# Costco Wholesale Corp: Form 10-Q for the period ended Feb 17, 2019

- Company: [Costco Wholesale Corp](/companies/cost.md) (CIK 909832)
- Form: 10-Q
- Filed: 2019-03-13
- Accepted by EDGAR: Mar 13, 2019, 16:49 ET
- Period: 2019-02-17
- Accession: 0000909832-19-000003
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/909832/000090983219000003/cost10q21719.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/909832/000090983219000003/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-02-17.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-11-26 to 2019-02-17 | $35.40bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2018-11-26 to 2019-02-17 | $30.72bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2018-11-26 to 2019-02-17 | $3.91bn | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2018-11-26 to 2019-02-17 | $3.46bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-11-26 to 2019-02-17 | $1.20bn | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-11-26 to 2019-02-17 | $34.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-11-26 to 2019-02-17 | $314.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-11-26 to 2019-02-17 | $889.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-11-26 to 2019-02-17 | $2.01 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-11-26 to 2019-02-17 | $2.02 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-11-26 to 2019-02-17 | 442,337,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Capital expenditure | 3 months, 2018-11-26 to 2019-02-17 | $587.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2019-02-17 | $6.08bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-02-17 | $21.65bn | us-gaap:AssetsCurrent |
| Total assets | at 2019-02-17 | $42.80bn | us-gaap:Assets |
| Current liabilities | at 2019-02-17 | $22.45bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-02-17 | $28.62bn | us-gaap:Liabilities |
| Long-term debt | at 2019-02-17 | $4.79bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2019-02-17 | $1.70bn | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2019-02-17 | $13.86bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 31,021 characters.

(amounts in millions, except per share, share, and warehouse count data)

### FORWARD-LOOKING STATEMENTS

Certain statements contained in this Report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. They include statements that address activities, events, conditions or developments that we expect or anticipate may occur in the future and may relate to such matters as sales growth, changes in comparable sales, cannibalization of existing locations by new openings, price or fee changes, earnings performance, earnings per share, stock-based compensation expense, warehouse openings and closures, capital spending, the effect of adopting certain accounting standards, future financial reporting, financing, margins, return on invested capital, strategic direction, expense controls, membership renewal rates, shopping frequency, litigation, and the demand for our products and services. Forward-looking statements may also be identified by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “likely,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or similar expressions and the negatives of those terms. 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, uncertainties in the financial markets, consumer and small business spending patterns and debt levels, breaches of security or privacy of member or business information, conditions affecting the acquisition, development, ownership or use of real estate, capital spending, actions of vendors, rising costs associated with employees (generally including health care costs), energy and certain commodities, geopolitical conditions (including tariffs), the ability to remediate material weaknesses in internal control, and other risks identified from time to time in our public statements and reports filed with the SEC. Forward-looking statements speak only as of the date they are made, and we do not undertake to update these statements, except as required by law.

This management discussion should be read in conjunction with the management discussion included in our fiscal 2018 Annual Report on Form 10-K, previously filed with the SEC.

### OVERVIEW

We operate membership warehouses and e-commerce websites based on the concept that offering our 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. When combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, these volumes and turnover enable us to operate profitably at significantly lower gross margins (net sales less merchandise costs) than most other retailers.

We believe that the most important driver of our profitability is sales growth, particularly comparable sales growth. We define comparable sales as sales from warehouses open for more than one year, including remodels, relocations and expansions, as well as online sales related to e-commerce websites operating for more than one year. Comparable sales growth is achieved through increasing shopping frequency from new and existing members and the amount they spend on each visit (average ticket). Sales comparisons can also be particularly influenced by certain factors that are beyond our control: fluctuations in currency exchange rates (with respect to the consolidation of the results of our international operations); changes in the cost of gasoline and associated competitive conditions; and changes from the revenue recognition standard. The higher our comparable sales exclusive of these items, the more we can leverage certain of our selling, general and administrative expenses, reducing them as a percentage of sales and enhancing profitability. Generating comparable sales growth is foremost a question of making available to our members the right merchandise at the right prices, a skill that we believe we have repeatedly demonstrated over the long term. Another substantial factor in sales growth is the health of the economies in which we do business, including the effects of inflation or deflation, especially the United States. Sales growth and gross margins are also impacted by our competition, which is vigorous and widespread, across a wide range of global, national and regional wholesalers and retailers, including those with e-commerce operations. While we cannot control or reliably predict general economic health or changes in competition, we believe that we have been successful historically in adapting our business to these changes, such as through adjustments to our pricing and to our merchandise mix, including increasing the penetration of our private label items and through our online offerings.

Our philosophy is to provide our members with quality goods and services at competitive prices. We do not focus in the short term on maximizing prices charged, but instead seek to maintain what we believe is a perception among our members of our “pricing authority” on quality goods– consistently providing the most competitive values. Our investments in merchandise pricing can, from time to time, include reducing prices on merchandise to drive sales or meet competition and holding prices steady despite cost increases instead of passing the increases on to our members, negatively impacting near-term gross margin as a percentage of net sales (gross margin percentage). We believe that our gasoline business draws members, but it generally has a significantly lower gross margin percentage relative to our non-gasoline business. A higher penetration of gasoline sales will generally lower our gross margin percentage. Rapidly changing gasoline prices may significantly impact our near-term net sales growth. Generally, rising gasoline prices benefit net sales growth which, given the higher sales base, negatively impacts our gross margin percentage but decreases our selling, general and administrative (SG&A) expenses as a percentage of net sales. A decline in gasoline prices has the inverse effect.

We also achieve sales growth by opening new warehouses. As our warehouse base grows, available and desirable potential sites become more difficult to secure, and square footage growth becomes a comparatively less substantial component of growth. The negative aspects of such growth, however, including lower initial operating profitability relative to existing warehouses and cannibalization of sales at existing warehouses when openings occur in existing markets, are continuing to decline in significance as they relate to the results of our total operations. Our rate of square footage growth is generally higher in foreign markets, due to the smaller base in those markets, and we expect that to continue. Our e-commerce business growth, domestically and internationally, has also increased our sales.

Our membership format is an integral part of our business and has a significant effect on our profitability. This format is designed to reinforce member loyalty and provide continuing fee revenue. The extent to which we achieve growth in our membership base, increase the penetration of our Executive members, and sustain high renewal rates materially influences our profitability. Our paid membership growth rate may be adversely impacted when warehouse openings occur in existing markets as compared to new markets.

Our financial performance depends heavily on our ability to control costs. While we believe that we have achieved successes in this area, some significant costs are partially outside our control, most particularly health care and utility expenses. With respect to compensation of our employees, our philosophy is not to seek to minimize their wages and benefits. Rather, we believe that reducing employee turnover and enhancing employee satisfaction requires maintaining compensation levels that are better than the industry average for much of our workforce. This may cause us, for example, to absorb costs that other employers might seek to pass through to their workforces. Because our business is operated on very low margins, modest changes in various items in the income statement, particularly merchandise costs and selling, general and administrative expenses, can have substantial impacts on net income.

Our operating model is generally the same across our U.S., Canada, and Other International operating segments (see Note 10 to the consolidated financial statements included in Part I, Item 1, of this Report). Certain countries in the Other International segment have relatively higher rates of square footage growth, lower wages and benefits costs as a percentage of country sales, and/or less or no direct membership warehouse competition.

In discussions of our consolidated operating results, we refer to the impact of changes in foreign currencies relative to the U.S. dollar, which relates to the differences between the foreign-exchange rates we use to convert the financial results of our international operations from local currencies into U.S. dollars for financial reporting purposes. This impact of foreign-exchange rate changes is calculated based on the difference between the current period's currency exchange rates and that of the comparable prior period. The impact of changes in gasoline prices on net sales is calculated based on the difference between the current period's average price per gallon sold and that of the comparable prior period.

Our fiscal year ends on the Sunday closest to August 31. References to the second quarters of 2019 and 2018 relate to the 12 week fiscal quarters ended February 17, 2019, and February 18, 2018, respectively. References to the first half of 2019 and 2018 relate to the 24 weeks ended February 17, 2019, and February 18, 2018, respectively. Certain percentages presented are calculated using actual results prior to rounding. Unless otherwise noted, references to net income relate to net income attributable to Costco.

Key items for the second quarter of 2019 as compared to the second quarter of 2018 include:

- Net sales increased 7% to $34,628, driven by an increase in comparable sales of 5% and sales at 22 net new warehouses opened since the end of the second quarter of fiscal 2018;
- Membership fee revenue increased 7% to $768, primarily due to sign-ups at existing and new warehouses and the annual fee increase in the U.S. and Canada in June 2017;
- Gross margin percentage increased 31 basis points primarily due to our warehouse ancillary and other businesses, predominantly our gasoline business;
- SG&A expenses as a percentage of net sales decreased two basis points due to leveraging increased sales;
- Net income increased 27% to $889, or $2.01 per diluted share, compared to $701, or $1.59 per diluted share in 2018;
- On January 24, 2019, our Board of Directors declared a quarterly cash-dividend of $0.57 per share, which was paid on February 22, 2019; and
- Subsequent to the end of the quarter, we increased our starting and supervisor wages and will provide paid bonding leave for hourly employees in the U.S. and Canada, effective March 2019. The estimated annualized pre-tax cost of these increases is approximately $50-$60.

### RESULTS OF OPERATIONS

### Net Sales

|  | 12 Weeks Ended February 17, 2019 | February 18, 2018 | 24 Weeks Ended February 17, 2019 | February 18, 2018 |
| --- | ---: | ---: | ---: | ---: |
| Net Sales | $34,628 | $32,279 | $68,939 | $63,396 |
| Changes in net sales |  |  |  |  |
| U.S | 9% | 9% | 11% | 10% |
| Canada | 1% | 12% | 3% | 14% |
| Other international | 4% | 21% | 6% | 19% |
| Total Company | 7% | 11% | 9% | 12% |
| Changes in comparable sales: |  |  |  |  |
| U.S | 7% | 7% | 9% | 9% |
| Canada | 0% | 9% | 1% | 10% |
| Other international | 1% | 16% | 2% | 13% |
| Total Company | 5% | 8% | 7% | 9% |
| Changes in comparable sales excluding the impact of changes in foreign currency and gasoline prices (1): |  |  |  |  |
| U.S | 7% | 6% | 8% | 7% |
| Canada | 6% | 2% | 6% | 3% |
| Other international | 5% | 7% | 5% | 8% |
| Total Company | 7% | 5% | 7% | 7% |

(1) Excludes the impact of the revenue recognition standard for the periods ended February 17, 2019. See Item 1 Note 1.

#### Net Sales

Net sales increased $2,349 or 7%, and $5,543 or 9% during the second quarter and first half of 2019, respectively, compared to the second quarter and first half of 2018. These increases were attributable to an increase in comparable sales of 5% and 7% in the second quarter and first half of 2019, respectively, and sales at the 22 net new warehouses opened since the end of the second quarter of 2018.

During the second quarter of 2019, changes in foreign currencies relative to the U.S. dollar negatively impacted net sales by approximately $460, or 142 basis points, compared to the second quarter of 2018, attributable to our Canadian and Other International operations. Changes in gasoline prices also negatively impacted net sales by approximately $195, or 60 basis points, due to a 5% decrease in the average price per gallon. The new revenue recognition standard positively impacted net sales by $179, or 55 basis points.

During the first half of 2019, changes in foreign currencies relative to the U.S. dollar negatively impacted net sales by approximately $773, or 122 basis points, compared to the first half of 2018, attributable to our Canadian and Other International operations. The new revenue recognition standard positively impacted net sales by $519, or 82 basis points. Changes in gasoline prices also positively impacted net sales by approximately $226, or 36 basis points, due to a 4% increase in the average price per gallon.

#### Comparable Sales

Comparable sales increased 5% and 7% in the second quarter and first half of 2019, respectively, and were positively impacted by increases in shopping frequency and the average ticket. Comparable sales for the second quarter and first half of 2019 were negatively impacted by cannibalization (established warehouses losing sales to our newly opened locations).

### Membership Fees

|  | 12 Weeks Ended February 17, 2019 | February 18, 2018 | 24 Weeks Ended February 17, 2019 | February 18, 2018 |
| --- | ---: | ---: | ---: | ---: |
| Membership fees | $768 | $716 | $1,526 | $1,408 |
| Membership fees as a percentage of net sales | 2.22% | 2.22% | 2.21% | 2.22% |
| Total paid members as of quarter end (000's) | 52,700 | 50,400 | — | — |
| Total cardholders as of quarter end (000's) | 96,300 | 92,200 | — | — |

Membership fees increased 7% and 8% in the second quarter and first half of 2019, respectively. This was primarily due to sign-ups at existing and new warehouses and the fee increase (discussed below). Renewal rates are 91% in the U.S. and Canada and 88% worldwide.

As previously reported, in fiscal 2017 we increased our membership fees in the U.S. and Canada. We account for membership fee revenue on a deferred basis, recognized ratably over the one-year membership period. These fee increases had a positive impact on revenues during the second quarter and first half of 2019 of approximately $24 and $61, respectively.

### Gross Margin

|  | 12 Weeks Ended February 17, 2019 | February 18, 2018 | 24 Weeks Ended February 17, 2019 | February 18, 2018 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $34,628 | $32,279 | $68,939 | $63,396 |
| Less merchandise costs | 30,720 | 28,733 | 61,343 | 56,350 |
| Gross margin | $3,908 | $3,546 | $7,596 | $7,046 |
| Gross margin percentage | 11.29% | 10.98% | 11.02% | 11.11% |

#### Quarterly Results

The gross margin of our core merchandise categories (food and sundries, hardlines, softlines, and fresh foods), when expressed as a percentage of core merchandise sales (rather than total net sales), increased eight basis points, primarily due to increases in food and sundries and fresh foods, partially offset by decreases in hardlines and softlines. This measure eliminates the impact of changes in sales penetration and gross margins from our warehouse ancillary and other businesses.

Total gross margin percentage increased 31 basis points compared to the second quarter of 2018. Excluding the impacts of gasoline price deflation and the new revenue recognition standard on net sales, gross margin as a percentage of adjusted net sales was 11.28%, an increase of 30 basis points. This was primarily due to a 32 basis point increase in our warehouse ancillary and other businesses, predominantly our gasoline business. Core merchandise categories were also higher by one basis point. Executive Membership 2% reward program negatively impacted gross margin by three basis points, due to increased spending by Executive Members.

Gross margin on a segment basis, when expressed as a percentage of the segment's own sales and excluding the impact of changes in gasoline prices on net sales (segment gross margin percentage), increased in our U.S. operations, primarily due to our warehouse ancillary and other businesses, predominantly our gasoline business. The segment gross margin percentage in our Canadian operations decreased primarily due to our warehouse ancillary and other businesses. Other International operations decreased, primarily in our core merchandise categories.

#### Year-to-date Results

The gross margin of core merchandise categories, when expressed as a percentage of core merchandise sales, increased one basis point. This was attributable to increases in food and sundries partially offset by decreases in softlines and fresh foods.

Total gross margin percentage decreased nine basis points compared to the first half of 2018. Excluding the impacts of gasoline price inflation and the new revenue recognition standard on net sales, gross margin as a percentage of adjusted net sales was 11.14%, an increase of three basis points from the first half of 2018. This was primarily due to a 22 basis point increase in our warehouse ancillary and other businesses, predominantly our gasoline business. This increase was partially offset by decreases of nine basis points in our core merchandise categories and six basis points due to an adjustment to our estimate of breakage on rewards earned under our co-branded credit card program.

The segment gross margin percentage increased in our U.S. operations, primarily due to our warehouse ancillary and other businesses, predominantly our gasoline business. This was partially offset by decreases from the breakage adjustment noted above and lower gross margins in certain of our core merchandise categories. The segment gross margin percentage in our Canadian operations decreased due to our warehouse ancillary and other businesses and certain of our core merchandise categories. The segment gross margin percentage in our Other International operations decreased due to our core merchandise categories.

### Selling, General and Administrative Expenses

|  | 12 Weeks Ended February 17, 2019 | February 18, 2018 | 24 Weeks Ended February 17, 2019 | February 18, 2018 |
| --- | ---: | ---: | ---: | ---: |
| SG&A expenses | $3,464 | $3,234 | $6,939 | $6,458 |
| SG&A expenses as a percentage of net sales | 10.00% | 10.02% | 10.06% | 10.19% |

#### Quarterly Results

SG&A expenses as a percentage of net sales decreased two basis points compared to the second quarter of 2018. The combined effect of gasoline price deflation and the new revenue recognition standard had no impact on SG&A expenses as a percentage of net sales. Operating costs related to warehouse, ancillary and other businesses, which includes e-commerce and travel, decreased two basis points, due to leveraging increased sales, partially offset by the wage increases of our U.S. hourly employees that went into effect in June 2018.

#### Year-to-date Results

SG&A expenses as a percentage of net sales decreased 13 basis points compared to the first half of 2018. Excluding the impacts of gasoline price inflation and the new revenue recognition standard on net sales, SG&A expenses as a percentage of adjusted net sales was 10.18%, a decrease of one basis point. Operating costs related to warehouse, ancillary and other businesses, which includes e-commerce and travel, were lower by three basis points, predominantly in our U.S. operations, due to leveraging increased sales. Central operating costs were lower by one basis point. Stock compensation expense was higher by three basis points.

### Preopening Expense

|  | 12 Weeks Ended February 17, 2019 | February 18, 2018 | 24 Weeks Ended February 17, 2019 | February 18, 2018 |
| --- | ---: | ---: | ---: | ---: |
| Preopening expenses | $9 | $12 | $31 | $29 |
| Warehouse openings, including relocations |  |  |  |  |
| United States | 2 | 1 | 8 | 7 |
| Canada | 0 | 0 | 2 | 1 |
| Other International | 0 | 0 | 0 | 0 |
| Total warehouse openings, including relocations | 2 | 1 | 10 | 8 |

Preopening expenses include costs for startup operations related to new warehouses and relocations, developments in new international markets, new manufacturing and distribution facilities, and expansions at existing warehouses. Preopening expenses vary due to the number of warehouse openings, the timing of the openings relative to our quarter-end, whether the warehouse is owned or leased, and whether the opening is in an existing, new or international market. For the remainder of fiscal 2019, we expect to open 17 warehouses, including two relocations.

### Interest Expense

|  | 12 Weeks Ended February 17, 2019 | February 18, 2018 | 24 Weeks Ended February 17, 2019 | February 18, 2018 |
| --- | ---: | ---: | ---: | ---: |
| Interest expense | $34 | $37 | $70 | $74 |

Interest expense is primarily related to Senior Notes. In October 2018 we repaid a Guaranteed Senior Note issued by our Japanese subsidiary.

### Interest Income and Other, Net

|  | 12 Weeks Ended February 17, 2019 | February 18, 2018 | 24 Weeks Ended February 17, 2019 | February 18, 2018 |
| --- | ---: | ---: | ---: | ---: |
| Interest income | $33 | $16 | $54 | $29 |
| Foreign-currency transaction gains (losses), net | 8 | (14) | 3 | (10) |
| Other, net | 5 | 5 | 11 | 10 |
| Interest income and other, net | $46 | $7 | $68 | $29 |

Interest income increased for the second quarter and first half of 2019, due to higher interest rates and higher average cash and investment balances. Foreign-currency transaction gains (losses), net, include the revaluation or settlement of monetary assets and liabilities by our Canadian and Other International operations and mark-to-market adjustments for forward foreign-exchange contracts. See Derivatives and Foreign Currency sections in Item 8, Note 1 of our Annual Report on Form 10-K, for the fiscal year ended September 2, 2018.

### Provision for Income Taxes

|  | 12 Weeks Ended February 17, 2019 | February 18, 2018 | 24 Weeks Ended February 17, 2019 | February 18, 2018 |
| --- | ---: | ---: | ---: | ---: |
| Provision for income taxes | $314 | $273 | $472 | $558 |
| Effective tax rate | 25.8% | 27.7% | 21.9% | 29.0% |

The effective tax rate for the second quarter and first half of 2019 was favorably impacted by the reduction in the U.S. federal corporate tax rate from 35% to 21%, which was in effect for the entire second quarter and first half of 2019, as compared to a higher blended rate effective for the second quarter and first half of 2018. The effective tax rate for the first half of 2019 included discrete net tax benefits of $90 which largely related to the first quarter of 2019. Excluding the discrete net tax benefits, the tax rate was 26.1% for the first half of 2019. The tax rate includes a benefit for certain foreign tax credits, which were originally disallowed beginning in fiscal 2019. Similar credits will not be allowed in future years.

### LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes our significant sources and uses of cash and cash equivalents:

|  | 24 Weeks Ended February 17, 2019 | February 18, 2018 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $1,958 | $2,115 |
| Net cash used in investing activities | (1,171) | (1,158) |
| Net cash used in financing activities | (749) | (748) |

Our primary sources of liquidity are cash flows from warehouse operations, cash and cash equivalents, and short-term investment balances. Cash and cash equivalents and short-term investments were $7,122 and $7,259 at February 17, 2019, and September 2, 2018, respectively. Of these balances, approximately $1,215 and $1,348 represented unsettled credit and debit card receivables, respectively. These receivables generally settle within four days.

Management believes that our cash position and operating cash flows will be sufficient to meet our liquidity and capital requirements for the foreseeable future. We believe that our U.S. current and projected asset position is sufficient to meet our U.S. liquidity requirements and, beginning in the second quarter of fiscal 2018, we no longer consider earnings of our non-U.S. consolidated subsidiaries to be permanently reinvested. We consider undistributed earnings of non-U.S. consolidated subsidiaries prior to fiscal 2018 to be indefinitely reinvested.

### Cash Flows from Operating Activities

Net cash provided by operating activities totaled $1,958 in the first half of 2019, compared to $2,115 in the first half of 2018. Cash provided by operations is primarily derived from net sales and membership fees. Cash used in operations generally consists of payments to merchandise vendors, warehouse operating costs including payroll and employee benefits, utilities, and debit and credit card processing fees. Cash used in operations also includes payments for income taxes.

### Cash Flows from Investing Activities

Net cash used in investing activities totaled $1,171 in the first half of 2019 compared to $1,158 in the first half of 2018, and primarily related to capital expenditures. Net cash from investing activities also includes purchases and maturities of short-term investments.

#### Capital Expenditure Plans

Our primary requirements for capital is acquiring land, buildings, and equipment for new and remodeled warehouses. Capital is also required for information systems, manufacturing and distribution facilities, initial warehouse operations and working capital. In the first half of 2019, we spent $1,317 on capital expenditures, and it is our current intention to spend approximately $2,800 to $3,100 during fiscal 2019. We opened 10 new warehouses, including three relocations, in the first half of 2019 and plan to open 17 additional new warehouses, including two relocations, in the remainder of fiscal 2019. There can be no assurance that current expectations will be realized and plans are subject to change upon further review of our capital expenditure needs.

### Cash Flows from Financing Activities

Net cash used in financing activities totaled $749 in the first half of 2019 compared to $748 in the first half of 2018. Cash flow used in financing activities primarily related to the payment of dividends and withholding taxes on stock-based awards. Dividends totaling $501 were paid during the first half of 2019, of which $250 related to the dividend declared in August 2018 and $251 related to the dividend declared in October 2018.

#### Stock Repurchase Programs

During the first half of 2019 and 2018, we repurchased 711,000 and 1,047,000 shares of common stock, at an average price of $213.08 and $170.06, respectively, totaling approximately $151 and $178, respectively. 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. 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. Repurchased shares are retired, in accordance with the Washington Business Corporation Act.

#### Dividends

On January 24, 2019, our Board of Directors declared a quarterly dividend of $0.57 per share payable to shareholders of record on February 8, 2019. The dividend was paid on February 22, 2019.

### Bank Credit Facilities and Commercial Paper Programs

We maintain bank credit facilities for working capital and general corporate purposes. At February 17, 2019, we had borrowing capacity under these facilities of $870, including a $400 revolving line of credit, which expires in June 2019. The Company currently has no plans to draw upon this facility. Our international operations maintain $343 of the borrowing capacity under bank credit facilities, of which $146 is guaranteed by the Company. There were no outstanding short-term borrowings under the bank credit facilities at the end of the second quarter of 2019 or at the end of 2018.

The Company has letter of credit facilities, for commercial and standby letters of credit, totaling $235. The outstanding standby letters of credit under these facilities at the end of the second quarter of 2019 totaled $164, and many expire within one year. Bank credit facilities and commercial paper programs that expire typically have a one-year term and we generally intend to renew these facilities. The amount of borrowings available at any time under our bank credit facilities is reduced by the amount of standby and commercial letters of credit then outstanding.

### Contractual Obligations

As of the date of this Report, there were no material changes to our contractual obligations outside the ordinary course of business since the end of our last fiscal year.

### Critical Accounting Estimates

The preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles (U.S. GAAP) requires that we make estimates and judgments. We base these on historical experience and on assumptions that we believe to be reasonable. Our critical accounting policies are discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K, for the fiscal year ended September 2, 2018. There have been no material changes to the critical accounting policies previously disclosed in that Report.

### Recent Accounting Pronouncements

See discussion of Recent Accounting Pronouncements in Note 1 to the condensed consolidated financial statements included in Part I, Item 1 of this Report.

## Market risk

As filed, 274 characters.

Our direct exposure to financial market risk results from fluctuations in foreign currency exchange rates and interest rates. There have been no material changes to our market risks as disclosed in our Annual Report on Form 10-K, for the fiscal year ended September 2, 2018.

## Controls and procedures

As filed, 2,122 characters.

### Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. The Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of February 17, 2019 and, based on their evaluation, have concluded the disclosure controls and procedures were not effective as of that date due to a material weakness in internal control over financial reporting that was disclosed in our Annual Report on Form 10-K for the fiscal year ended September 2, 2018.

### Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the second quarter of fiscal 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

### Remediation

As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended September 2, 2018, we began implementing a remediation plan to address the material weakness mentioned above. The weakness will not be considered remediated, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of fiscal 2019.

## Risk factors

As filed, 363 characters.

In addition to the other information set forth in the Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K, for the fiscal year ended September 2, 2018. There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K.

Filed Mar 13, 2019.
Source: SEC EDGAR, the filing index for accession 0000909832-19-000003. Last ingested by Listed: Oct 27, 2026, 16:16 ET. No prices; not investment advice.