NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data)
(unaudited)
Note 1—Summary of Significant Accounting Policies
Description of Business
Costco Wholesale Corporation (Costco or the Company), a Washington corporation, and its subsidiaries operate membership warehouses based on the concept that offering members low prices on a limited selection of nationally branded and private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. For the period ended May 10, 2020, Costco operated 787 warehouses worldwide: 547 in the United States (U.S.) located in 45 states, Washington, D.C., and Puerto Rico, 100 in Canada, 39 in Mexico, 29 in the United Kingdom (U.K.), 26 in Japan, 16 in Korea, 13 in Taiwan, 12 in Australia, two in Spain, and one each in Iceland, France and China. The Company operates e-commerce websites in the U.S., Canada, Mexico, U.K., Korea, Taiwan, Japan, and Australia.
Basis of Presentation
The condensed consolidated financial statements include the accounts of Costco, its wholly owned subsidiaries, and subsidiaries in which it has a controlling interest. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company’s equity. All material intercompany transactions between and among the Company and its consolidated subsidiaries have been eliminated in consolidation. In February 2020, the Company acquired a 35% interest in Navitus Health Solutions (Navitus), a pharmacy benefit manager, and is accounted for as an equity-method investment and included in the Company's earnings. The Company’s net income excludes income attributable to the noncontrolling interest in Taiwan. Unless otherwise noted, references to net income relate to net income attributable to Costco.
These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interim financial reporting pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). While these statements reflect all normal recurring adjustments that 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 U.S. generally accepted accounting principles (U.S. GAAP) for complete financial statements. Therefore, the interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report filed on Form 10-K for the fiscal year ended September 1, 2019.
Fiscal Year End
The Company operates on a 52/53 week fiscal year basis, with the fiscal year ending on the Sunday closest to August 31. Fiscal 2020 is a 52-week year ending on August 30, 2020. References to the third quarter of 2020 and 2019 relate to the 12-week fiscal quarters ended May 10, 2020, and May 12, 2019, respectively. References to the first thirty-six weeks of 2020 and 2019 relate to the 36 weeks ended May 10, 2020, and May 12, 2019, respectively.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions take into account historical and forward looking factors that the Company believes are reasonable, including but not limited
to the potential impacts arising from the novel coronavirus (COVID-19) and public and private sector policies and initiatives aimed at reducing its transmission. As the extent and duration of these impacts remain unclear, the Company's estimates and assumptions may evolve as conditions change. Actual results could differ from those estimates and assumptions.
Leases
The Company leases land and/or buildings at warehouses and certain other office and distribution facilities. Leases generally contain one or more of the following options, which the Company can exercise at the end of the initial term: (a) renew the lease for a defined number of years at the then-fair market rental rate or rate stipulated in the lease agreement; (b) purchase the property at the then-fair market value; or (c) a right of first refusal in the event of a third-party offer.
Some leases include free-rent periods and step-rent provisions, which are recognized on a straight-line basis over the original term of the lease and any extension options that the Company is reasonably certain to exercise from the date the Company has control of the property. Certain leases provide for periodic rent increases based on price indices or the greater of minimum guaranteed amounts or sales volume. Our leases do not contain any material residual value guarantees or material restrictive covenants.
The Company determines at inception whether a contract is or contains a lease. The Company initially records right-of-use (ROU) assets and lease obligations for its finance and operating leases based on the discounted future minimum lease payments over the term. As the rate implicit in the Company’s leases is not easily determinable, the present value of the sum of the lease payments is calculated by using the Company’s incremental borrowing rate. The rate is determined using a portfolio approach based on the rate of interest the Company would pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. The Company uses quoted interest rates from financial institutions to derive the incremental borrowing rate. The lease term is defined as the noncancelable period of the lease plus any options to extend when it is reasonably certain that the Company will exercise the option.
Goodwill and Acquired Intangible Assets
Goodwill represents the excess of acquisition cost over the fair value of the net assets acquired and is not subject to amortization. The Company reviews goodwill annually in the fourth quarter for impairment or if circumstances indicate its carrying value may exceed the fair value. This evaluation is performed at the reporting unit level. If a qualitative assessment indicates that it is more likely than not that the fair value is less than its carrying value, a quantitative analysis is completed using either the income or market approach. The income approach estimates fair value based on expected discounted future cash flows, while the market approach uses comparable public companies and transactions to develop metrics to be applied to historical and expected future operating results.
Goodwill is included in other long-term assets in the condensed consolidated balance sheets. The following table summarizes goodwill by reportable segment during the first thirty-six weeks of 2020:
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|
|
|
|
|
|
|
|
|
United States Operations
|
|
Canadian Operations
|
|
Other International Operations
|
|
Total
|
Balance as of September 1, 2019
|
$
|
13
|
|
|
$
|
27
|
|
|
$
|
13
|
|
|
$
|
53
|
|
Changes in currency translation
|
—
|
|
|
(1)
|
|
|
—
|
|
|
(1)
|
|
Acquisition
|
935
|
|
|
—
|
|
|
—
|
|
|
935
|
|
Balance as of May 10, 2020
|
$
|
948
|
|
|
$
|
26
|
|
|
$
|
13
|
|
|
$
|
987
|
|
Definite-lived intangible assets are included in other long-term assets on the consolidated balance sheets and are amortized on a straight-line basis over their estimated lives, which approximates the pattern of expected economic benefit.
Recent Accounting Pronouncements Adopted
In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02 - Leases (ASC 842), which required recognition on the balance sheet for the rights and obligations created by leases with terms greater than 12 months. The Company adopted ASC 842 using the modified retrospective transition method and elected to use the effective date of September 2, 2019, as the date of initial application. Consequently, the comparative periods presented continue to be in accordance with ASC 840, Leases, previously in effect.
The Company elected the package of practical expedients permitted under the transition guidance, allowing the Company to carry forward conclusions related to: (a) whether expired or existing contracts contain leases; (b) lease classification; and (c) initial direct costs for existing leases. The Company has elected not to record operating lease right-of-use assets or lease liabilities associated with leases with durations of 12 months or less. Lastly, the Company elected the practical expedient allowing aggregation of non-lease components with related lease components when evaluating the accounting treatment for all classes of underlying assets.
Adoption of the new standard resulted in an initial increase to assets and liabilities of $2,632 related to recognition of operating lease right-of-use assets and operating lease obligations as of September 2, 2019. Other line item impacts in the Company's condensed consolidated balance sheet were not material. The standard did not materially impact the condensed consolidated statements of income and cash flows. For more information on the Company's lease arrangements refer to Note 6.
Note 2—Acquisition of Innovel
On March 17, 2020, the Company acquired Innovel Solutions for $998 using existing cash and cash equivalents. Cash paid during the third quarter excludes a portion of the purchase price that will be paid upon the final settlement of certain holdbacks and provisional amounts, discussed below. Innovel provides final mile delivery, complete installation and white-glove capabilities for big and bulky products across the United States and Puerto Rico. Its financial results have been included in the Company's consolidated financial statements from the date of acquisition. Innovel's results of operations were not material to the Company's consolidated results during the current quarter.
At May 10, 2020, the initial accounting for the acquisition was incomplete pending determination of: the final purchase price, working capital adjustments, the fair value of intangible assets, property and equipment, operating lease right-of-use assets, operating lease liabilities, and other assumed obligations. The net purchase price of $998 was initially allocated to the tangible and intangible assets of $255 and liabilities assumed of $192, based on their preliminary fair values on the acquisition date. The remaining unallocated net purchase price of $935 was recorded as goodwill. Goodwill represents the acquisition's benefits to the Company, which include the ability to serve more members and improve delivery times, enabling growth in certain segments of our U.S. e-commerce operations. The Company assigned this goodwill, which is deductible for tax purposes, to reporting units within the U.S. segment. As additional information becomes available, the provisional fair value estimates will be refined.
Note 3—Investments
The Company's investments were as follows:
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
May 10, 2020:
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Cost
Basis
|
|
Unrealized
Gains, Net
|
|
Recorded
Basis
|
Available-for-sale:
|
|
|
|
|
|
Government and agency securities
|
$
|
464
|
|
|
$
|
14
|
|
|
$
|
478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity:
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|
|
|
|
|
Certificates of deposit
|
470
|
|
|
|
|
470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
$
|
934
|
|
|
$
|
14
|
|
|
$
|
948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 1, 2019:
|
Cost
Basis
|
|
Unrealized
Gains, Net
|
|
Recorded
Basis
|
Available-for-sale:
|
|
|
|
|
|
Government and agency securities
|
$
|
716
|
|
|
$
|
6
|
|
|
$
|
722
|
|
Held-to-maturity:
|
|
|
|
|
|
Certificates of deposit
|
338
|
|
|
|
|
338
|
|
Total short-term investments
|
$
|
1,054
|
|
|
$
|
6
|
|
|
$
|
1,060
|
|
Gross unrecognized holding gains and losses on available-for-sale securities were not material for the periods ended May 10, 2020, and September 1, 2019. At May 10, 2020, there were no available-for-sale securities in a continuous unrealized-loss position. At September 1, 2019, available-for-sale securities that were in a continuous unrealized-loss position were not material. There were no sales of available-for-sale securities during the first thirty-six weeks of 2020 or 2019.
The maturities of available-for-sale and held-to-maturity securities at May 10, 2020, are as follows:
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|
|
|
|
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Available-For-Sale
|
|
|
|
Held-To-Maturity
|
|
Cost Basis
|
|
Fair Value
|
|
|
Due in one year or less
|
$
|
169
|
|
|
$
|
170
|
|
|
$
|
470
|
|
Due after one year through five years
|
295
|
|
|
308
|
|
|
0
|
|
|
|
|
|
|
|
Total
|
$
|
464
|
|
|
$
|
478
|
|
|
$
|
470
|
|
Note 4—Fair Value Measurement
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The table below presents information regarding financial assets and liabilities that are measured at fair value on a recurring basis and indicate the level within the fair value hierarchy reflecting the valuation techniques utilized to determine fair value.
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|
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|
|
|
|
|
|
Level 2
|
|
|
|
May 10,
2020
|
|
September 1,
2019
|
|
|
|
|
Investment in government and agency securities(1)
|
$
|
478
|
|
|
$
|
766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward foreign-exchange contracts, in asset position(2)
|
9
|
|
|
15
|
|
Forward foreign-exchange contracts, in (liability) position(2)
|
(8)
|
|
|
(4)
|
|
Total
|
$
|
479
|
|
|
$
|
777
|
|
_______________
(1)At May 10, 2020, $478 short-term investments are included in the accompanying condensed consolidated balance sheets. At September 1, 2019, $44 cash and cash equivalents and $722 short-term investments are included in the accompanying condensed consolidated balance sheets.
(2)The asset and liability values are included in other current assets and other current liabilities, respectively, in the accompanying condensed consolidated balance sheets.
At May 10, 2020, and September 1, 2019, the Company did not hold any Level 1 or 3 financial assets or liabilities that were measured at fair value on a recurring basis. There were no transfers between levels during the first thirty-six weeks of 2020 or 2019.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities recognized and disclosed at fair value on a nonrecurring basis include items such as financial assets measured at amortized cost and long-lived nonfinancial assets. These assets are measured at fair value if determined to be impaired. There were no fair value adjustments to these items during the first thirty-six weeks of 2020 or 2019.
Note 5—Debt
The carrying value of the Company’s long-term debt consisted of the following:
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|
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|
|
|
|
|
|
May 10,
2020
|
|
September 1,
2019
|
1.700% Senior Notes due December 2019
|
$
|
0
|
|
|
$
|
1,200
|
|
1.750% Senior Notes due February 2020
|
0
|
|
|
500
|
|
2.150% Senior Notes due May 2021
|
1,000
|
|
|
1,000
|
|
2.250% Senior Notes due February 2022
|
500
|
|
|
500
|
|
2.300% Senior Notes due May 2022
|
800
|
|
|
800
|
|
2.750% Senior Notes due May 2024
|
1,000
|
|
|
1,000
|
|
3.000% Senior Notes due May 2027
|
1,000
|
|
|
1,000
|
|
1.375% Senior Notes due June 2027
|
1,250
|
|
|
0
|
|
1.600% Senior Notes due April 2030
|
1,750
|
|
|
0
|
|
1.750% Senior Notes due April 2032
|
1,000
|
|
|
0
|
|
Other long-term debt
|
849
|
|
|
852
|
|
Total long-term debt
|
9,149
|
|
|
6,852
|
|
Less unamortized debt discounts and issuance costs
|
54
|
|
|
29
|
|
Less current portion(1)
|
1,497
|
|
|
1,699
|
|
Long-term debt, excluding current portion
|
$
|
7,598
|
|
|
$
|
5,124
|
|
_______________
(1)Net of unamortized debt discounts and issuance costs. As of May 10, 2020, includes the 2.150% and 2.250% Senior Notes which were repaid, prior to maturity, subsequent to the end of the quarter.
The fair value of Senior Notes is estimated using Level 2 inputs. Other long-term debt consists of Guaranteed Senior Notes issued by the Company's Japan subsidiary, valued using Level 3 inputs. The fair value of the Company's long-term debt, including the current portion, was approximately $9,320 and $6,997 at May 10, 2020, and September 1, 2019, respectively.
During the first thirty-six weeks of 2020, the Company paid the outstanding principal balances and interest on the 1.700% and 1.750% Senior Notes. In April 2020, the Company issued $4,000 in aggregate principal amount of Senior Notes as follows: $1,250 of 1.375% due June 2027; $1,750 of 1.600% due April 2030; and $1,000 of 1.750% due April 2032. A portion of the proceeds were used to repay, prior to maturity, the 2.150% and 2.250% Senior Notes subsequent to the end of the quarter, at a redemption price plus accrued interest as specified in the Notes' agreements. The remaining funds will be used for general corporate purposes.
Note 6—Leases
The tables below present information regarding the Company's lease assets and liabilities.
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|
|
|
|
|
|
|
|
|
|
May 10,
2020
|
Assets(1)
|
|
|
Operating lease right-of-use assets
|
|
$
|
2,749
|
|
Finance lease assets(2)
|
|
638
|
|
Total lease assets
|
|
$
|
3,387
|
|
Liabilities(1)
|
|
|
Current
|
|
|
Operating(3)
|
|
$
|
223
|
|
Finance(3)
|
|
29
|
|
Long-term
|
|
|
Operating
|
|
2,535
|
|
Finance(4)
|
|
629
|
|
Total lease liabilities
|
|
$
|
3,416
|
|
_______________
(1)Includes provisional amounts related to the Innovel acquisition. See Note 2.
(2)Included in net property and equipment in the accompanying condensed consolidated balance sheets.
(3)Included in other current liabilities in the accompanying condensed consolidated balance sheets.
(4)Included in other long-term liabilities in the accompanying condensed consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
May 10,
2020
|
Weighted-average remaining lease term (years)
|
|
|
Operating leases
|
|
21
|
Finance leases
|
|
19
|
Weighted-average discount rate
|
|
|
Operating leases
|
|
2.25
|
%
|
Finance leases
|
|
6.47
|
%
|
The components of lease expense, excluding short-term lease costs and sublease income (which were not material), were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
36 Weeks Ended
|
|
|
May 10,
2020
|
|
May 10,
2020
|
Operating lease costs(1)
|
|
$
|
54
|
|
|
$
|
156
|
|
Finance lease costs:
|
|
|
|
|
Amortization of lease assets(1)
|
|
7
|
|
|
15
|
|
Interest on lease liabilities(2)
|
|
6
|
|
|
21
|
|
Variable lease costs(3)
|
|
19
|
|
|
55
|
|
Total lease costs
|
|
$
|
86
|
|
|
$
|
247
|
|
_______________
(1)Generally included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income.
(2)Included in interest expense in the accompanying condensed consolidated statements of income.
(3)Included in selling, general and administrative expenses and merchandise costs in the accompanying condensed consolidated statements of income. Amount excludes property taxes, which were immaterial.
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
36 Weeks Ended
|
|
|
May 10,
2020
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows — operating leases
|
|
$
|
149
|
|
Operating cash flows — finance leases
|
|
21
|
|
Financing cash flows — finance leases
|
|
40
|
|
Leased assets obtained in exchange for operating lease liabilities
|
|
235
|
|
Leased assets obtained in exchange for finance lease liabilities
|
|
272
|
|
As of May 10, 2020, future minimum payments during the next five fiscal years and thereafter are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases(1)
|
|
Finance Leases
|
|
|
2020
|
|
$
|
73
|
|
|
$
|
16
|
|
|
|
2021
|
|
267
|
|
|
60
|
|
|
|
2022
|
|
242
|
|
|
60
|
|
|
|
2023
|
|
236
|
|
|
64
|
|
|
|
2024
|
|
203
|
|
|
60
|
|
|
|
Thereafter
|
|
2,500
|
|
|
817
|
|
|
|
Total(2)
|
|
3,521
|
|
|
1,077
|
|
|
|
Less amount representing interest
|
|
763
|
|
|
419
|
|
|
|
Present value of lease liabilities
|
|
$
|
2,758
|
|
|
$
|
658
|
|
|
|
_______________
(1)Operating lease payments have not been reduced by future sublease income of $99.
(2)Excludes $144 of lease payments for leases that have been signed but not commenced.
As of September 1, 2019, future minimum payments, net of sub-lease income of $105, under noncancelable operating leases with terms of at least one year and capital leases reported under ASC 840 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Capital Leases
|
|
|
2020
|
|
$
|
239
|
|
|
$
|
51
|
|
|
|
2021
|
|
229
|
|
|
53
|
|
|
|
2022
|
|
202
|
|
|
38
|
|
|
|
2023
|
|
193
|
|
|
39
|
|
|
|
2024
|
|
181
|
|
|
39
|
|
|
|
Thereafter
|
|
2,206
|
|
|
544
|
|
|
|
Total
|
|
$
|
3,250
|
|
|
764
|
|
|
|
Less amount representing interest
|
|
|
|
|
343
|
|
|
|
Net present value of minimum lease payments
|
|
|
|
|
$
|
421
|
|
|
|
Note 7—Equity
Dividends
The Company’s current quarterly dividend is $0.70 per share, compared to $0.65 in the third quarter of 2019. On April 15, 2020, the Board of Directors declared a quarterly dividend in the amount of $0.70 per share, which was paid on May 15, 2020.
Stock Repurchase Programs
Stock repurchase activity during the third quarter and first thirty-six weeks of 2020 and 2019 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Repurchased (000s)
|
|
Average Price per Share
|
|
Total Cost
|
Third quarter of 2020
|
|
106
|
|
|
$
|
296.38
|
|
|
$
|
31
|
|
First thirty-six weeks of 2020
|
368
|
|
|
$
|
298.53
|
|
|
$
|
110
|
|
|
|
|
|
|
|
Third quarter of 2019
|
192
|
|
|
$
|
226.57
|
|
|
$
|
44
|
|
First thirty-six weeks of 2019
|
903
|
|
|
$
|
215.94
|
|
|
$
|
195
|
|
These amounts may differ from the stock repurchase balances in the accompanying condensed consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of a quarter. The remaining amount available for stock repurchases under the approved plan was $3,833 at May 10, 2020. Purchases are made from time to time, as conditions warrant, in the open market or in block purchases and pursuant to plans under SEC Rule 10b5-1.
Note 8—Stock-Based Compensation
The 2019 Incentive Plan authorized the issuance of 17,500,000 shares (10,000,000 RSUs) of common stock for future grants, plus the remaining shares that were available for grant and the future forfeited shares from grants under the previous plan, up to a maximum aggregate of 27,800,000 shares (15,885,000 RSUs). The Company issues new shares of common stock upon vesting of RSUs. Shares for vested RSUs are generally delivered to participants annually, net of shares withheld for taxes.
Summary of Restricted Stock Unit Activity
At May 10, 2020, 13,576,000 shares were available to be granted as RSUs, and the following awards were outstanding:
•5,081,000 time-based RSUs, which vest upon continued employment over specified periods of time;
•30,000 performance-based RSUs, granted to executive officers of the Company, for which the performance targets have been met. The awards vest upon continued employment over specified periods of time; and
•123,000 performance-based RSUs, granted to executive officers of the Company, subject to achievement of performance targets for fiscal 2020, as determined by the Compensation Committee of the Board of Directors after the end of the fiscal year. These awards are included in the table below and the Company recognized compensation expense for these awards as it is currently deemed probable that the targets will be achieved.
The following table summarizes RSU transactions during the first thirty-six weeks of 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Units
(in 000s)
|
|
Weighted-Average
Grant Date Fair
Value
|
Outstanding at September 1, 2019
|
6,496
|
|
|
$
|
167.55
|
|
Granted
|
2,252
|
|
|
294.08
|
|
Vested and delivered
|
(3,362)
|
|
|
188.91
|
|
Forfeited
|
(152)
|
|
|
196.52
|
|
|
|
|
|
Outstanding at May 10, 2020
|
5,234
|
|
|
$
|
207.45
|
|
The remaining unrecognized compensation cost related to nonvested RSUs at May 10, 2020, was $817, and the weighted-average period over which this cost will be recognized is 1.7 years.
Summary of Stock-Based Compensation
The following table summarizes stock-based compensation expense and the related tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
|
|
36 Weeks Ended
|
|
|
|
May 10,
2020
|
|
May 12,
2019
|
|
May 10,
2020
|
|
May 12,
2019
|
Stock-based compensation expense
|
$
|
88
|
|
|
$
|
93
|
|
|
$
|
508
|
|
|
$
|
482
|
|
Less recognized income tax benefit
|
18
|
|
|
20
|
|
|
105
|
|
|
104
|
|
Stock-based compensation expense, net
|
$
|
70
|
|
|
$
|
73
|
|
|
$
|
403
|
|
|
$
|
378
|
|
Note 9—Taxes
In March 2020, the Coronavirus Aid, Relief and Economic Security Act was signed into law. While the Company is still assessing the impact of the legislation, it is not expected to have a material impact to the consolidated financial statements.
Other Taxes
The Company is undergoing multiple examinations for value-added, sales-based, payroll, product, import or other non-income taxes in various jurisdictions. In certain cases, the Company has received assessments from the authorities. In September 2019, the Company received an assessment related to a product tax audit covering multiple years. The Company recorded the charge in fiscal 2019 and is protesting the assessment. No adjustments have been made to this estimate in 2020. Other possible losses or range of possible losses associated with these matters are either immaterial or an estimate of the possible loss or range of loss cannot be made at this time. If certain matters or a group of matters were to be decided adversely to the Company, it could result in a charge that might be material to the results of an individual fiscal quarter or year.
Note 10—Net Income per Common and Common Equivalent Share
The following table shows the amounts used in computing net income per share and the weighted average number of shares of basic and potentially dilutive common shares outstanding (shares in 000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
|
|
36 Weeks Ended
|
|
|
|
May 10,
2020
|
|
May 12,
2019
|
|
May 10,
2020
|
|
May 12,
2019
|
Net income attributable to Costco
|
$
|
838
|
|
|
$
|
906
|
|
|
$
|
2,613
|
|
|
$
|
2,562
|
|
Weighted average basic shares
|
442,322
|
|
|
439,859
|
|
|
442,054
|
|
|
439,767
|
|
RSUs
|
1,533
|
|
|
2,783
|
|
|
1,700
|
|
|
2,798
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares
|
443,855
|
|
|
442,642
|
|
|
443,754
|
|
|
442,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11—Commitments and Contingencies
Legal Proceedings
The Company is involved in a number of claims, proceedings and litigation arising from its business and property ownership. In accordance with applicable accounting guidance, the Company establishes an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. There may be exposure to loss in excess of any amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss (taking into account where applicable indemnification arrangements concerning suppliers and insurers) and the accrued amount, if any, thereof, and adjusts the amount as appropriate. As of the date of this Report, the Company has recorded immaterial accruals with respect to certain matters described below, in addition to other immaterial accruals for matters not described below. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. In each case, there is a reasonable possibility that a loss may be incurred, including a loss in excess of the applicable accrual. For matters where no accrual has been recorded, the possible loss or range of loss (including any loss in excess of the accrual) cannot, in the Company's view, be reasonably estimated because, among other things: (i) the remedies or penalties sought are indeterminate or unspecified; (ii) the legal and/or factual theories are not well developed; and/or (iii) the matters involve complex or novel legal theories or a large number of parties.
The Company is a defendant in a class action alleging violation of California Wage Order 7-2001 for failing to provide seating to member service assistants who act as greeters in the Company’s California warehouses. Canela v. Costco Wholesale Corp., et al. (Case No. 5:13-CV-03598; N.D. Cal.; filed July 1, 2013). The complaint seeks relief under the California Labor Code, including civil penalties and attorneys’ fees. The Company filed an answer denying the material allegations of the complaint. The action has been stayed pending review by the Ninth Circuit.
In January 2019, an employee brought similar claims for relief concerning Costco employees engaged at member services counters in California. Rodriguez v. Costco Wholesale Corp. (Case No. RG19001310; Alameda Superior Court; filed Jan. 4, 2019). The Company filed an answer denying the material allegations of the complaint. In December 2018, a depot employee raised similar claims, alleging that depot employees in California did not receive suitable seating or appropriate workplace temperature conditions. Lane v. Costco Wholesale Corp. (Dec. 6, 2018 Notice to California Labor and Workforce Development Agency). The Company filed an answer denying the material allegations of the complaint. In October 2019, the parties reached an agreement to settle the seating claims on a representative basis, which received court approval in February 2020.
In January 2019, a former seasonal employee filed a class action, alleging failure to provide California seasonal employees meal and rest breaks, proper wage statements, and appropriate wages. Jadan v. Costco Wholesale Corp. (Case No. 19-CV-340438; Santa Clara Superior Court; filed Jan. 3, 2019). The complaint seeks relief under the California Labor Code, including civil penalties and attorneys’ fees. In October 2019, the parties reached an agreement on a class settlement, which is subject to court approval.
In March 2019, employees filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide meal and rest periods and itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. Nevarez v. Costco Wholesale Corp. (Case No. 2:19-cv-03454; C.D. Cal.; filed Mar. 25, 2019). The Company filed an answer denying the material allegations of the complaint. In December 2019, the court issued an order denying class certification. In January 2020, the Plaintiffs dismissed their Labor Code claims without prejudice and the court remanded the action to state court. The remand is being appealed.
In May 2019, an employee filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Rough v. Costco Wholesale Corp. (Case No. 2:19-cv-01340; E.D. Cal.; filed May 28, 2019). Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. In August 2019, Rough filed a companion case in state court seeking penalties under the California Labor Code Private Attorneys General Act. Rough v. Costco Wholesale Corp. (Case No. FCS053454, Sonoma County Superior Court, filed August 23, 2019). Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. The state court action has been stayed pending resolution of the federal action.
In June 2019, an employee filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide meal and rest periods, itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Martinez v. Costco Wholesale Corp. (Case No. 3:19-cv-05624; N.D. Cal.; filed June 11, 2019). The Company filed an answer denying the material allegations of the complaint.
In April 2020, an employee, alleging underpayment of sick pay, filed a class and representative action against the Company alleging claims under California law for failure to pay all wages at termination and for Labor Code penalties under the California Private Attorneys General Act. Kristy v. Costco Wholesale Corp. (Case No. 20CV366341; Santa Clara County Superior Court).
In December 2017, the United States Judicial Panel on Multidistrict Litigation consolidated numerous cases filed against various defendants by counties, cities, hospitals, Native American tribes, third-party payors, and others concerning the impacts of opioid abuse. In re National Prescription Opiate Litigation (MDL No. 2804) (N.D. Ohio). Included are federal cases that name the Company, including actions filed by counties and cities in Michigan, New Jersey, Oregon, Virginia and South Carolina, a third-party payor in Ohio, and class actions filed on behalf of infants born with opioid-related medical conditions in 40 states, and class actions and individual actions filed on behalf of individuals seeking to recover alleged increased insurance costs associated with opioid abuse in 43 states and American Samoa. In 2019, similar actions were commenced against the Company in state court in Utah. Claims against the Company in state courts in New Jersey, Oklahoma, and Arizona have been dismissed. The Company is defending all of these matters.
The Company and its CEO and CFO are defendants in putative class actions brought on behalf of shareholders who acquired Company stock between June 6 and October 25, 2018. Johnson v. Costco Wholesale Corp., et al. (W.D. Wash. filed Nov. 5, 2018); Chen v. Costco Wholesale Corp., et al. (W.D. Wash. filed Dec. 11, 2018). The complaints allege violations of the federal securities laws stemming from the Company’s disclosures concerning internal control over financial reporting. They seek unspecified damages, equitable relief, interest, and costs and attorneys’ fees. On January 30, 2019, an order was entered consolidating the actions, and a consolidated amended complaint was filed on April 16, 2019. On November 26, 2019, the court entered an order dismissing the consolidated amended complaint and granting the plaintiffs leave to file a further amended complaint. A further amended complaint was filed on March 9, which the Company moved to dismiss on April 23.
Members of the Board of Directors, one other individual, and the Company are defendants in a shareholder derivative action related to the internal controls and related disclosures identified in the putative class actions, alleging that the individual defendants breached their fiduciary duties. Wedekind v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, Richard Libenson, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (W.D. Wash. filed Dec. 11, 2018). The complaint seeks unspecified damages, disgorgement of compensation, corporate governance changes, and costs and attorneys' fees. Because the complaint is derivative in nature, it does not seek monetary damages from the Company, which is a nominal defendant. By agreement among the parties the action has been stayed pending further proceedings in the class actions. Similar actions were filed in King County Superior Court on February 20, 2019, Elliott v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, Richard Libenson, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (Case No. 19-2-04824-7), April 16, 2019, Brad Shuman, et ano. v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (Case No. 19-2-10460-1), and June 12, 2019, Rahul Modi v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (Case No. 19-2-15514-1). These actions have also been stayed.
In November 2016 and September 2017, the Company received notices of violation from the Connecticut Department of Energy and Environmental Protection regarding hazardous waste practices at its Connecticut warehouses, primarily concerning unsalable pharmaceuticals. The relief to be sought is not known at this time. The Company is seeking to cooperate concerning the resolution of these notices.
The Company does not believe that any pending claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company’s financial position, results of operations or cash flows; however, it is possible that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be material to the results of an individual fiscal quarter or year.
Note 12—Segment Reporting
The Company and its subsidiaries are principally engaged in the operation of membership warehouses in the U.S., Canada, Mexico, U.K., Japan, Korea, Australia, Spain, Iceland, France and China and through a majority-owned subsidiary in Taiwan. Reportable segments are largely based on management’s organization of the operating segments for operational decisions and assessments of financial performance, which consider geographic locations. The material accounting policies of the segments are as described in the notes to the consolidated financial statements included in the Company's Annual Report filed on Form 10-K for the fiscal year ended September 1, 2019, and Note 1 above. Intersegment net sales and expenses have been eliminated in computing total revenue and operating income. Certain operating expenses, predominantly stock-based compensation, are incurred on behalf of the Company's Canadian and Other International operations, but are included in the U.S. operations because those costs generally come under the responsibility of the Company's U.S. management team.
The following table provides information for the Company's reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
Operations
|
|
Canadian
Operations
|
|
Other
International
Operations
|
|
Total
|
12 Weeks Ended May 10, 2020
|
|
|
|
|
|
|
|
Total revenue
|
$
|
27,626
|
|
|
$
|
4,722
|
|
|
$
|
4,918
|
|
|
$
|
37,266
|
|
Operating income
|
853
|
|
|
129
|
|
|
197
|
|
|
1,179
|
|
12 Weeks Ended May 12, 2019
|
|
|
|
|
|
|
|
Total revenue
|
$
|
25,536
|
|
|
$
|
4,792
|
|
|
$
|
4,412
|
|
|
$
|
34,740
|
|
Operating income
|
736
|
|
|
213
|
|
|
173
|
|
|
1,122
|
|
36 Weeks Ended May 10, 2020
|
|
|
|
|
|
|
|
Total revenue
|
$
|
83,214
|
|
|
$
|
15,080
|
|
|
$
|
15,084
|
|
|
$
|
113,378
|
|
Operating income
|
2,309
|
|
|
559
|
|
|
638
|
|
|
3,506
|
|
Total assets
|
36,618
|
|
|
4,432
|
|
|
10,682
|
|
|
51,732
|
|
36 Weeks Ended May 12, 2019
|
|
|
|
|
|
|
|
Total revenue
|
$
|
76,958
|
|
|
$
|
14,561
|
|
|
$
|
13,686
|
|
|
$
|
105,205
|
|
Operating income
|
2,108
|
|
|
625
|
|
|
541
|
|
|
3,274
|
|
Total assets
|
30,416
|
|
|
4,637
|
|
|
8,699
|
|
|
43,752
|
|
52 Weeks Ended September 1, 2019
|
|
|
|
|
|
|
|
Total revenue
|
$
|
111,751
|
|
|
$
|
21,366
|
|
|
$
|
19,586
|
|
|
$
|
152,703
|
|
Operating income
|
3,063
|
|
|
924
|
|
|
750
|
|
|
4,737
|
|
Total assets
|
32,162
|
|
|
4,369
|
|
|
8,869
|
|
|
45,400
|
|
Disaggregated Revenue
The following table summarizes net sales by merchandise category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
|
|
36 Weeks Ended
|
|
|
|
May 10,
2020
|
|
May 12,
2019
|
|
May 10,
2020
|
|
May 12,
2019
|
Food and Sundries
|
$
|
16,897
|
|
|
$
|
13,524
|
|
|
$
|
46,413
|
|
|
$
|
41,131
|
|
Hardlines
|
5,891
|
|
|
5,666
|
|
|
18,508
|
|
|
17,276
|
|
Fresh Foods
|
5,587
|
|
|
4,568
|
|
|
15,242
|
|
|
13,551
|
|
Softlines
|
2,806
|
|
|
3,413
|
|
|
11,607
|
|
|
11,760
|
|
Ancillary
|
5,270
|
|
|
6,793
|
|
|
19,173
|
|
|
19,185
|
|
Total Net Sales
|
$
|
36,451
|
|
|
$
|
33,964
|
|
|
$
|
110,943
|
|
|
$
|
102,903
|
|