MANAGEMENT 1A CASE ASSIGNMENT 2 Is this company worth the cost? COSTCO Instructions Costco Wholesale Corporation operates an international chain of membership warehouses, mainly under the "Costco Wholesale" name, that carry quality, brand name merchandise at substantially lower prices than are typically found at conventional wholesale or retail sources. The warehouses are designed to help small-to-mediumsized businesses reduce costs in purchasing for resale and for everyday business use. Individuals may also purchase for their personal needs. Costco's warehouses present one of the largest and most exclusive product category selections to be found under a single roof. Categories include groceries, candy, appliances, television and media, automotive supplies, tires, toys, hardware, sporting goods, jewelry, watches, cameras, books, housewares, apparel, health and beauty aids, tobacco, furniture, office supplies and office equipment. Costco is known for carrying top quality national and regional brands, with 100% satisfaction guaranteed, at prices consistently below traditional wholesale or retail outlets. 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 select private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. At September 1, 2013, Costco operated 634 warehouses worldwide: 451 United States (U.S.) locations (in 41 U.S. states, Washington, D.C., and Puerto Rico), 85 Canadian locations, 33 Mexico locations, 25 United Kingdom (U.K.) locations, 18 Japan locations, 10 Taiwan locations, 9 Korea locations, and 3 Australia locations. The Company's online business operates websites in the U.S., Canada, and the U.K. Requirements: You have been hired to analyze the performance of Costco, specifically; they would like to know what has happened to the company over time. Further, they would appreciate any suggestions you have as to how to improve the company's performance. Page 1 Management 1A Case 2 Using the information provided, answer the questions below. A. Operating Performance and Profitability Fill in the table below, comparing the various profit margins of the company over the previous years. Is it consistently doing better? Has the firm improved or declined in performance? What do you learn from this analysis? Total Gross Sales Profit (millions) Margin Operating Margin Net Profit Margin Return on Return on Assets Equity 2013 2012 2011 B. Activity and Efficiency Examine the turnover ratios the two company. Does the firm seem to be consistently doing better? Offer reasons as to why there might be significant differences in the turnover ratios. Turnover Ratios (in days) Accounts Inventory Accounts Rec. (use net Payable* A/R) Growth from prior year Sales Growth Growth in Growth in A/R Inventory 2013 2012 2011 * Accounts payable turnover is the number of times that accounts payable are paid during the accounting period. This ratio equals: Accounts Payable Turnover (X) =[COGS + the increase in inventory (or - the decrease in inventory)] / Avg. Accounts Payable Similar to the Accounts Receivable and Inventory Turnover ratios, this ratio can also be expressed in days to determine how long, on average, the company takes to pay its accounts payable. C. Financial Position Assess the liquidity and capital structure of the firm, using the ratios below. How is the liquidity of the firm? Has the capital structure changed? Current Ratio Quick Ratio Total Assets (millions) Debt/Equity Debt/Total Assets 2013 2012 2011 Page 2 Management 1A Case 2 D. Cash Flow Performance Assess the company's cash flows. How has the company's Cash Flow from Operations changed? What does this analysis tell you? Cash Flow from Operations (CFO) CFO / Total Assets Cash Flow from Investing Activities Cash Flow from Financing Activities 2013 2012 2011 E. Market Performance Determine the market capitalization of the firm and the average P/E ratio. No. of Shares Outstanding Recent Stock Price Market Capitalization P/E Ratio 2013 2012 2011 SUMMARY What have you learned about Costco? What have you learned about the retail industry as a result of this analysis? Page 3 Management 1A Case 2 COSTCO WHOLESALE CORPORATION CONSOLIDATED BALANCE SHEETS (amounts in millions, except par value and share data) September 1, 2013 September 2, 2012 ASSETS CURRENT ASSETS Cash and cash equivalents Short-term investments Receivables, net Merchandise inventories Deferred income taxes and other current assets Total current assets $ 4,644 1,480 1,201 7,894 621 15,840 $ 3,528 1,326 1,026 7,096 550 13,526 PROPERTY AND EQUIPMENT Land Buildings and improvements Equipment and fixtures Construction in progress Less accumulated depreciation and amortization Net property and equipment OTHER ASSETS TOTAL ASSETS $ 4,409 11,556 4,472 585 21,022 (7,141 ) 13,881 562 30,283 $ 4,032 10,879 4,261 374 19,546 (6,585 ) 12,961 653 27,140 LIABILITIES AND EQUITY CURRENT LIABILITIES Accounts payable Accrued salaries and benefits Accrued member rewards Accrued sales and other taxes Deferred membership fees Other current liabilities Total current liabilities LONG-TERM DEBT, excluding current portion DEFERRED INCOME TAXES AND OTHER LIABILITIES Total liabilities COMMITMENTS AND CONTINGENCIES 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; 436,839,000 and 432,350,000 shares issued and outstanding Additional paid-in capital Accumulated other comprehensive (loss) income Retained earnings Total Costco stockholders' equity Noncontrolling interests $ 7,872 2,037 710 382 1,167 1,089 13,257 4,998 $ 7,303 1,832 661 397 1,101 966 12,260 1,381 1,016 19,271 981 14,622 0 0 2 2 4,670 (122 ) 6,283 10,833 179 4,369 156 7,834 12,361 157 Page 4 Management 1A Total equity TOTAL LIABILITIES AND EQUITY Case 2 $ 11,012 30,283 $ 12,518 27,140 Page 5 Management 1A Case 2 COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (amounts in millions, except per share data) 52 Weeks Ended 53 Weeks Ended 52 Weeks Ended September 1, 2013 September 2, 2012 August 28, 2011 REVENUE Net sales $ Membership fees 102,870 $ 97,062 $ 87,048 2,286 2,075 1,867 105,156 99,137 88,915 Merchandise costs 91,948 86,823 77,739 Selling, general and administrative 10,104 9,518 8,691 51 37 46 3,053 2,759 2,439 Total revenue OPERATING EXPENSES Preopening expenses Operating income OTHER INCOME (EXPENSE) Interest expense (99 ) Interest income and other, net INCOME BEFORE INCOME TAXES Provision for income taxes Net income including noncontrolling interests Net income attributable to noncontrolling interests NET INCOME ATTRIBUTABLE TO COSTCO (95 ) (116 ) 97 103 60 3,051 2,767 2,383 990 1,000 841 2,061 1,767 1,542 (22 ) (58 ) (80 ) $ 2,039 $ 1,709 $ 1,462 Basic $ 4.68 $ 3.94 $ 3.35 Diluted $ 4.63 $ 3.89 $ 3.30 NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO: Shares used in calculation (000's) Basic Diluted CASH DIVIDENDS DECLARED PER COMMON SHARE $ 435,741 433,620 436,119 440,512 439,373 443,094 8.17 $ 1.03 $ 0.89 Page 6 Management 1A Case 2 COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (amounts in millions) NET INCOME INCLUDING NONCONTROLLING INTERESTS 52 Weeks Ended 53 Weeks Ended 52 Weeks Ended September 1, 2013 September 2, 2012 August 28, 2011 $ Foreign-currency translation adjustment and other, net 2,061 $ (278 ) 1,767 $ (96 ) 1,542 275 Comprehensive income Less: Comprehensive income attributable to noncontrolling interests COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO $ 1,783 1,671 1,817 22 24 104 1,761 $ 1,647 $ 1,713 Page 7 Management 1A Case 2 COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF EQUITY (amounts in millions) Amount Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings $ 2 $ 4,115 $ 122 $ 6,590 7,245 Common Stock Shares (000's) BALANCE AT AUGUST 29, 2010 433,510 Initial consolidation of noncontrolling interest in Costco Mexico Net income Foreigncurrency translation adjustment and other, net Stock-based compensation Stock options exercised, including tax effects Release of vested restricted stock units (RSUs), including tax effects Conversion of convertible notes Repurchases of common stock Stock-based compensation Stock options exercised, including tax effects Release of vested RSUs, including tax effects Conversion of convertible notes Repurchases of common stock Cash dividends declared Distribution to noncontrolling interest Purchase of noncontrolling interest in Costco Mexico 357 357 1,462 1,462 80 1,542 251 251 24 275 207 207 207 332 332 332 2,385 (51 ) (51 ) (51 ) 65 2 2 2 (89 ) (552 ) (641 ) (641 ) (389 ) (389 ) (389 ) 9 9 2 4,516 373 7,111 12,002 571 12,573 1,709 1,709 58 1,767 (62 ) (62 ) 241 241 241 2,756 142 142 142 2,554 (76 ) (76 ) (76 ) 46 2 2 2 (77 ) (540 ) (617 ) (617 ) (446 ) (446 ) (446 ) (183 ) (183 ) (379 ) (155 ) (534 ) (255 ) (789 ) (7,272 ) 10,829 $ Total Equity $ 10,930 (8,939 ) $ Noncontrolling Interests 101 Cash dividends declared Investment by noncontrolling interest BALANCE AT AUGUST 28, 2011 434,266 Net income Foreigncurrency translation adjustment and other, net Total Costco Stockholders' Equity (34 ) (96 ) Page 8 Management 1A BALANCE AT SEPTEMBER 2, 2012 Net income Foreigncurrency translation adjustment and other, net Stock-based compensation Stock options exercised, including tax effects Release of vested RSUs, including tax effects Conversion of convertible notes Repurchases of common stock Cash dividends declared BALANCE AT SEPTEMBER 1, 2013 Case 2 432,350 2 4,369 156 7,834 12,361 157 12,518 2,039 2,039 22 2,061 (278 ) (278 ) (278 ) 285 285 285 1,435 75 75 75 2,609 (85 ) (85 ) (85 ) 802 30 30 30 (357 ) (4 ) (30 ) (34 ) (34 ) (3,560 ) (3,560 ) (3,560 ) 2 $ 4,670 436,839 $ $ (122 ) $ 6,283 $ 10,833 $ 179 $ 11,012 Page 9 Management 1A Case 2 COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in millions) 52 Weeks Ended 53 Weeks Ended 52 Weeks Ended September 1, 2013 September 2, 2012 August 28, 2011 CASH FLOWS FROM OPERATING ACTIVITIES Net income including noncontrolling interests $ 2,061 $ 1,767 $ 1,542 Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities: Depreciation and amortization 946 908 855 Stock-based compensation 285 241 207 Excess tax benefits on stock-based awards (61 ) (64 ) (45 ) (7 ) 28 23 (3 ) 84 Other non-cash operating activities, net Deferred income taxes 7 Changes in operating assets and liabilities, net of the initial consolidation of Costco Mexico at the beginning of fiscal 2011: Increase in merchandise inventories (898 ) (490 ) (642 ) Increase in accounts payable 718 338 804 Other operating assets and liabilities, net 386 332 370 3,437 3,057 3,198 Purchases of short-term investments (2,572 ) (2,048 ) (3,276 ) Maturities of short-term investments 2,141 1,821 2,614 Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Sales of investments Additions to property and equipment Increase resulting from initial consolidation of Costco Mexico Other investing activities, net Net cash used in investing activities 244 (2,083 ) 482 (1,480 ) 0 0 19 (11 ) (2,251 ) (1,236 ) 602 (1,290 ) 165 5 (1,180 ) CASH FLOWS FROM FINANCING ACTIVITIES Change in bank checks outstanding (70 ) 457 (514 ) Repayments of short-term borrowings (287 ) (114 ) (105 ) Proceeds from short-term borrowings 326 114 79 3,717 130 0 0 (900 ) 0 (22 ) (161 ) 9 52 109 (121 ) (107 ) Proceeds from issuance of long-term debt Repayments of long-term debt (Distribution to) investment by noncontrolling interests Proceeds from exercise of stock options Minimum tax withholdings on stock-based awards Excess tax benefits on stock-based awards Repurchases of common stock Cash dividend payments Purchase of noncontrolling interest in Costco Mexico 285 (61 ) 61 64 45 (36 ) (632 ) (624 ) (3,560 ) (446 ) (389 ) 0 (789 ) 0 Page 10 Management 1A Case 2 Other financing activities, net (16 ) Net cash provided by (used in) financing activities 44 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (114 ) Net increase (decrease) in cash and cash equivalents 1,116 CASH AND CASH EQUIVALENTS BEGINNING OF YEAR CASH AND CASH EQUIVALENTS END OF YEAR 3,528 (6 ) (2 ) (2,281 ) (1,277 ) (21 ) 54 (481 ) 795 4,009 3,214 $ 4,644 $ 3,528 $ 4,009 $ 86 $ 112 $ 111 $ 1,001 $ 956 $ 742 Increase in accrued property and equipment $ 40 $ $ Property acquired under capital leases $ 11 $ 18 $ 0 Unsettled repurchases of common stock $ 0 $ 2 $ 17 Distribution declared but not paid to noncontrolling interest $ 0 $ 22 $ 0 Common stock issued upon conversion of 3.5% Zero Coupon Convertible Subordinated Notes $ 30 $ 2 $ 2 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest (reduced by $12, $10 and $9, interest capitalized in 2013, 2012 and 2011, respectively) Income taxes SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Page 11 Management 1A Case 2 COSTCO WHOLESALE CORPORATION CONSOLIDATED BALANCE SHEETS (dollars in millions, except par value and share data) September 2, 2012 ASSETS CURRENT ASSETS Cash and cash equivalents Short-term investments Receivables, net Merchandise inventories Deferred income taxes and other current assets $ Total current assets PROPERTY AND EQUIPMENT Land Buildings and improvements Equipment and fixtures Construction in progress Less accumulated depreciation and amortization Net property and equipment OTHER ASSETS TOTAL ASSETS 3,528 1,326 1,026 7,096 550 August 28, 2011 $ 4,009 1,604 965 6,638 490 13,526 13,706 4,032 10,879 4,261 374 3,819 10,278 4,002 269 19,546 (6,585) 18,368 (5,936) 12,961 12,432 653 623 $ 27,140 $ 26,761 $ 7,303 1 1,832 661 397 965 1,101 $ 6,544 900 1,758 602 335 938 973 LIABILITIES AND EQUITY CURRENT LIABILITIES Accounts payable Current portion of long-term debt Accrued salaries and benefits Accrued member rewards Accrued sales and other taxes Other current liabilities Deferred membership fees Total current liabilities LONG-TERM DEBT, excluding current portion DEFERRED INCOME TAXES AND OTHER LIABILITIES Total liabilities 12,260 1,381 981 12,050 1,253 885 14,622 14,188 0 0 2 4,369 156 7,834 2 4,516 373 7,111 12,361 157 12,002 571 12,518 12,573 COMMITMENTS AND CONTINGENCIES 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; 432,350,000 and 434,266,000 shares issued and outstanding Additional paid-in capital Accumulated other comprehensive income Retained earnings Total Costco stockholders' equity Noncontrolling interests Total equity TOTAL LIABILITIES AND EQUITY $ 27,140 $ 26,761 Page 12 Management 1A Case 2 COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (dollars in millions, except per share data) REVENUE Net sales Membership fees 53 weeks ended September 2, 2012 52 weeks ended August 28, 2011 52 weeks ended August 29, 2010 $ $ $ Total revenue OPERATING EXPENSES Merchandise costs Selling, general and administrative Preopening expenses 97,062 2,075 87,048 1,867 76,255 1,691 99,137 88,915 77,946 86,823 9,518 37 77,739 8,691 46 67,995 7,848 26 Operating income OTHER INCOME (EXPENSE) Interest expense Interest income and other, net 2,759 2,439 2,077 INCOME BEFORE INCOME TAXES Provision for income taxes 2,767 1,000 2,383 841 2,054 731 1,767 1,542 1,323 Net income including noncontrolling interests Net income attributable to noncontrolling interests NET INCOME ATTRIBUTABLE TO COSTCO NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO: Basic Diluted Shares used in calculation (000's) Basic Diluted CASH DIVIDENDS DECLARED PER COMMON SHARE (95) 103 (116) 60 (58) (111) 88 (80) (20) $ 1,709 $ 1,462 $ 1,303 $ $ 3.94 3.89 $ $ 3.35 3.30 $ $ 2.97 2.92 433,620 439,373 $ 1.03 436,119 443,094 $ 0.89 438,611 445,970 $ 0.77 Page 13 Management 1A Case 2 COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME (dollars in millions) Accumulated Other Common Stock Shares (000's ) BALANCE AT AUGUST 30, 2009 Comprehensive Income: Net income Amoun t 435,97 4 $ Additiona l Paid-in Capital 2 $ 3,81 1 $ BALANCE AT AUGUST 29, 2010 Initial consolidation of noncontrolling interest in Costco Mexico Comprehensive Income: Net income 110 $ 6,10 1 $ 12 Noncontrollin g Interests Total Equity 80 $ 10,10 4 1,303 20 1,323 12 1 13 1,315 21 1,336 10,024 $ 190 190 190 5,576 0 243 243 243 1,885 0 ) (38 ) (38 ) (38 18 ) (9,943 0 1 ) (568 ) (338 1 433,51 0 0 2 1 ) (92 4,11 5 ) (476 ) (338 122 6,59 0 1,46 2 Foreigncurrency translation adjustmen t and other, net Comprehensive income Stock-based compensation Stock options exercised, including tax effects Release of vested RSUs, including tax effects Conversion of convertible notes Repurchases of common stock Retained Stockholders ' Earnings Equity 1,30 3 Foreigncurrency translation adjustmen t and other, net Comprehensive income Stock-based compensation Stock options exercised, including tax effects Release of vested restricted stock units (RSUs), including tax effects Conversion of convertible notes Repurchases of common stock Cash dividends declared Comprehensiv e Income Total Costco 251 ) (568 ) (338 10,829 101 10,93 0 0 357 357 1,462 80 1,542 251 24 275 1,713 104 1,817 207 207 207 7,245 0 332 332 332 2,385 0 ) (51 ) (51 ) (51 65 ) (8,939 0 2 ) (641 2 0 2 ) (89 ) (552 ) (641 Page 14 Management 1A Case 2 Cash dividends declared Investment by noncontrolling interest ) (389 BALANCE AT AUGUST 28, 2011 Comprehensive Income: Net income 434,26 6 2 4,51 6 Foreigncurrency translation adjustmen t and other, net Comprehensive income Stock-based compensation Stock options exercised, including tax effects Release of vested RSUs, including tax effects Conversion of convertible notes Repurchases of common stock Cash dividends declared Distribution to noncontrolling interest Purchase of noncontrolling interest in Costco Mexico BALANCE AT SEPTEMBER 2, 2012 373 ) (389 ) (389 9 9 7,11 1 12,002 571 12,57 3 1,70 9 1,709 58 1,767 ) (62 ) (62 1,647 ) (34 24 ) (96 1,671 241 241 241 2,756 0 142 142 142 2,554 0 ) (76 ) (76 ) (76 46 ) (7,272 0 2 ) (617 ) (446 2 0 2 ) (77 ) (379 432,35 0 $ 2 $ 4,36 9 $ ) (540 ) (446 ) (155 156 $ ) (534 7,83 4 $ 12,361 $ ) (617 ) (446 ) (183 ) (183 ) (255 ) (789 157 $ 12,51 8 The accompanying notes are an integral part of these consolidated financial statements. Page 15 Management 1A Case 2 COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in millions) CASH FLOWS FROM OPERATING ACTIVITIES Net income including noncontrolling interests Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities: Depreciation and amortization Stock-based compensation Excess tax benefits on stock-based awards Other non-cash operating activities, net Deferred income taxes Changes in operating assets and liabilities, net of the initial consolidation of Costco Mexico at the beginning of fiscal 2011: Increase in merchandise inventories Increase in accounts payable Other operating assets and liabilities, net 53 Weeks ended September 2, 2012 52 Weeks ended August 28, 2011 52 Weeks ended August 29, 2010 $ $ $ Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Purchases of short-term investments Maturities of short-term investments Sales of investments Additions to property and equipment Proceeds from the sale of property and equipment Increase resulting from initial consolidation of Costco Mexico Other investing activities, net Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Change in bank checks outstanding Repayments of short-term borrowings Proceeds from short-term borrowings Proceeds from issuance of long-term debt Repayments of long-term debt Investment by (distribution to) noncontrolling interests Proceeds from exercise of stock options Minimum tax withholdings on stock-based awards Excess tax benefits on stock-based awards Repurchases of common stock Cash dividend payments Purchase of noncontrolling interest in Costco Mexico Other financing activities, net Net cash used in financing activities EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS Net increase (decrease) in cash and cash equivalents CASH AND CASH EQUIVALENTS BEGINNING OF YEAR 1,767 1,542 1,323 908 241 (64) 28 (3) 855 207 (45) 23 84 795 190 (10) (40) 7 (490) 338 332 (642) 804 370 (213) 445 283 3,057 3,198 2,780 (2,048) 1,821 482 (1,480) 11 (3,276) 2,614 602 (1,290) 16 (2,693) 1,428 309 (1,055) 4 0 (22) 165 (11) 0 (8) (1,236) (1,180) (2,015) 457 (114) 114 130 (900) (161) 109 (107) 64 (632) (446) (789) (6) (514) (105) 79 0 0 9 285 (61) 45 (624) (389) 0 (2) 5 (73) 81 0 (84) 0 235 (42) 10 (551) (338) 0 38 (2,281) (1,277) (719) (21) 54 11 (481) 795 57 3,214 3,157 4,009 CASH AND CASH EQUIVALENTS END OF YEAR $ 3,528 $ 4,009 $ 3,214 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest (reduced by $10, $9, and $11 interest capitalized in 2012, 2011, and 2010, respectively) Income taxes $ $ 112 956 $ $ 111 742 $ $ 110 637 Page 16 Management 1A SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: (Decrease)/increase in accrued property and equipment Property acquired under capital leases Unsettled repurchases of common stock Distribution declared but not paid to noncontrolling interest Case 2 $ $ $ (29) 18 2 $ $ $ (10) 0 17 $ $ $ 24 90 17 $ 22 $ 0 $ 0 Page 17 Management 1A Case 2 COSTCO WHOLESALE CORPORATION CONSOLIDATED BALANCE SHEETS (dollars in millions, except par value and share data) August 28, August 29, 2011 2010 ASSETS CURRENT ASSETS Cash and cash equivalents Short-term investments Receivables, net Merchandise inventories Deferred income taxes and other current assets Total current assets PROPERTY AND EQUIPMENT $ 4,009 $ 3,214 1,604 1,535 965 884 6,638 5,638 490 437 13,706 11,708 Land Buildings and improvements Equipment and fixtures Construction in progress 3,819 10,278 4,002 269 3,484 9,096 3,513 267 Less accumulated depreciation and amortization 18,368 (5,936) 16,360 (5,046) Net property and equipment 12,432 11,314 623 793 OTHER ASSETS TOTAL ASSETS $ 26,761 $ 23,815 LIABILITIES AND EQUITY CURRENT LIABILITIES Short-term borrowings Accounts payable Current portion of long-term debt Accrued salaries and benefits Accrued sales and other taxes Other current liabilities Deferred membership fees $ 0 $ 6,544 900 1,758 335 1,540 973 26 5,947 0 1,571 322 1,328 869 Total current liabilities LONG-TERM DEBT, excluding current portion DEFERRED INCOME TAXES AND OTHER LIABILITIES 12,050 1,253 885 10,063 2,141 681 Total liabilities COMMITMENTS AND CONTINGENCIES 14,188 12,885 0 0 2 4,516 373 7,111 2 4,115 122 6,590 12,002 10,829 101 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 434,266,000 and 433,510,000 shares issued and outstanding Additional paid-in capital Accumulated other comprehensive income Retained earnings Total Costco stockholders' equity Noncontrolling interests Total equity TOTAL LIABILITIES AND EQUITY 571 12,573 10,930 $ 26,761 $ 23,815 Page 18 Management 1A Case 2 COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (dollars in millions, except per share data) 52 weeks ended August 28, 2011 52 weeks ended August 29, 2010 52 weeks ended August 30, 2009 $ $ $ REVENUE Net sales Membership fees 87,048 1,867 76,255 1,691 69,889 1,533 Total revenue OPERATING EXPENSES 88,915 77,946 71,422 Merchandise costs Selling, general and administrative Preopening expenses Provision for impaired assets and closing costs, net 77,739 8,682 46 67,995 7,840 26 62,335 7,252 41 9 8 17 2,439 2,077 1,777 Operating income OTHER INCOME (EXPENSE) Interest expense Interest income and other, net (116) 60 (111) 88 (108) 58 INCOME BEFORE INCOME TAXES Provision for income taxes 2,383 841 2,054 731 1,727 628 Net income including noncontrolling interests Net income attributable to noncontrolling interests 1,542 (80) 1,323 (20) 1,099 (13) NET INCOME ATTRIBUTABLE TO COSTCO $ 1,462 $ 1,303 $ 1,086 NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO: Basic $ 3.35 $ 2.97 $ 2.50 Diluted $ 3.30 $ 2.92 $ 2.47 $ 436,119 443,094 0.89 $ 438,611 445,970 0.77 $ 433,988 440,454 0.68 Shares used in calculation (000's) Basic Diluted Dividends per share Page 19 Management 1A Case 2 COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME (dollars in millions) Accumulated Additional Other Total Costco Paid-in Comprehensive Retained Stockholders' Noncontrolling Shares (000's) Amount Capital Income Earnings Equity Interests Common Stock BALANCE AT AUGUST 31, 2008 Comprehensive Income: Net income 432,513 $ 2 $ 3,543 $ Unrealized gain on short-term investments, net of ($2) tax Foreigncurrency translation adjustment and other Comprehensive income Stock options exercised and release of vested restricted stock units, including tax effects Conversion of convertible notes Repurchases of common stock Stock-based compensation Cash dividends 288 $ 5,361 $ 9,194 $ 80 $ 9,274 1,086 1,086 13 1,099 3 0 3 3 (181) (181) (4) (185) 908 9 917 3,794 0 75 75 75 562 0 19 19 19 (895) 0 (7) (57) (57) 181 181 (296) (296) (50) 181 (296) Distribution to noncontrolling interest BALANCE AT AUGUST 30, 2009 Comprehensive Income: Net income (9) 435,974 2 3,811 Unrealized gain on short-term investments, net of ($1) tax Foreigncurrency translation adjustment and other Comprehensive income Stock options exercised and release of vested restricted stock units, including tax effects Conversion of Total Equity 110 (9) 6,101 10,024 80 10,104 1,303 1,303 20 1,323 3 3 0 3 9 9 1 10 1,315 21 1,336 7,461 0 205 205 205 18 0 1 1 1 Page 20 Management 1A convertible notes Repurchases of common stock Stock-based compensation Cash dividends BALANCE AT AUGUST 29, 2010 Initial consolidation of noncontrolling interest in Costco Mexico Comprehensive Income: Net income Case 2 (9,943) 0 (92) 190 (338) 433,510 2 4,115 122 6,590 (568) (568) 190 190 (338) (338) 10,829 101 10,930 0 357 357 1,462 80 1,542 1 1 0 1 250 250 24 274 1,713 104 1,817 1,462 Unrealized gain on short-term investments, net of ($1) tax Foreigncurrency translation adjustment and other Comprehensive income Stock options exercised and release of vested restricted stock units, including tax effects Conversion of convertible notes Repurchases of common stock Stock-based compensation Cash dividends (476) 9,630 0 281 281 281 65 0 2 2 2 0 (89) (8,939) (552) 207 (389) (641) (641) 207 207 (389) (389) Investment by noncontrolling interest BALANCE AT AUGUST 28, 2011 9 434,266 $ 2 $ 4,516 $ 373 $ 7,111 $ 12,002 $ 9 571 $12,573 Page 21 Management 1A Case 2 COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in millions) 52 Weeks ended 52 Weeks ended 52 Weeks ended August 28, August 29, August 30, 2011 2010 2009 CASH FLOWS FROM OPERATING ACTIVITIES Net income including noncontrolling interests $ Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities: Depreciation and amortization Stock-based compensation Undistributed equity earnings in joint ventures Excess tax benefits on stock-based awards Other non-cash operating activities, net Deferred income tax expense Changes in operating assets and liabilities, net of the initial consolidation of Costco Mexico at the beginning of fiscal 2011: Increase in merchandise inventories Increase in accounts payable Other operating assets and liabilities, net 1,542 $ 1,323 $ 1,099 855 207 (1) (45) 24 84 795 190 (42) (10) 2 7 728 181 (33) (2) 46 70 (642) 804 370 (213) 445 283 (394) 255 142 Net cash provided by operating activities 3,198 2,780 2,092 Additions to property and equipment Increase resulting from initial consolidation of Costco Mexico Proceeds from the sale of property and equipment Purchases of short-term investments Maturities of short-term investments Sales of investments Other investing activities, net (1,290) (1,055) (1,250) 165 16 (3,276) 2,614 602 (11) 0 4 (2,693) 1,428 309 (8) 0 7 (1,806) 1,780 183 (15) Net cash used in investing activities (1,180) (2,015) (1,101) (514) (105) 79 0 (389) 9 45 5 (73) 81 (84) (338) 0 10 (22) (1,777) 1,669 (6) (296) (9) 2 224 (624) (2) 193 (551) 38 69 (69) 0 (1,277) (719) (439) 54 11 (14) 795 57 538 3,214 3,157 2,619 CASH FLOWS FROM INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Change in bank checks outstanding Repayments of short-term borrowings Proceeds from short-term borrowings Repayments of long-term debt Cash dividend payments Investment by (distribution to) noncontrolling interests Excess tax benefits on stock-based awards Proceeds from stock-based awards, net of minimum tax withholdings Repurchases of common stock Other financing activities, net Net cash used in financing activities EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS Net increase in cash and cash equivalents CASH AND CASH EQUIVALENTS BEGINNING OF YEAR Page 22 Management 1A CASH AND CASH EQUIVALENTS END OF YEAR Case 2 $ 4,009 $ 3,214 $ 3,157 $ $ 111 $ 742 $ 110 $ 637 $ 104 565 $ (10) $ 24 $ 20 $ $ $ 2 $ 0 $ 17 $ 1 $ 90 $ 17 $ 19 72 0 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest (reduced by $9, $11, and $8 interest capitalized in 2011, 2010, and 2009, respectively) Income taxes SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: (Decrease) Increase in accrued property and equipment Common stock issued upon conversion of 3.5% Zero Coupon Convertible Subordinated Notes Property acquired under capital leases Unsettled repurchases of common stock Page 23