Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades on the New York Stock Exchange under the symbol “CMG.”

As of January 31, 2020, there were approximately 864 shareholders of record. This does not include persons whose stock is in nominee or “street name” accounts through brokers.

Purchases of Equity Securities by the Issuer

The table below reflects shares of common stock we repurchased during the fourth quarter of 2019.

			Total Number of Shares Purchased		Average Price Paid Per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs**(1)**		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs**(2)**
October			26,811		$	792.50		26,811		$	86,414,406
	Purchased 10/1 through 10/31
November			22,684		$	749.33		22,684		$	69,416,580
	Purchased 11/1 through 11/30
December			-		$	-		-		$	69,416,580
	Purchased 12/1 through 12/31
Total			49,495		$	772.71		49,495

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(1)Shares were repurchased pursuant to the $100 million repurchase programs announced on February 6, 2019 and July 23, 2019.

(2)This column does not include an additional $100 million in authorized repurchases announced on February 4, 2020. There is no expiration date for this program, and the authorization to repurchase shares will end when we have repurchased the maximum amount of shares authorized, or our Board of Directors have determined to discontinue such repurchases.

Dividend Policy

We are not required to pay any dividends and have not declared or paid any cash dividends on our common stock. We intend to continue to retain earnings for use in the operation and expansion of our business and to repurchase shares of common stock (subject to market conditions), and therefore do not anticipate paying any cash dividends on our common stock in the foreseeable future.

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COMPARISON OF CUMULATIVE TOTAL RETURN

The following graph compares the cumulative annual stockholders return on our common stock from December 31, 2014, through December 31, 2019, to that of the total return index for the S&P 500 and the S&P 500 Restaurants Index assuming an investment of $100 on December 31, 2014. In calculating total annual stockholder return, reinvestment of dividends, if any, is assumed. The indices are included for comparative purposes only. They do not necessarily reflect management’s opinion that such indices are an appropriate measure of the relative performance of our common stock. The values shown are neither indicative nor determinative of future performance. This graph is not “soliciting material,” is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference in any of our filings under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

Company/Index	Dec. 31, 2014			Dec. 31, 2015			Dec. 30, 2016			Dec. 30, 2017			Dec. 30, 2018			Dec. 30, 2019
Chipotle Mexican Grill, Inc.	$	100		$	70		$	55		$	42		$	63		$	122
S&P 500		100			101			112			136			129			169
S&P 500 Restaurants		100			125			129			162			179			222

*$100 invested on December 31, 2014 in stock or index, including reinvestment of dividends.

Fiscal year ending December 31.

Source data: S&P Capital IQ

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ITEM 6**. SELECTED FINANCIAL DATA**

Our selected consolidated financial data shown below should be read together with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and respective notes included in Item 8. “Financial Statements and Supplementary Data.” The data shown below are not necessarily indicative of results to be expected for any future period (dollar and share amounts in thousands, except per share data).

	Year ended December 31,
	2019			2018			2017			2016			2015
Statement of Income:
Revenue	$	5,586,369		$	4,864,985		$	4,476,412		$	3,904,384		$	4,501,223
Food, beverage and packaging costs		1,847,916			1,600,760			1,535,428			1,365,580			1,503,835
Labor costs		1,472,060			1,326,079			1,205,992			1,105,001			1,045,726
Occupancy costs		363,072			347,123			327,132			293,636			262,412
Other operating costs		760,831			680,031			651,644			641,953			514,963
General and administrative expenses		451,552			375,460			296,388			276,240			250,214
Depreciation and amortization		212,778			201,979			163,348			146,368			130,368
Pre-opening costs		11,108			8,546			12,341			17,162			16,922
Impairment, closure costs and asset disposals		23,094			66,639			13,345			23,877			13,194
Total operating expenses		5,142,411			4,606,617			4,205,618			3,869,817			3,737,634
Income from operations		443,958			258,368			270,794			34,567			763,589
Interest and other income, net		14,327			10,068			4,949			4,172			6,278
Income before income taxes		458,285			268,436			275,743			38,739			769,867
Provision for income taxes		(108,127)			(91,883)			(99,490)			(15,801)			(294,265)
Net income	$	350,158		$	176,553		$	176,253		$	22,938		$	475,602
Earnings per share:
Basic	$	12.62		$	6.35		$	6.19		$	0.78		$	15.30
Diluted	$	12.38		$	6.31		$	6.17		$	0.77		$	15.10
Weighted average common shares: outstanding
Basic		27,740			27,823			28,491			29,265			31,092
Diluted		28,295			27,962			28,561			29,770			31,494
	December 31,
	2019			2018			2017			2016			2015
Balance Sheet Data:
Total current assets	$	1,072,204		$	814,794		$	629,535		$	522,374		$	814,647
Total assets	$	5,104,604		$	2,265,518		$	2,045,692		$	2,026,103		$	2,725,066
Total current liabilities	$	666,593		$	449,990		$	323,893		$	281,793		$	279,942
Total liabilities	$	3,421,578		$	824,179		$	681,247		$	623,610		$	597,092
Total shareholders’ equity	$	1,683,026		$	1,441,339		$	1,364,445		$	1,402,493		$	2,127,974

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ITEM 7**. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

You should read the following discussion together with Item 6. “Selected Financial Data” and our consolidated financial statements and related notes included in Item 8. “Financial Statements and Supplementary Data.” This section of the Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons of 2019 to 2018. Discussions of 2017 items and year-to-year comparisons of 2018 and 2017 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 on our Annual Report on Form 10-K for the year ended December 31, 2018. The discussion contains forward-looking statements involving risks, uncertainties and assumptions that could cause our results to differ materially from expectations. See “Cautionary Note Regarding Forward-Looking Statements.” Factors that might cause such differences include those described in Item 1A. “Risk Factors” and elsewhere in this report.

Overview

As of December 31, 2019, we operated 2,580 Chipotle restaurants throughout the United States, 39 international Chipotle restaurants, and three non-Chipotle restaurants. We are committed to making good food more accessible to everyone while continuing to be a brand with a demonstrated purpose.

2019 Financial Highlights

Revenue increased 14.8% to $5.6 billion in 2019 compared to $4.9 billion in 2018

Comparable sales increased 11.1%, which included a 7.0% increase in comparable restaurant transactions

Diluted earnings per share (“diluted EPS”) for 2019 increased to $12.38, which included corporate restructuring, restaurant closure costs, charges relate to settlements for several distinct legal matters and other costs of $54.3 million, compared to $6.31 diluted EPS for 2018, which included corporate restructuring, restaurant closure costs, litigation and other costs of $90.7 million.

Sales Trends. Average restaurant sales were $2.2 million for the year ended December 31, 2019, an increase from $2.0 million for the year ended December 31, 2018. We define average restaurant sales as the average trailing 12-month sales for restaurants in operation for at least 12 full calendar months.

Comparable restaurant sales increased 11.1% for the full year 2019, which included a 7% increase in comparable restaurant transactions. Comparable restaurant sales and comparable restaurant transactions represent the change in period-over-period sales or transactions for restaurants in operation for at least 13 full calendar months. We expect our full year 2020 comparable restaurant sales to be in the mid-single digit range.

We continue to invest in improving our digital platforms and have significantly upgraded our capabilities by completing the rollout of digital pickup shelves, digitizing almost all of our digital-make lines, and expanding our delivery capabilities to over 98% of our store base. Digital sales from out-of-restaurant orders, including delivery orders, increased 7.1% to 18.0% of revenue for the full year 2019, an increase from 10.9% of revenue for the full year 2018.

Restaurant Operating Costs. During the full year 2019, our restaurant operating costs (food, beverage and packaging; labor; occupancy; and other operating costs) as a percentage of revenue decreased 180 basis points to 79.5% compared to 81.3% for the full year 2018. The decrease was primarily due to comparable restaurant sales increases, partially offset by higher food costs across many items and food expenses related to the launch of Chipotle Rewards, as well as wage inflation, and increased delivery expenses.

Corporate Restructuring. In 2018, we opened a new headquarters office in Newport Beach, California, consolidated certain corporate administrative functions into our existing office in Columbus, Ohio, closed a corporate office in New York, New York, and commenced the closure of our previous headquarters office in Denver, Colorado. All affected employees were either offered an opportunity to continue in the new organization or were offered a severance package. In total we recognized corporate restructuring activities of $56.8 million, of which $14.2 million was recognized during the full year 2019. We do not expect any other material costs to be incurred in connection with the corporate restructuring. For additional information, please see Note 5. “Corporate Restructuring” in the notes to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”.

Restaurant Closures. In June 2018, we announced planned restaurant closures of approximately 55 to 65 restaurants beginning in the second quarter of 2018 and continuing over the next several quarters. We have closed or relocated 51 Chipotle restaurants and five Pizzeria Locale restaurants in connection with this initiative. In total we recognized restaurant exit costs of approximately $36.5 million, of which $0.8 million was recognized during the full year 2019. We do not expect any other material costs to be incurred in connection with the planned restaurant closures. For additional information, please see Note 6. “Restaurant Closure Costs” in the notes to the consolidated financial statements.

Restaurant Development. For the full year 2019, we opened 140 new restaurants, which included 56 restaurants with a Chipotlane. We expect to open between 150 to 165 new restaurants in 2020, with a heavier weighting of openings towards the second half of the year.

Restaurant Activity

The following table details restaurant unit data for the years indicated.

	Year ended December 31,
	2019		2018		2017
Beginning of period	2,491		2,408		2,250
Openings	140		137		183
Chipotle closures	(7)		(43)		(8)
Chipotle relocations	(2)		(5)		(2)
Pizzeria Locale closures	-		(5)		-
TastyMade closures	-		(1)		-
ShopHouse closures	-		-		(15)
Total restaurants at end of period	2,622		2,491		2,408

Results of Operations

Our results of operations as a percentage of revenue and period-over-period change are discussed in the following section.

Revenue

	Year ended December 31,									Percentage change
	2019			2018			2017			2019/2018		2018/2017
	(dollars in millions)
Revenue	$	5,586.4		$	4,865.0		$	4,476.4		14.8%		8.7%
Average restaurant sales	$	2.2		$	2.0		$	1.9		10.8%		3.3%
Comparable restaurant sales increases		11.1%			4.0%			6.4%

The significant factors contributing to the revenue increase in 2019 were comparable restaurant sales increases and new restaurant openings. Comparable restaurant sales increased $498.7 million and revenue from restaurants not yet in the comparable restaurant base contributed $222.7 million to the revenue increase, of which $76.6 million was attributable to restaurants opened in 2019. In 2019 comparable restaurant sales increased 11.1% as a result of a 7.0% increase in comparable restaurant transactions and a 4.1% increase in average check. The increase in average check includes a 2.4% benefit from menu price increases that were implemented at the end of 2018 and a 0.2% benefit from menu price increases implemented at the end of 2019.

Food, Beverage and Packaging Costs

	Year ended December 31,									Percentage change
	2019			2018			2017			2019/2018		2018/2017
	(dollars in millions)
Food, beverage and packaging	$	1,847.9		$	1,600.8		$	1,535.4		15.4%		4.3%
As a percentage of revenue		33.1%			32.9%			34.3%		0.2%		(1.4%)

Food, beverage and packaging costs increased as a percentage of revenue in 2019 primarily due to higher protein costs, food expenses related to the launch of Chipotle Rewards in March of 2019, and to a lesser extent higher costs of cheese, avocados, and beverages. These increases were partially offset by the menu price increases taken at the end of 2018.

Labor Costs

	Year ended December 31,									Percentage change
	2019			2018			2017			2019/2018		2018/2017
	(dollars in millions)
Labor costs	$	1,472.1		$	1,326.1		$	1,206.0		11.0%		10.0%
As a percentage of revenue		26.4%			27.3%			26.9%		(0.9%)		0.3%

Labor costs decreased as a percentage of revenue in 2019 primarily due to sales leverage, partially offset by wage inflation.

Occupancy Costs

	Year ended December 31,									Percentage change
	2019			2018			2017			2019/2018		2018/2017
	(dollars in millions)
Occupancy costs	$	363.1		$	347.1		$	327.1		4.6%		6.1%
As a percentage of revenue		6.5%			7.1%			7.3%		(0.6%)		(0.2%)

Occupancy costs as a percentage of revenue decreased in 2019 and 2018 primarily due to sales leverage on a largely fixed-cost base.

Other Operating Costs

	Year ended December 31,									Percentage change
	2019			2018			2017			2019/2018		2018/2017
	(dollars in millions)
Other operating costs	$	760.8		$	680.0		$	651.6		11.9%		4.4%
As a percentage of revenue		13.6%			14.0%			14.6%		(0.4%)		(0.6%)

Other operating costs include, among other items, marketing and promotional costs, bank and credit card processing fees, restaurant utilities and maintenance costs, and delivery expense. Other operating costs decreased as a percentage of revenue in 2019 primarily due to sales leverage and, to a lesser extent, elevated store repairs and maintenance in 2018. This was partially offset by increased delivery expenses in 2019 compared to 2018 as we launched delivery during the middle of 2018 and delivery sales (or transactions) grew substantially in 2019.

General and Administrative Expenses

	Year ended December 31,									Percentage change
	2019			2018			2017			2019/2018		2018/2017
	(dollars in millions)
General and administrative expense	$	451.6		$	375.5		$	296.4		20.3%		26.7%
As a percentage of revenue		8.1%			7.7%			6.6%		0.4%		1.1%

General and administrative expenses increased in dollar terms in 2019, primarily due to the following: a $41.6 million increase in estimated loss contingencies related to a number of legal matters; $29.2 million increase in wage and payroll tax expense, which includes increased expense for performance bonuses and increased payroll tax expense from stock-based compensation; $25.0 million in non-cash stock-based compensation expense, which includes increased expense for performance shares in the current year; $9.5 million to support our restaurant growth and digitizing our restaurant experience, and increased legal expense of $2.8 million. These increases were partially offset by a $14.6 million reduction in restructuring expense, an $11.4 million reduction in estimated charges related to the data security incident, and a reduction of $7.3 million primarily associated with the biennial All Managers’ Conference that was held in September 2018.

Depreciation and Amortization

	Year ended December 31,									Percentage change
	2019			2018			2017			2019/2018		2018/2017
	(dollars in millions)
Depreciation and amortization	$	212.8		$	202.0		$	163.3		5.3%		23.6%
As a percentage of revenue		3.8%			4.2%			3.6%		(0.3%)		0.5%

Depreciation and amortization decreased as a percentage of revenue in 2019 due to sales leverage on a partially fixed-cost base, partially offset by increased depreciation associated with our website and mobile app and upgrading equipment in the restaurants primarily to support the growth in our digital business.

Impairment, Closure Costs, and Asset Disposals

	Year ended December 31,									Percentage change
	2019			2018			2017			2019/2018		2018/2017
	(dollars in millions)
Impairment, closure costs, and asset disposals	$	23.1		$	66.6		$	13.3		(65.3%)		399.4%
As a percentage of revenue		0.4%			1.4%			0.3%		(1.0%)		1.1%

Impairment, closure costs, and asset disposals during 2019 consisted primarily of charges related to the replacement of certain kitchen equipment and leasehold improvements, and to a lesser extent impairments on equipment, restaurants, and offices.

Provision for Income Tax

	Year ended December 31,									Percentage change
	2019			2018			2017			2019/2018		2018/2017
	(dollars in millions)
Provision for income taxes	$	108.1		$	91.9		$	99.5		17.7%		(7.6%)
Effective tax rate		23.6%			34.2%			36.1%		(10.6%)		(1.9%)

The effective tax rate for the year ended December 31, 2019 was lower than the effective tax rate for the year ended December 31, 2018, primarily due to net excess benefits from stock-based compensation and a net year over year decrease in tax expense related to equity award expirations, partially offset by current year increases in non-deductible executive compensation.

Quarterly Financial Data/Seasonality

See Note 14. “Quarterly Financial Data (Unaudited)” for a table presenting data from the consolidated statements of income for each of the eight quarters in the period ended December 31, 2019.

Seasonal factors cause our profitability to fluctuate from quarter to quarter. Historically, our average daily restaurant sales and net income are lower in the first and fourth quarters due, in part, to the holiday season and because fewer people eat out during periods of inclement weather (the winter months) than during periods of mild or warm weather (the spring, summer and fall months). Other factors also have a seasonal effect on our results. For example, restaurants located near colleges and universities generally do more business during the academic year. Seasonal factors, however, might be moderated or outweighed by other factors that may influence our quarterly results, such as unexpected publicity impacting our business in a positive or negative way, fluctuations in food or packaging costs, or the timing of menu price increases or promotional activities and other marketing initiatives. The number of trading days in a quarter can also affect our results, although, on an overall annual basis, changes in trading days do not have a significant impact.

Our quarterly results are also affected by other factors such as the amount and timing of non-cash stock-based compensation expense and related tax rate impacts, litigation, settlement costs and related legal expenses, impairment charges and non-operating costs, timing of marketing or promotional expenses, the number and timing of new restaurants opened in a quarter, and closure of restaurants. New restaurants typically have lower margins following opening as a result of the expenses associated with their opening and operating inefficiencies in the months immediately following opening. Accordingly, results for a particular quarter are not necessarily indicative of results to be expected for any other quarter or for any year.

Liquidity and Capital Resources

Our primary liquidity and capital requirements are for new restaurant construction, initiatives to improve the guest experience in our restaurants, working capital, and general corporate expenses. As of December 31, 2019, we had a cash and short-term investment balance of $880.8 million that we expect to utilize, along with cash flow from operations, to provide capital in support of the growth of our business, to invest in, maintain, and refurbish our existing restaurants, to repurchase additional shares of our common stock subject to market conditions, and for general corporate purposes. As of December 31, 2019, $169.4 million remained available for repurchases of shares of our common stock repurchase authorizations. Under the remaining repurchase authorizations, shares may be purchased from time to time in open market transactions, subject to market conditions. We believe that cash from operations, together with our cash and investment balances, will be sufficient to meet ongoing capital expenditures, working capital requirements and other cash needs for the foreseeable future.

We have not required significant working capital because customers generally pay using cash or credit and debit cards and because our operations do not require significant receivables, nor do they require significant inventories due, in part, to our use of various fresh ingredients. In addition, we generally have the right to pay for the purchase of food, beverages and supplies sometime after the receipt of those items, generally within ten days, thereby reducing the need for incremental working capital to support our growth.

Our total capital expenditures for 2019 were $333.9 million. In 2019, we spent on average about $1.0 million in development and construction costs per new restaurant, or about $0.9 million net of landlord reimbursements of $0.1 million. In 2020, we expect to incur about $350 million in total capital expenditures. We expect approximately $160 million in capital expenditures related to our construction of new restaurants, before any reductions for landlord reimbursements. For new restaurants to be opened in 2020, we anticipate average development costs will increase due to strategic initiatives planned in new restaurants such as design updates or the addition of Chipotlanes. We expect approximately $140 million in capital expenditures related to investments in existing restaurants, including updated equipment, technology, remodeling and similar improvements, and upgrading our digital make lines and other restaurant equipment. Finally, we expect a portion of our capital expenditures for the year to be incurred for additional corporate initiatives including building corporate offices, a culinary and training center, rebuilding our mobile app, and other projects.

Contractual Obligations

Our contractual obligations as of December 31, 2019 were as follows:

		Payments Due by Fiscal Year
		Total			2020			2021-2022			2023-2024			Thereafter
		(in thousands)
Operating leases(1)		$	4,108,804		$	294,291		$	643,675		$	622,358		$	2,548,479
Purchase obligations(2)		$	807,718		$	591,801		$	197,555		$	18,362		$	-
Deemed landlord financing(1)		$	2,626		$	432		$	908		$	910		$	376
Total		$	4,919,148		$	886,524		$	842,138		$	641,630		$	2,548,855

(1)See Note 11. “Leases” of our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.” This includes commitments related to reasonably certain renewal periods.

(2)Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms. We have excluded agreements that are cancelable without penalty. The majority of our purchase obligations relate to amounts owed for produce and other ingredients and supplies, chicken, orders submitted for equipment for restaurants under construction and planned remodels, information technology, and marketing initiatives and corporate sponsorships.

The above table does not include income tax liabilities for uncertain tax positions for which we are not able to make a reasonably reliable estimate of the amount and period of related future payments. Additionally, we have excluded our estimated loss contingencies, due to uncertainty regarding the timing and amount of payment. See Note 13. “Commitments and Contingencies” of our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

Off-Balance Sheet Arrangements

As of December 31, 2019 and 2018, we had no material off-balance sheet arrangements or obligations.

Inflation

The primary areas of our operations affected by inflation are food, labor, rent, healthcare costs, fuel, utility costs, and materials used in the construction of our restaurants. Although a significant majority of our crew members make more than the federal and applicable state and local minimum wage, increases in the applicable federal or state minimum wage may have an impact on our labor costs by causing wage inflation above the minimum wage level. Additionally, many of our leases require us to pay property taxes, maintenance, and utilities, all of which are generally subject to inflationary increases. In the past we have largely been able to offset inflationary increases with menu price increases. If we do raise menu prices in the future, general competitive pressures or negative consumer responses may limit our ability to completely recover cost increases attributable to inflation.

Critical Accounting Estimates

We describe our significant accounting policies in Note 1. “Description of Business and Summary of Significant Accounting Policies” of our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.” Critical accounting estimates are those that we believe are both significant and that require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and we might obtain different estimates if we used different assumptions or factors.

Leases

We determine if a contract contains a lease at inception. Our material operating leases consist of restaurant locations and office space. Our leases generally have remaining terms of 1-20 years and most include options to extend the leases for additional 5-year periods. Generally, the lease term is the minimum of the noncancelable period of the lease or the lease term inclusive of reasonably certain renewal periods up to a term of 20 years. If the estimate of our reasonably certain lease term was changed, our depreciation and rent expense could differ materially.

Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental borrowing rates corresponding to the reasonably certain lease term. As we have no outstanding debt nor committed credit facilities, secured or otherwise, we estimate this rate based on prevailing financial market conditions, comparable company and credit analysis, and management judgment. If the estimate of our incremental borrowing rate was changed, our operating lease assets and liabilities could differ materially.

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.

The fair value measurement for asset impairment is based on Level 3 inputs. We first compare the carrying value of the asset (or asset group, referred interchangeably throughout as asset) to the asset’s estimated future undiscounted cash flows. If the estimated undiscounted future cash flows are less than the carrying value of the asset, we determine if we have an impairment loss by comparing the carrying value of the asset to the asset's estimated fair value. The estimated fair value of the asset is generally determined using the income approach to measure the fair value, which is based on the present value of estimated future cash flows. Key inputs to the income approach for restaurant assets include the discount rate, projected restaurant cash flows, and sublease income if we are closing the restaurant. In certain cases, management uses other market information, when available, to estimate the fair value of an asset. The impairment charges represent the excess of each asset’s carrying amount over its estimated fair value and are allocated among the long-lived asset or assets of the group.

Our estimates of future cash flows are highly subjective judgments based on internal projections and knowledge of our operations, historical performance, and trends in sales and restaurant operating costs, and can be significantly impacted by changes in our business or economic conditions. The determination of asset fair value is also subject to significant judgment and utilizes valuation techniques including discounting estimated future cash flows and market-based analyses to determine fair value. If our estimates or underlying assumptions, including discount rate and sublease income change in the future, our operating results may be materially impacted.

Stock-based Compensation

We recognize compensation expense for equity awards over the requisite service period based on the award’s fair value. We use the Black-Scholes valuation model to determine the fair value of our stock-only stock appreciation rights, or “SOSARs”, and we use the Monte Carlo simulation model to determine the fair value of stock awards that contain market conditions. Both of these models require assumptions to be made regarding our stock price volatility, the expected life of the award and expected dividend rates. The volatility assumption was based on our historical data and implied volatility, and the expected life assumptions were based on our historical data. Similarly, the compensation expense of performance share awards, and SOSARs with performance-based vesting conditions, is based in part on the estimated probability of achieving levels of performance associated with particular levels of payout for performance shares and with vesting for performance SOSARs. We determine the probability of achievement of future levels of performance by comparing the relevant performance level with our internal estimates of future performance. Those estimates are

based on a number of assumptions, including but not limited to growth in comparable restaurant sales and average restaurant level margin, and different assumptions may have resulted in different conclusions regarding the probability of our achieving future levels of performance relevant to the payout levels for the awards. Had we arrived at different assumptions of stock price volatility or expected lives of our SOSARs, or if we changed our assumptions regarding the probability of our achieving future levels of performance with respect to performance share awards and performance SOSARs, our stock-based compensation expense and results of operations may be materially different.

Insurance Liability

We are self-insured for a significant portion of our employee health benefits programs, and carry significant retentions for risks and associated liabilities with respect to workers’ compensation, general liability, property and auto damage, employment practices liability, cyber liability and directors and officer’s liability. Predetermined loss limits have been arranged with third party insurance companies to limit exposure to these claims. We record a liability that represents our estimated cost of claims incurred and unpaid as of the balance sheet date. Our estimated liability is not discounted and is based on a number of assumptions and factors, including historical trends, actuarial assumptions and economic conditions, and is closely monitored and adjusted when warranted by changing circumstances. If a greater amount of claims occurs compared to what we have estimated, or if medical costs increase beyond what we expected, our accrued liabilities might not be sufficient and we may be required to record additional expense. Actual claims experience could also be more favorable than estimated, which would result in expense reductions. Unanticipated changes may produce materially different amounts of expense than that reported under these programs.

Reserves/Contingencies for Litigation and Other Matters

We are involved in various claims and legal actions that arise in the ordinary course of business. We record an accrual for legal contingencies when we determine that it is probable that we have incurred a liability and we can reasonably estimate the amount of the loss. Although we have recorded liabilities related to a number of legal actions, our estimates used to determine the amount of these liabilities may not be accurate, and there are other legal actions for which we have not recorded a liability. As a result, in the event legal actions for which we have not accrued a liability or for which our accrued liabilities are not accurate are resolved, such resolution may affect our operating results and cash flows.

Income Taxes

Our provision for income taxes, deferred tax assets and liabilities including valuation allowance requires the use of estimates based on our management’s interpretation and application of complex tax laws and accounting guidance. We are primarily subject to income taxes in the United States. We establish reserves for uncertain tax positions for material, known tax exposures in accordance with Accounting Standards Codification (“ASC”) 740 relating to deductions, transactions and other matters involving some uncertainty as to the measurement and recognition of the item. We may adjust these reserves when our judgment changes as a result of the evaluation of new information not previously available and will be reflected in the period in which the new information is available. While we believe that our reserves are adequate, issues raised by a tax authority may be resolved at an amount different than the related reserve and could materially increase or decrease our income tax provision in future periods. ‎