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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 MAY 13, 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 450,922,804 common shares, par value $.005, outstanding
at June 8, 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................................. 8
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K.................. 8
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 May 13, 2001, the condensed
consolidated balance sheet as of September 3, 2000, the unaudited condensed
consolidated statements of income for the 12- and 36-week periods ended May 13,
2001 and May 7, 2000, and the unaudited condensed consolidated statements of
cash flows for the 36-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.
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 MAY 13, 2001 AND MAY 7, 2000 (DOLLARS IN
THOUSANDS, EXCEPT PER SHARE DATA)
Net income for the third quarter of fiscal 2001 decreased 13% to $105,257,
or $.23 per diluted share, from $120,329, or $.26 per diluted share, during the
third quarter of fiscal 2000.
Net sales increased 12% to $7,563,494 during the third quarter of fiscal
2001, from $6,768,608 during the third quarter of fiscal 2000. This increase was
due to opening a net of 35 new warehouses (43 opened, 8 closed) since the end of
the third quarter of fiscal 2000 and an increase in comparable warehouse sales.
Comparable sales, that is sales in warehouses open for at least a year,
increased 5% during the third quarter of fiscal 2001, as compared to the third
quarter of fiscal 2000. Changes in prices of merchandise did not materially
contribute to sales increases.
Membership fees and other revenue increased 23% to $155,401 or 2.05% of net
sales in the third quarter of fiscal 2001 from $126,000 or 1.86% of net sales in
the third 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
third 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 8% to
$737,858 or 9.76% of net sales in the third quarter of fiscal 2001 from $684,362
or 10.11% of net sales in the third quarter of fiscal 2000.
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The decrease in gross margin as a percentage of net sales reflects the cost
related to the Executive Membership two percent reward program as well as lower
year-over-year gasoline gross margins. This decrease was partially offset
through the Company's ability to reduce merchandise costs in more mature
merchandise categories through greater purchasing power. The gross margin
figures reflect accounting for merchandise costs on the last-in, first-out
(LIFO) method. The third 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 9.33% during the third quarter of fiscal 2001 from 8.94% during the
third 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 35 and 17
warehouses opened since the end of the third quarter of fiscal 2000 and 1999,
respectively) where expense ratios to sales are typically higher than at more
mature warehouses; continued expansion of the Company's co-branded credit card
program; and higher utility costs.
Preopening expenses totaled $12,751 or 0.17% of net sales during the third
quarter of fiscal 2001 compared to $6,728 or 0.10% of net sales during the third
quarter of fiscal 2000. Nine warehouses were opened in the third quarter of
fiscal 2001 compared to two warehouses opened during last year's third quarter.
Additionally, five warehouses are scheduled to open during the fourth quarter of
fiscal 2001, as compared to 11 warehouses that were opened during last year's
fourth quarter.
The provision for impaired assets and closing costs netted to $0 in the
third quarter of fiscal 2001, compared to a $1,500 charge in the third quarter
of fiscal 2000. The fiscal 2001 provision reflected impairment and closing costs
of $8,157, including a $3,000 charge related to the reorganization of the
Canadian administrative operations, which was offset by gains on the sale of
real property.
Interest expense totaled $9,023 in the third quarter of fiscal 2001
compared to $9,604 in the third 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 third quarter of fiscal 2001, resulting
from the current increased level of expansion over the prior year's third
quarter.
Interest income and other totaled $9,801 in the third quarter of fiscal
2001 compared to $12,943 in the third quarter of fiscal 2000. The decrease
primarily reflects lower interest income due to lower interest rates and lower
cash and cash equivalents and short-term investment balances on hand throughout
the third quarter of fiscal 2001, which was partially offset by improved
earnings from Costco Mexico, a 50% owned joint venture, as compared to the prior
year's third quarter.
The effective income tax rate on earnings in the third quarter of both
fiscal 2001 and 2000 was 40%.
COMPARISON OF THE 36 WEEKS ENDED MAY 13,2001 AND MAY 7, 2000 (DOLLARS IN
THOUSANDS, EXCEPT PER SHARE DATA)
Net income for the first thirty-six weeks of fiscal 2001 decreased 5% to
$411,355, or $.88 per diluted share, from $431,255, or $0.92 per diluted share,
during the first thirty-six weeks of fiscal 2000.
Net sales increased 10% to $23,222,453 during the first thirty-six weeks of
fiscal 2001, from $21,206,406 during the first thirty-six weeks of fiscal 2000.
This increase was due to opening a net of 35 new warehouses (43 opened, 8
closed) since the end of the first thirty-six weeks of fiscal 2000 and an
increase in comparable warehouse sales. Comparable sales, that is sales in
warehouses open for at least a year, increased 4% during the first thirty-six
weeks of fiscal 2001. Changes in prices of merchandise did not materially
contribute to sales increases.
Membership fees and other revenue increased 19% to $440,029 or 1.89% of net
sales in the first thirty-six weeks of fiscal 2001 from $368,701 or 1.74% of net
sales in the first thirty-six weeks of fiscal 2000. Increases in membership fee
income reflect an increase in the annual membership fee -- averaging
approximately $5 per
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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 third 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
$2,407,215 or 10.37% of net sales in the first thirty-six weeks of fiscal 2001
from $2,209,592 or 10.42% of net sales in the first thirty-six weeks of fiscal
2000. The decrease in gross margin as a percentage of net sales reflects the
cost related to the Executive Membership two percent reward program as well as
lower gasoline margins year over year. This decrease was partially offset
through the Company's ability to reduce merchandise costs in more mature
merchandise categories through greater purchasing power. The gross margin
figures reflect accounting for merchandise costs on the last-in, first-out
(LIFO) method. The first thirty-six weeks of fiscal 2001 and fiscal 2000 each
include a $7,500 LIFO provision.
Selling, general and administrative expenses as a percent of net sales
increased to 9.17% during the first thirty-six weeks of fiscal 2001 from 8.67%
during the first thirty-six weeks 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 35 and 17
warehouses opened since the end of the third quarter of fiscal 2000 and 1999,
respectively) where expense ratios to sales are typically higher than at more
mature warehouses; continued expansion of the Company's co-branded credit card
program; and increased utility costs.
Preopening expenses totaled $43,003 or 0.19% of net sales during the first
thirty-six weeks of fiscal 2001 compared to $25,170 or 0.12% of net sales during
the first thirty-six weeks of fiscal 2000. Thirty-two warehouses (including 5
relocated warehouses) were opened in the first thirty-six weeks of fiscal 2001,
compared to 14 warehouses opened (including one relocated warehouses) during
last year's first thirty-six weeks. Additionally, five warehouses are scheduled
to open during the fourth quarter of fiscal 2001, as compared to 11 warehouses
that were opened during last year's fourth quarter.
A provision for impaired assets and closing costs of $2,000 was recorded in
the first thirty-six weeks of fiscal 2001 compared to $4,000 in the first
thirty-six weeks of fiscal 2000. The provision includes actual and estimated
closing costs for warehouses already relocated to new facilities during the
fiscal year, with expenses offset by gains on sales of real property. In
addition, this year's provision includes a charge related to the reorganization
of the Canadian administrative operations totaling $3,000.
Interest expense totaled $24,889 in the first thirty-six weeks of fiscal
2001 compared to $30,577 in the first thirty-six weeks 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 thirty-six weeks of fiscal
2001, resulting from the current increased level of expansion over the prior
year's first thirty-six weeks.
Interest income and other totaled $36,635 in the first thirty-six weeks of
fiscal 2001 compared to $38,593 in the first thirty-six weeks of fiscal 2000.
The decrease primarily reflects lower interest income due to lower interest
rates and lower cash and cash equivalents and short-term investment balances on
hand throughout the first thirty-six weeks of fiscal 2001, which was partially
offset by improved earnings from Costco Mexico, a 50% owned joint venture, as
compared to the year-earlier first thirty-six weeks.
The effective income tax rate on earnings in the first thirty-six weeks 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 $1,000,000 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 33 new warehouse clubs, including five relocations of existing warehouses
to larger and better-located facilities. The Company expects to continue
expansion of its international operations and has opened one additional unit in
the United Kingdom through its 80%-owned subsidiary, two additional units in
Korea through its 96%-owned subsidiary and one additional unit in Japan. No
additional international units are planned to open throughout 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 May 13, 2001, Costco
Mexico operated 19 warehouses in Mexico and has opened one additional warehouse
club subsequent to the close of the third quarter 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
one to two fiscal quarters. During the current quarter the Company expensed
$3,000 related to this reorganization and consolidation process and has reported
this charge as part of the "provision for impaired assets and closing costs".
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 May
13, 2001, $76,000 was outstanding under the commercial paper program and no
amounts were outstanding under the loan facility.
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 March 2002. At May 13, 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 May 13, 2001 totaled approximately
$81,000, including approximately $29,000 in standby letters of credit.
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Financing Activities
During April 2001, the Company retired its unsecured note payable to banks
of $140,000 using cash provided from operations, cash and cash equivalents and
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 May 13, 2001 and the impact of recording those
contracts to fair value were 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 $194,436 at May 13, 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 $203,665, increases in deferred membership income of
$62,973, short-term borrowings of $82,900 and a decrease in cash and cash
equivalents and short-term investments of $9,029, which were partially offset by
increases in receivables of $56,947, as well as decreases in other current
liabilities of $45,514.
Net cash provided by operating activities in the first thirty-six weeks of
fiscal 2001 totaled $753,561 compared to $580,947 in the first thirty-six weeks
of fiscal 2000. The year-over-year increase in net cash from operating
activities is primarily a result of increases in deferred membership income, a
net increase resulting from a decrease in net inventories (inventories less
accounts payable) and increases in accrued liabilities.
Net cash used in investing activities totaled $924,420 in the first
thirty-six weeks of fiscal 2001 compared to $607,398 in the first thirty-six
weeks of fiscal 2000. The investing activities primarily relate to additions to
property and equipment for new and remodeled warehouses and related operations
of $978,295 and $737,917 in the first thirty-six weeks of fiscal 2001 and 2000,
respectively. The Company opened a net of 27 warehouses (32 opened, 5 closed)
during the first thirty-six weeks of fiscal 2001 compared to 13 warehouses (14
opened, 1 closed) during the first thirty-six weeks of fiscal 2000. In addition,
the Company plans to open five new warehouses during the fourth quarter of
fiscal 2001 as compared to 11 new warehouses (including three relocations)
opened during the fourth quarter of fiscal 2000. Net cash used in investing
activities also reflects a decrease in short-term investments of $41,728 and
$115,236 in the first thirty-six weeks of fiscal 2001 and 2000, respectively.
Net cash provided by financing activities totaled $213,614 in the first
thirty-six weeks of fiscal 2001 compared to $113,819 in the first thirty-six
weeks of fiscal 2000. The year-over-year change relates primarily to an increase
in bank checks outstanding of $173,772 and an increase in short-term borrowings
of $84,753, which was partially offset by an increase in repayments of long-term
debt totaling $142,163.
The Company's balance sheet as of May 13, 2001 reflects a $941,973 or 11%
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.
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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 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 May 13, 2001 was limited to
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
None.
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 May 13, 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: June 12, 2001 /s/ JAMES D. SINEGAL
--------------------------------------
James D. Sinegal
President and Chief Executive Officer
Date: June 12, 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)
MAY 13, SEPTEMBER 3,
2001 2000
----------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 558,576 $ 524,505
Short-term investments.................................... 4,926 48,026
Receivables, net.......................................... 231,322 174,375
Merchandise inventories, net.............................. 2,675,311 2,490,088
Other current assets...................................... 223,070 233,124
----------- -----------
Total current assets.............................. 3,693,205 3,470,118
----------- -----------
PROPERTY AND EQUIPMENT
Land and land rights...................................... 1,771,436 1,621,798
Buildings, leaseholds and land improvements............... 3,591,886 3,007,752
Equipment and fixtures.................................... 1,476,747 1,311,110
Construction in progress.................................. 146,737 200,729
----------- -----------
6,986,806 6,141,389
Less-accumulated depreciation and amortization............ (1,472,112) (1,307,273)
----------- -----------
Net property and equipment........................ 5,514,694 4,834,116
----------- -----------
OTHER ASSETS................................................ 368,014 329,706
----------- -----------
$ 9,575,913 $ 8,633,940
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short term borrowings..................................... $ 92,400 $ 9,500
Accounts payable.......................................... 2,586,027 2,197,139
Accrued salaries and benefits............................. 420,597 422,264
Accrued sales and other taxes............................. 155,419 159,717
Deferred membership income................................ 325,222 262,249
Other current liabilities................................. 307,976 353,490
----------- -----------
Total current liabilities......................... 3,887,641 3,404,359
LONG-TERM DEBT.............................................. 828,294 790,053
DEFERRED INCOME TAXES AND OTHER LIABILITIES................. 94,878 90,391
----------- -----------
Total liabilities................................. 4,810,813 4,284,803
----------- -----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST........................................... 109,850 108,857
----------- -----------
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; 450,614,000 and 447,297,000 shares issued
and outstanding........................................ 2,253 2,236
Additional paid-in capital................................ 1,097,877 1,028,414
Other accumulated comprehensive loss...................... (182,894) (117,029)
Retained earnings......................................... 3,738,014 3,326,659
----------- -----------
Total stockholders' equity........................ 4,655,250 4,240,280
----------- -----------
$ 9,575,913 $ 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 36 WEEKS ENDED
------------------------ --------------------------
MAY 13, MAY 7, MAY 13, MAY 7,
2001 2000 2001 2000
---------- ---------- ----------- -----------
REVENUE
Net sales............................. $7,563,494 $6,768,608 $23,222,453 $21,206,406
Membership fees and other............. 155,401 126,000 440,029 368,701
---------- ---------- ----------- -----------
Total revenue................. 7,718,895 6,894,608 23,662,482 21,575,107
OPERATING EXPENSES
Merchandise costs..................... 6,825,636 6,084,246 20,815,238 18,996,814
Selling, general and administrative... 705,858 604,924 2,128,396 1,838,380
Preopening expenses................... 12,751 6,728 43,003 25,170
Provision for impaired assets and
closing costs...................... -- 1,500 2,000 4,000
---------- ---------- ----------- -----------
Operating income.............. 174,650 197,210 673,845 710,743
OTHER INCOME (EXPENSE)
Interest expense...................... (9,023) (9,604) (24,889) (30,577)
Interest income and other............. 9,801 12,943 36,635 38,593
---------- ---------- ----------- -----------
INCOME BEFORE INCOME TAXES.............. 175,428 200,549 685,591 718,759
Provision for income taxes............ 70,171 80,220 274,236 287,504
---------- ---------- ----------- -----------
NET INCOME.............................. $ 105,257 $ 120,329 $ 411,355 $ 431,255
========== ========== =========== ===========
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE:
Basic................................. $ .23 $ 0.27 $ .92 $ 0.97
========== ========== =========== ===========
Diluted............................... $ .23 $ 0.26 $ .88 $ 0.92
========== ========== =========== ===========
Shares used in calculation (000's)
Basic................................. 450,195 448,113 448,886 445,557
Diluted............................... 475,840 478,750 474,973 476,409
The accompanying notes are an integral part of these financial statements.
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COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
36 WEEKS ENDED
----------------------
MAY 13, MAY 7,
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 411,355 $ 431,255
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 204,908 172,507
Amortization of discount on zero coupon notes.......... 11,320 11,087
Tax benefit from exercise of stock options............. 26,943 50,400
Change in receivables, other current assets, accrued
and other current liabilities......................... 111,585 5,529
Increase in merchandise inventories.................... (210,925) (157,539)
Increase in accounts payable........................... 219,890 79,147
Other.................................................. (21,515) (11,439)
--------- ---------
Total adjustments.................................... 342,206 149,692
--------- ---------
Net cash provided by operating activities......... 753,561 580,947
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment....................... (978,295) (737,917)
Proceeds from the sale of property and equipment.......... 48,034 45,237
Investment in unconsolidated joint ventures............... (28,500) --
Decrease in short-term investments........................ 41,728 115,236
Increase in other assets and other, net................... (7,387) (29,954)
--------- ---------
Net cash used in investing activities............. (924,420) (607,398)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowings................... 84,753 --
Net proceeds from issuance of long-term debt.............. 44,051 253
Repayments of long-term debt.............................. (149,794) (7,631)
Changes in bank checks outstanding........................ 191,517 17,745
Proceeds from minority interests.......................... 550 11,289
Exercise of stock options................................. 42,537 92,163
--------- ---------
Net cash provided by financing activities......... 213,614 113,819
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (8,684) (722)
--------- ---------
Net increase in cash and cash equivalents................. 34,071 86,646
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR................. 524,505 440,586
--------- ---------
CASH AND CASH EQUIVALENTS END OF PERIOD..................... $ 558,576 $ 527,232
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (excludes amounts capitalized)................ $ 8,887 $ 16,287
Income taxes........................................... $ 198,960 $ 209,362
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 accounting principles generally accepted in the
United States 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 May 13, 2001, Costco operated 359 warehouse clubs: 259 in the
United States; 60 in Canada; 11 in the United Kingdom; five 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.
Short-term Investments
At May 13, 2001 and September 3, 2000 short-term investments consisted of
the following:
MAY 13, SEPTEMBER 3,
2001 2000
------- ------------
Corporate notes and bonds.............................. $4,926 $38,331
Certificates of deposit................................ -- 9,667
Other.................................................. -- 28
------ -------
Total short-term investments................. $4,926 $48,026
====== =======
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)
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 May 13, 2001 or September 3, 2000. Realized gains and losses are
included in interest income and were not significant in the first thirty-six
weeks 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 $3,581 and $3,368 at May 13, 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 $15,650 at May
13, 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 is 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 May 13, 2001 and September 3, 2000, are $245,947 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 and forecasted inventory purchases.
The amount of interest rate and foreign exchange contracts outstanding at
quarter-end or in place during the first thirty-six weeks of fiscal 2001 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, 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.
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)
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 the Statement of Income
as realized.
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.
Provision for Impaired Assets and 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 May 13, 2001, the reserve for warehouse
closing costs was $11,358, of which $9,066 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 36 WEEKS ENDED
-------------------- --------------------
MAY 13, MAY 7, MAY 13, MAY 7,
2001 2000 2001 2000
-------- -------- -------- --------
Net income available to common stockholders used
in basic EPS.................................. $105,257 $120,329 $411,355 $431,255
Interest on convertible bonds, net of tax....... 2,264 2,230 6,792 6,691
-------- -------- -------- --------
Net income available to common stockholders
after assumed conversions of dilutive
securities.................................... $107,521 $122,559 $418,147 $437,946
======== ======== ======== ========
Weighted average number of common shares used in
basic EPS (000's)............................. 450,195 448,113 448,886 445,557
Stock options (000's)........................... 6,300 11,290 6,742 11,504
Conversion of convertible bonds (000's)......... 19,345 19,347 19,345 19,348
-------- -------- -------- --------
Weighted number of common shares and dilutive
potential common stock used in diluted EPS
(000's)....................................... 475,840 478,750 474,973 476,409
======== ======== ======== ========
The diluted share base calculation for the fiscal quarters ended May 13,
2001 and May 7, 2000, excludes 7,091,411 and 160,000 stock options outstanding,
respectively. The diluted share base calculation for the fiscal year-to-date
periods ended May 13, 2001 and May 7, 2000, excludes 7,132,315 and 53,333 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.
NOTE (2) -- COMPREHENSIVE INCOME
Consolidated comprehensive income is as follows:
12 WEEKS ENDED 36 WEEKS ENDED
-------------------- --------------------
MAY 13, MAY 7 MAY 13, MAY 7,
2001 2000 2001 2000
-------- -------- -------- --------
Net income...................................... $105,257 $120,329 $411,355 $431,255
Other comprehensive income (expense):
Foreign currency translation.................. (27,597) (30,174) (65,865) 1,702
Income taxes.................................. 11,039 12,070 26,346 (681)
-------- -------- -------- --------
Other comprehensive income (expense), net
of income taxes.......................... (16,558) (18,104) (39,519) 1,021
-------- -------- -------- --------
Comprehensive income............................ $ 88,699 $102,225 $371,836 $432,276
======== ======== ======== ========
16
17
COSTCO WHOLESALE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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 May
13, 2001, $76,000 was outstanding under the commercial paper program and no
amounts were outstanding under the loan facility.
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 March 2002. At May 13, 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 May 13, 2001 totaled approximately
$81,000, including approximately $29,000 in standby letters of credit.
Financing Activities
During April 2001, the Company retired its unsecured note payable to banks
of $140,000 using cash provided from operations, cash and cash equivalents and
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.
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 one to two
fiscal quarters. During the current quarter the Company expensed $3,000 related
to this reorganization and consolidation process and is reported as part of the
"provision for impaired assets and closing costs".
17
18
COSTCO WHOLESALE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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
------------- ---------- ------------- -----------
THIRTY-SIX WEEKS ENDED MAY 13, 2001
Total revenue......................... $19,421,103 $3,231,034 $1,010,345 $23,662,482
Operating income (loss)............... 551,551 127,320 (5,026) 673,845
Depreciation and amortization......... 163,532 24,504 16,872 204,908
Capital expenditures.................. 885,832 32,148 60,315 978,295
Total assets.......................... 7,794,198 1,037,312 744,403 9,575,913
THIRTY-SIX WEEKS ENDED MAY 7, 2000
Total revenue......................... $17,537,965 $3,175,255 $ 861,887 $21,575,107
Operating income (loss)............... 586,260 127,377 (2,894) 710,743
Depreciation and amortization......... 134,408 25,374 12,725 172,507
Capital expenditures.................. 603,705 32,756 101,456 737,917
Total assets.......................... 6,516,636 1,071,909 609,720 8,198,265
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