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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 18, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-20355
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COSTCO WHOLESALE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 91-1223280
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
999 LAKE DRIVE, ISSAQUAH, WA 98027
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(ZIP CODE)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (425) 313-8100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock $.005 Par Value The Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The registrant had 450,019,412 common shares, par value $.005, outstanding
at March 16, 2001.
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COSTCO WHOLESALE CORPORATION
INDEX TO FORM 10-Q
PAGE
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS................................ 3
Condensed Consolidated Balance Sheets..................... 10
Condensed Consolidated Statements of Income............... 11
Condensed Consolidated Statements of Cash Flows........... 12
Notes to Condensed Consolidated Financial Statements...... 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................. 3
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................... 8
ITEM 2. CHANGES IN SECURITIES............................... 8
ITEM 3. DEFAULTS UPON SENIOR SECURITIES..................... 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................... 8
ITEM 5. OTHER INFORMATION................................... 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................... 9
Exhibit (28) Report of Independent Public Accountants..... 19
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Costco Wholesale Corporation's ("Costco" or the "Company") unaudited
condensed consolidated balance sheet as of February 18, 2001, the condensed
consolidated balance sheet as of September 3, 2000, the unaudited condensed
consolidated statements of income for the 12- and 24-week periods ended February
18, 2001 and February 13, 2000, and the unaudited condensed consolidated
statements of cash flows for the 24-week periods then ended, are included
elsewhere herein. Also, included elsewhere herein are notes to the unaudited
condensed consolidated financial statements and the results of the limited
review performed by Arthur Andersen LLP, independent public accountants.
The Company reports on a 52/53-week fiscal year, consisting of 13 four-week
periods and ending on the Sunday nearest the end of August. Fiscal 2001 is a
52-week year with period 13 ending on September 2, 2001, with the first, second,
and third quarters consisting of 12 weeks each and the fourth quarter consisting
of 16 weeks. Fiscal 2000 was a 53-week year that ended on September 3, 2000,
with the fourth quarter consisting of 17 weeks.
In December 1999, the Company's Board of Directors approved a 2-for-1 stock
split of Costco Common Stock whereby shareholders of record received one
additional share of common stock for every share held on the record date of
December 24, 1999. The common stock began trading at a post-split price on
January 14, 2000, and all per share data reflects that 2-for-1 stock split.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in this document constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. For these purposes, forward-looking statements are statements that address
activities, events, conditions or developments that the company expects, or
anticipates may occur in the future. Such forward-looking statements involve
risks and uncertainties that may cause actual events, results or performance to
differ materially from those indicated by such statements. These risks and
uncertainties include, but are not limited to, domestic and international
economic conditions including exchange rates, the effects of competition and
regulation, conditions affecting the acquisition, development and ownership or
use of real estate, actions of vendors and other risks identified in the
Company's reports filed with the Securities and Exchange Commission.
It is suggested that this management discussion be read in conjunction with
the management discussion included in the Company's fiscal 2000 annual report on
Form 10-K previously filed with the Securities and Exchange Commission.
COMPARISON OF THE 12 WEEKS ENDED FEBRUARY 18, 2001 AND FEBRUARY 13, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income for the second quarter of fiscal 2001 decreased 3% to $176,577,
or $.38 per diluted share, from $181,608 or $.39 per diluted share, during the
second quarter of fiscal 2000.
Net sales increased 7% to $8,159,980 during the second quarter of fiscal
2001, from $7,613,601 during the second quarter of fiscal 2000. This increase
was due to opening a net of 28 new warehouses (36 opened, 8 closed) since the
end of the second quarter of fiscal 2000 and an increase in comparable warehouse
sales. Comparable sales, i.e. sales in warehouses open for at least a year,
increased 2% during the second quarter of fiscal 2001, as compared to the second
quarter of fiscal 2000. Changes in prices of merchandise did not materially
contribute to sales increases.
Membership fees and other revenue increased 19% to $146,329 or 1.79% of net
sales in the second quarter of fiscal 2001 from $123,386 or 1.62% of net sales
in the second quarter of fiscal 2000. Increases in membership fee income reflect
an increase in the annual membership fee -- averaging approximately $5 per
member across all member categories -- beginning with renewals on October 1,
2000; new membership sign-ups, both at the new warehouses opened since the end
of the second quarter of fiscal 2000 and at existing
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warehouse locations; increased penetration of the Company's Executive Membership
and high overall member renewal rates (currently 86%).
Gross margin (defined as net sales minus merchandise costs) increased 8% to
$884,022 or 10.83% of net sales in the second quarter of fiscal 2001 from
$821,234 or 10.79% of net sales in the second quarter of fiscal 2000. The
increase in gross margin as a percentage of net sales reflects continued
improvement in purchasing power and increased sales penetration of certain
private label products that generally have higher gross margins, offset by the
Company's efforts to continually lower prices to its members. The gross margin
figures reflect accounting for merchandise costs on the last-in, first-out
(LIFO) method. The second quarter of fiscal 2001 and fiscal 2000 each include a
$2,500 LIFO provision.
Selling, general and administrative expenses as a percent of net sales
increased to 8.96% during the second quarter of fiscal 2001 from 8.36% during
the second quarter of fiscal 2000. The increase in selling, general and
administrative expenses as a percent of net sales was due to a number of
factors, including: an increase in the entry-level wage rate of hourly employees
beginning in the fourth quarter of fiscal 2000; higher expenses associated with
an increase in new warehouse openings year-over-year (a net of 28 and 18
warehouses opened since the end of the second quarter of fiscal 2000 and 1999,
respectively) where expense ratios to sales are typically higher than at more
mature warehouses; continued expansion and rollout of the Company's co-branded
credit card program; and increased utility costs.
Preopening expenses totaled $10,572 or 0.13% of net sales during the second
quarter of fiscal 2001 compared to $8,108 or 0.11% of net sales during the
second quarter of fiscal 2000. Nine warehouses were opened in the second quarter
of fiscal 2001 compared to six warehouses opened during last year's second
quarter. Additionally, approximately 11 new warehouse openings are scheduled
within the four month period subsequent to the fiscal 2001 second quarter end,
whereas only five new warehouse openings occurred within the four month period
subsequent to the second quarter end of fiscal 2000. Preopening expenses also
include costs related to remodels, including expanded fresh foods and ancillary
operations at existing warehouses, as well as costs associated with expanding
international operations.
A provision for impaired assets and warehouse closing costs of $1,000 was
recorded in the second quarter of fiscal 2001 compared to $1,500 in the second
quarter of fiscal 2000. The provision includes actual and estimated closing
costs for warehouses already relocated to new facilities during the fiscal year.
Interest expense totaled $8,902 in the second quarter of fiscal 2001
compared to $10,576 in the second quarter of fiscal 2000. Interest expense
primarily includes interest on the 3 1/2% Zero Coupon Notes and the 7 1/8%
Senior Notes. The decrease in interest expense is primarily attributable to an
increase in capitalized interest in the second quarter of fiscal 2001, resulting
from the current increased level of expansion over the prior year's second
quarter.
Interest income and other totaled $15,829 in the second quarter of fiscal
2001 compared to $14,983 in the second quarter of fiscal 2000. The increase
primarily reflects improved earnings from Costco Mexico, a 50% owned joint
venture, which was partially offset by lower interest income due to lower cash
and cash equivalents and short-term investment balances on hand throughout the
second quarter of fiscal 2001.
The effective income tax rate on earnings in the second quarter of both
fiscal 2001 and 2000 was 40%.
COMPARISON OF THE 24 WEEKS ENDED FEBRUARY 18, 2001 AND FEBRUARY 13, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income for the first half of fiscal 2001 decreased 2% to $306,098, or
$0.65 per diluted share, from $310,926, or $0.66 per diluted share, during the
first half of fiscal 2000.
Net sales increased 8% to $15,658,959 during the first half of fiscal 2001,
from $14,437,798 during the first half of fiscal 2000. This increase was due to
opening a net of 28 new warehouses (36 opened, 8 closed) since the end of the
first half of fiscal 2000 and an increase in comparable warehouse sales.
Comparable sales, i.e. sales in warehouses open for at least a year, increased
3% during the first half of fiscal 2001. Changes in prices of merchandise did
not materially contribute to sales increases.
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Membership fees and other revenue increased 17% to $284,628 or 1.82% of net
sales in the first half of fiscal 2001 from $242,701 or 1.68% of net sales in
the first half of fiscal 2000. Increases in membership fee income reflect an
increase in the annual membership fee -- averaging approximately $5 per member
across all member categories -- beginning with renewals on October 1, 2000; new
membership sign-ups, both at the new warehouses opened since the end of the
second quarter of fiscal 2000 and at existing warehouse locations; increased
penetration of the Company's Executive Membership and high overall member
renewal rates (currently 86%).
Gross margin (defined as net sales minus merchandise costs) increased 9% to
$1,669,357 or 10.66% of net sales in the first half of fiscal 2001 from
$1,525,230 or 10.56% of net sales in the first half of fiscal 2000. The increase
in gross margin as a percentage of net sales reflects continued improvement in
purchasing power and increased sales penetration of certain private label
products and improved performance of its international operations, offset by the
Company's on-going efforts to continually lower prices to its members. The gross
margin figures reflect accounting for merchandise costs on the last-in,
first-out (LIFO) method. The first half of fiscal 2001 and fiscal 2000 each
include a $5,000 LIFO provision.
Selling, general and administrative expenses as a percent of net sales
increased to 9.08% during the first half of fiscal 2001 from 8.54% during the
first half of fiscal 2000. The increase in selling, general and administrative
expenses as a percent of net sales was due to a number of factors: an increase
in the entry level wage rate of hourly employees beginning in the fourth quarter
of fiscal 2000; higher expenses associated with an increase in new warehouse
openings year over year (a net of 28 and 18 warehouses opened since the end of
the second quarter of fiscal 2000 and 1999, respectively) where expense ratios
to sales are typically higher than at more mature warehouses; continued
expansion and rollout of the Company's co-branded credit card program; and
increased utility costs.
Preopening expenses totaled $30,252 or 0.19% of net sales during the first
half of fiscal 2001 compared to $18,442 or 0.13% of net sales during the first
half of fiscal 2000. Twenty-three warehouses (including five relocated
warehouses) were opened in the first half of fiscal 2001, compared to 12
warehouses opened (including one relocated warehouse) during last year's first
half. Additionally, approximately 11 new warehouse openings are scheduled within
the next four months of fiscal 2001, whereas only five new warehouse openings
occurred within the four month period subsequent to the second quarter end of
fiscal 2000. Preopening expenses also include costs related to remodels,
including expanded fresh foods and ancillary operations at existing warehouses,
as well as costs associated with expanding international operations.
A provision for impaired assets and warehouse closing costs of $2,000 was
recorded in the first half of fiscal 2001 compared to $2,500 in the first half
of fiscal 2000. The provision includes actual and estimated closing costs for
warehouses already relocated to new facilities during the fiscal year.
Interest expense totaled $15,866 in the first half of fiscal 2001 compared
to $20,973 in the first half of fiscal 2000. Interest expense primarily includes
interest on the 3 1/2% Zero Coupon Notes and the 7 1/8% Senior Notes. The
decrease in interest expense is primarily attributable to an increase in
capitalized interest in the first half of fiscal 2001, resulting from the
current increased level of expansion over the prior year's first half.
Interest income and other totaled $26,834 in the first half of fiscal 2001
compared to $25,650 in the first half of fiscal 2000. The increase primarily
reflects improved earnings from Costco Mexico, a 50% owned joint venture, which
was partially offset by lower interest income due to lower cash and cash
equivalents and short-term investment balances on hand throughout the first half
of fiscal 2001, as compared to the year-earlier first half.
The effective income tax rate on earnings in the first half of both fiscal
2001 and 2000 was 40%.
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LIQUIDITY AND CAPITAL RESOURCES (DOLLARS IN THOUSANDS)
Expansion Plans
Costco's primary requirement for capital is the financing of the land,
building and equipment costs for new warehouses plus the costs of initial
warehouse operations and working capital requirements, as well as additional
capital for international expansion through investments in foreign subsidiaries
and joint ventures.
While there can be no assurance that current expectations will be realized,
and plans are subject to change upon further review, it is management's current
intention to spend an aggregate of approximately $900,000 to $1,100,000 during
fiscal 2001 in the United States and Canada for real estate, construction,
remodeling and equipment for warehouse clubs and related operations; and
approximately $150,000 to $200,000 for international expansion, including the
United Kingdom, Asia, Mexico and other potential ventures. These expenditures
will be financed with a combination of cash provided from operations, the use of
cash and cash equivalents and short-term investments, short-term borrowings
under revolving credit facilities and other financing sources as required.
Expansion plans for the United States and Canada during fiscal 2001 are to
open approximately 34 to 36 new warehouse clubs, including five to six
relocations of existing warehouses to larger and better-located facilities. The
Company expects to continue expansion of its international operations and plans
to open one to two additional units in the United Kingdom through its 80%-owned
subsidiary and one additional unit in Korea through its 96%-owned subsidiary
during the remainder of fiscal 2001. Other international markets are being
assessed.
Costco and its Mexico-based joint venture partner, Controladora Comercial
Mexicana, each own a 50% interest in Costco Mexico. As of February 18, 2001,
Costco Mexico operated 19 warehouses in Mexico and plans to open one additional
warehouse club during the remainder of fiscal 2001.
Reorganization of Canadian Administrative Operations
On January 17, 2001, the Company announced plans to reorganize and
consolidate the administration of its operations in Canada. Anticipated costs
related to the reorganization are estimated to total $26,000 pre-tax ($15,600
after-tax, or $.03 per diluted share), to be expensed as incurred over the next
three to four fiscal quarters.
Bank Credit Facilities and Commercial Paper Programs (all amounts stated in US
dollars)
The Company has in place a $500,000 commercial paper program supported by a
$500,000 bank credit facility with a group of 11 banks, of which $250,000
expires on November 14, 2001 and $250,000 expires on November 15, 2005. At
February 18, 2001, no amounts were outstanding under the loan facility or the
commercial paper program.
In addition, a wholly owned Canadian subsidiary has a $130,000 commercial
paper program supported by a $91,000 bank credit facility with three Canadian
banks, which expires in April, 2001. The Company expects to renew the facility
for an additional year. At February 18, 2001, no amounts were outstanding under
the bank credit facility or the Canadian commercial paper program.
The Company has agreed to limit the combined amount outstanding under the
U.S. and Canadian commercial paper programs to the $591,000 combined amounts of
the respective supporting bank credit facilities.
Letters of Credit
The Company has separate letter of credit facilities (for commercial and
standby letters of credit), totaling approximately $318,000. The outstanding
commitments under these facilities at February 18, 2001 totaled approximately
$163,000, including approximately $29,000 in standby letters of credit.
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Financing Activities
The Company's unsecured note payable to banks of $140,000 is due in April
2001. The Company anticipates funding this repayment with cash provided from
operations, the use of cash and cash equivalents and/or short-term borrowings
under its commercial paper program.
Derivatives
The Company has limited involvement with derivative financial instruments
and uses them only to manage well-defined interest rate and foreign exchange
risks. Forward foreign exchange contracts are used to hedge the impact of
fluctuations of foreign exchange on selected inventory purchases and are
generally for short terms. The amount of interest rate and foreign exchange
contracts outstanding at February 18, 2001, and the impact of recording those
contracts to fair value was not material to the Company's results of operations
or its financial position. Effective December 10, 1999, the Company entered into
a "fixed-to-floating" interest rate swap agreement on its $300,000 7 1/8% Senior
Notes, replacing the fixed interest rate with a floating rate indexed to the
30-day commercial paper rate. On August 11, 2000, the swap agreement was amended
to index the floating rate to the three-month LIBOR rate. Effective December 12,
2000, the Company terminated the swap agreement, resulting in a gain of
approximately $5,000, which is being amortized over the remaining term of the
debt.
Financial Position and Cash Flows
Working capital was a deficit of $152,631 at February 18, 2001, compared to
working capital of $65,759 at September 3, 2000. The net decrease in working
capital was primarily due to a decrease in net inventory levels (inventories
less accounts payable) of $106,167, increases in accrued salaries and benefits
and other current liabilities of $130,302, deferred membership income of $56,809
and a decrease in cash and cash equivalents and short-term investments of
$34,722, which were offset by increases in receivables of $83,993, as well as
decreases in accrued sales and other taxes of $23,660.
Net cash provided by operating activities in the first half of fiscal 2001
totaled $440,807 compared to $408,453 in the first half of fiscal 2000. The
increase in net cash from operating activities is primarily a result of
increases in accrued liabilities, other current liabilities and deferred
membership income offset by an increase in receivables.
Net cash used in investing activities totaled $726,011 in the first half of
fiscal 2001 compared to $397,418 in the first half of fiscal 2000. The investing
activities primarily relate to additions to property and equipment for new and
remodeled warehouses of $728,322 and $515,118 in the first half of fiscal 2001
and 2000, respectively. The Company opened a net of 18 warehouses (23 opened, 5
closed) during the first half of fiscal 2001 compared to eleven warehouses (12
opened, 1 closed) during the first half of fiscal 2000. In addition, the Company
plans to open approximately 14 to 16 new warehouses (including two relocations)
during the remainder of fiscal 2001 as compared to 13 new warehouses (including
three relocations) opened during the second half of fiscal 2000. Net cash used
in investing activities also reflects a decrease in short-term investments of
$20,747 and $103,587 in the first half of fiscal 2001 and 2000, respectively.
Net cash provided by financing activities totaled $278,844 in the first
half of fiscal 2001 compared to $53,745 in the first half of fiscal 2000. This
increase is primarily due to the increase in changes in bank overdrafts of
$200,298 and the issuance of long-term debt totaling $44,907 in the first half
of fiscal 2001.
The Company's balance sheet as of February 18, 2001 reflects a $872,342 or
10% increase in total assets since September 3, 2000. The increase is primarily
due to a net increase in property and equipment and merchandise inventory
related to the Company's expansion program.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative and Hedging Activities", and in June 2000, issued SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
an
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amendment of SFAS 133. These new standards require companies to record
derivative financial instruments on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the fair value
of those derivatives are to be accounted for based on the use of the derivative
and whether the instrument qualifies for hedge accounting, as defined in SFAS
133 and SFAS 138.
The Company adopted SFAS 133 and SFAS 138 on September 4, 2000, the first
day of fiscal 2001. On that date the Company designated its fixed-to-floating
swap contract as a fair value hedge of its Senior Notes and recorded the Senior
Notes and the swap contract at fair market value. Effective December 12, 2000,
the swap agreement was terminated; resulting in a gain of approximately $5,000
which is being amortized over the remaining term of the debt. The Company's use
of derivative instruments during the quarter ended February 18, 2001 was limited
to the fixed-to-floating swap contract on its 7 1/8% Senior Notes and foreign
exchange contracts. The impact of recording these derivatives was not material
to the Company's financial statements.
PART II -- OTHER INFORMATION
(DOLLARS IN THOUSANDS)
ITEM 1. LEGAL PROCEEDINGS
The Company is involved from time to time in claims, proceedings and
litigation arising from its business and property ownership. The Company does
not believe that any such claim, proceeding or litigation, either alone or in
the aggregate, will have a material adverse effect on the Company's financial
position or results of its operations.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held at 10:00 a.m. on
January 25, 2001 at the Doubletree Hotel, 300 -- 112th Ave SE, in Bellevue,
Washington. Stockholders of record at the close of business on December 8, 2000
were entitled to notice of and to vote in person or by proxy at the annual
meeting. At the date of record, December 8, 2000, there were 448,098,396 shares
outstanding. The matters presented for vote received the required votes for
approval and had the following total, for, against and abstained votes as noted
below.
(1) To elect four Class II directors to hold office until the 2004
Annual Meeting of Stockholders and until their successors are elected and
qualified.
WITHHELD
AUTHORITY
TOTAL SHARES FOR AGAINST AND ABSTAINED
VOTED/(%) VOTES/(%) VOTES/(%) VOTES/(%)
------------ ----------- --------- -------------
Benjamin S. Carson, Sr.................. 384,548,597 377,890,642 -- 6,657,955
(Class II).............................. 85.82% 98.27% -- 1.73%
Hamilton E. James....................... 384,548,597 377,983,073 -- 6,565,524
(Class II).............................. 85.82% 98.29% -- 1.71%
Frederick O. Paulsell, Jr............... 384,548,597 368,049,942 -- 16,498,655
(Class II).............................. 85.82% 95.71% -- 4.29%
Jill S. Ruckelshaus..................... 384,548,597 377,966,002 -- 6,582,595
(Class II).............................. 85.82% 98.29% -- 1.71%
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(2) To consider and ratify the selection of the Company's independent
public accountants, Arthur Andersen LLP.
WITHHELD
TOTAL SHARES FOR AGAINST AUTHORITY AND
VOTED/(%) VOTES/(%) VOTES/(%) ABSTAINED VOTES/(%)
- ------------ ----------- ------------ -------------------
384,548,597 383,181,375 191,815 1,175,407
85.82% 99.64% .05% .31%
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein or incorporated by
reference:
(28) Report of Independent Public Accountants
(b) No reports on Form 8-K were filed for the 12 weeks ended February 18,
2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COSTCO WHOLESALE CORPORATION
Registrant
Date: March 23, 2001 /s/ JAMES D. SINEGAL
---------------------------------------------
James D. Sinegal
President and Chief Executive Officer
Date: March 23, 2001 /s/ RICHARD A. GALANTI
---------------------------------------------
Richard A. Galanti
Executive Vice President,
Chief Financial Officer
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COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PAR VALUE)
ASSETS
FEBRUARY 18, SEPTEMBER 3,
2001 2000
------------ ------------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents................................. $ 511,657 $ 524,505
Short-term investments.................................... 26,152 48,026
Receivables, net.......................................... 258,368 174,375
Merchandise inventories, net.............................. 2,723,367 2,490,088
Other current assets...................................... 241,241 233,124
----------- -----------
Total current assets.............................. 3,760,785 3,470,118
----------- -----------
PROPERTY AND EQUIPMENT
Land and land rights...................................... 1,739,035 1,621,798
Buildings, leaseholds and land improvements............... 3,491,460 3,007,752
Equipment and fixtures.................................... 1,441,851 1,311,110
Construction in progress.................................. 120,766 200,729
----------- -----------
6,793,112 6,141,389
Less-accumulated depreciation and amortization............ (1,418,005) (1,307,273)
----------- -----------
Net property and equipment........................ 5,375,107 4,834,116
----------- -----------
OTHER ASSETS................................................ 370,390 329,706
----------- -----------
$ 9,506,282 $ 8,633,940
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short term borrowings..................................... $ 15,660 $ 9,500
Accounts payable.......................................... 2,536,585 2,197,139
Accrued salaries and benefits............................. 486,224 422,264
Accrued sales and other taxes............................. 136,057 159,717
Deferred membership income................................ 319,058 262,249
Other current liabilities................................. 419,832 353,490
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Total current liabilities......................... 3,913,416 3,404,359
LONG-TERM DEBT.............................................. 827,827 790,053
DEFERRED INCOME TAXES AND OTHER LIABILITIES................. 95,406 90,391
----------- -----------
Total liabilities................................. 4,836,649 4,284,803
----------- -----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST........................................... 109,682 108,857
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock $.005 par value; 200,000,000 shares
authorized; no shares issued and outstanding........... -- --
Common stock $.005 par value; 1,800,000,000 shares
authorized; 449,799,000 and 447,297,000 shares issued
and outstanding........................................ 2,249 2,236
Additional paid-in capital................................ 1,080,242 1,028,414
Other accumulated comprehensive loss...................... (155,297) (117,029)
Retained earnings......................................... 3,632,757 3,326,659
----------- -----------
Total stockholders' equity........................ 4,559,951 4,240,280
----------- -----------
$ 9,506,282 $ 8,633,940
=========== ===========
The accompanying notes are an integral part of these balance sheets.
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COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
12 WEEKS ENDED 24 WEEKS ENDED
--------------------------- ---------------------------
FEBRUARY 18, FEBRUARY 13, FEBRUARY 18, FEBRUARY 13,
2001 2000 2001 2000
------------ ------------ ------------ ------------
REVENUE
Net sales................................... $8,159,980 $7,613,601 $15,658,959 $14,437,798
Membership fees and other................... 146,329 123,386 284,628 242,701
---------- ---------- ----------- -----------
Total revenue....................... 8,306,309 7,736,987 15,943,587 14,680,499
OPERATING EXPENSES
Merchandise costs........................... 7,275,958 6,792,367 13,989,602 12,912,568
Selling, general and administrative......... 731,411 636,739 1,422,538 1,233,456
Preopening expenses......................... 10,572 8,108 30,252 18,442
Provision for impaired assets and warehouse
closing costs............................ 1,000 1,500 2,000 2,500
---------- ---------- ----------- -----------
Operating income......................... 287,368 298,273 499,195 513,533
OTHER INCOME (EXPENSE)
Interest expense............................ (8,902) (10,576) (15,866) (20,973)
Interest income and other................... 15,829 14,983 26,834 25,650
---------- ---------- ----------- -----------
INCOME BEFORE INCOME TAXES.................... 294,295 302,680 510,163 518,210
Provision for income taxes.................. 117,718 121,072 204,065 207,284
---------- ---------- ----------- -----------
NET INCOME.................................... $ 176,577 $ 181,608 $ 306,098 $ 310,926
========== ========== =========== ===========
NET INCOME PER COMMON AND COMMON EQUIVALENT
SHARE:
Basic....................................... $ 0.39 $ 0.41 $ 0.68 $ 0.70
========== ========== =========== ===========
Diluted..................................... $ 0.38 $ 0.39 $ 0.65 $ 0.66
========== ========== =========== ===========
Shares used in calculation (000's)
Basic....................................... 448,788 445,255 448,234 444,277
Diluted..................................... 475,488 476,642 474,543 475,120
The accompanying notes are an integral part of these financial statements.
11
12
COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
24 WEEKS ENDED
----------------------------
FEBRUARY 18, FEBRUARY 13,
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 306,098 $ 310,926
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 133,619 114,424
Accretion of discount on zero coupon notes............. 7,547 7,431
Net (gain)/loss on sale of property and equipment and
other................................................. 738 (2,249)
Change in deferred income taxes........................ (2,125) (1,023)
Tax benefit from exercise of stock options............. 20,370 22,750
Change in receivables, other current assets, accrued
and other current liabilities......................... 79,353 43,374
Increase in merchandise inventories.................... (252,274) (124,369)
Increase in accounts payable........................... 156,163 42,373
Other.................................................. (8,682) (5,184)
--------- ---------
Total adjustments................................. 134,709 97,527
--------- ---------
Net cash provided by operating activities......... 440,807 408,453
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment....................... (728,322) (515,118)
Proceeds from the sale of property and equipment.......... 12,471 33,738
Investment in unconsolidated joint ventures............... (28,500) --
Decrease in short-term investments........................ 20,747 103,587
Increase in other assets and other, net................... (2,407) (19,625)
--------- ---------
Net cash used in investing activities............. (726,011) (397,418)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowings................... 7,199 --
Net proceeds from issuance of long-term debt.............. 44,907 253
Repayments of long-term debt.............................. (5,776) (5,473)
Changes in bank overdraft................................. 200,298 10,608
Proceeds from minority interests.......................... 745 8,816
Exercise of stock options................................. 31,471 39,541
--------- ---------
Net cash provided by financing activities......... 278,844 53,745
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (6,488) 4,661
--------- ---------
Net increase/(decrease) in cash and cash equivalents........ (12,848) 69,441
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR................. 524,505 440,586
--------- ---------
CASH AND CASH EQUIVALENTS END OF PERIOD..................... $ 511,657 $ 510,027
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (excludes amounts capitalized)................ $ 7,559 $ 14,531
Income taxes........................................... $ 181,645 $ 118,559
The accompanying notes are an integral part of these financial statements.
12
13
COSTCO WHOLESALE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and pursuant to the rules and regulations of the Securities
and Exchange Commission. While these statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary for fair
presentation of the results of the interim period, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the financial statements and footnotes thereto included in the Company's annual
report filed on Form 10-K for the fiscal year ended September 3, 2000.
The consolidated financial statements include the accounts of Costco
Wholesale Corporation, a Washington corporation, and its subsidiaries ("Costco"
or the "Company"). All inter-company transactions between the Company and its
subsidiaries have been eliminated in consolidation. Costco Wholesale Corporation
and its wholly owned subsidiary, The Price Company, primarily operate membership
warehouses under the Costco Wholesale name.
Costco operates membership warehouses that offer very low prices on a
limited selection of nationally branded and selected private label products in a
wide range of merchandise categories in no-frills, self-service warehouse
facilities. At February 18, 2001, Costco operated 350 warehouse clubs: 252 in
the United States; 59 in Canada; 11 in the United Kingdom; four in Korea; three
in Taiwan; and two in Japan. The Company also operated (through a 50%-owned
joint venture) 19 warehouses in Mexico. The Company also operates Costco Online,
an electronic commerce web site, at www.costco.com.
The Company's investment in the Costco Mexico joint venture and in other
unconsolidated joint ventures that are less than majority owned are accounted
for under the equity method.
Fiscal Years
The Company reports on a 52/53-week fiscal year basis, which ends on the
Sunday nearest August 31st. Fiscal year 2001 is a 52-week year, with the first,
second and third quarters consisting of 12 weeks each and the fourth quarter,
ending September 2, 2001, consisting of 16 weeks. Fiscal year 2000 was a 53-week
year, with the fourth quarter consisting of 17 weeks.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
13
14
COSTCO WHOLESALE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Short-term Investments
At February 18, 2001 and September 3, 2000 short-term investments consisted
of the following:
FEBRUARY 18, SEPTEMBER 3,
2001 2000
------------ ------------
Corporate notes and bonds........................... $15,027 $38,331
U.S. Treasury/Agency securities..................... 4,713 --
Certificates of deposit............................. 6,004 9,667
Other............................................... 408 28
------- -------
Total short-term investments.............. $26,152 $48,026
======= =======
The Company's short-term investments have been designated as being
available-for-sale. The fair market value of short-term investments approximates
their carrying value and unrealized holding gains and losses were not
significant at February 18, 2001 or September 3, 2000. Realized gains and losses
are included in interest income and were not significant in the first half of
fiscal 2001 or 2000.
Receivables
Receivables consist primarily of vendor rebates and promotional allowances
and other miscellaneous amounts due to the Company, and are net of allowance for
doubtful accounts of $3,580 and $3,368 at February 18, 2001 and September 3,
2000, respectively.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market as
determined primarily by the retail inventory method, and are stated using the
last-in, first-out (LIFO) method for substantially all U.S. merchandise
inventories. The Company believes the LIFO method more fairly presents the
results of operations by more closely matching current costs with current
revenues. If all merchandise inventories had been valued using the first-in,
first-out (FIFO) method, inventories would have been higher by $13,150 at
February 18, 2001 and $8,150 at September 3, 2000. The Company provides for
estimated inventory losses between physical inventory counts on the basis of a
standard percentage of sales. This provision may be adjusted to reflect the
actual shrinkage results of physical inventory counts, which generally occur in
the second and fourth fiscal quarters.
Accounts Payable
The Company's banking system provides for the daily replenishment of major
bank accounts as checks are presented. Accordingly, included in accounts payable
at February 18, 2001 and September 3, 2000, are $254,728 and $55,002,
respectively, representing the excess of outstanding checks over cash on deposit
at the banks on which the checks were drawn.
Derivatives
The Company has limited involvement with derivative financial instruments
and only uses them to manage well-defined interest rate and foreign exchange
risks. Forward foreign exchange contracts are used to hedge the impact of
fluctuations of foreign exchange on selected inventory purchases. The amount of
interest rate and foreign exchange contracts outstanding at quarter-end or in
place during the first 24 weeks of fiscal 2001 was not material to the Company's
results of operations or its financial position.
14
15
COSTCO WHOLESALE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Effective December 10, 1999, the Company entered into a "fixed-to-floating"
interest rate swap agreement on its $300,000 7 1/8% Senior Notes, which, as
amended, replaced the fixed interest rate with a floating rate indexed to the
three month LIBOR rate. The notional amount of the swap agreement was equal to
the face value of the notes ($300,000). This swap agreement contained an
expiration date of June 15, 2005, coinciding with the maturity date of the
Senior Notes. Effective December 12, 2000, the Company terminated the swap
agreement resulting in a gain of approximately $5,000, which is being amortized
over the remaining term of the debt.
Foreign Currency Translations
Assets and liabilities recorded in foreign currencies, as well as the
Company's investment in the Costco Mexico joint venture, are translated at the
exchange rate on the balance sheet date. Translation adjustments resulting from
this process are charged or credited to other accumulated comprehensive loss.
Revenue and expenses of the Company's consolidated foreign operations are
translated at average rates of exchange prevailing during the year. Gains and
losses on foreign currency transactions are included in expenses.
Membership Fees
Membership fee revenue represents annual membership fees paid by
substantially all of the Company's members. Membership fee income is accounted
for on a "deferred basis," whereby income is recognized ratably over the
one-year life of the membership.
Preopening Expenses
Preopening expenses related to new warehouses, major remodels/expansions,
regional offices and other start-up operations are expensed as incurred.
Warehouse Closing Costs
Warehouse closing costs incurred relate principally to the Company's
efforts to relocate certain warehouses that were not otherwise impaired to
larger and better-located facilities. At February 18, 2001, the reserve for
warehouse closing costs was $11,092, of which $8,110 related to future lease
obligations.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
That standard requires companies to account for deferred income taxes using the
asset and liability method.
15
16
COSTCO WHOLESALE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Income Per Common and Common Equivalent Share
The following data show the amounts used in computing earnings per share
and the effect on income and the weighted average number of shares of dilutive
potential common stock.
12 WEEKS ENDED 24 WEEKS ENDED
---------------------------- ----------------------------
FEBRUARY 18, FEBRUARY 13, FEBRUARY 18, FEBRUARY 13,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net income available to common stockholders
used in basic EPS........................ $176,577 $181,608 $306,098 $310,926
Interest on convertible bonds, net of
tax...................................... 2,264 2,230 4,528 4,460
-------- -------- -------- --------
Net income available to common stockholders
after assumed conversions of dilutive
securities............................... $178,841 $183,838 $310,626 $315,386
======== ======== ======== ========
Weighted average number of common shares
used in basic EPS (000's)................ 448,788 445,255 448,234 444,277
Stock options (000's)...................... 7,355 12,039 6,964 11,495
Conversion of convertible bonds (000's).... 19,345 19,348 19,345 19,348
-------- -------- -------- --------
Weighted number of common shares and
dilutive potential common stock used in
diluted EPS (000's)...................... 475,488 476,642 474,543 475,120
======== ======== ======== ========
All per share data reflects the 2-for-1 stock split which was approved by
the Company's Board of Directors in December 1999, for shareholders of record on
December 24, 1999. The common stock began trading at the post-split price on
January 14, 2000.
The diluted share base calculation for the fiscal quarters ended February
18, 2001 and February 13, 2000, excludes 7,152,302 and 0 stock options
outstanding, respectively. The diluted share base calculation for the fiscal
year-to-date periods ended February 18, 2001 and February 13, 2000, excludes
7,175,456 and 512,000 stock options outstanding, respectively. These options are
excluded due to their anti-dilutive effect as a result of their exercise prices
being greater than the average market price of the common shares during those
fiscal periods.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
16
17
COSTCO WHOLESALE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (2) -- COMPREHENSIVE INCOME
Consolidated comprehensive income is as follows:
12 WEEKS ENDED 24 WEEKS ENDED
---------------------------- ----------------------------
FEBRUARY 18, FEBRUARY 13, FEBRUARY 18, FEBRUARY 13,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net income................................. $176,577 $181,608 $306,098 $310,926
Other comprehensive income (expense):
Foreign currency translation............. 17,424 17,530 (38,268) 31,876
Income taxes............................. (6,970) (7,012) 15,307 (12,750)
-------- -------- -------- --------
Other comprehensive income (expense), net
of income taxes....................... 10,454 10,518 (22,961) 19,126
-------- -------- -------- --------
Comprehensive income....................... $187,031 $192,126 $283,137 $330,052
======== ======== ======== ========
NOTE (3) -- DEBT
Bank Credit Facilities and Commercial Paper Programs (all amounts stated in US
dollars)
The Company has in place a $500,000 commercial paper program supported by a
$500,000 bank credit facility with a group of 11 banks, of which $250,000
expires on November 14, 2001 and $250,000 expires on November 15, 2005. At
February 18, 2001, no amounts were outstanding under the loan facility or the
commercial paper program.
In addition, a wholly owned Canadian subsidiary has a $130,000 commercial
paper program supported by a $91,000 bank credit facility with three Canadian
banks, which expires in April, 2001. The Company expects to renew the facility
for an additional year. At February 18, 2001, no amounts were outstanding under
the bank credit facility or the Canadian commercial paper program.
The Company has agreed to limit the combined amount outstanding under the
U.S. and Canadian commercial paper programs to the $591,000 combined amounts of
the respective supporting bank credit facilities.
Letters of Credit
The Company has separate letter of credit facilities (for commercial and
standby letters of credit), totaling approximately $318,000. The outstanding
commitments under these facilities at February 18, 2001 totaled approximately
$163,000, including approximately $29,000 in standby letters of credit.
Financing Activities
The Company's unsecured note payable to banks of $140,000, included in
other current liabilities, is due in April 2001. The Company anticipates funding
this repayment with cash provided from operations, the use of cash and cash
equivalents and/or short-term borrowings under its commercial paper program.
NOTE (4) -- COMMITMENTS AND CONTINGENCIES
The Company is involved from time to time in claims, proceedings and
litigation arising from its business and property ownership. The Company does
not believe that any such claim, proceeding or litigation, either alone or in
the aggregate, will have a material adverse effect on the Company's financial
position or results of operations.
17
18
COSTCO WHOLESALE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (4) -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
Additionally, the Company announced plans to reorganize and consolidate the
administration of its operations in Canada. Anticipated costs related to the
reorganization are estimated to total $26,000 pre-tax ($15,600 after-tax, or
$.03 per diluted share), to be expensed as incurred over the next three to four
fiscal quarters.
NOTE (5) -- SEGMENT REPORTING
The Company and its subsidiaries are principally engaged in the operation
of membership warehouses in the United States, Canada, and Japan; through
majority-owned subsidiaries in the United Kingdom, Taiwan and Korea; and through
a 50%-owned joint venture in Mexico. The Company's reportable segments are based
on management responsibility.
OTHER
UNITED STATES CANADIAN INTERNATIONAL
OPERATIONS OPERATIONS OPERATIONS TOTAL
------------- ---------- ------------- -----------
TWENTY-FOUR WEEKS ENDED FEBRUARY 18,
2001
Total revenue......................... $13,045,447 $2,218,259 $ 679,881 $15,943,587
Operating income (loss)............... 404,402 96,708 (1,915) 499,195
Depreciation and amortization......... 106,196 16,480 10,943 133,619
Capital expenditures.................. 650,513 24,127 53,682 728,322
Total assets.......................... 7,734,541 1,018,995 752,746 9,506,282
TWENTY-FOUR WEEKS ENDED FEBRUARY 13,
2000
Total revenue......................... $11,917,461 $2,172,814 $ 590,224 $14,680,499
Operating income (loss)............... 417,215 96,738 (420) 513,533
Depreciation and amortization......... 89,088 17,156 8,180 114,424
Capital expenditures.................. 432,234 21,023 61,861 515,118
Total assets.......................... 6,431,002 1,078,600 598,744 8,108,346
YEAR ENDED SEPTEMBER 3, 2000
Total revenue......................... $26,170,108 $4,743,657 $1,250,531 $32,164,296
Operating income (loss)............... 848,605 192,310 (3,465) 1,037,450
Depreciation and amortization......... 198,436 36,563 19,398 254,397
Capital expenditures.................. 998,429 41,962 188,030 1,228,421
Total assets.......................... 6,833,440 1,134,998 665,502 8,633,940
18