes		(99,490)			(15,801)			(294,265)
Net income	$	176,253		$	22,938		$	475,602
Earnings per share:
Basic	$	6.19		$	0.78		$	15.30
Diluted	$	6.17		$	0.77		$	15.10
Weighted average common shares outstanding:
Basic		28,491			29,265			31,092
Diluted		28,561			29,770			31,494

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(in thousands)

	Year ended December 31,
	2017			2016			2015
Net income	$	176,253		$	22,938		$	475,602
Other comprehensive income (loss), net of income taxes:
Foreign currency translation adjustments		4,689			(1,291)			(6,322)
Unrealized gain (loss) on available-for-sale securities		(274)			2,251			(2,468)
Tax benefit (expense)		88			(849)			946
Other comprehensive income (loss), net of income taxes		4,503			111			(7,844)
Comprehensive income	$	180,756		$	23,049		$	467,758

See accompanying notes to consolidated financial statements.

CHIPOTLE MEXICAN GRILL, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(in thousands)

	Common Stock								Treasury Stock								Accumulated Other Comprehensive Income (Loss)
	Shares		Amount			Additional Paid-In Capital			Shares		Amount			Retained Earnings			Available-for-Sale Securities				Foreign Currency Translation		Total
Balance, December 31, 2014	35,394		$	354		$	1,038,932		4,367		$	(748,759)		$	1,722,271		$	-		$	(429)		$	2,012,369
Stock-based compensation							59,465																	59,465
Stock plan transactions and other	396			4			(211)																	(207)
Excess tax benefit on stock-based compensation							74,442																	74,442
Acquisition of treasury stock									839			(485,853)												(485,853)
Net income															475,602									475,602
Other comprehensive income (loss), net of income tax																		(1,522)			(6,322)			(7,844)
Balance, December 31, 2015	35,790		$	358		$	1,172,628		5,206		$	(1,234,612)		$	2,197,873		$	(1,522)		$	(6,751)		$	2,127,974
Stock-based compensation							65,112																	65,112
Stock plan transactions and other	43			-			(185)																	(185)
Excess tax benefit on stock-based compensation							1,320																	1,320
Acquisition of treasury stock									1,813			(814,777)												(814,777)
Net income															22,938									22,938
Other comprehensive income (loss), net of income tax																		1,402			(1,291)			111
Balance, December 31, 2016	35,833		$	358		$	1,238,875		7,019		$	(2,049,389)		$	2,220,811		$	(120)		$	(8,042)		$	1,402,493
Stock-based compensation							66,396																	66,396
Stock plan transactions and other	19			1			(181)																	(180)
Acquisition of treasury stock									807			(285,020)												(285,020)
Net income															176,253									176,253
Other comprehensive income (loss), net of income tax																		(186)			4,689			4,503
Balance, December 31, 2017	35,852		$	359		$	1,305,090		7,826		$	(2,334,409)		$	2,397,064		$	(306)		$	(3,353)		$	1,364,445

See accompanying notes to consolidated financial statements.

CHIPOTLE MEXICAN GRILL, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)

	Year ended December 31,
	2017			2016			2015
Operating activities
Net income	$	176,253		$	22,938		$	475,602
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		163,348			146,368			130,368
Deferred income tax (benefit) provision		(18,026)			(14,207)			11,666
Loss on disposal and impairment of assets		13,345			23,877			13,194
Bad debt allowance		214			(262)			(23)
Stock-based compensation expense		65,255			64,166			57,911
Excess tax benefit on stock-based compensation		-			(1,320)			(74,442)
Other		(218)			(604)			582
Changes in operating assets and liabilities:
Accounts receivable		(140)			(1,923)			(3,504)
Inventory		(5,250)			(91)			262
Prepaid expenses and other current assets		(6,710)			(4,259)			(5,259)
Other assets		(2,587)			(4,855)			(5,619)
Accounts payable		10,908			(6,734)			19,525
Accrued liabilities		38,574			33,491			(7,440)
Income tax payable/receivable		(4,173)			54,340			32,756
Deferred rent		29,996			37,030			32,911
Other long-term liabilities		6,316			1,287			4,826
Net cash provided by operating activities		467,105			349,242			683,316
Investing activities
Purchases of leasehold improvements, property and equipment		(216,777)			(258,842)			(257,418)
Purchases of investments		(199,801)			-			(559,372)
Maturities of investments		330,000			45,000			352,650
Proceeds from sale of investments		-			540,648			-
Net cash provided by (used in) investing activities		(86,578)			326,806			(464,140)
Financing activities
Acquisition of treasury stock		(285,920)			(837,655)			(460,675)
Excess tax benefit on stock-based compensation		-			1,320			74,442
Stock plan transactions and other financing activities		26			52			(207)
Net cash used in financing activities		(285,894)			(836,283)			(386,440)
Effect of exchange rate changes on cash and cash equivalents		2,056			110			(4,196)
Net change in cash and cash equivalents		96,689			(160,125)			(171,460)
Cash and cash equivalents at beginning of year		87,880			248,005			419,465
Cash and cash equivalents at end of year	$	184,569		$	87,880		$	248,005
Supplemental disclosures of cash flow information
Income taxes paid	$	119,787		$	23,862		$	248,547
Increase (decrease) in purchases of leasehold improvements, property, and equipment accrued in accounts payable and accrued liabilities	$	(7,690)		$	(1,781)		$	(2,870)
Increase (decrease) in acquisition of treasury stock accrued in accrued liabilities	$	(900)		$	(22,778)		$	25,178

See accompanying notes to consolidated financial statements.

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

In this annual report on Form 10-K, Chipotle Mexican Grill, Inc., a Delaware corporation, together with its subsidiaries, is collectively referred to as “Chipotle,” “we,” “us,” or “our.”

We develop and operate restaurants that serve a focused menu of burritos, tacos, burrito bowls, and salads, made using fresh, high-quality ingredients. As of December 31, 2017, we operated 2,363 Chipotle restaurants throughout the United States as well as 37 international Chipotle restaurants and eight non-Chipotle restaurants. We transitioned the management of our operations from 11 to nine regions during 2017 and have aggregated our operations to one reportable segment.

Principles of Consolidation and Basis of Presentation

Our consolidated financial statements include our accounts, including wholly and majority owned subsidiaries. All intercompany balances and transactions have been eliminated.

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

We recognize revenue, net of discounts and incentives, when payment is tendered at the point of sale. We recognize a liability for offers of free food by estimating the cost to satisfy the offer based on company–specific historical redemption patterns for similar promotions. These costs are recognized in other operating costs in the consolidated statement of income and in accrued liabilities in the consolidated balance sheet. We report revenue net of sales-related taxes collected from customers and remitted to governmental taxing authorities.

We sell gift cards which do not have an expiration date and we do not deduct non-usage fees from outstanding gift card balances. We recognize revenue from gift cards when: (i) the gift card is redeemed by the customer; or (ii) we determine 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. We have determined that 4% of gift card sales will not be redeemed and will be retained. Gift card breakage is recognized in revenue as the gift cards are used on a pro rata basis. During the quarter ended December 31, 2017, we revised the period over which we recognize gift card breakage from six months to eight months from the date of the gift card sale in the consolidated statement of income. Breakage recognized during the years ended December 31, 2017, 2016 and 2015 was $3,590, $3,624 and $4,226, respectively.

During the year ended December 31, 2016, we offered a limited-time frequency program that awarded free food or merchandise to customers based on frequency of monthly visits. We deferred revenue reflecting the portion of original sales allocated to the rewards that were earned by program participants and not redeemed at the end of the year, and recorded a corresponding liability in accrued liabilities on our consolidated balance sheet. The portion of revenue allocated to the rewards was based on the estimated value of the award earned and takes into consideration company-specific historical redemption patterns for similar promotions. Rewards expire according to the loyalty awards terms and conditions. Deferred revenue related to the frequency program was $0 and $5,489 as of December 31, 2017 and December 31, 2016, respectively, and the entire amount that was deferred as of December 31, 2016 was recognized during 2017.

Cash and Cash Equivalents

We consider all highly liquid investment instruments purchased with an initial maturity of three months or less to be cash equivalents. We maintain cash and cash equivalent balances with financial institutions that exceed federally-insured limits. We have not experienced any losses related to these balances and believe the risk to be minimal.

Accounts Receivable

Accounts receivable primarily consists of receivables from third party gift card distributors, tenant improvement receivables, vendor rebates, and interest receivable. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable based on a specific review of account balances. Account balances are charged 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 net realizable value. Certain key ingredients (beef, pork, chicken, beans, rice, sour cream, cheese, and tortillas) are purchased from a small number of suppliers.

Investments

Investments classified as trading securities are carried at fair value with any unrealized gain or loss being recorded in the consolidated statement of income. Investments classified as available-for-sale are carried at fair value with unrealized gains and losses, net of tax, included as a component of other comprehensive income (loss) on the statement of comprehensive income. Held-to-maturity securities are carried at amortized cost. Impairment charges on investments are recognized in interest and other income, net on the consolidated statement of income when management believes the decline in the fair value of the investment is other-than-temporary.

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 $7,507, $8,076 and $9,554 for the years ended December 31, 2017, 2016 and 2015, 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 any related gain or loss is reflected in loss on disposal and impairment of assets in the consolidated statement of income.

At least annually, we evaluate, and adjust when necessary, the estimated useful lives of leasehold improvements, property and equipment. 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	4-7 years
Equipment	3-10 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 we are 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 our analysis, no impairment charges were recognized on goodwill for the years ended December 31, 2017, 2016 and 2015.

Other Assets

Other assets consist primarily of restricted cash assets of $29,601 and $28,490 as of December 31, 2017 and 2016, respectively, a rabbi trust as described further in Note 7. “Employee Benefit Plans,” transferable liquor licenses which are carried at the lower of fair value or cost, and rental deposits related to leased properties. 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. We manage our 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, 2017, 2016 and 2015, an aggregate impairment charge of $3,291, $17,394 and $6,675, respectively, was recognized in loss on disposal and impairment of assets in the consolidated statement of income. During the year ended December 31, 2017, the impairment charges resulted primarily from the closure of a small number of underperforming Chipotle restaurants. Impairment charges recognized during the year ended December 31, 2016 resulted primarily from the impairment of ShopHouse Southeast Asian Kitchen restaurants which were closed during 2017. During the year ended December 31, 2015, the impairment charges resulted from an internally developed software program we chose not to implement and the related hardware, the discontinued use of certain kitchen equipment from our restaurants, as well as restaurant relocations. The fair value of restaurants was determined using Level 3 inputs (unobservable inputs) based on a discounted cash flows method. See “Fair Value Measurements” below for a description of level inputs.

Income Taxes

Deferred tax assets and liabilities are recognized at enacted income tax rates for the temporary differences between the financial reporting bases and the tax bases of our 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, we provide a corresponding valuation allowance against the deferred tax asset, except for deferred tax assets related to stock awards when there is sufficient future taxable income to recover the deferred tax assets. 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, we measure the amount of tax benefit from our position and record the largest amount of tax benefit that is greater than 50% likely of being realized after settlement with a tax authority. Our 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.

Restaurant Pre-Opening Costs

Pre-opening costs, including rent, wages, benefits and travel for training and opening teams, food and other restaurant operating costs, are expensed as incurred prior to a restaurant opening for business, and are included in operating expenses on the consolidated statement of income.

Insurance Liability

We are self-insured for a significant portion of our risks and associated liabilities with respect to workers’ compensation, employee health, general liability, automobile, and property damage. Pursuant to these policies, we are responsible for losses up to varying deductibles and are required to estimate a liability that represents the ultimate exposure for aggregate losses below those limits. This liability is based on our 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, 2017 and 2016, $37,096 and $35,550, respectively, of the estimated liability was included in accrued payroll and benefits and $14,014 and $13,881, respectively, was included in accrued liabilities in the consolidated balance sheet.

Advertising and Marketing Costs

Advertising and marketing costs are expensed as incurred and totaled $106,345, $102,969 and $69,257 for the years ended December 31, 2017, 2016 and 2015, respectively. Advertising and marketing costs are included in other operating costs in the consolidated statement of income.

Rent

Rent expense for our 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 we have 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 statement of income. 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 operating leases contain clauses that provide additional contingent rent based on a percentage of sales greater than certain specified target amounts. Contingent rent expense is recognized provided the achievement of that target is considered probable.

Stock-Based Compensation

We issue shares as part of employee compensation pursuant to the Amended and Restated Chipotle Mexican Grill, Inc. 2011 Stock Incentive Plan (the “2011 Incentive Plan”). Stock only stock appreciation rights (“SOSARs”) and stock awards 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. We estimate forfeitures based on historical data when determining the amount of stock-based compensation costs to be recognized in each period. We have also granted SOSARs and stock awards with performance vesting conditions and/or market vesting conditions. Stock awards with performance or market vesting conditions generally vest based on our achievement versus stated targets or criteria over a three-year performance and service period. Compensation expense on SOSARs subject to performance conditions is recognized over the longer of the estimated performance goal attainment period or time vesting period. Compensation expense on stock awards subject to performance conditions, which is based on the quantity of awards we have determined are probable of vesting, is recognized over the longer of the estimated performance goal attainment period or time vesting period. Compensation expense is recognized ratably for awards subject to market conditions regardless of whether the market condition is satisfied, provided that the requisite service has been provided. Some stock-based compensation awards are made to employees involved in our new restaurant development activities, and expense for these awards is recognized as capitalized development and included in leasehold improvements, property and equipment in the consolidated balance sheet.

Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of their short-term nature.

Fair Value Measurements

Fair value is the price we would receive to sell an asset or pay to transfer a liability (exit price) in an orderly transaction between market participants. For assets and liabilities recorded or disclosed at fair value on a recurring basis, we determine fair value based on the following:

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

Our international operations 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 other comprehensive income (loss) in the consolidated statement of comprehensive income.

Recently Issued Accounting Standards

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-18, “Statement of Cash Flows (Topic 230)”, which provides guidance on the classification of restricted cash to be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts on the statement of cash flows. We will be adopting this pronouncement on January 1, 2018, using a retrospective adoption method. For the years ended December 31, 2017, 2016 and 2015, $29,601, $28,490 and $22,572, respectively, of restricted cash would have been included in cash and cash equivalents and changes in the balance excluded from net cash provided by operating activities in the consolidated statement of cash flows if this new guidance had been adopted as of the respective dates.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The pronouncement requires lessees to recognize 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. The guidance requires 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. We expect to adopt the requirements of the new lease standard effective January 1, 2019. We are currently evaluating the provisions of the new lease standard, including optional practical expedients, and assessing our existing lease portfolio in order to determine the impact to our accounting systems, processes and internal control over financial reporting. The adoption of ASU 2016-02 will have a significant impact on our consolidated balance sheet because we will record material assets and obligations for current operating leases. We are still assessing the expected impact on our consolidated statements of income and cash flows.

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 will require us to enhance our disclosures, including disclosing performance obligations to customers arising from gift cards and certain promotional activity. The pronouncement is effective for reporting periods beginning after December 15, 2017. The adoption is not expected to have an impact on our consolidated financial position or results of operations.

We reviewed all other recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact to the consolidated financial statements.

Recently Adopted Accounting Standard

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 consolidated statement of cash flows.

We adopted ASU 2016-09 on January 1, 2017, prospectively (prior periods have not been restated). The primary impact of adoption was the recognition for the year ended December 31, 2017, of an excess tax benefit of $448, which reduces our 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. We 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 2016-09 had a material impact on our financial statements or disclosures.

2. Supplemental Financial Information

Leasehold improvements, property and equipment were as follows:

	December 31,
	2017			2016
Land	$	12,943		$	12,943
Leasehold improvements and buildings		1,677,294			1,572,606
Furniture and fixtures		166,915			157,541
Equipment		460,138			405,937
Leasehold improvements, property and equipment		2,317,290			2,149,027
Accumulated depreciation		(978,924)			(845,469)
Leasehold improvements, property and equipment, net	$	1,338,366		$	1,303,558

Accrued payroll and benefits were as follows:

	December 31,
	2017			2016
Workers' compensation liability	$	34,631		$	33,038
Accrued payroll		19,666			22,338
Other accrued payroll and benefits		28,244			20,925
Accrued payroll and benefits	$	82,541		$	76,301

Accrued liabilities were as follows:

	December 31,
	2017			2016
Gift card liability	$	63,645		$	59,438
Transaction tax payable		18,920			20,435
Data security incident liability		30,000			-
Other accrued liabilities		46,759			47,256
Accrued liabilities	$	159,324		$	127,129

3. Investments

As of December 31, 2017 and 2016, our investments consisted of U.S. treasury notes with maturities up to approximately one year and were classified as available-for-sale. Fair value of U.S. treasury notes is measured on a recurring basis based on Level 1 inputs (quoted prices for identical assets in active markets).

The following is a summary of available-for-sale securities:

	December 31,			December 31,
	2017			2016
Amortized cost	$	324,875		$	455,109
Unrealized gains (losses)		(493)			(218)
Fair value	$	324,382		$	454,891

The following is a summary of unrealized gains (losses) on available-for-sale securities recorded in other comprehensive income (loss) in the consolidated statement of comprehensive income:

	Year ended December 31,
	2017			2016			2015
Unrealized gains (losses) on available-for-sale securities	$	(274)		$	2,251		$	(2,468)
Unrealized gains (losses) on available-for-sale securities, net of tax	$	(186)		$	1,402		$	(1,522)

Realized gains and losses on available-for-sale securities are recorded in interest and other income on the consolidated statement of income. We had no realized gains or losses for the years ended December 31, 2017 and 2015, and $547 of realized gains on available-for-sale securities for the year ended December 31, 2016. During the year ended December 31, 2015, we recorded an other-than-temporary impairment charge of $244 in interest and other income in the consolidated statement of income in connection with a decline in the fair market value of certain available-for-sale securities.

We have elected to fund certain deferred compensation obligations through a rabbi trust, the assets of which are designated as trading securities, as described further in Note 7. “Employee Benefit Plans.”

4. Income Taxes

The components of the provision for income taxes are as follows:

	Year ended December 31,
	2017			2016			2015
Current tax:
U.S. Federal	$	98,208		$	20,765		$	244,470
U.S. State		18,639			8,687			37,957
Foreign		669			556			172
		117,516			30,008			282,599
Deferred tax:
U.S. Federal		(16,201)			(11,596)			11,000
U.S. State		(1,559)			(2,546)			699
Foreign		(496)			(2,470)			(2,288)
		(18,256)			(16,612)			9,411
Valuation allowance		230			2,405			2,255
Provision for income taxes	$	99,490		$	15,801		$	294,265

On December 22, 2017, the Tax Cuts and Jobs Act, (the “TCJA”) was enacted. The TCJA includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate tax rate from 35% to 21%, for tax years beginning after December 31, 2017. We recorded a benefit of $6,047 ($0.21 per basic and diluted earnings per share) in deferred income tax expense for the remeasurement of our net deferred tax liability at the 21% tax rate. The TCJA also provides for acceleration of depreciation for certain assets placed into service after September 27, 2017, as well as prospective changes beginning in 2018, including additional limitations on deductibility of executive compensation and employee meal benefits.

The $6,047 benefit represents what we believe is the impact of the TCJA. As the benefit is based on currently available information and interpretations, which are continuing to evolve, the benefit should be considered provisional. We will continue to analyze additional information and guidance related to the TCJA as supplemental legislation, regulatory guidance, or evolving technical interpretations become available. The final impacts may differ from the recorded amounts as of December 31, 2017, and we will continue to refine such amounts within the measurement period provided by Staff Accounting Bulletin No. 118. We expect to complete our analysis no later than the fourth quarter of 2018.

Actual taxes paid for 2016 and 2015 were less than the current tax expense due to the excess tax benefit on stock-based compensation of $1,320 and $74,442 during the years ended December 31, 2016 and 2015, respectively.

The effective tax rate differs from the statutory tax rates as follows:

		Year ended December 31,
		2017			2016			2015
Statutory U.S. federal income tax rate		35.0	%		35.0	%		35.0	%
State income tax, net of related federal income tax benefit		4.4			13.3			3.6
Federal credits		(1.5)			(10.1)			(0.4)
Enhanced deduction for food donation		(0.2)			(2.4)			(0.2)
Valuation allowance		0.1			6.0			0.3
Other		1.5			6.2			-
Effects of the TCJA		(2.3)			-			-
Return to provision and other discrete items		(0.9)			(7.2)			(0.1)
Effective income tax rate		36.1	%		40.8	%		38.2	%

The 2017 effective tax rate was lower than the 2016 rate due to the enactment of the TCJA and a lower state tax rate, partially offset by federal credits on overall higher pre-tax operating income. The 2016 effective tax rate was higher than 2015 due to a higher state tax rate, not qualifying for the federal research and development tax credit in 2016, and other federal credits on overall lower pre-tax operating income.

Deferred income tax liabilities are taxes we expect 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,
				2017			2016
Deferred income tax liability:
Leasehold improvements, property and equipment				$	140,908		$	204,640
Goodwill and other assets					1,339			1,856
Prepaid assets and other					5,191			6,012
Total deferred income tax liability					147,438			212,508
Deferred income tax asset:
Deferred rent					42,859			63,159
Gift card liability					4,580			5,563
Capitalized transaction costs					324			500
Stock-based compensation and other employee benefits					80,447			101,628
Foreign net operating loss carry-forwards					11,376			9,580
State credits					5,589			4,595
Allowances, reserves and other					13,719			19,359
Valuation allowance					(12,270)			(10,820)
Total deferred income tax asset					146,624			193,564
Net deferred income tax liability				$	814		$	18,944

The December 31, 2017, deferred tax liability was measured using a 21% U.S. federal tax rate because of the enactment of TCJA, which reduced the rate from 35%.

As of December 31, 2017, we have $8,468 of deferred tax assets related to outstanding non-vested stock awards that contain market conditions. If market conditions are not achieved, then we may not realize the benefit of these deferred tax assets, which would result in a higher effective tax rate in future periods.

The unrecognized tax benefits are as follows:

	2017			2016			2015
Beginning of year	$	4,211		$	3,776		$	1,342
Increase resulting from prior year tax position		-			-			402
Increase resulting from current year tax position		4,726			435			2,032
End of year	$	8,937		$	4,211		$	3,776

During the years ended December 31, 2017, 2016, and 2015, we recognized $364, $430, and $0, respectively, in interest expense related to uncertain tax positions. We have $794 and $430 for the payment of interest accrued at December 31, 2017, and 2016, respectively. We are 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. We are no longer subject to U.S. federal tax examinations by tax authorities for tax years before 2014. For the majority of states where we have a significant presence, we are no longer subject to tax examinations by tax authorities for tax years before 2014. As of December 31, 2017, we had cumulative gross foreign net operating losses of $50,292, which have no expiration date.

5. Shareholders’ Equity

Through December 31, 2017, we had announced authorizations by our Board of Directors of repurchases of shares of common stock, which in the aggregate, authorized expenditures of up to $2,400,000. Under the remaining repurchase authorizations, shares may be purchased from time to time in open market transactions, subject to market conditions.

The following table summarizes common stock repurchases under authorized programs:

	Year ended December 31,
	2017			2016			2015
Shares of common stock repurchased		805			1,811			839
Total cost of common stock repurchased	$	284,318		$	813,881		$	485,841

As of December 31, 2017, $118,274 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 2017, 2016, and 2015, shares of common stock were netted and surrendered as payment for minimum statutory tax withholding obligations in connection with the exercise and vesting of outstanding stock awards. We deem shares surrendered by the participants in accordance with the applicable award agreements and plan as repurchased, but do not deem such shares to be part of publicly announced share repurchase programs.

6. Stock-Based Compensation

We issue shares in connection with stock-based compensation pursuant to the Amended and Restated Chipotle Mexican Grill, Inc. 2011 Stock Incentive Plan. 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, counts as two shares used, whereas each share underlying a stock appreciation right or stock option counts as one share used. Under the 2011 Incentive Plan, 5,560 shares of common stock have been authorized and reserved for issuance to eligible participants, of which 1,786 represent shares that were authorized for issuance but not issued or subject to outstanding awards at December 31, 2017. 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 or to delegate its authority under the plan to make grants (subject to certain legal and regulatory restrictions), 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 following table sets forth stock-based compensation expense, including SOSARs and stock awards:

	Year ended December 31,
	2017			2016			2015
Stock-based compensation expense	$	66,396		$	65,112		$	59,465
Stock-based compensation expense, net of tax	$	40,370		$	35,974		$	36,666
Stock-based compensation expense recognized as capitalized development	$	1,141		$	946		$	1,554
Excess tax benefit on stock-based compensation recognized in provision for income taxes	$	448		$	-		$	-

The tables below summarize the SOSAR activity under the stock incentive plans (in thousands, except years and per share data):

	2017					2016					2015
	Shares		Weighted-Average Exercise Price Per Share			Shares		Weighted-Average Exercise Price Per Share			Shares		Weighted-Average Exercise Price Per Share
Outstanding, beginning of year	1,917		$	490.06		1,694		$	490.70		2,087		$	395.46
Granted	304		$	426.70		460		$	457.77		379		$	659.12
Exercised	(35)		$	307.83		(124)		$	315.87		(716)		$	297.25
Forfeited or cancelled	(187)		$	527.53		(113)		$	559.25		(56)		$	554.73
Outstanding, end of year	1,999		$	480.09		1,917		$	490.06		1,694		$	490.70

	Shares		Weighted-Average Exercise Price Per Share			Weighted-Average Remaining Years of Contractual Life		Aggregate Intrinsic Value
Outstanding as of December 31, 2017	1,999		$	480.09		3.7		$	209
Vested and expected to vest as of December 31, 2017	1,957		$	480.77		3.7		$	209
Exercisable as of December 31, 2017	1,130		$	474.20		2.7		$	209

In the past, we have granted SOSARs that included performance conditions. As of December 31, 2017, 278 outstanding SOSARs that included performance conditions were determined to have met the performance conditions. For the remaining 110 outstanding SOSARs that included performance conditions, the financial targets underlying the performance conditions had been satisfied as of December 31, 2017, and vesting of the awards was pending confirmation by the Compensation Committee that the performance conditions were met. The total intrinsic value of options and SOSARs exercised during the years ended December 31, 2017, 2016 and 2015 was $4,296, $15,946 and $260,466. Unearned compensation as of December 31, 2017 was $21,998 for SOSAR awards, and is expected to be recognized over a weighted average period of 1.4 years.

The following table reflects the weighted average assumptions utilized in the Black-Scholes option-pricing model to value SOSAR awards granted for each year:

		2017				2016				2015
Risk-free interest rate			1.6	%			1.0	%			1.1	%
Expected life (years)			3.7				3.5				3.4
Expected dividend yield			0.0	%			0.0	%			0.0	%
Volatility			29.9	%			32.2	%			30.8	%
Weighted-average Black-Scholes fair value per share at date of grant		$	105.97			$	117.48			$	156.32

The risk-free interest rate is based upon U.S. Treasury rates for instruments with similar terms and the expected life assumptions were based on our historical data. We have not paid dividends to date and do not plan to pay dividends in the near future. The volatility assumption was based on our historical data and implied volatility.

A summary of non-vested stock award activity under the 2011 Stock Incentive Plans and prior stock compensation plan is as follows (in thousands, except per share data):

	2017					2016					2015
	Shares		Weighted Average Grant Date Fair Value Per Share			Shares		Weighted Average Grant Date Fair Value Per Share			Shares		Weighted Average Grant Date Fair Value Per Share
Outstanding, beginning of year	125		$	606.24		116		$	511.88		70		$	525.60
Granted	127		$	436.36		90		$	509.05		47		$	785.32
Vested	(8)		$	454.84		(7)		$	605.83		(1)		$	413.07
Forfeited or cancelled	(31)		$	502.46		(74)		$	529.54		-		$	534.55
Outstanding, end of year	213		$	519.62		125		$	606.24		116		$	511.88

There were 141 non-vested stock awards with a weighted average grant date fair value per share of $522.38 that were vested and expected to vest as of December 31, 2017. The aggregate intrinsic value of the shares was $32,829 and the weighted average remaining contractual life was 5.8 years. Unearned compensation for non-vested stock awards we have determined are probable of vesting was $37,962 as of December 31, 2017, and is expected to be recognized over a weighted average period of 1.6 years. The fair value of shares earned as of the vesting date during the year ended December 31, 2017, 2016, and 2015 was $3,524, $2,787, and $634, respectively.

As of December 31, 2017, 133 of the outstanding non-vested stock awards were subject to performance and/or market conditions, in addition to service vesting conditions. During the first quarter of 2017, we awarded 36 performance shares that are subject to service, market and performance vesting conditions. Two-thirds of the shares had a grant date fair value of $485.53 per share and have vesting criteria based on the price of our common stock reaching certain targets for a consecutive number of days during the three-year period starting on the grant date, with the quantity of shares that vest ranging from 0% to 350% of the targeted number of shares. The remaining one-third of the shares had a grant date fair value of $427.61 and have vesting criteria based on reaching certain comparable restaurant sales increases during the three-year period starting on January 1, 2017, with the quantity of shares that vest ranging from 0% to 300% of the targeted number of shares. If the defined minimum targets are not met, then no shares will vest.

During the year ended December 31, 2016, we awarded 73 performance shares, net of cancellations, that are subject to both service and market vesting conditions. The quantity of shares that vest will range from 0% to 400% of a targeted number of shares, and will be determined based on the price of our common stock reaching certain targets for a consecutive number of days during the three-year period starting on the grant date. If the minimum defined stock price target is not met, then no shares will vest.

During the year ended December 31, 2015, we awarded 40 performance shares that were subject to service, performance, and market vesting conditions. The quantity of shares that vest will be determined based on our relative performance versus a restaurant industry peer group in annual average revenue growth, net income growth, and total shareholder return. The quantity of shares that vest will range from 0% to 200% based on the level of achievement of the performance and market conditions. If minimum targets are not met, then no shares will vest. Each performance and market measure will be weighted equally, and performance is calculated over a three-year period beginning January 1, 2015 through December 31, 2017.

During the year ended December 31, 2017, 20 stock awards that were subject to service and performance or market conditions were forfeited.

We adjusted our estimates of the non-vested stock awards expected to vest, which had the following reduction on our expense and earnings per share (dollars in thousands, except per share data) in each of the following years:

	Year ended December 31,
	2017			2016			2015
Cumulative change in expense	$	(1,410)		$	(6,031)		$	(12,195)
Net of tax impact from cumulative change in expense	$	(857)		$	(3,332)		$	(7,520)
Impact on basic earnings per share	$	0.03		$	0.11		$	0.25
Impact on diluted earnings per share	$	0.03		$	0.11		$	0.24

Measurement of the grant date fair value of the stock awards with market conditions included a Monte Carlo simulation model, which incorporates into the fair value determination the possibility that the market condition may not be satisfied, using the following assumptions:

		2017				2016				2015
Risk-free interest rate			1.5	%			0.9	%			1.0	%
Expected life (years)			3.0				3.0				2.9
Expected dividend yield			0.0	%			0.0	%			0.0	%
Volatility			29.9	%			31.4	%			33.7	%

The assumptions are based on the same factors as those described for SOSARs, except that the expected life is based on the contractual performance period for the stock awards.

7. Employee Benefit Plans

We maintain the Chipotle Mexican Grill 401(k) Plan (the “401(k) Plan”). We match 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, 2017, 2016, and 2015, matching contributions totaled approximately $6,072, $5,939 and $4,995, respectively.

We also maintain the Chipotle Mexican Grill, Inc. Supplemental Deferred Investment Plan (the “Deferred Plan”) which covers our eligible employees. 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, 2017 and 2016 were $19,887 and $17,843, respectively, and are included in other liabilities in the consolidated balance sheet. We match 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, 2017, 2016, and 2015, we made deferred compensation matches of $199, $225, and $617, respectively, to the Deferred Plan.

We have elected to fund our deferred compensation obligation 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, consistent with the investment choices selected by participants in their Deferred Plan accounts, 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 values of the investments in the rabbi trust were $19,887 and $17,843 as of December 31, 2017 and 2016, respectively. Trading gains and losses are recorded in general and administrative expenses in the consolidated statement of 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 following table sets forth unrealized gains (losses) on trading securities held in the rabbi trust:

	Year ended December 31,
	2017			2016			2015
Unrealized gains (losses) on trading securities held in rabbi trust	$	1,520		$	586		$	(571)

We also offer an employee stock purchase plan (“ESPP”). Employees become eligible to participate after one year of service with Chipotle and may contribute up to 15% of their base earnings, subject to an annual maximum dollar amount, toward the monthly purchase of our common stock. Under the ESPP, 250 shares of common stock have been authorized and reserved for issuances to eligible employees, of which 246 represent shares that were authorized for issuance but not issued at December 31, 2017. For each of the years ended December 31, 2017, 2016, and 2015, the number of shares issued under the ESPP were less than 1.

8. Leases

Our restaurants are generally operated 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 that include a fixed base rent plus an additional percentage of the restaurant’s sales in excess of stipulated amounts. Our leases generally provide for the payment of common area maintenance, property taxes, insurance and various other use and occupancy costs. In addition, we are the lessee under non-cancelable leases covering certain offices.

Contractually required future minimum cash lease payments under existing operating leases as of December 31, 2017 are as follows:

2018	$	281,461
2019		285,264
2020		283,934
2021		279,816
2022		278,615
Thereafter		2,497,163
Total minimum lease payments	$	3,906,253

Minimum lease payments have not been reduced by minimum sublease rentals of $7,359 due in the future under non-cancelable subleases.

Rental expense consists of the following:

	Year ended December 31,
	2017			2016			2015
Minimum rentals	$	278,812		$	255,955		$	227,602
Contingent rentals	$	2,317		$	1,811		$	4,542
Sublease rental income	$	(2,214)		$	(2,074)		$	(1,879)

We have six sales and leaseback transactions. These transactions do not qualify for sale leaseback accounting because of our 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 $2,630 and $2,854 as of December 31, 2017, and 2016, 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.

9. 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 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 are excluded from the calculation of diluted EPS in the event they are subject to performance conditions or antidilutive. The following stock awards were excluded from the calculation of diluted EPS:

	Year ended December 31,
	2017			2016			2015
Stock awards subject to performance conditions		217			263			266
Stock awards that were antidilutive		1,695			1,316			289
Total stock awards excluded from diluted earnings per share		1,912			1,579			555

The following table sets forth the computations of basic and diluted earnings per share:

	Year ended December 31,
	2017			2016			2015
Net income	$	176,253		$	22,938		$	475,602
Shares:
Weighted average number of common shares outstanding		28,491			29,265			31,092
Dilutive stock awards		70			505			402
Diluted weighted average number of common shares outstanding		28,561			29,770			31,494
Basic earnings per share	$	6.19		$	0.78		$	15.30
Diluted earnings per share	$	6.17		$	0.77		$	15.10

10. Commitments and Contingencies

Purchase Obligations

We enter into various purchase obligations in the ordinary course of business, generally of a 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

Data Security Incident

In April 2017, our information security team detected unauthorized activity on the network that supports payment processing for our restaurants, and immediately began an investigation with the help of leading computer security firms. We also self-reported the issue to payment card processors and law enforcement. Our investigation detected malware designed to access payment card data from cards used at point-of-sale devices at most Chipotle restaurants, primarily in the period from March 24, 2017 through April 18, 2017. The malware searched for track data, which may include cardholder name, card number, expiration date, and internal verification codes; however, no other customer information was affected. We have removed the malware from our systems and continue to evaluate ways to enhance our security measures. We expect that substantially all of our investigation costs will be covered by insurance; however, we may incur legal expenses in excess of our insurance coverage limits associated with the data security incident in future periods. We will recognize these expenses as services are received.

During the year ended December 31, 2017, we recorded an expense of $30,000 ($18,234 after tax), or $0.64 per diluted earnings per share, as an estimate of potential liabilities associated with anticipated claims and assessments by payment card networks in connection with the data security incident. We may ultimately be subject to liabilities greater than or less than the amount accrued. The expense is recorded in general and administrative expenses in our consolidated statement of income and a corresponding liability in accrued liabilities on our consolidated balance sheet.

Litigation Arising from Security Incident

On May 4, 2017, Bellwether Community Credit Union filed a purported class action complaint in the United States District Court for the District of Colorado alleging that we negligently failed to provide adequate security to protect the payment card information of customers of the plaintiffs and those of other similarly situated credit unions, banks and other financial institutions alleged to be part of the putative class, causing those institutions to suffer financial losses. The complaint also claims we were negligent per se based on alleged violations of Section 5 of the Federal Trade Commission Act and similar state laws. The plaintiff seeks monetary damages, injunctive relief and attorneys’ fees. On May 26, 2017, Alcoa Community Credit Union filed a purported class action complaint in the U. S. District Court for the District of Colorado making substantially the same allegations as the Bellwether complaint and seeking substantially the same relief. The Bellwether and Alcoa cases have been consolidated and will proceed as a single action.

On June 9, 2017, Todd Gordon filed a purported class action complaint in the U. S. District Court for the District of Colorado alleging that we negligently failed to provide adequate security to protect the payment card information of the plaintiff and other similarly situated customers alleged to be part of the putative class, causing some customers to suffer alleged injuries and others to be at risk of possible future injuries. The complaint also claims we were negligent per se based on alleged violations of Section 5 of the Federal Trade Commission Act and similar state laws, and also alleges breach of contract, unjust enrichment, and violations of the Arizona Consumer Fraud Act. Additionally, on August 21, 2017, Greg Lawson and Judy Conard filed a purported class action complaint in the U. S. District Court for the District of Colorado making allegations substantially similar to those in the Gordon complaint, and stating substantially similar claims as well as claims under the Colorado Consumer Protection Act. The Gordon and Lawson/Conard cases have been consolidated and will proceed as a single action.

We intend to vigorously defend each of the aforementioned cases, but it is not possible at this time to reasonably estimate the outcome of or any potential liability from these cases. Although certain fees and costs associated with the data security incident and the aforementioned litigation to date have been paid or reimbursed by our cyber liability insurer, the ultimate amount of liabilities arising from the litigation may be in excess of the limits of our applicable insurance coverage.

Receipt of Grand Jury Subpoenas

On January 28, 2017, we were 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. We received a follow-up subpoena on July 19, 2017 requesting information related to illness incidents associated with a single Chipotle restaurant in Sterling, Virginia. We intend to continue to fully cooperate in the investigation. It is not possible at this time to determine whether we 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 April 6, 2016, Uri Skorski filed a shareholder derivative action in Colorado state court in Denver, Colorado, alleging that our Board of Directors and officers breached their fiduciary duties in connection with our alleged failure to disclose material information about our food safety policies and procedures, and also alleging that our Board of Directors and officers breached their fiduciary duties in connection with allegedly excessive compensation awarded from 2011 to 2015 under our stock incentive plan. 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 the U.S. District Court for the District of Colorado, alleging that our 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. 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 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 our behalf, and is based on statements in our SEC filings and related public disclosures, as well as media reports and company records. We have reached an agreement in principle to settle the foregoing actions, and have recorded a corresponding liability in accrued liabilities on our consolidated balance sheet; the proposed settlement has been preliminarily approved by the U.S. District Court for the District of Colorado, with a final approval hearing set for March 15, 2018.

On July 28, 2017, Mark Blau filed a shareholder derivative action in the U.S. District Court for the District of Colorado, making allegations similar to those of the several shareholder derivative actions described above, and adding further allegations related to the Board’s investigation of the foregoing matters, as well as customer illnesses and operational issues associated with two Chipotle restaurants in July 2017. The action purports to state claims for damages on our behalf, and is based on statements in our SEC filings and related public disclosures, as well as media reports and company records. On February 2, 2018, the Court stayed this matter pending the outcome of the March 15, 2018 settlement approval hearing in the consolidated Gubricky actions described above.

Shareholder Class Actions

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 our common stock between February 4, 2015 and January 5, 2016. The complaint purports to state claims against us, 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 our alleged failure during the claimed class period to disclose material information about our 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 our 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 our motion to dismiss the complaint, with leave to amend. The plaintiff filed an amended complaint on April 7, 2017. On June 7, 2017, Chipotle filed a motion to dismiss the amended complaint, and briefing on that motion was completed on September 6, 2017. Additionally, on July 20, 2017, Elizabeth Kelley filed a complaint in the U.S. District Court for the District of Colorado on behalf of a purported class of purchasers of shares of our common stock between February 5, 2016 and July 19, 2017, with claims and factual allegations similar to the Ong complaint, based primarily on media reports regarding illnesses associated with a Chipotle restaurant in Sterling, Virginia. A response to the amended complaint in that matter is due on February 12, 2018. We intend to defend these cases vigorously, but it is not possible at this time to reasonably estimate the outcome of or any potential liability from the cases.

Miscellaneous

We are involved in various other claims and legal actions that arise in the ordinary course of business. We do not believe that the ultimate resolution of these actions will have a material adverse effect on our 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 we incur greater liabilities than we currently anticipate, could materially and adversely affect our business, financial condition, results of operations and cash flows.

11. Quarterly Financial Data (Unaudited)

Summarized unaudited quarterly financial data:

					2017
					March 31			June 30			September 30			December 31
Revenue					$	1,068,829		$	1,169,409		$	1,128,074		$	1,110,100
Operating income					$	73,173		$	106,725		$	30,867		$	60,029
Net income					$	46,120		$	66,730		$	19,610		$	43,793
Basic earnings per share					$	1.60		$	2.33		$	0.69		$	1.56
Diluted earnings per share					$	1.60		$	2.32		$	0.69		$	1.55
					2016
					March 31			June 30			September 30			December 31
Revenue					$	834,459		$	998,383		$	1,036,982		$	1,034,560
Operating income (loss)					$	(46,604)		$	40,895		$	9,726		$	30,550
Net income (loss)					$	(26,432)		$	25,596		$	7,799		$	15,975
Basic earnings (loss) per share					$	(0.88)		$	0.88		$	0.27		$	0.55
Diluted earnings (loss) per share					$	(0.88)		$	0.87		$	0.27		$	0.55