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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended February 17, 2002 |
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OR |
||
[ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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Commission file number 0-20355
Costco Wholesale Corporation
(Exact name of registrant as specified in its charter)
Washington (State or other jurisdiction of incorporation or organization) |
91-1223280 (I.R.S.Employer Identification No.) |
|
999 Lake Drive, Issaquah, WA 98027 (Address of principal executive office) (Zip Code) |
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(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 |
|
|---|---|---|
| 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 454,063,773 common shares, par value $.005, outstanding at March 8, 2002.
INDEX TO FORM 10-Q
PART I—FINANCIAL INFORMATION
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Page |
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|---|---|---|---|---|
| ITEM 1— | FINANCIAL STATEMENTS | 3 | ||
Condensed Consolidated Balance Sheets |
11 |
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Condensed Consolidated Statements of Income |
12 |
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Condensed Consolidated Statements of Cash Flows |
13 |
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Notes to Condensed Consolidated Financial Statements |
14 |
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ITEM 2— |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
3 |
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PART II—OTHER INFORMATION |
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ITEM 1— |
LEGAL PROCEEDINGS |
9 |
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ITEM 2— |
CHANGES IN SECURITIES |
9 |
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ITEM 3— |
DEFAULTS UPON SENIOR SECURITIES |
9 |
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ITEM 4— |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
9 |
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ITEM 5— |
OTHER INFORMATION |
10 |
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ITEM 6— |
EXHIBITS AND REPORTS ON FORM 8-K |
10 |
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| Exhibit (28) Report of Independent Public Accountants | 19 | |||
2
Costco Wholesale Corporation's ("Costco" or the "Company") unaudited condensed consolidated balance sheet as of February 17, 2002, the condensed consolidated balance sheet as of September 2, 2001, the unaudited condensed consolidated statements of income and cash flows for the 12- and 24-week periods ended February 17, 2002 and February 18, 2001, 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 2002 is a 52-week year with period 13 ending on September 1, 2002, with the first, second, and third quarters consisting of 12 weeks each and the fourth quarter consisting of 16 weeks. Fiscal 2001 was a 52-week year that ended on September 2, 2001, with the first, second, and third quarters consisting of 12-weeks each and the fourth quarter consisting of 16 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 2001 annual report on Form 10-K previously filed with the Securities and Exchange Commission.
Comparison of the 12 Weeks ended February 17, 2002 and February 18, 2001
(dollars in thousands, except per share data)
Net income for the second quarter of fiscal 2002 increased 9.0% to $192,556, or $.41 per diluted share, compared to $176,577, or $.38 per diluted share, during the second quarter of fiscal 2001.
Net sales increased 12.8% to $9,208,413 during the second quarter of fiscal 2002, from $8,159,980 during the second quarter of fiscal 2001. This increase was due to opening a net of 34 new warehouses (39 opened, 5 closed) since the end of the second quarter of fiscal 2001 and an increase in comparable warehouse sales. Comparable sales, that is sales in warehouses open for at least a year, increased 7% during the second quarter of fiscal 2002 over the second quarter of fiscal 2001. Changes in prices of merchandise did not materially contribute to sales increases.
Membership fees and other revenue increased 19.2% to $174,439, or 1.89% of net sales, in the second quarter of fiscal 2002 from $146,329, or 1.79% of net sales, in the second quarter of fiscal 2001. Increases in membership fee income reflect an increase in the annual membership fee – averaging approximately $5 per member across all member categories – beginning with renewals on October 1, 2000; new membership sign-ups, both at the new warehouses opened since the end of the second quarter of fiscal
3
2001 and at existing warehouse locations; and increased penetration of the Company's Executive Membership. Overall, member renewal rates remain consistent with the prior year, currently at 85%.
Gross margin (defined as net sales minus merchandise costs) increased 12.7% to $996,383, or 10.82% of net sales, in the second quarter of fiscal 2002 from $884,022, or 10.83% of net sales, in the second quarter of fiscal 2001. The decrease in gross margin as a percentage of net sales primarily reflects the cost related to the Executive Membership two-percent reward program, which was almost completely offset by merchandise gross margin improvement. The gross margin figures reflect accounting for merchandise costs on the last-in, first-out (LIFO) method. The second quarters of fiscal 2002 and fiscal 2001 each included a $2,500 LIFO provision.
Selling, general and administrative expenses as a percent of net sales increased to 9.12% during the second quarter of fiscal 2002 from 8.96% during the second quarter of fiscal 2001. This percentage increase was primarily due to higher expense ratios at new warehouses, where the ratio of operating expenses to sales is typically higher than at more mature warehouses.
Preopening expenses totaled $8,616, or .09% of net sales, during the second quarter of fiscal 2002 compared to $10,572, or 0.13% of net sales, during the second quarter of fiscal 2001. Seven new warehouses were opened in the second quarter of fiscal 2002 compared to nine warehouses (including two relocations) opened during last year's second quarter.
The provision for impaired assets and closing costs was $3,000 in the second quarter of fiscal 2002 compared to $1,000 in the second quarter of fiscal 2001. The provision includes actual and estimated closing costs for warehouses already relocated to new facilities.
Interest expense totaled $6,199 in the second quarter of fiscal 2002 compared to $8,902 in the second quarter of fiscal 2001. Interest expense in fiscal 2002 primarily includes interest on the 3.5% Zero Coupon Notes, 7.125% Senior Notes and on balances outstanding under the Company's commercial paper program. The decrease is primarily related to the retirement of an unsecured note payable with a principal amount of $140,000 in April 2001, and due to the interest rate reduction on the Company's $300,000 7.125% Senior Notes as the Company entered into interest rate swap agreements effective November 13, 2001, converting the interest rate from fixed to floating. This decrease in interest expense was partially offset by interest related to increased borrowings under the commercial paper program.
Interest income and other totaled $7,926 in the second quarter of fiscal 2002 compared to $15,829 in the second quarter of fiscal 2001. The decrease primarily reflects lower interest income due to lower interest rates and lower daily cash and short-term investment balances on hand throughout the second quarter of fiscal 2002 as compared to the second quarter of fiscal 2001.
The effective income tax rate on earnings in the second quarter of both fiscal 2002 and 2001 was 40%.
Comparison of the 24 Weeks ended February 17, 2002 and February 18, 2001
(dollars in thousands, except per share data)
Net income for the first half of fiscal 2002 increased 5.3% to $322,212, or $0.68 per diluted share, from $306,098, or $0.65 per diluted share, during the first half of fiscal 2001.
Net sales increased 11.8% to $17,505,489 during the first half of fiscal 2002, from $15,658,959 during the first half of fiscal 2001. This increase was due to opening a net of 34 new warehouses (39 opened, 5 closed) since the end of the first half of fiscal 2001 and an increase in comparable warehouse
4
sales. Comparable sales, that is sales in warehouses open for at least a year, increased 6% during the first half of fiscal 2002. Changes in prices of merchandise did not materially contribute to sales increases.
Membership fees and other revenue increased 20.8% to $343,916, or 1.96% of net sales, in the first half of fiscal 2002 from $284,628, or 1.82% of net sales, in the first half of fiscal 2001. Increases in membership fee income reflect an increase in the annual membership fee – averaging approximately $5 per member across all member categories – beginning with renewals on October 1, 2000; new membership sign-ups, both at the new warehouses opened since the end of the second quarter of fiscal 2001 and at existing warehouse locations; and increased penetration of the Company's Executive Membership. Overall, member renewal rates remain consistent with the prior year, currently at 85%.
Gross margin (defined as net sales minus merchandise costs) increased 11.4% to $1,859,062, or 10.62% of net sales, in the first half of fiscal 2002 from $1,669,357, or 10.66% of net sales, in the first half of fiscal 2001. The decrease in gross margin as a percentage of net sales primarily reflects the cost related to the Executive Membership two-percent reward program, the majority of which was offset by merchandise gross margin improvement. The gross margin figures reflect accounting for merchandise costs on the last-in, first-out (LIFO) method. The first half of fiscal 2002 and fiscal 2001 each included a $5,000 LIFO provision.
Selling, general and administrative expenses as a percent of net sales increased to 9.29% during the first half of fiscal 2002 from 9.08% during the first half of fiscal 2001. The increase in selling, general and administrative expenses as a percent of net sales was primarily due to higher expense ratios at new warehouses, where such expense ratios to sales are typically higher than at more mature warehouses.
Preopening expenses totaled $30,750 or 0.18% of net sales during the first half of fiscal 2002 compared to $30,252 or 0.19% of net sales during the first half of fiscal 2001. Twenty-three warehouses (including three relocated warehouses) were opened in the first half of fiscal 2002, compared to 23 warehouses opened (including five relocated warehouses) during last year's first half. Preopening expenses also include costs related to remodels, including expanded fresh foods and ancillary operations at existing warehouses, as well as costs associated with expanding international operations.
A provision for impaired assets and closing costs of $11,550 was recorded in the first half of fiscal 2002 compared to $2,000 in the first half of fiscal 2001. The current year provision includes costs related to the reorganization and consolidation of the Canadian administrative operations totaling $8,550, which has been completed. The provision includes, for both years, actual and estimated closing costs for warehouses already relocated to new facilities. These latter amounts total $3,000 and $2,000 in fiscal 2002 and 2001, respectively.
Interest expense totaled $12,437 in the first half of fiscal 2002 compared to $15,866 in the first half of fiscal 2001. Interest expense primarily includes interest on the 3.5% Zero Coupon Notes and the 7.125% Senior Notes. The decrease is primarily related to the retirement of an unsecured note payable with a principal amount of $140,000 in April 2001, and due to the interest rate reduction on the Company's $300,000 7.125% Senior Notes as the Company entered into interest rate swap agreements effective November 13, 2001, converting the interest rate from fixed to floating. This decrease in interest expense was partially offset by interest related to increased borrowings under the commercial paper program.
Interest income and other totaled $14,903 in the first half of fiscal 2002 compared to $26,834 in the first half of fiscal 2001. The decrease primarily reflects lower interest income due to lower interest rates and lower daily cash and short-term investment balances on hand throughout the first half of fiscal 2002, as compared to the year-earlier first half.
The effective income tax rate on earnings in the first half of both fiscal 2002 and 2001 was 40%.
5
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 $1,150,000 during fiscal 2002 in the United States and Canada for real estate, construction, remodeling and equipment for warehouse clubs and related operations; and approximately $100,000 to $150,000 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 2002 are to open approximately 35 to 37 new warehouse clubs, including six to seven relocations to larger and better-situated sites. The Company expects to continue expansion of its international operations and plans to open two to three additional units in the United Kingdom, through its 80%-owned subsidiary, and one additional unit in Japan. Other international markets are being assessed.
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 were estimated to total $26,000 pre-tax ($15,600 after-tax, or $.03 per diluted share), expensed as incurred in fiscal 2001 and the first quarter of fiscal 2002. During the first quarter of fiscal 2002 the Company expensed $8,550 (of the actual total of $27,550) related to this reorganization and consolidation process and reported this charge as part of the provision for impaired assets and closing costs. These costs consisted primarily of employee severance, implementation and consolidation of support systems and employee relocation. The reorganization has been completed and no significant additional costs are anticipated.
Bank Credit Facilities and Commercial Paper Programs (all amounts stated in thousands of US dollars, unless otherwise noted)
The Company has in place a $500,000 commercial paper program supported by a $500,000 bank credit facility with a group of ten banks, of which $250,000 expires on November 12, 2002 and $250,000 expires on November 15, 2005. At February 17, 2002, approximately $105,000 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 $126,000 commercial paper program supported by an $88,000 bank credit facility with three Canadian banks, which expires in May, 2002. At February 17, 2002, 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 $588,000 combined amounts of the respective supporting bank credit facilities.
6
The Company's wholly-owned Japanese subsidiary has a short-term ¥3 billion bank line of credit, equal to approximately $22,500, expiring in November 2002. At February 17, 2002, no amounts were outstanding under the line of credit.
At February 17, 2002, the Company's 80%-owned UK subsidiary had a £35 million ($50,000) bank overdraft facility, which expired on February 21, 2002, at which time a five-year £60 million ($86,000) bank revolving credit facility was put in place together with a £20 million ($28,700) bank overdraft facility. At February 17, 2002, $37,300 was outstanding under the overdraft facility. On February 21, 2002, this amount was refinanced to the revolving credit facility.
Letters of Credit
The Company has separate letter of credit facilities (for commercial and standby letters of credit), totaling approximately $553,000. The outstanding commitments under these facilities at February 17, 2002 totaled approximately $77,000, including approximately $30,000 in standby letters of credit.
Financing Activities
On October 23, 2001, the Company filed with the Securities and Exchange Commission a shelf registration statement for $600,000 of senior debt securities. To date, no securities have been issued under this filing.
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 inventory purchases. The only significant derivative instruments the Company holds are interest rate swaps, which the Company uses as a means to manage the interest rate risk associated with its borrowings and to manage the Company's mix of fixed and variable-rate debt. As of February 17, 2002, the Company had two "fixed-to-floating" interest rate swaps with an aggregate negative fair value of $5,425 recorded within other long-term liabilities. These swaps were entered into effective November 13, 2001, and are designated and qualify as fair value hedges of the Company's $300,000 7.125% Senior Notes. As the terms of the swaps match those of the underlying hedged debt, the changes in the fair value of these swaps are offset by corresponding changes in the fair value recorded on the hedged debt, and result in no net earnings impact.
Financial Position and Cash Flows
The Company was in a negative working capital position at February 17, 2002 of approximately $246,000, compared to a negative working capital position of approximately $230,000 at September 2, 2001. The increase of approximately $16,000 was primarily due to increases in accrued salaries and benefits of approximately $110,000; decreases in net inventory levels (inventories less accounts payable) of approximately $54,000; increases in deferred membership income of approximately $39,000; increases in other current liabilities and accrued sales and other taxes of $26,000; and a decrease in other current assets and short-term investments of $6,000 and $5,000, respectively, offset by an increase in cash and cash equivalents of approximately $172,000 and decreases in short term borrowings of approximately $52,000.
Net cash provided by operating activities totaled $572,137 in the first half of fiscal 2002 compared to $440,807 in the first half of fiscal 2001. The increase of $131,330 is primarily a result of a larger decrease in the change in receivables, other current assets and accrued and other current liabilities of approximately
7
$113,246; a larger add-back for depreciation and amortization of $17,823 and higher net income in fiscal 2002 of $16,114, offset by a larger increase in net inventories (inventories less accounts payable) of $11,861.
Net cash used in investing activities totaled $531,883 in the first half of fiscal 2002 compared to $726,011 in the first half of fiscal 2001. The investing activities primarily relate to additions to property and equipment for new and remodeled warehouses of $525,170 and $728,322 in the first half of fiscal 2002 and 2001, respectively; investments in unconsolidated joint ventures of $1,000 and $28,500 in the first half of fiscal 2002 and fiscal 2001, respectively; and net cash proceeds from sales of short-term investments of $4,890 and $20,747 during the first half of fiscal 2002 and fiscal 2001, respectively.
Net cash provided by financing activities totaled $136,716 in the first half of fiscal 2002 compared to $278,844 in the first half of fiscal 2001. The decrease resulted from an increase in the change in net repayments of short-term borrowings of $59,436; an overall decrease in the change in proceeds from long-term borrowings of $44,907 and a decrease in the change in bank overdrafts of $39,316.
The Company's balance sheet as of February 17, 2002 reflects a $799,562 or 7.9% increase in total assets since September 2, 2001. The increase is primarily due to an increase in net property and equipment of $333,248; an increase in inventories of $270,132; and an increase in cash and cash equivalents of $171,966.
Stock Repurchase Program (dollars in thousands except per share data)
On November 30, 2001, the Company's Board of Directors approved a stock repurchase program authorizing the repurchase of up to $500,000 of Costco Common Stock. Under the program, the Company can repurchase shares at any time in the open market or in private transactions as market conditions warrant. The repurchased shares would constitute authorized, but unissued shares and would be used for general corporate purposes, including stock option grants under stock option programs. To date, no shares have been repurchased under this program.
Membership Fee Increases
Effective September 1, 2000, the Company increased annual membership fees for its Gold Star (individual), Business, and Business Add-on Members. These fee increases averaged approximately $5 per member across its member categories, and are recorded as income ratably using the deferred method of accounting.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, "Accounting for Goodwill and Other Intangibles," which specifies that goodwill and some intangible assets will no longer be amortized, but instead will be subject to periodic impairment testing. On September 3, 2001, the Company adopted SFAS No. 142 and accordingly will continue to test previously reported goodwill for impairment on an annual basis, or more frequently if circumstances dictate. The overall effect of the adoption of SFAS No. 142 on the Company's financial statements was not material and the Company recorded no impairment charge. The reduction in amortization expense going forward, as a result of the adoption, is not material.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," effective for the Company on September 2, 2002 (beginning of fiscal 2003). This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived
8
assets and the associated asset retirement costs. The Company is in the process of evaluating the financial statement impact of the adoption of SFAS No. 143.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," effective for the Company on September 2, 2002 (beginning of fiscal 2003). This Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and other related accounting guidance. The Company is in the process of evaluating the financial statement impact of the adoption of SFAS No. 144, but does not believe it will have any significant impact at this time.
PART II—OTHER INFORMATION
(dollars in thousands)
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.
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting was held at 7:00 p.m. on January 30, 2002 at the Nob Hill Masonic Center, 1111 California Street, San Francisco, California. Stockholders of record at the close of business on December 7, 2001 were entitled to notice of and to vote in person or by proxy at the annual meeting. At the date of record there were 452,405,546 shares outstanding. The matters presented for vote received the required votes for approval and had the following total, for, against and abstained votes as noted below.
- (1)
- To elect four Class III directors to hold office until the 2005 Annual Meeting of Stockholders and until their successors are elected and qualified.
| |
Total Shares Voted/(%) |
For Votes/(%) |
Against Votes/(%) |
Withheld Authority and Abstained Votes/(%) |
||||
|---|---|---|---|---|---|---|---|---|
| Richard D. DiCerchio | 399,978,895 | 352,354,181 | – | 47,624,714 | ||||
| 88.41% | 88.09% | – | 11.91% | |||||
| Richard M. Libenson | 399,978,895 | 390,608,053 | – | 9,370,842 | ||||
| 88.41% | 97.66% | – | 2.34% | |||||
| John W. Meisenbach | 399,978,895 | 389,603,698 | – | 10,375,197 | ||||
| 88.41% | 97.41% | – | 2.59% | |||||
| Charles T. Munger | 399,978,895 | 392,315,806 | – | 7,663,089 | ||||
| 88.41% | 98.08% | – | 1.92% |
9
- (2)
- To adopt the Company's 2002 Stock Incentive Plan.
| |
Total Shares Voted/(%) |
For Votes/(%) |
Against Votes/(%) |
Withheld Authority and Abstained Votes/(%) |
||||
|---|---|---|---|---|---|---|---|---|
| 325,211,485 | 215,788,502 | 107,276,481 | 2,146,502 | |||||
| 77.85% | 66.35% | 32.99% | 0.66% |
- (3)
- To consider and ratify the selection of the Company's independent public accountants, Arthur Andersen LLP.
| |
Total Shares Voted/(%) |
For Votes/(%) |
Against Votes/(%) |
Withheld Authority and Abstained Votes/(%) |
||||
|---|---|---|---|---|---|---|---|---|
| 399,978,895 | 392,258,902 | 3,608,470 | 4,111,523 | |||||
| 88.41% | 98.07% | .90% | 1.03% |
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)
- One report on Form 8-K was filed during the 12 week period ended February 17, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
COSTCO WHOLESALE CORPORATION Registrant |
Date: March 15, 2002 |
/s/ James D. Sinegal James D. Sinegal President & Chief Executive Officer |
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Date: March 15, 2002 |
/s/ Richard A. Galanti Richard A. Galanti Executive Vice President, Chief Financial Officer |
10
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except par value)
| |
February 17, 2002 |
September 2, 2001 |
|||||||
|---|---|---|---|---|---|---|---|---|---|
| |
(unaudited) |
|
|||||||
| ASSETS | |||||||||
| CURRENT ASSETS | |||||||||
| Cash and cash equivalents | $ | 774,551 | $ | 602,585 | |||||
| Short-term investments | — | 4,999 | |||||||
| Receivables, net | 323,778 | 324,768 | |||||||
| Merchandise inventories, net | 3,008,636 | 2,738,504 | |||||||
| Other current assets | 205,791 | 211,601 | |||||||
| Total current assets | 4,312,756 | 3,882,457 | |||||||
| PROPERTY AND EQUIPMENT | |||||||||
| Land | 1,926,501 | 1,877,158 | |||||||
| Buildings, leaseholds and land improvements | 4,115,412 | 3,834,714 | |||||||
| Equipment and fixtures | 1,625,798 | 1,529,307 | |||||||
| Construction in progress | 144,034 | 133,995 | |||||||
| 7,811,745 | 7,375,174 | ||||||||
| Less—accumulated depreciation and amortization | (1,651,912 | ) | (1,548,589 | ) | |||||
| Net property and equipment | 6,159,833 | 5,826,585 | |||||||
| OTHER ASSETS | 416,759 | 380,744 | |||||||
| $ | 10,889,348 | $ | 10,089,786 | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||
| CURRENT LIABILITIES | |||||||||
| Short term borrowings | $ | 142,294 | $ | 194,552 | |||||
| Accounts payable | 3,051,533 | 2,727,639 | |||||||
| Accrued salaries and benefits | 593,310 | 483,473 | |||||||
| Accrued sales and other taxes | 164,978 | 152,864 | |||||||
| Deferred membership income | 361,367 | 322,583 | |||||||
| Other current liabilities | 244,992 | 231,078 | |||||||
| Total current liabilities | 4,558,474 | 4,112,189 | |||||||
| LONG-TERM DEBT | 853,629 | 859,393 | |||||||
| DEFERRED INCOME TAXES AND OTHER LIABILITIES | 125,076 | 119,434 | |||||||
| Total liabilities | 5,537,179 | 5,091,016 | |||||||
| COMMITMENTS AND CONTINGENCIES MINORITY INTEREST |
118,172 | 115,830 | |||||||
| STOCKHOLDERS' EQUITY | |||||||||
| Preferred stock $.005 par value; 100,000,000 shares authorized; no shares issued and outstanding | — | — | |||||||
| Common stock $.005 par value; 900,000,000 shares authorized; 453,860,000 and 451,754,000 shares issued and outstanding | 2,269 | 2,259 | |||||||
| Additional paid-in capital | 1,180,151 | 1,125,543 | |||||||
| Other accumulated comprehensive loss | (199,383 | ) | (173,610 | ) | |||||
| Retained earnings | 4,250,960 | 3,928,748 | |||||||
| Total stockholders' equity | 5,233,997 | 4,882,940 | |||||||
| $ | 10,889,348 | $ | 10,089,786 | ||||||
The accompanying notes are an integral part of these financial statements
11
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
(unaudited)
| |
12 Weeks Ended |
24 Weeks Ended |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
February 17, 2002 |
February 18, 2001 |
February 17, 2002 |
February 18, 2001 |
|||||||||||
| REVENUE | |||||||||||||||
| Net sales | $ | 9,208,413 | $ | 8,159,980 | $ | 17,505,489 | $ | 15,658,959 | |||||||
| Membership fees and other | 174,439 | 146,329 | 343,916 | 284,628 | |||||||||||
| Total revenue | 9,382,852 | 8,306,309 | 17,849,405 | 15,943,587 | |||||||||||
| OPERATING EXPENSES | |||||||||||||||
| Merchandise costs | 8,212,030 | 7,275,958 | 15,646,427 | 13,989,602 | |||||||||||
| Selling, general and administrative | 840,005 | 731,411 | 1,626,123 | 1,422,538 | |||||||||||
| Preopening expenses | 8,616 | 10,572 | 30,750 | 30,252 | |||||||||||
| Provision for impaired assets and closing costs | 3,000 | 1,000 | 11,550 | 2,000 | |||||||||||
| Operating income | 319,201 | 287,368 | 534,555 | 499,195 | |||||||||||
| OTHER INCOME (EXPENSE) | |||||||||||||||
| Interest expense | (6,199 | ) | (8,902 | ) | (12,437 | ) | (15,866 | ) | |||||||
| Interest income and other | 7,926 | 15,829 | 14,903 | 26,834 | |||||||||||
| INCOME BEFORE INCOME TAXES | 320,928 | 294,295 | 537,021 | 510,163 | |||||||||||
| Provision for income taxes | 128,372 | 117,718 | 214,809 | 204,065 | |||||||||||
| NET INCOME | $ | 192,556 | $ | 176,577 | $ | 322,212 | $ | 306,098 | |||||||
| NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE: | |||||||||||||||
| Basic | $ | 0.43 | $ | 0.39 | $ | 0.71 | $ | 0.68 | |||||||
| Diluted | $ | 0.41 | $ | 0.38 | $ | 0.68 | $ | 0.65 | |||||||
| Shares used in calculation (000's) | |||||||||||||||
| Basic | 452,882 | 448,788 | 452,436 | 448,234 | |||||||||||
| Diluted | 479,931 | 475,488 | 478,749 | 474,543 | |||||||||||
The accompanying notes are an integral part of these financial statements.
12
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
| |
24 Weeks Ended |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
February 17, 2002 |
February 18, 2001 |
||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||
| Net income | $ | 322,212 | $ | 306,098 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||
| Depreciation and amortization | 151,442 | 133,619 | ||||||||
| Accretion of discount on zero coupon notes | 7,813 | 7,547 | ||||||||
| Net loss on sale of property and equipment and other | 811 | 738 | ||||||||
| Change in deferred income taxes | (1,640 | ) | (2,125 | ) | ||||||
| Tax benefit from exercise of stock options | 16,805 | 20,370 | ||||||||
| Change in receivables, other current assets, accrued and other current liabilities | 192,599 | 79,353 | ||||||||
| Increase in merchandise inventories | (283,736 | ) | (252,274 | ) | ||||||
| Increase in accounts payable | 175,764 | 156,163 | ||||||||
| Other | (9,933 | ) | (8,682 | ) | ||||||
| Total adjustments | 249,925 | 134,709 | ||||||||
| Net cash provided by operating activities | 572,137 | 440,807 | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||
| Additions to property and equipment | (525,170 | ) | (728,322 | ) | ||||||
| Proceeds from the sale of property and equipment | 11,005 | 12,471 | ||||||||
| Investment in unconsolidated joint ventures | (1,000 | ) | (28,500 | ) | ||||||
| Decrease in short-term investments | 4,890 | 20,747 | ||||||||
| Increase in other assets and other, net | (21,608 | ) | (2,407 | ) | ||||||
| Net cash used in investing activities | (531,883 | ) | (726,011 | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||
| Net (repayments)/proceeds of short-term borrowings | (52,237 | ) | 7,199 | |||||||
| Net proceeds from issuance of long-term debt | — | 44,907 | ||||||||
| Repayments of long-term debt | (12,219 | ) | (5,776 | ) | ||||||
| Changes in bank overdraft | 160,982 | 200,298 | ||||||||
| Proceeds from minority interests | 2,377 | 745 | ||||||||
| Exercise of stock options | 37,813 | 31,471 | ||||||||
| Net cash provided by financing activities | 136,716 | 278,844 | ||||||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH | (5,004 | ) | (6,488 | ) | ||||||
| Net increase/(decrease) in cash and cash equivalents | 171,966 | (12,848 | ) | |||||||
| CASH AND CASH EQUIVALENTS BEGINNING OF YEAR | 602,585 | 524,505 | ||||||||
| CASH AND CASH EQUIVALENTS END OF PERIOD | $ | 774,551 | $ | 511,657 | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||
| Cash paid during the period for: | ||||||||||
| Interest (excludes amounts capitalized) | $ | 6,143 | $ | 7,559 | ||||||
| Income taxes | $ | 182,777 | $ | 181,645 | ||||||
The accompanying notes are an integral part of these financial statements.
13
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 2, 2001.
The consolidated financial statements include the accounts of Costco Wholesale Corporation, a Washington corporation, and its subsidiaries ("Costco" or the "Company"). All material inter-company transactions between the Company and its subsidiaries have been eliminated in consolidation. Costco Wholesale Corporation primarily operates membership warehouses under the Costco Wholesale name.
Costco operates membership warehouses that offer very low prices on a limited selection of nationally branded and selected private label products in a wide range of merchandise categories in no-frills, self-service warehouse facilities. At February 17, 2002, Costco operated 385 warehouse clubs: 284 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) 20 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 2002 is a 52-week year, with the first, second and third quarters consisting of 12 weeks each and the fourth quarter, ending September 1, 2002, consisting of 16 weeks. Fiscal year 2001 was a 52-week year, which ended September 2, 2001.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Receivables, net
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 $2,143 and $3,474 at February 17, 2002 and September 2, 2001, respectively.
Merchandise Inventories, net
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
14
been valued using the first-in, first-out (FIFO) method, inventories would have been higher by $18,650 at February 17, 2002 and $13,650 at September 2, 2001. The Company provides for estimated inventory losses between physical inventory counts on the basis of a standard percentage of sales. This provision is adjusted periodically to reflect the actual shrinkage results of physical inventory counts, which generally occur in the second and fourth fiscal quarters.
Goodwill
Goodwill, net of accumulated amortization, resulting from certain business combinations is included in other assets, and totaled $43,343 at February 17, 2002 and $43,831 at September 2, 2001. On September 3, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Accounting for Goodwill and Other Intangibles", which specifies that goodwill and some intangible assets will no longer be amortized, but instead will be subject to periodic impairment testing. Accordingly, the Company will test previously reported goodwill for impairment on an annual basis, or more frequently if circumstances dictate.
Accounts Payable
The Company's banking system provides for the daily replenishment of major bank accounts as checks are presented. Accordingly, included in accounts payable at February 17, 2002 and September 2, 2001, are $430,976 and $270,757, 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 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 inventory purchases. The only significant derivative instruments the Company holds are interest rate swaps, which the Company uses as a means to manage the interest rate risk associated with its borrowings and to manage the Company's mix of fixed and variable-rate debt. As of February 17, 2002, the Company had two "fixed-to-floating" interest rate swaps with an aggregate negative fair value of $5,425 recorded within other long-term liabilities. These swaps were entered into effective November 13, 2001, and are designated and qualify as fair value hedges of the Company's $300,000 7.125% Senior Notes. As the terms of the swaps match those of the underlying hedged debt, the changes in the fair value of these swaps are offset by corresponding changes in the fair value recorded on the hedged debt, and result in no net earnings impact.
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 comprehensive income (loss). Revenue and expenses of the Company's consolidated foreign operations are translated at average rates of exchange prevailing during the period. Gains and losses on foreign currency transactions are included in expenses.
Membership Fees
Membership fee revenue represents annual membership fees paid by substantially all of the Company's members. Membership fee income is accounted for on a "deferred basis," whereby income is recognized ratably over the one-year life of the membership.
15
Preopening Expenses
Preopening expenses relate to new warehouses, major remodels/expansions, regional offices and other start-up operations and are expensed as incurred.
Closing Costs
Closing costs incurred generally relate to the Company's efforts to relocate certain warehouses that were not otherwise impaired to larger and better-located facilities. In the first half of fiscal 2002, closing costs also included costs incurred in the reorganization of the Company's Canadian administrative operations. At February 17, 2002, the reserve for warehouse closing costs was $11,436, this compares to a reserve of $15,434 at September 2, 2001.
Net Income Per Common and Common Equivalent Share
The following data show the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of dilutive potential common stock.
| |
12 Weeks Ended |
24 Weeks Ended |
||||||
|---|---|---|---|---|---|---|---|---|
| |
February 17, 2002 |
February 18, 2001 |
February 17, 2002 |
February 18, 2001 |
||||
| Net income available to common stockholders used in basic EPS | $192,556 | $176,577 | $322,212 | $306,098 | ||||
| Interest on convertible bonds, net of tax | 2,344 | 2,264 | 4,688 | 4,528 | ||||
| Net income available to common stockholders after assumed conversions of dilutive securities | $194,900 | $178,841 | $326,900 | $310,626 | ||||
| Weighted average number of common shares used in basic EPS (000's) | 452,882 | 448,788 | 452,436 | 448,234 | ||||
| Stock options (000's) | 7,704 | 7,355 | 6,968 | 6,964 | ||||
| Conversion of convertible bonds (000's) | 19,345 | 19,345 | 19,345 | 19,345 | ||||
| Weighted number of common shares and dilutive potential common stock used in diluted EPS (000's) | 479,931 | 475,488 | 478,749 | 474,543 | ||||
The diluted share base calculation for the fiscal quarters ended February 17, 2002 and February 18, 2001, excludes 896,000 and 7,152,302 stock options outstanding, respectively. The diluted share base calculation for the fiscal year-to-date periods ended February 17, 2002 and February 18, 2001, excludes 6,978,036 and 7,175,456 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.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, "Accounting for Goodwill and Other Intangibles", which specifies that goodwill and some intangible assets will no longer be amortized, but instead will be subject to periodic impairment testing. On September 3, 2001, the Company adopted SFAS No. 142 and accordingly will continue to test previously reported goodwill for impairment on an annual basis, or more frequently if circumstances dictate. The overall effect of the adoption of SFAS No. 142 on the Company's financial statements was not material and the Company recorded no impairment charge. The reduction in amortization expense going forward, as a result of the adoption, is not material.
16
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," effective for the Company on September 2, 2002 (beginning of fiscal 2003). This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company is in the process of evaluating the financial statement impact of the adoption of SFAS No. 143.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," effective for the Company on September 2, 2002 (beginning of fiscal 2003). This Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and other related accounting guidance. The Company is in the process of evaluating the financial statement impact of the adoption of SFAS No. 144, but does not believe it will have any significant impact at this time.
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
Comprehensive income is net income, plus certain other items that are recorded directly to shareholders' equity. Comprehensive income was $190,878 and $194,001 for the second quarter of fiscal 2002 and 2001, respectively and $296,439 and $267,830 for the first half of fiscal 2002 and 2001, respectively. Comprehensive income includes the impact of foreign currency translation adjustments.
NOTE (3)—DEBT
Bank Lines of Credit and Commercial Paper Programs
The Company has in place a $500,000 commercial paper program supported by a $500,000 bank credit facility with a group of ten banks, of which $250,000 expires on November 12, 2002 and $250,000 expires on November 15, 2005. At February 17, 2002, approximately $105,000 was outstanding under the commercial paper program and no amounts were outstanding under the loan facility. Covenants related to the credit facility place limitations on total company indebtedness. As of February 17, 2002, the Company was in compliance with all restrictive covenants.
In addition, a wholly owned Canadian subsidiary has a $126,000 commercial paper program supported by an $88,000 bank credit facility with three Canadian banks, which expires in May, 2002. At February 17, 2002, 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 $588,000 combined amounts of the respective supporting bank credit facilities.
The Company's wholly-owned Japanese subsidiary has a short-term ¥3 billion bank line of credit, equal to approximately $22,500, expiring in November 2002. At February 17, 2002, no amounts were outstanding under the line of credit.
17
At February 17, 2002, the Company's 80%-owned UK subsidiary had a £35 million ($50,000) bank overdraft facility, which expired on February 21, 2002, at which time a five-year £60 million ($86,000) bank revolving credit facility was put in place together with a £20 million ($28,700) bank overdraft facility. At February 17, 2002, $37,300 was outstanding under the overdraft facility. On February 21, 2002, this amount was refinanced to the revolving credit facility.
Letters of Credit
The Company has separate letter of credit facilities (for commercial and standby letters of credit), totaling approximately $553,000. The outstanding commitments under these facilities at February 17, 2002 totaled approximately $77,000, including approximately $30,000 in standby letters of credit.
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.
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.
| |
United States Operations |
Canadian Operations |
Other International Operations |
Total |
|||||
|---|---|---|---|---|---|---|---|---|---|
| Twenty-Four Weeks Ended February 17, 2002 | |||||||||
| Total revenue | $14,845,780 | $2,194,387 | $809,238 | $17,849,405 | |||||
| Operating income | 434,916 | 88,518 | 11,121 | 534,555 | |||||
| Depreciation and amortization | 124,308 | 15,219 | 11,915 | 151,442 | |||||
| Capital expenditures | 438,403 | 14,042 | 72,725 | 525,170 | |||||
| Total assets | 8,987,947 | 1,070,771 | 830,630 | 10,889,348 | |||||
Twenty-Four Weeks Ended February 18, 2001 |
|||||||||
| Total revenue | $13,045,447 | $2,218,259 | $679,881 | $15,943,587 | |||||
| Operating income (loss) | 404,402 | 96,708 | (1,915 | ) | 499,195 | ||||
| Depreciation and amortization | 106,196 | 16,480 | 10,943 | 133,619 | |||||
| Capital expenditures | 650,513 | 24,127 | 53,682 | 728,322 | |||||
| Total assets | 7,734,541 | 1,018,995 | 752,746 | 9,506,282 | |||||
Year Ended September 2, 2001 |
|||||||||
| Total revenue | $28,636,483 | $4,695,778 | $1,464,776 | $34,797,037 | |||||
| Operating income (loss) | 813,665 | 179,095 | (493 | ) | 992,267 | ||||
| Depreciation and amortization | 241,777 | 35,377 | 24,143 | 301,297 | |||||
| Capital expenditures | 1,298,889 | 43,092 | 105,568 | 1,447,549 | |||||
| Total assets | 8,216,242 | 1,093,789 | 779,755 | 10,089,786 | |||||
18
FORM 10-Q
PART I—FINANCIAL INFORMATION
-
ITEM 1. Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations