136 139 Kanazawa Seaside Kawasaki Kitakyushu SCOTLAND (3) Aberdeen Edinburgh Glasgow WALES (1) Cardiff SPAIN (2) Kobe Seishin Getafe Maebashi Gunma Seville Kaminoyama Makuhari MÉXICO (36) Sapporo Shin Misato Tamasakai Tsukuba Yawata Kyoto Zama SOUTH KOREA (12) Scarborough Sudbury Vaughan Windsor QUÉBEC (21) Anjou Busan Nonoichi Izumi Peterborough Richmond Hill St. Catharines Oshawa Spartanburg SOUTH DAKOTA (1) Sioux Falls TENNESSEE (5) Brentwood Farragut N.E. Memphis S.E. Memphis W. Nashville TEXAS (26) Arlington Austin S. Austin Bunker Hill Cedar Park Duncanville El Paso Fort Worth N. Fort Worth 2 2 Willowbrook Etobicoke Gloucester Guelph Kanata Kingston Kitchener London North London Markham E. Markham Mississauga Central Mississauga North Mississauga South Nepean Newmarket Cheonan Myrtle Beach Boisbriand Boucherville Daegu Medicine Hat Okotoks Red Deer Pointe Claire Québec Sainte-Foy Rocky View Saint-Hubert Sherwood Park Saint-Jérôme Puyallup St. Albert Tacoma BRITISH COLUMBIA (14) Terrebonne Abbotsford Trois-Rivières-Ouest Hsinchu Burnaby Vaudreuil Kaohsiung Courtenay Sherbrooke Montréal Lethbridge Marysville Daejeon Euijeongbu Gongse Gwangmyeong Ilsan Sangbong Ulsan Yangjae Yangpyung TAIWAN (11) AGUASCALIENTES (1) Aguascalientes BAJA CALIFORNIA (4) Ensenada Mexicali Tijuana Tijuana II BAJA CALIFORNIA SUR (1) Cabo San Lucas CHIHUAHUA (2) Chihuahua Juarez COAHUILA (1) Saltillo GUANAJUATO (3) Celaya León León II PUERTO RICO Chicoutimi Drummondville Lacey Gatineau Lynnwood Laval Lynnwood Bus. Ctr. Levis Grande Prairie Marché Central Brossard Candiac Greenville Charleston SOUTH CAROLINA (4) Lawrence Hillsboro Naples Bozeman Manhattan Medford E. Orlando Helena Melville Portland Eugene S. Orlando Palm Beach Gardens Missoula Nanuet Roseburg Pembroke Pines Foster City Fountain Valley Fremont Fresno N. Fresno Fullerton Garden Grove Kalispell Holbrook MONTANA (5) Billings Clackamas Union Wayne Wharton NEW MEXICO (3) Albuquerque NORTH CAROLINA (7) Charlotte Durham Greensboro Matthews Raleigh Wilmington Winston-Salem NORTH DAKOTA (1) West Fargo OHIO (10) Avon Centerville Columbus Deerfield Township Easton Mayfield Heights Perrysburg Springdale Strongsville Toledo OREGON (13) N.W. Albuquerque S.E. Albuquerque Albany NEW YORK (18) Aloha Brooklyn Bend Commack Gilroy Goleta Hawthorne Santa Maria Santa Rosa Santee Signal Hill Syracuse Westbury Yonkers Warrenton Wilsonville PENNSYLVANIA (10) Bucks County Concordville Cranberry Harrisburg King of Prussia Lancaster Santa Cruz Summerlin S OF DECEMBER 31, 2015 NEWFOUNDLAND UNITED KINGDOM SPAIN 10 22 3 7 Montgomeryville Robinson Sanatoga West Homestead Staten Island North Kaohsiung Sparks Rochester Simi Valley Stockton Sunnyvale Temecula Torrance Tracy Royal Palm Beach Sarasota Square Mall Tallahassee GEORGIA (11) Alpharetta Augusta Brookhaven Cumberland Mall LOUISIANA (2) Baton Rouge New Orleans MARYLAND (10) Arundel Mills Beltsville Pompano Beach KENTUCKY (3) Florence Nesconset Salem Lexington Louisville NEBRASKA (1) Omaha NEVADA (7) Carson City New Rochelle Tigard Port Chester Queens Rego Park Centennial Riverhead Henderson Las Vegas Bus. Ctr. Reno Marlboro Mount Laurel Ocean Township N. Plainfield Teterboro Satélite Kelowna ONTARIO (29) Ajax Ancaster Barrie Brampton Burlington Downsview Amagasaki Liverpool Manchester Milton Keynes Oldham Querétaro QUINTANA ROO (1) Cancún SAN LUIS POTOSÍ (1) San Luis Potosí SINALOA (1) Culiacan Halifax SONORA (1) Hermosillo Chiba New Town Chubu Gifu Hashima Reading Hiroshima Sheffield Hisayama Southampton Hitachinaka Imizu Sunbury Thurrock VERACRUZ (2) NOVA SCOTIA (2) Dartmouth AND LABRADOR (1) St. John's NEWFOUNDLAND S. Winnipeg SOUTH AUSTRALIA (1) Coventry NEW BRUNSWICK (3) Adelaide Puebla Croydon Fredericton VICTORIA (3) Derby QUERÉTARO (1) Melbourne Farnborough Moorabbin Gateshead Ringwood Haydock Hayes Leeds JAPAN (24) Leicester Moncton Saint John Iruma Chingford Watford Xalapa Ancillary and Other (including gas stations, pharmacy, food court, and optical) 16% 17% 17% 7 Ancillary businesses within or next to our warehouses provide expanded products and services and encourage members to shop more frequently. The following table indicates the number of ancillary businesses in operation at fiscal year-end: Food Courts. Optical Dispensing Centers.. Photo Processing Centers.. Pharmacies.... Hearing-Aid Centers. Gas Stations. Number of warehouses. 11% 11% 11% 2015 2014 2013 662 641 614 656 649 622 606 589 565 581 549 502 472 445 414 686 663 634 Our online business, which operates websites in the U.S., Canada, U.K., and Mexico, provides our members additional products, many not found in our warehouses. These products vary by country and include services such as photo processing, pharmacy, travel, business delivery, and membership services. Net sales for our online business were approximately 3% of our net sales in each of the last three fiscal years. We have direct buying relationships with many producers of national brand-name merchandise. We do not obtain a significant portion of merchandise from any one supplier. We generally have not experienced difficulty in obtaining sufficient quantities of merchandise, and believe that if one or more of our current sources of supply became unavailable, we would be able to obtain alternative sources without substantial disruption of our business. We also purchase private label merchandise, as long as quality and customer demand are comparable and the value to our members is greater as compared to brand-name items. Certain financial information for our segments and geographic areas is included in Note 11 to the consolidated financial statements included in this Report. Membership Our format allows our members to utilize their memberships at any of our worldwide Costco warehouse locations. We have two types of members: Gold Star (individual) and Business. Gold Star memberships are available to individuals; Business memberships are limited to businesses, including individuals with a business license, retail sales license or other evidence of business existence. Business members have the ability to add additional cardholders (add-ons). Add-ons are not available for Gold Star members. Our annual fee for these memberships is $55 in our U.S. and Canadian operations and varies by country in our Other International operations. All paid memberships include a free household card. Our member renewal rate was approximately 91% in the U.S. and Canada, and approximately 88% on a worldwide basis in 2015. The renewal rate is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date. The majority of members renew within the six months following their renewal date. 8 680 657 628 14% 13% 13% 16% 16% 16% YUCATÁN (1) Mérida LO BUSINESS OVERVIEW 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, increases in comparable store 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, spending on our expansion plans, 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 “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity," "plan," "may," "should,” “will,” “would,” “will be,” “will continue," "will likely result,” and similar expressions. 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, including, without limitation, the factors set forth in the section titled "Risk Factors”, and other factors noted in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations” and in the consolidated financial statements and related notes in this Report. Forward-looking statements speak only as of the date they are made, and we do not undertake to update them, except as required by law. General Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983 in Seattle, Washington. We are principally engaged in the operation of membership warehouses in the United States (U.S.) and Puerto Rico, Canada, United Kingdom (U.K.), Mexico, Japan, Australia, Spain, and through majority-owned subsidiaries in Taiwan and Korea. Our common stock trades on the NASDAQ Global Select Market under the symbol "COST." We report on a 52/53-week fiscal year, consisting of thirteen, four-week periods and ending on the Sunday nearest the end of August. The first three quarters consist of three periods each, and the fourth quarter consists of four periods (five weeks in the thirteenth period in a 53-week year). The material seasonal impact in our operations is an increased level of net sales and earnings during the winter holiday season. References to 2015, 2014, and 2013 relate to the 52-week fiscal years ended August 30, 2015, August 31, 2014, and September 1, 2013, respectively. We operate membership warehouses 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 than most other retailers. We generally sell inventory before we are required to pay for it, even while taking advantage of early payment discounts when available. To the extent that sales increase and inventory turnover becomes more rapid, more inventory is financed through payment terms provided by suppliers rather than by our working capital. We buy most of our merchandise directly from manufacturers and route it to a cross-docking consolidation point (depot) or directly to our warehouses. Our depots receive large shipments from 6 manufacturers and quickly reallocate these goods for shipment to our individual warehouses. This process maximizes freight volume and handling efficiencies, eliminating many of the costs associated with traditional multiple-step distribution channels. Our average warehouse space is approximately 144,000 square feet, however our newer units tend to be slightly larger. Floor plans are designed for economy and efficiency in the use of selling space, the handling of merchandise, and the control of inventory. Because shoppers are attracted principally by the quality of merchandise and the availability of low prices, our warehouses are not elaborate. By strictly controlling the entrances and exits of our warehouses and using a membership format, we have limited inventory losses (shrinkage) to amounts well below those of typical discount retail operations. Marketing activities for new locations generally include community outreach programs to local businesses in new and existing markets and direct mail to prospective new members. Ongoing promotional programs primarily relate to coupon mailers, The Costco Connection (a magazine we publish for our members), and e-mails to members promoting selected merchandise. Our warehouses on average operate on a seven-day, 70-hour week. Gasoline operations generally have extended hours. Because the hours of operation are shorter than other retailers, and due to other efficiencies inherent in a warehouse-type operation, labor costs are lower relative to the volume of sales. Merchandise is generally stored on racks above the sales floor and displayed on pallets containing large quantities, thereby reducing labor required. In general, with variations by country, our warehouses accept cash, checks, certain debit and credit cards, or a private label Costco credit card. Our strategy is to provide our members with a broad range of high quality merchandise at prices consistently lower than they can obtain elsewhere. We seek to limit specific items in each product line to fast-selling models, sizes, and colors. We carry an average of approximately 3,700 active stock keeping units (SKUs) per warehouse in our core warehouse business, significantly less than other broadline retailers. Many consumable products are offered for sale in case, carton, or multiple-pack quantities only. In keeping with our policy of member satisfaction, we generally accept returns of merchandise. On certain electronic items, we typically have a 90-day return policy and provide, free of charge, technical support services, as well as an extended warranty. Additional third-party warranty coverage is sold on certain electronic item purchases. The following table indicates the approximate percentage of net sales accounted for by major category of items: Foods (including dry and institutionally packaged foods) Sundries (including snack foods, candy, alcoholic and nonalcoholic beverages, tobacco, and cleaning and institutional supplies).... Hardlines (including major appliances, electronics, health and beauty aids, hardware, and garden and patio)... Fresh Foods (including meat, produce, deli, and bakery). Softlines (including apparel and small appliances). 2015 2014 2013 22% 22% 21% 21% 21% 22% Veracruz North Lakes Chester Bristol Charlottesville Chesterfield Fairfax Fredericksburg Harrisonburg W. Henrico Leesburg Manassas Mount Vernon Newington Newport News Norfolk Pentagon City Potomac Mills Sterling Winchester WASHINGTON (30) Frisco Galleria Houston Lewisville Chantilly Aurora Village Bellingham Pearland Burlington East Plano West Plano Rockwall N.W. San Antonio Selma Sonterra Park Southlake Sugar Land Lubbock West Valley VERMONT (1) Colchester VIRGINIA (17) Spanish Fork Salt Lake City Sandy SASKATCHEWAN (2) Regina Saskatoon Neihu Toluca Shih Chih Langford Taichung Langley Nanaimo Tainan Taoyuan Chiayi Chung Ho Chungli South JALISCO (3) Guadalajara Guadalajara II Puerto Vallarta MÉXICO (4) Arboledas Interlomas The Woodlands UTAH (11) W. Bountiful S. Jordan Seattle Lehi Murray S. Ogden Orem St. George Clarkston Covington Everett Federal Way Fife - Bus. Ctr. Gig Harbor S. Edmonton W. Edmonton Port Coquitlam Prince George Richmond Surrey Vancouver Willingdon MANITOBA (3) Winnipeg E. Winnipeg AUSTRALIA (8) AUS CAP TER (1) Canberra NEW SOUTH WALES (2) UNITED KINGDOM (27) ENGLAND (23) MÉXICO, D.F. (3) Coapa Mixcoac Polanco MICHOACÁN (1) Morelia MORELOS (1) Cuernavaca NUEVO LEÓN (3) Monterrey Monterrey II Monterrey III PUEBLA (1) Auburn Sydney Birmingham QUEENSLAND (1) S. Calgary Edmonton N. Edmonton Kamloops N. Calgary N.W. Calgary CANADA (90) Issaquah Kennewick Kirkland Sequim Silverdale Spokane N. Spokane Tukwila Tumwater Union Gap Vancouver E. Vancouver E. Wenatchee Woodinville WISCONSIN (9) Bellevue Grafton Grand Chute Menemonee Falls Middleton New Berlin Pewaukee Pleasant Prairie Sun Prairie WASHINGTON, D.C. (1) Washington, D.C. PUERTO RICO (4) E. Bayamón W. Bayamón Caguas Carolina ALBERTA (15) E. Hanover Hazlet Manahawkin Pharr NEW JERSEY (16) Brick Township Bridgewater 2014 2015 At Fiscal Year End Year Opened # of Whses 2015 2014 2013 2012 2013 2011 2009 2008 2007 2006 & Before 481 Totals 686 2222222258 23 30 26 2010 2012 2011 2015 2012 2013 וווי יון Fiscal Year Average Sales Per Warehouse* (Sales In Millions) At Fiscal Year End Millions Business Members 7.6 7.4 7.2 7.0 6.8 6.6 6.400 6.4 6.300 6.2 6.600 7.100 6.900 0 2014 $83 $108 109 2011 $99 109 113 $105 9.95% 9.90% 9.85% 9.81% 9.80% וייון 9.82% 9.89% 2011 2012 2013 2014 2015 Fiscal Year 10.00% 9.98% December 17, 2015 Fiscal 2015, which ended August 30, 2015, represented another year of record sales and earnings for Costco! Sales totaled $113.7 billion during the fiscal year; and net income increased 15 percent to $2.4 billion, or $5.37 per share. Additionally, our fiscal 2015 operating cash flows, along with our strong balance sheet, enabled us to invest nearly $2.4 billion into our business, while at the same time return over $3.3 billion to shareholders in the form of dividends ($2.9 billion, including a special cash dividend of $5.00 per share) and share repurchases ($481 million). These accomplishments were possible because of the dedication and hard work of our more than 200,000 Costco employees around the world. Looking ahead, we are optimistic about Costco's future, and continue to invest in growing our businesses in the U.S. and around the world. During the fiscal year, our membership base grew by more than six percent; and we ended fiscal 2015 with more than 81 million cardholders worldwide. Member loyalty - as measured by renewal rates and shopping frequency - continued to reach record levels in 2015: 91% of members in the U.S. and Canada and 88% worldwide renewed their memberships; and shopping frequency, year- over-year, increased four percent. Executive Members, an increasing percentage of our total membership base, now represent over one-third of our members and nearly two-thirds of our sales. TM TM TM In terms of merchandising, we continued to expand both our Kirkland Signature ™ product offerings, as well as new brand-named items. This past year, new Kirkland Signature ™ items included Kirkland Signature ™ organic 2% milk, organic liquid eggs, organic coconut water, artisan breads, and light beer. Sales of all organic products at Costco continued to grow, topping $4 billion during the fiscal year. New non-food Kirkland Signature™ items in 2015 included new apparel and cookware; and new brand names offered this past year included Cole Haan shoes, Chi hair products, Brown Jordan patio furniture and SK-II skin care products. Costco's e-commerce business grew over 20% in 2015 to $3.4 billion in sales. We finished the fiscal year with operations in four countries – the U.S., Canada, U.K. and Mexico - and have since opened an online site in Korea. During the fiscal year, we upgraded our e-commerce distribution network by adding new depot distribution points, allowing us to deliver orders faster and reduce shipping costs. We continued to leverage our inline vendor relationships to enhance our online offerings and prices, with particular success in electronics, apparel and household goods. We also leveraged our in- location traffic to drive online sales of jewelry, as well as larger-sized products, such as electronics and appliances, mattresses, exercise equipment and furniture. Lastly, we expanded our merchandise mix to include additional products in infant care, apparel, health and beauty aids, and cosmetics. In mainland China, we are selling Costco products on Alibaba's Tmall site. Two hundred Costco items, including many Kirkland Signature ™ products, are now being offered to online shoppers in China. In addition, other ecommerce delivery businesses, including Google Express, Instacart, Boxed, and Jet.com, offer Costco products for delivery through their own online services. Costco's ancillary businesses – gasoline stations, pharmacies, optical and hearing aid centers, food courts, and travel – all performed well in 2015. Sales increased in all of these operations, with the exception of our gasoline business, where the average sales price per gallon was lower by 22% year-over-year. Profits in these businesses were also up. We continue to expand our gasoline operations globally, with almost all new U.S. and Canadian warehouses opening with gasoline stations; and other international locations adding stations where regulations allow and space permits. As of calendar 2015 year-end, 490 gasoline stations were in operation. Finally, our travel business, Costco Travel, had an exceptional year in 2015. 2 Dear Costco Shareholders, 9.75% 0 10.07% 115 124 128 21 $103 120 130 13 20 26 31 $94 106 122 135 $100 107 130 146 155 $86 83 99 116 128 136 $76 88 92 103 116 127 136 127 133 143 138 146 153 162 171 144 148 157 158 144 146 143 144 177 177 $127 $130 $137 $131 $139 $146 $155 $160 $164 $162 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 *First year sales annualized. 2011-2015 results include Mexico. 2006 and 2012 were 53-week years. Fiscal Year Percent of Net Sales Selling, General and Administrative Expenses 10.20% 10.15% 10.10% 10.05% 15 Gold Star Members Membership 35 Management's Reports.. 38 39 Reports of Independent Registered Public Accounting Firm. Consolidated Financial Statements.. Notes to Consolidated Financial Statements. Directors and Officers of the Company. Additional Information G & A W W N 75 Executive Officers and Corporate Governance.... 48 41 43 Percent Increase Number of Warehouses 700 675 650 625 Warehouses in Operation 608 73 24 Management's Discussion and Analysis of Financial Condition and Results of Operations ...... 23 N. Brunswick Clifton Edison Annual Report 2015 COSTCO WHOLESALE FISCAL YEAR ENDED AUGUST 30, 2015 2015 THE COMPANY Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983 in Seattle, Washington. In October 1993, Costco merged with The Price Company, which had pioneered the membership warehouse concept in 1976, to form Price/Costco, Inc., a Delaware corporation. In January 1997, after the spin-off of most of its non-warehouse assets to Price Enterprises, Inc., the Company changed its name to Costco Companies, Inc. On August 30, 1999, the Company reincorporated from Delaware to Washington and changed its name to Costco Wholesale Corporation, which trades on the NASDAQ Global Select Market under the symbol "COST." As of December 2015, the Company operated a chain of 698 warehouses in 43 states, Washington, D.C., and Puerto Rico (488 locations), nine Canadian provinces (90 locations), Mexico (36 locations), the United Kingdom (27 locations), Japan (24 locations), Korea (12 locations), Taiwan (11 locations, through a 55%-owned subsidiary), Australia (eight locations) and Spain (two locations). The Company's online business operates websites in the U.S., Canada, U.K., Mexico and Korea. CONTENTS Financial Highlights. Letter to Shareholders.. Map of Warehouse Locations.. Business Overview. Risk Factors....... Properties: Warehouses, Administration and Merchandise Distribution Properties. Market for Costco Common Stock, Dividend Policy and Stock Repurchase Program......... 2 4 11 20 21 Five Year Operating and Financial Highlights 600 592 634 663 85 1,500 1,462 0 0 2011 2012 2013 2014 2015 2011 2012 At Fiscal Year End 2013 2014 Fiscal Year 2015 2011 2012 2013 2014 2015 Fiscal Year Comparable Sales Growth 12% 87.048 In terms of expansion, we continued opening new warehouses in 2015 – in the U.S. and globally - both in-fill and in new markets. Costco's appeal, strong in North America for many years, has translated very well to the international marketplace; and international expansion is a key element in our business strategy. For the fiscal year, 23 new warehouses were opened: twelve in the U.S., one in Canada; and ten in other international markets, including three new warehouses in Mexico; three in Japan; and one each in the U.K., Korea, Taiwan, and Australia. These openings brought our total warehouse count at fiscal year-end to 686 warehouses in operation: 480 in the United States and Puerto Rico; 89 in Canada; 36 in Mexico; 27 in the United Kingdom; 23 in Japan; 12 in Korea; 11 in Taiwan; seven in Australia; and one in Spain. 90 2,377 FINANCIAL HIGHLIGHTS 120 (698 at 12/31/15) 686 115 110 105 Net Sales 100 97.062 95 102.870 2,500 113.666 2,300 110.212 Net Income 2,100 2,058 2,039 1,900 1,709 1,700 575 We are now four months into fiscal 2016; and our current plan is to open up to 32 new warehouses this year: 22 in the U.S., three in Canada, two each in Japan and Australia, and one each in the U.K., Taiwan, and Spain. To date, in fiscal 2016, twelve new Costco warehouses have already been opened. 0 Earlier this year, Ben Carson and Bill Gates retired from our Board of Directors. We thank Ben and Bill for their significant contributions during their many years of dedicated service. More recently, two new members were added to Costco's Board - Maggie Wilderotter and John Stanton. Maggie is the Executive Chairman of Frontier Communications, and previously served as Frontier's Chief Executive Officer and Chairman of the Board. Her broad-ranging experience includes senior leadership positions in the areas of telecommunications and technology. John is Chairman of Trilogy International Partners, Inc., and Trilogy Equity Partners. He is a wireless industry pioneer and former top executive at companies including McCaw Cellular and Clearwire; and earlier founded and served as Chairman and CEO of Western Wireless Corporation. Montclair Montebello Morena Moreno Valley Mountain View Northridge Norwalk Novato Oxnard Pacoima Palm Desert Poway Rancho Cordova Rancho Cucamonga Rancho del Rey Modesto Redding Rohnert Park Roseville Sacramento Salinas San Bernardino San Diego Bus. Ctr. S.E. San Diego San Dimas San Francisco S. San Francisco San Jose Redwood City Richmond Mission Valley Merced Fontana Azusa Bakersfield S.W. Bakersfield Burbank Cal Expo Carlsbad Carmel Mountain Chico Chino Hills Chula Vista Citrus Heights Clovis City of Industry Commerce Bus. Ctr. Concord Corona Culver City Cypress Danville El Camino El Centro Eureka Fairfield Folsom N.E. San Jose San Juan Capistrano San Leandro San Luis Obispo Bedford Park Bus. Ctr. Bloomingdale Bolingbrook Chicago South Loop Glenview Lake in the Hills Lake Zurich Lincoln Park Melrose Park Mettawa Mount Prospect Naperville Niles Oak Brook Orland Park East Peoria N. Riverside St. Charles Schaumburg INDIANA (5) Castleton Fort Wayne N.W. Indianapolis Merrillville Mishawaka IOWA (2) Coralville Des Moines KANSAS (3) Lenexa Overland Park Wichita Dedham Everett W. Springfield Waltham MICHIGAN (13) Auburn Hills Bloomfield Commerce Township Grand Rapids Green Oak Township Kalamazoo Livonia | Livonia II Madison Heights Pittsfield Township Roseville Shelby Township Wyoming MINNESOTA (8) Baxter Burnsville Coon Rapids Eden Prairie Maple Grove Maplewood Rochester St. Louis Park MISSOURI (5) Independence Kansas City Manchester S. St. Louis St. Peters MÉXICO As we continue the global growth of our Company we must build and operate our business in a responsible and sustainable manner. In this regard, we are committed to protecting the sustainability of our business, which involves many dimensions, including our workforce, a continuing supply of merchandise for our customers, a supply chain that protects the environment, as well as the workers and animals in the supply chain, and the efficient use and reuse of resources associated with our operations. Our customers, shareholders, employees, regulators and others are increasingly focused on sustainability; and we are enhancing our efforts in these challenging areas. NEW HAMPSHIRE (1) Nashua ILLINOIS (19) Antioch Twin Falls Nampa San Marcos Sand City Santa Clara Santa Clarita East Colorado Springs S.W. Denver Douglas County Gypsum Parker Sheridan Superior Thornton Timnath Westminster CONNECTICUT (6) Brookfield Enfield Milford New Britain Norwalk Waterbury DELAWARE (1) Christiana FLORIDA (22) Altamonte Springs Boca Raton Brandon Clearwater Davie Estero E. Jacksonville Kendall Lantana Miami N. Miami Beach Miami Lakes Pocatello Almaden Fort Myers CALIFORNIA (121) Turlock Tustin Huntsville Mobile Montgomery ALASKA (3) Anchorage N. Anchorage Juneau ARIZONA (18) Avondale Cave Creek Road Chandler Huntington Beach Gilbert Glendale Mesa Inglewood Irvine La Habra Lakewood La Mesa Laguna Marketplace Laguna Niguel Lake Elsinore Lancaster La Quinta S.E. Gilbert Hayward Bus. Ctr. Hawthorne Bus. Ctr. Hayward Hoover Preserving and enhancing our Company culture developed over more than three decades remains an “imperative” as Costco expands its operations domestically and internationally. We remain focused on exceeding the expectations of our stakeholders our members, our employees, our suppliers and our shareholders - each and every day. These are our challenges for 2016 and in the years to come; and we are confident that the entrepreneurial and innovative spirit at every level and in every region of our global company will sustain our growth and continue exceptional performance. Alhambra Best Regards, Янва Jeff Brotman Chairman of the Board Cray Jelek Craig Jelinek President and Chief Executive Officer 3 COSTCO WHOLESALE SOUTH KOREA TAIWAN D JAPAN ده ALASKA AUSTRALIA HAWAII 698 LOCATIONS A U.S.A. (488) ALABAMA (4) Livermore Lodi As always, we extend our best wishes to you and your families for a joyous holiday season and a healthy, happy and prosperous New Year. Manteca Colorado Springs Coeur d'Alene Brandywine Columbia Frederick Gaithersburg Glen Burnie Wheaton White Marsh Woodmore Twn Ctr. MASSACHUSETTS (6) Avon Danvers 2 10 Paradise Valley Phoenix Phoenix - Bus. Ctr. N. Phoenix Prescott Scottsdale Tempe Thomas Road Tucson Los Feliz N.W. Tucson S.W. Tucson IDAHO (5) Boise Aurora 3 Waipio Visalia Westlake Village Westminster Bus. Ctr. Cumming Fort Oglethorpe Gwinnett Mall of Georgia Morrow - Bus. Ctr. Perimeter Vista Town Center Tustin Ranch Vacaville Vallejo Van Nuys Victorville HAWAII (7) Iwilei Kailua-Kona Woodland Kapolei Woodland Hills Kauai Yorba Linda Maui COLORADO (13) Hawaii Kai Arvada Our failure to maintain positive membership loyalty and brand recognition could adversely affect our results of operations. other wholesale club operators, our lack of familiarity with local member preferences, and seasonal differences in the market. In addition, entry into new markets may bring us into competition with new competitors or with existing competitors with a large, established market presence. We cannot ensure that our new warehouses and new online business websites will be profitably deployed and, as a result, our future profitability could be delayed or otherwise materially adversely affected. Membership loyalty and growth are essential to our business model. 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. Damage to our brands or reputation may negatively impact comparable warehouse sales, diminish member trust, and reduce member renewal rates and, accordingly, net sales and membership fee revenue, negatively impacting our results of operations. 11 We are highly dependent on the financial performance of our U.S. and Canadian operations. Our financial and operational performance is highly dependent on our U.S. and Canadian operations, which comprised 88% and 85% of net sales and operating income in 2015, respectively. Within the U.S., we are highly dependent on our California operations, which comprised 31% of U.S. net sales in 2015. Our California market, in general, has a larger percentage of higher volume warehouses as compared to our other domestic markets. Any substantial slowing or sustained decline in these operations could materially adversely affect our business and financial results. Declines in financial performance of our U.S. operations, particularly in California, and our Canadian operations could arise from, among other things: declines in actual or estimated comparable warehouse sales growth rates and expectations; negative trends in operating expenses, including increased labor, healthcare and energy costs; failing to meet targets for warehouse openings; cannibalizing existing locations with new warehouses; shifts in sales mix toward lower gross margin products; changes or uncertainties in economic conditions in our markets, including higher levels of unemployment and depressed home values; and failing to consistently provide high quality products and innovative new products to retain our existing member base and attract new members. We seek to expand our business in existing markets in order to attain a greater overall market share. A new warehouse may draw members away from our existing warehouses and adversely affect comparable warehouse sales performance and member traffic at those existing warehouses. Our growth is dependent, in part, on our ability to acquire property and build or lease new warehouses and regional depots. We compete with other retailers and businesses for suitable locations. Local land use and other regulations restricting the construction and operation of our warehouses and depots, as well as local community actions opposed to the location of our warehouses or depots at specific sites and the adoption of local laws restricting our operations and environmental regulations, may impact our ability to find suitable locations, and increase the cost of sites and of constructing, leasing and operating our warehouses and depots. We also may have difficulty negotiating leases or real estate purchase agreements on acceptable terms. In addition, certain jurisdictions have enacted or proposed laws and regulations that would prevent or restrict the operation or expansion plans of certain large retailers and warehouse clubs, including us, within their jurisdictions. Failure to manage these and other similar factors effectively may affect our ability to timely build or lease new warehouses and depots, which could have a material adverse effect on our future growth and profitability. We may be unsuccessful implementing our growth strategy, including expanding our business, both in existing markets and in new markets, which could have an adverse impact on our business, financial condition and results of operations. In addition, we sell many products under our private label Kirkland Signature brand. Maintaining consistent product quality, competitive pricing, and availability of our Kirkland Signature products for our members is essential to developing and maintaining member loyalty. These products also generally carry higher margins than national brand products carried in our warehouses and represent a growing portion of our overall sales. If the Kirkland Signature brand experiences a loss of member acceptance or confidence, our sales and gross margin results could be adversely affected. Our membership was made up of the following (in thousands): Gold Star Business, including add-ons We intend to continue to open warehouses in new markets. The risks associated with entering a new market include difficulties in attracting members due to a lack of familiarity with us, attracting members of Disruptions in our depot operations could adversely affect sales and member satisfaction. We depend on the orderly operation of the merchandise receiving and distribution process, primarily through our depots. Although we believe that our receiving and distribution process is efficient, unforeseen disruptions in operations due to fires, hurricanes, earthquakes or other catastrophic events, labor issues or other shipping problems may result in delays in the delivery of merchandise to our warehouses, which could adversely affect sales and the satisfaction of our members. We are subject to payment-related risks. Given the very high volume of transactions we process each year it is important that we maintain uninterrupted operation of our business-critical computer systems. Our computer systems, including our back-up systems, are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, internal or external security breaches, catastrophic events such as fires, earthquakes, tornadoes and hurricanes, and errors by our employees. If our computer systems or our back-up systems are damaged or cease to function properly, we may have to make significant investments to fix or replace them, and we may suffer interruptions in our operations in the interim. Any material interruption in our computer systems could have a material adverse effect on our business and results of operations. 14 It is difficult to consistently and successfully predict the products and services our members will desire. Our success depends, in part, on our ability to identify and respond to trends in demographics and consumer preferences. Failure to timely identify or effectively respond to changing consumer tastes, preferences (including those relating to sustainability of product sources and animal welfare) and spending patterns could negatively affect our relationship with our members, the demand for our products Total paid members. and services and our market share. If we are not successful at predicting our sales trends and adjusting our purchases accordingly, we may have excess inventory, which could result in additional markdowns and reduce our operating performance. This could have an adverse effect on gross margin (net sales less merchandise costs) and operating income. We may not timely identify or effectively respond to consumer trends, which could negatively affect our relationship with our members, the demand for our products and services, and our market share. If our merchandise offerings, including food and prepared food products for human consumption, drugs, children's products, pet products, and durable goods, do not meet or are perceived not to meet applicable safety standards or our members' expectations regarding safety, we could experience lost sales, increased costs, and legal and reputational losses. The sale of these items involves the risk of health- related illness or injury to our members. Such illnesses or injuries could result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, manufacturing, storage, handling and transportation phases, or faulty design. Our vendors are generally contractually required to comply with applicable product safety laws, and we are dependent on them to ensure that the products we buy comply with all safety standards. While we are subject to governmental inspection and regulations and work to comply in all material respects with applicable laws and regulations, we cannot be sure that consumption or use of our products will not cause a health-related illness or injury in the future or that we will not be subject to claims, lawsuits, or government investigations relating to such matters resulting in costly product recalls and other liabilities that could adversely affect our business and results of operations. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential members and our corporate and brand image, and these effects could be long term. We might sell unsafe products, resulting in illness or injury to our members, harm our reputation, and litigation. We rely extensively on computer systems to process transactions, summarize results, and manage our business. Failure to adequately update our systems and disruptions in both our primary and back-up systems could harm our ability to run our business and adversely affect our results of operations. We accept payments using a variety of methods, including cash and checks, a select variety of credit and debit cards, and our proprietary cash card. As we offer new payment options to our members, we may be subject to additional rules, regulations, compliance requirements, and higher fraud losses. For certain payment methods, we pay interchange and other related card acceptance fees, along with additional transaction processing fees which may increase over time and raise our operating costs. We rely on third parties to provide payment transaction processing services, including the processing of credit and debit cards, and our proprietary cash card, and it could temporarily disrupt our business if these companies become unwilling or unable to provide these services to us. We are also subject to payment card association rules and network operating rules, including data security rules, certification requirements and rules governing electronic funds transfers, which could change over time. If we fail to comply with these rules or transaction processing requirements, we may not be able to accept certain payment methods. In addition, if our internal systems are breached or compromised, we may be liable for banks' compromised card re-issuance costs, subject to fines and higher transaction fees and lose our ability to accept credit and/or debit card payments from our members, and our business and operating results could be adversely affected. Our security measures may be undermined due to the actions of outside parties, employee error, malfeasance, or otherwise, and, as a result an unauthorized party may obtain access to our data systems and misappropriate business and personal information. In July 2015, we discovered that the company that hosts our online photo center suffered a security breach that compromised information of users of the company's site, including some Costco members. In response, that company implemented new technology with enhanced security features. Additional data security breaches may occur in the future and may, individually or in the aggregate, have a material adverse effect on our business and operations. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may not immediately produce signs of intrusion, we may be unable to anticipate these techniques, timely discover or counter them, or implement adequate preventative measures. Any such breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation, and potentially have an adverse effect on our business. The use of data by our business and our business associates is regulated at the national and state or local level in all of our operating countries. Privacy and information security laws and regulations change, and compliance with them may result in cost increases due to necessary systems changes and the development of new administrative processes. If we, or those with whom we share information, fail to comply with these laws and regulations or experience a data security breach, our reputation could be damaged, possibly resulting in lost future business, and we could be subjected to additional legal risk as a result of non-compliance. We receive, retain, and transmit certain personal information about our members and entrust that information to third party business associates, including cloud service providers that perform activities for us. Our online business, which operates websites in the U.S., Canada, U.K., and Mexico, depends upon the secure transmission of encrypted confidential information over public networks, including information permitting cashless payments. A compromise of our security systems or those of our business associates that results in our members' information being obtained by unauthorized persons could adversely affect our reputation with our members and others, as well as our operations, results of operations, financial condition and liquidity, and could result in litigation against us or the imposition of penalties. In addition, a security breach could require that we expend significant additional resources related to the security of information systems and could result in a disruption of our operations. If we do not maintain the privacy and security of member-related and other business information, we could damage our reputation with members, incur substantial additional costs, and become subject to litigation. effectiveness of adoption, and could make it more difficult for us to realize benefits from the technology. Targeting the wrong opportunities, failing to make the best investments, or making an investment commitment significantly above or below our needs could result in the loss of our competitive position and adversely impact our financial condition and results of operations. Additionally, the potential problems and interruptions associated with implementing technology initiatives could disrupt or reduce the efficiency of our operations in the short term. These initiatives might not provide the anticipated benefits or may provide them on a delayed schedule or at a higher cost. 12 We are currently making, and will continue to make, significant technology investments to improve or replace our information processes and systems that are key to managing our business. Failure to monitor and choose the right investments and implement them at the right pace would be harmful. The risk of system disruption is increased when significant system changes are undertaken, although we believe that our change management process can mitigate this risk. Excessive technological change could impact the 13 Household cards.. Competition 2014 Approximately 14,000 employees in a minority of our locations are represented by the International Brotherhood of Teamsters. All remaining employees are non-union. We consider our employee relations to be very good. If we do not successfully develop and maintain a relevant multichannel experience for our members, our results of operations could be adversely impacted. Our industry is highly competitive, based on factors such as price, merchandise quality and selection, location and customer service. We compete with warehouse club operations across the U.S. and Mexico (primarily Wal-Mart's Sam's Club and BJ's Wholesale Club), and nearly every major metropolitan area has multiple club operations. In addition, we compete on a worldwide basis with global, national and regional wholesalers and retailers, including supermarkets, supercenters, department and specialty stores, gasoline stations, and internet retailers. Competitors such as Wal-Mart, Target, Kroger, and Amazon.com are among our significant general merchandise retail competitors. We also compete with operators selling a single category or narrow range of merchandise, such as Lowe's, Home Depot, Office Depot, PetSmart, Staples, Kohl's, Trader Joe's, Whole Foods, CVS, Walgreens, and Best Buy. 9 Intellectual Property We believe that, to varying degrees, our trademarks, trade names, copyrights, proprietary processes, trade secrets, patents, trade dress, domain names and similar intellectual property add significant value to our business and are important to our success. We have invested significantly in the development and protection of our well-recognized brands, including the Costco WholesaleⓇ series of trademarks and our private label brand, Kirkland Signature®. We believe that Kirkland Signature products are premium products offered to our members at prices that are generally lower than those for similar national brand products and that they help lower costs, differentiate our merchandise offerings from other retailers, and generally earn higher margins. We expect to continue to increase the sales penetration of our private label items. We rely on trademark and copyright laws, trade secret protection, and confidentiality, license and other agreements with our suppliers, employees and others to protect our intellectual property rights. The availability and duration of trademark registrations vary by country; however, trademarks are generally valid and may be renewed indefinitely as long as they are in use and their registrations are properly maintained. Sustainability We are ever mindful of our responsibilities as an environmental steward to manage our global operations in an energy-efficient, environmentally-friendly and sustainable manner. With the establishment of our Corporate Sustainability and Energy Department almost ten years ago we have been actively developing solutions for many aspects of our business related to sustainability: seeking opportunities to reduce our carbon footprint; enhancing our warehouse energy management systems; refining our packaging design initiatives and the "cube efficiency" of our merchandise distribution systems; and further developing our recycling and waste stream management programs. The construction of our warehouses has increasingly included green building design and sustainable features. Many of our main building structures use 80% recycled steel materials designed to minimize the amount of material utilized. The roof materials used on our metal pre-engineered warehouses are recycled standing seam metal panels, designed to maximize efficiency for spanning the structure; and the exterior skin of the building is also recycled metal. This past year we increased the number of large rooftop solar photovoltaic systems to 89 warehouses. in Hawaii, California, Ohio, Utah, New Mexico, New Jersey, Puerto Rico, Colorado, Arizona, New York, and Japan. These systems are projected to generate 77 million kWh of electricity per year. We also closely monitor our water usage, especially in drought-stricken states; and continue to expand the use of non-chemical water treatment systems used in our cooling towers to reduce the amount of chemicals going into sewer systems and, where possible, reuse that water for site irrigation. By coordinating with state and federal incentive programs, these and other energy-saving systems help us lower the cost of operating our facilities. We continue to make significant progress in lowering the power consumption of the lighting systems in our buildings by as much as 50% while actually improving the lighting quality with the use of LED fixtures. Our HVAC systems are also considerably more efficient over the last several years, while at the same time meeting stricter requirements for heating, cooling, and humidity control. Recycling and waste stream management in our warehouses and cross-dock depots have expanded significantly in recent years. Tons of trash that our warehouses generate each week, much of which was once discarded into landfills, are now being recycled into usable products, converted into biofuels or compost, or used as feed stock. We also have warehouse programs where meat scraps and rotisserie chicken grease are recycled by third parties to make animal feed, biodiesel fuel, soaps, and other products. Additionally, our merchandise packaging is becoming more sustainable as we pursue opportunities to eliminate polyvinyl chloride (PVC) plastic in our packaging and replace it with recycled or recyclable materials. 10 RISK FACTORS 2013 2015 117,000 112,000 103,000 88,000 83,000 81,000 205,000 195,000 184,000 2014 Total employees. 2013 34,000 31,600 28,900 10,600 10,400 10,100 44,600 42,000 39,000 36,700 2015 34,400 32,200 76,400 71,200 Total cardholders.. All Gold Star and Business paid cardholders are eligible to upgrade to an Executive membership in the U.S., Canada, Mexico, and U.K., for an additional annual fee of approximately $55. Our Executive members qualify for a 2% reward on qualified purchases (up to a maximum reward of approximately $750 per year), which can be redeemed only at Costco warehouses. This program also offers (except in Mexico) additional savings and benefits on various business and consumer services, such as auto and home insurance, the Costco auto purchase program and check printing services. The services are generally provided by third-parties and vary by country and state. Executive members represented 39% of eligible cardholders at the end of 2015 and 2014 and 38% at the end of 2013. Executive members generally spend more than other members, and the percentage of our net sales attributable to these members continues to increase. Labor Our employee count was as follows: Full-time employees. Part-time employees 81,300 Multichannel retailing is rapidly evolving and we must keep pace with changing member expectations and new developments by our competitors. Our members, especially younger members, are increasingly using computers, tablets, mobile phones, and other devices to shop. As part of our multichannel strategy, we are making technology investments in our websites and mobile applications. If we are unable to make, improve, or develop relevant member-facing technology in a timely manner, our ability to compete and our results of operations could be adversely affected. During 2015, we operated 206 warehouses in eight countries outside of the U.S. and we plan to continue expanding our international operations. Future operating results internationally could be negatively affected by a variety of factors, many similar to those we face in the U.S., certain of which are beyond our control. These factors include political conditions, economic conditions, regulatory constraints, currency regulations, and other matters in any of the countries or regions in which we operate, now or in the future. Other factors that may impact international operations include foreign trade, monetary and fiscal policies and the laws and regulations of the U.S. and foreign governments, agencies and similar organizations, and risks associated with having major facilities located in countries which have been historically less stable than the U.S. Risks inherent in international operations also include, among others, the costs and difficulties of managing international operations, adverse tax consequences, and greater difficulty in enforcing intellectual property rights. Our success depends on the continued contributions of members of our senior management and other key operations, merchandising and administrative personnel, and the loss of these contributions could have a material adverse effect on our business. We must attract, train and retain a large and growing number of qualified employees, while controlling related labor costs and maintaining our core values. Our ability to control labor and benefit costs is subject to numerous external factors, including regulatory changes, prevailing wage rates, and healthcare and other insurance costs. We compete with other retail and non-retail businesses for these employees and invest significant resources in training and motivating them. There is no assurance that we will be able to attract or retain highly qualified employees in the future, which could have a material adverse effect on our business, financial condition and results of operations. The risks described below could materially and adversely affect our business, financial condition and results of operations. These risks are not the only risks that we face. We could also be affected by additional factors that apply to all companies operating in the U.S. and globally, as well as other risks that are not presently known to us or that we currently consider to be immaterial. These Risk Factors should be carefully reviewed in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes in this Report. Our inability to attract, train and retain highly qualified employees could adversely impact our business, financial condition and results of operations. 18 We compute our income tax provision based on enacted tax rates in the countries in which we operate. As the tax rates vary among countries, a change in earnings attributable to the various jurisdictions in which we operate could result in an unfavorable change in our overall tax provision. Additionally, changes We could be subject to additional income tax liabilities. Accounting principles and related accounting pronouncements, implementation guidelines, and interpretations we apply to a wide range of matters that are relevant to our business, including, but not limited to, revenue recognition, merchandise inventories, vendor rebates and other vendor consideration, impairment of long-lived assets, self-insurance liabilities, and income taxes are highly complex and involve many subjective assumptions, estimates and judgments by our management. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance. Provisions for losses related to self-insured risks are generally based upon independent actuarially determined estimates. The assumptions underlying the ultimate costs of existing claim losses can be highly unpredictable, which can affect the liability recorded for such claims. For example, variability in inflation rates of health care costs inherent in these claims can affect the amounts realized. Similarly, changes in legal trends and interpretations, as well as a change in the nature and method of how claims are settled can impact ultimate costs. Although our estimates of liabilities incurred do not anticipate significant changes in historical trends for these variables, any changes could have a considerable effect upon future claim costs and currently recorded liabilities and could materially impact our consolidated financial statements. Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial condition and results of operations. Our international operations subject us to risks associated with the legislative, judicial, accounting, regulatory, political and economic factors specific to the countries or regions in which we operate which could adversely affect our business, financial condition and results of operations. Legal and Regulatory Risks cause the market price of our stock to decline, as could changes in our dividend or stock repurchase policies. 17 We believe that the price of our stock generally reflects high market expectations for our future operating results. Any failure to meet or delay in meeting these expectations, including our comparable warehouse sales growth rates, gross margin, earnings and earnings per share or new warehouse openings could Failure to meet market expectations for our financial performance could adversely affect the market price and volatility of our stock. We use natural gas, diesel fuel, gasoline, and electricity in our distribution and warehouse operations. Increased U.S. and foreign government and agency regulations to limit carbon dioxide and other greenhouse gas emissions may result in increased compliance costs and legislation or regulation affecting energy inputs that could materially affect our profitability. In addition, climate change could affect our ability to procure needed commodities at costs and in quantities we currently experience. We also sell a substantial amount of gasoline, the demand for which could be impacted by concerns about climate change and which also could face increased regulation. Climate change may be associated with extreme weather conditions, such as more intense hurricanes, thunderstorms, tornadoes, and snow or ice storms, as well as rising sea levels. Extreme weather conditions increase our costs and damage resulting from extreme weather may not be fully insured. Factors associated with climate change could adversely affect our business. Business and Operating Risks Natural disasters or other catastrophic events could negatively affect our business, financial condition, and results of operations. We face strong competition from other retailers and warehouse club operators, which could adversely affect our business, financial condition and results of operations. Natural disasters, such as hurricanes, typhoons or earthquakes, particularly in California or in Washington state, where our centralized operating systems and administrative personnel are located, could negatively affect our operations and financial performance. Such events could result in physical damage to one or more of our properties, the temporary closure of one or more warehouses or depots, the temporary lack of an adequate work force in a market, the temporary or long-term disruption in the supply of products from some local or overseas suppliers, the temporary disruption in the transport of goods to or from overseas, delays in the delivery of goods to our warehouses or depots within the countries in which we operate, and the temporary reduction in the availability of products in our warehouses. Public health issues, whether occurring in the U.S. or abroad, could disrupt our operations, disrupt the operations of suppliers or members, or have an adverse impact on consumer spending and confidence levels. These events could also reduce demand for our products or make it difficult or impossible to receive products from suppliers. We may be required to suspend operations in some or all of our locations, which could have a material adverse effect on our business, financial condition and results of operations. Market and Other External Risks 15 General economic factors, domestically and internationally, may adversely affect our business, financial condition, and results of operations. Higher energy and gasoline costs, inflation, levels of unemployment, healthcare costs, consumer debt levels, foreign currency exchange rates, unsettled financial markets, weaknesses in housing and real estate markets, reduced consumer confidence, changes related to government fiscal and tax policies, sovereign debt crises, and other economic factors could adversely affect demand for our products and services or require a change in the mix of products we sell. Prices of certain commodity products, including gasoline and other food products, are historically volatile and are subject to fluctuations arising from changes in domestic and international supply and demand, labor costs, competition, market speculation, government regulations, taxes and periodic delays in delivery. Rapid and significant changes in commodity prices may affect our sales and profit margins. These factors could also increase our merchandise costs and selling, general and administrative expenses, and otherwise adversely affect our operations and financial results. General economic conditions can also be affected by the outbreak of war, acts of terrorism, or other significant national or international events. The retail business is highly competitive. We compete for customers, employees, sites, products and services and in other important respects with a wide range of local, regional and national wholesalers and retailers, both in the United States and in foreign countries, including other warehouse club operators, supermarkets, supercenters, department and specialty stores, gasoline stations, and internet retailers. Such retailers and warehouse club operators compete in a variety of ways, including merchandise pricing, selection and availability, services, location, convenience, and store hours. The evolution of retailing in online and mobile channels has improved the ability of customers to comparison shop with digital devices, which has enhanced competition. Some competitors may have greater financial resources, better access to merchandise and greater market penetration than we do. Our inability to respond effectively to competitive pressures, changes in the retail markets and member expectations could result in lost market share and negatively affect our financial results. We depend heavily on our ability to purchase merchandise in sufficient quantities at competitive prices. As these quantities continue to grow, we have no assurances of continued supply, pricing or access to new products, and any vendor could at any time change the terms upon which it sells to us or discontinue selling to us. Member demands may lead to out-of-stock positions of our merchandise leading to loss of sales and profits. We purchase our merchandise from numerous domestic and foreign manufacturers and importers and have thousands of vendor relationships. Our inability to acquire suitable merchandise on acceptable terms or the loss of key vendors could negatively affect us. We may not be able to develop relationships with new vendors, and products from alternative sources, if any, may be of a lesser quality or more expensive than those from existing vendors. Because of our efforts to adhere to high quality standards for which available supply may be limited, particularly for certain food items, the large volume we demand may not be consistently available. Our suppliers (and those they depend upon for materials and services) are subject to risks, including labor disputes, union organizing activities, financial liquidity, inclement weather, natural disasters, supply constraints, and general economic and political conditions that could limit their ability to timely provide us with acceptable merchandise. For these or other reasons, one or more of our suppliers might not adhere to our quality control, legal, regulatory or animal welfare standards. These deficiencies may delay or preclude delivery of merchandise to us and might not be identified before we sell such merchandise to our members. This failure could lead to litigation and recalls, which could damage our reputation and our brands, increase our costs, and otherwise adversely impact our business. Fluctuations in foreign exchange rates may adversely affect our results of operations. During 2015, our international operations, including Canada, generated 27% and 36% of our net sales and operating income, respectively. Our international operations have accounted for an increasingly larger portion of our warehouses and we plan to continue expanding our international operations. Our operations in countries other than the U.S. are conducted primarily in the local currencies of those countries. Our consolidated financial statements are denominated in U.S. dollars, and to prepare those 16 financial statements we must translate the results of operations of our international operations from local currencies into U.S. dollars using exchange rates for the current period. As a result of such translations, future fluctuations in currency exchange rates over time that are unfavorable to us may adversely affect the financial performance of our Canadian and Other International operating segments and have a corresponding adverse period-over-period effect on our results of operations. As we continue to expand our international operations, our exposure to fluctuations in foreign exchange rates may increase. We may pay for products we purchase for sale in our warehouses around the world with a currency other than the local currency of the country in which the goods will be sold. Currency fluctuations may increase our cost of goods and may not be passed on to members. Consequently, fluctuations in currency exchange rates may adversely affect our results of operations. Vendors may be unable to supply us with quality merchandise at the right prices in a timely manner or may fail to adhere to our high standards resulting in adverse effects on our business, merchandise inventories, sales, and profit margins. 2014 5% 7% 5 % $102,870 $110,212 2013 2015 $113,666 RESULTS OF OPERATIONS U.S. Increases in net sales: Net Sales... Net Sales (3)% The Board of Directors approved an increase in the quarterly cash dividend from $0.355 to $0.40 per share in April 2015. In February 2015, we issued $1,000 in aggregate principal amount of Senior Notes, which partially funded a special cash dividend of $5.00 per share paid in February 2015 (approximately $2,201); and Changes in foreign currencies relative to the U.S. dollar adversely impacted diluted earnings per share by $0.28, primarily due to changes in the Canadian dollar; Net income increased to $2,377, or $5.37 per diluted share compared to $2,058, or $4.65 per diluted share in 2014. The current year results were positively impacted by a $57 tax benefit, or $0.13 per diluted share, in connection with the special cash dividend paid to the Company's 401(k) Plan participants; Canada. 5% 3 % Other International. Total Company. 1% 3% (3)% Other International. 9% 2% (5)% 6% 5% 3 % U.S. Increases in comparable warehouse sales: 6% 7% Total Company. 7% 14% 2 % 9% Canada. Gross margin on a segment basis, when expressed as a percentage of the segment's own sales (segment gross margin percentage), increased in our U.S. operations, primarily due to our gasoline business, food and sundries merchandise category and the LIFO benefit discussed above. The segment gross margin percentage in our Canadian operations decreased, primarily in hardlines and softlines. The segment gross margin percentage in our Other International operations decreased, primarily in food and sundries. 4% 10.62% 10.66% 11.09% $10,922 $11,754 $12,601 91,948 98,458 101,065 $102,870 2015 vs. 2014 $110,212 2013 2014 2015 Gross margin as a percentage of net sales. Gross margin... Less merchandise costs Net sales Gross Margin Membership program. The raising of our membership fees in fiscal 2012 positively impacted 2014 and 2013 by $9 and $119, respectively. These increases were partially offset by changes in foreign currencies relative to the U.S. dollar, which negatively impacted membership fees by approximately $35 in 2014. 22 $113,666 During 2015, the gross margin of our combined 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 five basis points, primarily due to increases in softlines and food and sundries, partially offset by a decrease in fresh foods. This measure eliminates the impact of changes in sales penetration and gross margins from our warehouse ancillary and other businesses. Our gross margin percentage increased 43 basis points compared to 2014 and most of the improvement was derived from the impact of gasoline price deflation on net sales. Excluding this impact, gross margin as a percentage of adjusted net sales was 10.81%, an increase of 15 basis points from the prior year. This increase is predominantly due to: an increase in our warehouse ancillary and other business gross margin of 23 basis points, due primarily to our gasoline business; partially offset by a negative contribution from core merchandise categories of 12 basis points, as a result of a decrease in their sales penetration. A LIFO benefit in 2015 compared to a charge in 2014 positively contributed five basis points. The LIFO benefit resulted largely from lower costs for gasoline. Changes in foreign currencies relative to the U.S. dollar negatively impacted gross margin by approximately $359 in 2015. 2014 vs. 2013 First Quarter Selling, general and administrative (SG&A) expenses as a percentage of net sales increased 18 basis points; (1) The amount shown includes a special cash dividend of $5.00 per share. Price Range Cash Dividends High Low Declared $146.89 $132.71 $0.400 153.14 143.05 0.400 155.92 137.31 5.355 (1) 140.01 121.35 0.355 28 Our gross margin percentage increased four basis points compared to 2013 and most of the improvement was derived from the impact of gasoline price deflation on net sales. Excluding this impact, gross margin as a percentage of adjusted net sales was 10.63%, an increase of one basis point from the prior year. This increase is predominantly due to warehouse ancillary and other business gross margin of six basis points, which was largely offset by five basis points due to a LIFO charge in 2014 compared to a benefit in 2013. The LIFO charge resulted from higher costs for our merchandise inventories, primarily our foods During 2014, the gross margin of our combined core merchandise categories, when expressed as a percentage of core merchandise sales, increased seven basis points, primarily due to increases in our softlines and food and sundries categories, partially offset by a decrease in hardlines. Fresh foods also had a positive impact as a result of higher sales penetration. 27 Membership fees increased 6% in 2014. This increase was primarily due to membership sign-ups at existing and new warehouses and increased number of upgrades to our higher-fee Executive 2014 vs. 2013 Membership fees increased 4% in 2015. This increase was primarily due to membership sign-ups at existing and new warehouses and increased number of upgrades to our higher-fee Executive Membership program. These increases were partially offset by changes in foreign currencies relative to the U.S. dollar, which negatively impacted membership fees by approximately $76 in 2015. Our member renewal rates are currently 91% in the U.S. and Canada and 88% worldwide. Net sales increased $3,454 or 3% during 2015. This was attributable to sales at new warehouses opened in 2014 and 2015 and a 1% increase in comparable warehouse sales. Changes in foreign currencies Net Sales 2015 vs. 2014 6% 6% 7 % 2% 4% 6 % 9% 9% 8 % 6% 5% 6% Total Company. Other International. Canada... U.S.. gasoline prices: the impact of changes in foreign currency and Increases in comparable warehouse sales excluding 6% 26 1 % 26 Comparable Sales 2.22% 10% $2,286 2013 2.20% 6% $2,428 2014 2.23% 4% $2,533 2015 2015 vs. 2014 Membership fees as a percentage of net sales Membership fees increase Membership fees Membership Fees Comparable sales increased 4% during 2014 and were primarily impacted by an increase in shopping frequency. Changes in foreign currencies relative to the U.S. dollar and gasoline prices negatively impacted comparable sales results, including the average ticket during 2014. The increase in comparable sales also includes the negative impact of cannibalization (established warehouses losing sales to our newly opened locations), primarily in our Other International operations. Comparable Sales Net sales increased $7,342 or 7% during 2014. This was attributable to a 4% increase in comparable warehouse sales, and sales at warehouses opened in 2013 and 2014. Changes in foreign currencies negatively impacted net sales by approximately $1,336, or 130 basis points, compared to 2013. The negative impact was primarily due to the Canadian dollar of approximately $1,140 and the Japanese yen of approximately $311. Changes in gasoline prices negatively impacted net sales by approximately $364, or 35 basis points, due to a 3% decrease in the average sales price per gallon. Net Sales 2014 vs. 2013 Comparable sales increased 1% during 2015 and was positively impacted by an increase in shopping frequency partially offset by a decrease in the average ticket. The average ticket and comparable sales results were negatively impacted by changes in foreign currencies relative to the U.S. dollar and a decrease in gasoline prices. The increase in comparable sales also includes the negative impact of cannibalization (established warehouses losing sales to our newly opened locations). relative to the U.S. dollar negatively impacted net sales by approximately $3,344, or 303 basis points, compared to 2014. The negative impact was attributable to all foreign countries in which we operate, predominantly Canada of $2,027, Mexico of $385, and Japan of $368. Changes in gasoline prices negatively impacted net sales by approximately $2,902, or 263 basis points, due to a 22% decrease in the average sales price per gallon. • 1,836,000 • $110,212 $113,666 Net sales... RESULTS OF OPERATIONS Aug. 28, 2011 (52 weeks) Sept. 2, 2012 (53 weeks) Sept. 1, 2013 (52 weeks) Aug. 31, 2014 (52 weeks) (52 weeks) As of and for the year ended Aug. 30, 2015 SELECTED FINANCIAL DATA (dollars in millions, except per share data) The following table sets forth information concerning our consolidated financial condition, operating results, and key operating metrics. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, included in this Report, and our consolidated financial statements and notes thereto, included in this Report. $102,870 FIVE YEAR OPERATING AND FINANCIAL HIGHLIGHTS 22 Our U.S. internet website is www.costco.com. We make available through the Investor Relations section of that site, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and Forms 3, 4 and 5, and any amendments to those reports, as soon as reasonably practicable after filing such materials with, or furnishing such documents to, the Securities and Exchange Commission (SEC). The information found on our website is not part of this or any other report filed with or furnished to the SEC. In addition, the public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers, such as the Company, that file electronically with the SEC at www.sec.gov. Available Information The graph assumes the investment of $100 in Costco common stock, the S&P 500 Index and the Peer Group Index on August 29, 2010 and reinvestment of all dividends. -----S&P 500 --Peer Group Index Costco Wholesale Corporation 8/30/15 8/31/14 9/1/13 9/2/12 8/28/11 8/29/10 22 0 $97,062 Membership fees 2,039 2,058 2,377 Net income attributable to Costco (2) $2,439 $2,759 $3,053 $3,220 $3,624 Operating income 9.98% 9.81% 9.82% $87,048 9.89% expenses as a percentage of net sales. Selling, general and administrative 10.69% 10.55% 10.62% 10.66% 11.09 % Gross margin (1) as a percentage of net sales 1,867 2,075 2,286 2,428 2,533 10.07 % 50 100 150 Program(1) Announced Shares Purchased as Part of Publicly Total Number of $143.32 per Share Average Price Paid 420,000 Total Number of shares Purchased August 3, 2015-August 30, 2015. July 6, 2015 August 2, 2015. June 8, 2015-July 5, 2015. May 11, 2015 June 7, 2015. 111 Period Issuer Purchases of Equity Securities Payment of future dividends is subject to declaration by the Board of Directors. Factors considered in determining dividends are our profitability and expected capital needs. Subject to these qualifications, we presently expect to continue to pay dividends on a quarterly basis. 0.310 111.50 125.21 0.310 110.18 125.43 0.355 110.65 116.80 0.355 Second Quarter. The following table sets forth information on our common stock repurchase program activity for the 16- week fourth quarter of fiscal 2015 (dollars in millions, except per share data): 508,000 435,000 138.39 200 250 300 350 Dollars S&P 500 INDEX AND PEER GROUP INDEX COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG COSTCO WHOLESALE CORPORATION, The following graph compares the cumulative total shareholder return (stock price appreciation plus dividends) on our common stock for the last five years with the cumulative total return of the S&P 500 Index and the following group of peer companies (based on weighted market capitalization) selected by the Company: Amazon.com, Inc.; The Home Depot, Inc.; Lowe's Companies; Best Buy Co., Inc.; Staples Inc.; Target Corporation; Kroger Company; and Wal-Mart Stores, Inc. The information provided is from August 29, 2010 through August 30, 2015. Performance Graph 21 Information related to our Equity Compensation Plans is incorporated herein by reference to Costco's Proxy Statement filed with the Securities and Exchange Commission. Equity Compensation Plans Our stock repurchase program is conducted under a $4,000 authorization approved by our Board of Directors in April 2015, which expires in April 2019. Total fourth quarter. (1) $3,699 473,000 $3,766 435,000 $3,828 508,000 $3,898 420,000 Maximum Dollar Value of Shares that May Yet be Purchased Under the Program $141.69 1,836,000 473,000 142.51 143.08 1,709 1,462 Net income per diluted common share attributable to Costco 5.37 42,000 44,600 592 608 634 663 686 (4) (1) 0 (1) (3) 24 39,000 17 30 26 572 592 608 634 663 (1) Net sales less merchandise costs. Total paid members (000's).. MEMBERSHIP INFORMATION End of year Closed (4) Opened(4) 26 36,900 35,300 (2) Includes 50% of the results of Costco Mexico's operations in fiscal 2011, and in 2012 prior to the July acquisition of our former joint venture partner's 50% equity interest. The remainder of fiscal 2012 and thereafter include 100% of Costco Mexico's results of operations. • 25 25 Gross margin as a percentage of net sales increased 43 basis points, primarily from the impact of gasoline price deflation on net sales as well as higher gross margins in our gasoline business; Membership fee revenue increased 4% to $2,533, primarily due to membership sign-ups at existing and new warehouses and executive membership upgrades, partially offset by the negative impact of changes in all foreign currencies relative to the U.S. dollar; Net sales increased 3% to $113,666, driven by sales at new warehouses opened in 2014 and 2015, and a 1% increase in comparable sales. Net and comparable sales results were negatively impacted by changes in all foreign currencies relative to the U.S. dollar and decreases in the price of gasoline; We opened 23 net new warehouses in 2015, 12 in the U.S., one in Canada, and 10 in our Other International segment, compared to 29 net new warehouses in 2014; • • • Highlights for fiscal year 2015 included: Our fiscal year ends on the Sunday closest to August 31. Fiscal years 2015, 2014 and 2013 were 52- week fiscal years ending on August 30, 2015, August 31, 2014 and September 1, 2013, 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. In discussions of our consolidated operating results, we refer to the impact of changes in foreign currencies relative to the U.S. dollar, which are references 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 the comparable prior-year period's currency exchange rates. We also refer to the impact of changes in gasoline prices on our net sales. This impact is calculated based on the difference between the current period's average gasoline price per gallon sold and the comparable prior-year period's average gasoline price per gallon sold. Our operating model is generally the same across our U.S., Canada, and Other International operating segments (see Note 11 to the consolidated financial statements included in this Report). Certain countries in the Other International segment have relatively higher rates of square footage growth, lower wages and benefit costs as a percentage of country sales, and/or less or no direct membership warehouse competition. Additionally, we operate our lower-margin gasoline business in the U.S., Canada, Australia, U.K., and Japan. Our financial performance depends heavily on our ability to control costs. While we believe that we have achieved successes in this area historically, some significant costs are partially outside our control, most particularly health care and utility expenses. With respect to expenses relating to the compensation of our employees, our philosophy is not to seek to minimize the wages and benefits that they earn. Rather, we believe that achieving our longer-term objectives of 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 gross margin and selling, general and administrative expenses, can have substantial impacts on net income. extent to which we achieve growth in our membership base, increase penetration of our Executive members, and sustain high renewal rates, materially influences our profitability. 24 24 Our membership format is an integral part of our business model and has a significant effect on our profitability. This format is designed to reinforce member loyalty and provide continuing fee revenue. The 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 increasingly less significant relative to the results of our total operations. Our rate of square footage growth is higher in foreign markets, due to the smaller base in those markets, and we expect that to continue. Our online business growth both domestically and internationally has also increased our sales. Our philosophy is to provide our members with quality goods and services at the most 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" - 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, all 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 expenses as a percentage of net sales. A decline in gasoline prices has the inverse effect. We believe that the most important driver of our profitability is sales growth, particularly comparable warehouse sales (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 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); and changes in the cost of gasoline and associated competitive conditions (primarily impacting our U.S. and Canadian operations). 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, 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. 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. (amounts in millions, except per share, membership fee, and warehouse count data) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW 223 23 (4) Includes warehouse relocations and closures. (3) Includes net sales from warehouses and websites operating for more than one year. For fiscal 2013 and 2012, the prior year includes the comparable 52 and 53 weeks, respectively. Beginning of year. • Warehouses in Operation $12,002 3% (3)% 14% 8% 9% 2% (5)% Other International Canada. 7% 7% 6% 5% 1% 3 % (3) Increase in comparable warehouse sales( 0.89 1.03 8.17 1.33 6.51 share Cash dividends declared per common 3.30 3.89 4.63 4.65 United States 3% 20% Total Company... 1,253 1,381 $12,361 26,761 27,140 $12,432 $13,881 $12,961 30,283 4,998 $10,833 $14,830 33,024 5,093 $12,303 $10,617 Costco stockholders' equity. 4,864 Long-term debt, excluding current portion. 33,440 Total assets. $15,401 Net property and equipment BALANCE SHEET DATA 6% 6% 6% 6% 7 % changes in foreign currency and gasoline prices........ warehouse sales excluding the impact of Increase in Total Company comparable 10% 7% 6% 4% 1 % WAREHOUSE INFORMATION Third Quarter. 121.62 2014: 78 36 36 21 6 27 8 15 23 5 7 12 2 7 Total (1) 95 of the 144 leases are land-leases only, where Costco owns the building. 542 144 686 The following schedule shows warehouse openings for the past five fiscal years and expected warehouse openings through December 31, 2015: Openings by Fiscal Year (1) United States Canada Spain...... Australia Taiwan Korea Fourth Quarter.. 113.87 in the enacted tax rates, adverse outcomes in connection with income tax audits in any jurisdiction, including transfer pricing disputes, or any change in the pronouncements relating to accounting for income taxes could have a material adverse effect on our financial condition and results of operations. Significant changes in, or failure to comply with, federal, state, regional, local and international laws and regulations relating to the use, storage, discharge and disposal of hazardous materials, hazardous and non-hazardous wastes and other environmental matters could adversely impact our business, financial condition and results of operations. We are subject to a wide variety of federal, state, regional, local and international laws and regulations relating to the use, storage, discharge and disposal of hazardous materials, hazardous and non- hazardous wastes and other environmental matters. Any failure to comply with these laws could result in significant costs to satisfy environmental compliance, remediation or compensatory requirements, or the imposition of severe penalties or restrictions on operations by governmental agencies or courts that could adversely affect our business, financial condition and results of operations. We are involved in a number of legal proceedings and audits and some of these outcomes could adversely affect our business, financial condition and results of operations. Our business requires compliance with many laws and regulations. Failure to achieve compliance could subject us to lawsuits and other proceedings, and lead to damage awards, fines, penalties, and remediation costs. We are, or may become involved, in a number of legal proceedings and audits including grand jury investigations, government and agency investigations, and consumer, employment, tort, unclaimed property laws, and other litigation (see discussion of Legal Proceedings in Note 10 to the consolidated financial statements included in this Report). We cannot predict with certainty the outcomes of these legal proceedings and other contingencies, including environmental remediation and other proceedings commenced by governmental authorities. The outcome of some of these legal proceedings, audits, unclaimed property laws, and other contingencies could require us to take, or refrain from taking, actions which could negatively affect our operations or could require us to pay substantial amounts of money adversely affecting our financial condition and results of operations. Additionally, defending against these lawsuits and proceedings may involve significant expense and diversion of management's attention and resources. 19 PROPERTIES Warehouse Properties At August 30, 2015 we operated 686 membership warehouses: Other International NUMBER OF WAREHOUSES Mexico Own Land and Building 388 Lease Land and/or Building Total 92 480 89 F 111 United Kingdom... Japan.. United States and Puerto Rico. Canada.. Total Warehouses (1) in Operation 686 2016 (expected through 12/31/2015)... 7 1 3 11 697 Total 487 90 120 23 697 Second Quarter.. 20 20 MARKET FOR COSTCO COMMON STOCK Market Information and Dividend Policy Our common stock is traded on the NASDAQ Global Select Market under the symbol "COST." On October 5, 2015, we had 8,527 stockholders of record. The following table shows the quarterly high and low closing sale prices as reported by NASDAQ for each quarter during the last two fiscal years and the quarterly cash dividend declared per share of our common stock. 2015: Fourth Quarter.. Third Quarter Total First Quarter (1) Net of closings and relocations. 10 At the end of 2015, our warehouses contained approximately 98.7 million square feet of operating floor space: 69.9 million in the U.S.; 12.3 million in Canada; and 16.5 million in Other International locations. Additionally, we operate regional depots for the consolidation and distribution of most merchandise shipments to the warehouses, and various processing, packaging, and other facilities to support ancillary and other businesses, which includes our online business. We operate 23 depots consisting of approximately 9.3 million square feet. Our executive offices are located in Issaquah, Washington, and we operate 18 regional offices in the U.S., Canada and Other International locations. 12 2011 and prior 429 1 82 81 592 2012. 10 6 16 608 2013. 592 3 12 663 9 29 17 3 2014 634 26 11 2015. We account for membership fee revenue, net of refunds, on a deferred basis, whereby revenue is recognized ratably over one-year. Our Executive members qualify for a 2% reward on qualified purchases (up to a maximum reward of approximately $750 per year), which can be redeemed only at Costco warehouses. We account for this reward as a reduction in sales. The sales reduction and corresponding liability are computed after giving effect to the estimated impact of non-redemptions based on historical data. We evaluate whether it is appropriate to record the gross amount of merchandise sales and related costs or a net amount. Generally, when we are the primary obligor, subject to inventory risk, have latitude in establishing prices and selecting suppliers, influence product or service specifications, or have several but not all of these indicators, revenue is recorded on a gross basis. If we are not the primary obligor and do not possess other indicators of gross reporting as noted above, we record a net amount, which is reflected in net sales. We record related shipping fees on a gross basis. We generally recognize sales, which include shipping fees where applicable, net of returns, at the time the member takes possession of merchandise or receives services. When we collect payment from customers prior to the transfer of ownership of merchandise or the performance of services, the amount is generally recorded as deferred sales in the consolidated balance sheets until the sale or service is completed. We provide for estimated sales returns based on historical trends and reduce sales and merchandise costs accordingly. Our sales returns reserve is based on an estimate of the net realizable value of merchandise inventories to be returned. Amounts collected from members for sales and value added taxes are recorded on a net basis. Revenue Recognition 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 including those related to revenue recognition, merchandise inventory valuation, impairment of long-lived assets, insurance/self-insurance liabilities, and income taxes. We base our estimates on historical experience and on assumptions that we believe to be reasonable and we continue to review and evaluate these statements. For further information on significant accounting policies, see discussion in Note 1 to the consolidated financial statements included in this Report. 33 We have no off-balance sheet arrangements that in the opinion of management have had, or are reasonably likely to have, a material current or future effect on our financial condition or consolidated financial statements. Off-Balance Sheet Arrangements (6) Includes $54 in asset retirement obligations, and $54 in deferred compensation obligations. The total amount excludes $103 of non-current unrecognized tax contingencies and $22 of other obligations due to uncertainty regarding the timing of future cash payments. (5) The amounts exclude certain services negotiated at the individual warehouse or regional level that are not significant and generally contain clauses allowing for cancellation without significant penalty. (4) Includes build-to-suit lease obligations and contractual interest payments. Merchandise Inventories (3) Operating lease obligations exclude amounts for common area maintenance, taxes, and insurance and have been reduced by $131 to reflect sub-lease income. Critical Accounting Estimates 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. We record an adjustment each quarter, if necessary, for the estimated effect of inflation or deflation, and these estimates are adjusted to actual results determined at year-end. We believe the LIFO method more fairly presents the results of operations by more closely matching current costs with current revenues. Merchandise inventories for all foreign operations are primarily valued by the retail inventory method and are stated using the first-in, first-out (FIFO) method. See Note 1 to the consolidated financial statements included in this Report for a detailed description of recent accounting pronouncements. 34 government and agency securities, and asset and mortgage-backed securities with effective maturities of generally three months to five years at the date of purchase. The primary objective of our investment activities is to preserve principal and secondarily to generate yields. The majority of our short-term investments are in fixed interest rate securities. These securities are subject to changes in fair value due to interest rate fluctuations. 55 35 Our exposure to market risk for changes in interest rates relates primarily to our investment holdings that are diversified among various instruments considered to be cash equivalents as defined in Note 1 to the consolidated financial statements included in this Report, as well as short-term investments in Interest Rate Risk QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (amounts in millions) Our exposure to financial market risk results from fluctuations in interest rates and foreign currency exchange rates. We do not engage in speculative or leveraged transactions or hold or issue financial instruments for trading purposes. Recent Accounting Pronouncements The determination of our provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits associated with uncertain tax positions are recorded in our consolidated financial statements only after determining a more-likely-than-not probability that the positions will withstand challenge from tax authorities. Additionally, certain of our cumulative foreign undistributed earnings are considered indefinitely reinvested. These earnings would be subject to U.S. income tax if we changed our position and could result in a U.S. deferred tax liability. When facts and circumstances change, we reassess these positions and record any changes in the consolidated financial statements as appropriate. Income Taxes We use a combination of insurance and self-insurance mechanisms, including for certain risks, a wholly- owned captive insurance subsidiary and participation in a reinsurance program, to provide for potential liabilities for workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability, and employee health care benefits. Liabilities associated with the risks that we retain are not discounted and are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends. Insurance/Self-Insurance Liabilities We evaluate our long-lived assets for impairment on an annual basis, when relocating or closing a facility, or when events or changes in circumstances occur that may indicate the carrying amount of the asset group, generally an individual warehouse, may not be fully recoverable. Our judgments are based on existing market and operational conditions. Future events could cause us to conclude that impairment factors exist, requiring a downward adjustment of these assets to their then-current fair value. Impairment of Long-Lived Assets Inventory cost, where appropriate, is reduced by estimates of vendor rebates when earned or as we progress toward earning those rebates, provided they are probable and reasonably estimable. Other consideration received from vendors is generally recorded as a reduction of merchandise costs upon completion of contractual milestones, terms of agreement, or other systematic and rational approaches. 34 We provide for estimated inventory losses (shrink) between physical inventory counts as a percentage of net sales. The provision is adjusted periodically to reflect results of the actual physical inventory counts, which generally occur in the second and fourth quarters of the year. (2) Includes only open merchandise purchase orders. 48 $17,799 10 170 47 24 (4) Capital lease obligations (4 43 744 obligations.. Construction and land 2,964 2,097 321 359 Our Board of Directors have approved a policy that limits investments in the U.S. to direct U.S. government and government agency obligations, repurchase agreements collateralized by U.S. government and government agency obligations, and U.S. government and government agency money market funds. Our wholly-owned captive insurance subsidiary invests in U.S. government and government agency obligations, corporate notes and bonds, and asset and mortgage-backed securities with a minimum overall portfolio average credit rating of AA+. 797 452 571 Purchase obligations $3,446 $2,252 $2,971 113 58 29 18 $9,130 (1) Includes contractual interest payments. 380 11 38 326 Total Other (6) and other) (5) (equipment, services 5 Our Canadian and Other International subsidiaries' investments are primarily in money market funds, bankers' acceptances and bank certificates of deposit, generally denominated in their local currencies. We performed a sensitivity analysis to determine the impact that a 100 basis-point change in interest rates would have on the value of our investment portfolio. At the end of 2015, the incremental change in the fair market value was $27. For those investments that are classified as available-for-sale, the unrealized gains or losses related to fluctuations in market volatility and interest rates are reflected within stockholders' equity in accumulated other comprehensive income. Joseph P. Portera Foreign Currency-Exchange Risk 1994 Executive Vice President, Chief Operating Officer, Eastern and Canadian Divisions. Mr. Portera has held these positions since 1994, and has been the Chief Diversity Officer since 2010. 187 62 62 2011 Executive Vice President, Chief Operating Officer, International. Mr. Murphy was Senior Vice President, International, from 2004 to October 2010. James P. Murphy. 64 2001 Executive Vice President, Chief Information Officer. Mr. Moulton was Executive Vice President, Real Estate Development from 2001 until March 2010. Paul G. Moulton. 58 2010 68 63 2012 Timothy L. Rose. Vice President, Ancillary Businesses, Manufacturing, and Business Centers. Mr. Rose was Senior Vice President, Merchandising, Food and Sundries and Private Label from 1995 to December 2012. Executive Compensation We have adopted a code of ethics for senior financial officers pursuant to Section 406 of the Sarbanes- Oxley Act. Copies of the code are available free of charge by writing to Secretary, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, WA 98027. If the Company makes any amendments to this code (other than technical, administrative, or non-substantive amendments) or grants any waivers, including implicit waivers, from this code to the CEO, chief financial officer or principal accounting officer and controller, we will disclose (on our website or in a Form 8-K report filed with the SEC) the nature of the amendment or waiver, its effective date, and to whom it applies. 66 56 $ 99 1993 Executive Vice President, Chief Operating Officer, Southwest Division and Mexico. Dennis R. Zook 2004 Executive Vice President, Chief Operating Officer, Merchandising. Mr. Schutt was Executive Vice President, Chief Operating Officer, Northern Division and Midwest Region from 2004 to March 2010. Douglas W. Schutt. 33 63 2013 Executive The nature and amount of our long-term debt may vary as a result of future business requirements, market conditions, and other factors. As of the end of 2015, the majority of our long-term debt is fixed rate Senior Notes, carried at $5,596. Fluctuations in interest rates may affect the fair value of the fixed-rate debt. See Note 4 to the consolidated financial statements included in this Report for more information on our long-term debt. Executive Vice President, Chief Operating Officer, Northern Division. Mr. McKay was Senior Vice President, General Manager, Northwest Region from 2000 to March 2010. John D. McKay. EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Costco will also receive benefits from Citi in the form of a bounty on new credit card accounts Costco sources, assistance in increasing membership, marketing assistance, staff support, and potentially a share of any profits of the program. The loyalty rewards earned by co-branded cardholders are expected to be in the form of certificates redeemable at Costco, for cash or merchandise. Based on prior experience, Costco expects that most cardholders will redeem the certificates for merchandise, resulting in a benefit to net sales and gross margin on those transactions. The next most significant expected benefit to Costco is the reduction in the base discount rate—the fee Costco is charged for accepting the co-branded credit card. Costco's cost of acceptance of the co- branded credit card will be lower than the cost that Costco bears currently. The most significant expected revenue provided to Costco from Citi under the co-brand credit card program is the percentage or royalty on "external spend," purchases made with the co-branded card other than from Costco. That percentage will vary based primarily on the amount of external spend over the term of the program. Costco's royalty revenue will also be impacted by the nature and extent of the loyalty rewards to be provided to cardholders under the program, primarily by Citi but also partially by Costco under certain circumstances. The amount and character of the loyalty rewards have yet to be determined and may be adjusted over the term of the program. On February 27, 2015, we entered into a Co-Branded Credit Card Program Agreement (the "Program Agreement”) with Citibank, N.A. (“Citi”). Under the terms of the Program Agreement, Citi would become the exclusive issuer of our co-branded credit cards to new and existing members of the Company and Visa U.S.A. Inc. would replace American Express as the credit card network for Costco in the United States and Puerto Rico. Our current expectation is that Citi will purchase the current co-branded credit card portfolio from American Express by April 1, 2016 and begin issuing Visa cards by the summer of 2016. We would receive various forms of consideration under the Program Agreement. The initial term of the Program Agreement is ten years. Other Information other facilities, predominately in the U.S. and Canada. We also enter into variable-priced contracts for some purchases of electricity and natural gas, in addition to fuel for our gas stations, on an index basis. These contracts meet the characteristics of derivative instruments, but generally qualify for the "normal purchases or normal sales" exception under authoritative guidance and, thus, require no mark-to-market adjustment. 37 34 36 We are exposed to fluctuations in prices for energy that we consume, particularly electricity and natural gas, which we seek to partially mitigate through fixed-price contracts for certain of our warehouses and Commodity Price Risk While we seek to manage counterparty risk associated with these contracts by limiting transactions to counterparties with which we have established banking relationships, there can be no assurance that this practice is effective. These contracts are limited to less than one year in duration. See Note 1 and Note 3 to the consolidated financial statements included in this Report for additional information on the fair value of unsettled forward foreign-exchange contracts at the end of 2015 and 2014. A hypothetical 10% strengthening of the functional currency compared to the non-functional currency exchange rates at August 30, 2015 would have decreased the fair value of the contracts by $88 and resulted in an unrealized loss in the consolidated statements of income for the same amount. Our foreign subsidiaries conduct certain transactions in their non-functional currencies, which exposes us to fluctuations in exchange rates. We manage these fluctuations, in part, through the use of forward foreign-exchange contracts, seeking to economically hedge the impact of fluctuations of foreign exchange on known future expenditures denominated in a non-functional foreign-currency. The contracts are intended primarily to economically hedge exposure to U.S. dollar merchandise inventory expenditures made by our international subsidiaries whose functional currency is other than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. We seek to mitigate risk with the use of these contracts and do not intend to engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features. The executive officers of Costco, their position, and ages are listed below. All executive officers have 25 or more years of service with the Company. Executive Vice President, Administration. Mr. Lazarus was Senior Vice President, Administration-Global Operations from 2006 to September 2012. Name Jeffrey H. Brotman......... 59 1993 Executive Vice President and Chief Financial Officer. Mr. Galanti has been a director since January 1995. 13 73 1983 63 1995 Age Since Executive Officer Chairman of the Board. Mr. Brotman is a co-founder of Costco and has been a director since its inception. President and Chief Executive Officer. Mr. Jelinek has been President and Chief Executive Officer since January 2012 and a director since February 2010. He was President and Chief Operating Officer from February 2010 to December 2011. Prior to that he was Executive Vice President, Chief Operating Officer, Merchandising since 2004. Position Richard A. Galanti. W. Craig Jelinek... 6,429 Net cash used in investing activities. 6,424 $124 2013 2014 2015 Interest expense Interest Expense Preopening expenses include costs for startup operations related to new warehouses, development in new international markets, and expansions at existing warehouses. Preopening expenses vary due to the number of warehouse openings, the timing of the opening relative to our year-end, whether the warehouse is owned or leased, and whether the opening is in an existing, new, or international market. (1) Includes one relocation and the conversion of an existing warehouse to a business center in 2015. (2) Includes one relocation in 2015. 26 30 11 23 12 17 730 $113 10 $99 Interest Income and Other, Net 7 39 26 47 $44 $52 $50 2013 2014 2015 2015 vs. 2014 Interest income and other, net. Other, net Foreign-currency transaction gains, net. Interest income... Interest expense in 2015 primarily relates to $1,100 of 5.5% Senior Notes issued in fiscal 2007, $3,500 of Senior Notes issued in December 2012, and $1,000 of Senior Notes issued in February 2015 (described in further detail under the heading "Cash Flows from Financing Activities" and in Note 4 to the consolidated financial statements included in this Report). 12 11 26 14 9.82% 9.89% $10,104 $10,899 2013 2014 10.07% $11,445 2015 2015 vs. 2014 SG&A expenses as a percentage of net sales. SG&A expenses.. Selling, General and Administrative Expenses Gross margin on a segment basis, when expressed as a percentage of the segment's own sales, increased in our U.S. operations, primarily due to our softlines and food and sundries categories, partially offset by a decrease in hardlines and the LIFO charge discussed above. The segment gross margin percentage in our Canadian operations decreased, primarily due to decreases in hardlines and food and sundries, partially offset by an increase in fresh foods. The segment gross margin percentage in our Other International operations increased, primarily due to fresh foods. and fresh foods categories. Changes in foreign currencies relative to the U.S. dollar negatively impacted gross margin by approximately $151 in 2014. SG&A expenses as a percentage of net sales increased 18 basis points, mostly due to the negative impact of gasoline price deflation on net sales. Excluding this impact, SG&A expenses as a percentage of adjusted net sales were 9.82%, an improvement of seven basis points. This was due to lower warehouse operating costs of 16 basis points, primarily from improvements in payroll expenses in our core business as a result of leveraging increased sales. This improvement was partially offset by higher central operating costs of five basis points, predominantly due to increased depreciation and service contract costs associated with our information systems modernization projects that were placed into service during the year, primarily incurred by our U.S. operations. Our investment in modernizing our information systems is ongoing. Higher stock compensation expense also negatively impacted our SG&A expenses by four basis points, due to an appreciation in the trading price of our stock at the time of grant. Changes in foreign currencies relative to the U.S. dollar decreased our SG&A expenses by approximately $282 in 2015. 1 2014 vs. 2013 29 $51 $63 $65 2013 2014 2015 Total warehouse openings, including relocations.... Other International (2). (1) Canada.. United States Warehouse openings, including relocations Preopening expenses Preopening Expenses 29 SG&A expenses as a percentage of net sales increased seven basis points. Excluding the effect of gasoline price deflation on net sales, SG&A expenses as a percentage of adjusted net sales were 9.86%, an increase of four basis points. This increase was largely due to an increase in central operating costs of three basis points primarily due to continued investment in modernizing our information systems, primarily incurred by our U.S. operations. Stock compensation expense was also higher by two basis points due to accelerated vesting for long service and appreciation in the trading price of our stock at the time of grant, despite a 14% reduction in the average number of restricted stock units (RSUs) granted to each participant. Warehouse operating costs were lower by one basis point, primarily resulting from improvements in payroll in our Canadian operations as a result of leveraging increased sales, partially offset by increases in employee benefit costs, primarily health care, in our U.S. operations. Changes in foreign currencies relative to the U.S. dollar decreased our SG&A expenses by $119 in 2014. 14 $104 $90 Dividends 32 32 In April 2015, our Board of Directors authorized a new share repurchase program in the amount of $4,000, which expires in April 2019. This authorization revoked previously authorized but unused amounts, totaling $2,528. During 2015 and 2014, we repurchased 3,456,000 and 2,915,000 shares of common stock, at an average price of $142.87 and $114.45, totaling approximately $494 and $334, respectively. The remaining amount available to be purchased under our approved plan was $3,699 at the end of 2015. 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. Stock Repurchase Programs In February 2015, we issued $1,000 in aggregate principal amount of Senior Notes as follows: $500 of 1.75% Senior Notes due February 15, 2020, and $500 of 2.25% Senior Notes due February 15, 2022. The proceeds were used to pay a portion of the special cash dividend on February 27, 2015. Net cash used in financing activities totaled $2,324 in 2015 compared to $786 in 2014. The primary uses of cash in 2015 were dividend payments of $2,865, which includes a $5.00 per share special cash dividend, repurchases of common stock, and payment of withholding taxes on stock-based awards. Net cash used in financing activities was partially offset by the issuance of $1,000 in Senior Notes. Cash Flows from Financing Activities We opened 23 new warehouses, relocated two warehouses, and converted an existing warehouse to a business center in 2015 and plan to open up to 32 new warehouses in 2016 and relocate up to five warehouses. Our primary requirement for capital is acquiring land, buildings, and equipment for new and remodeled warehouses. To a lesser extent, capital is required for initial warehouse operations, the modernization of our information systems, and working capital. In 2015 we spent $2,393 on capital expenditures, and it is our current intention to spend approximately $2,800 to $3,000 during fiscal 2016. These expenditures are expected to be financed with cash from operations, existing cash and cash equivalents, and short-term investments. 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. Capital Expenditure Plans Net cash used in investing activities totaled $2,480 in 2015 compared to $2,093 in 2014. Our cash flow used in investing activities is primarily related to funding our warehouse expansion and remodeling activities. Net cash flows from investing activities also includes purchases and maturities of short-term investments. Cash Flows from Investing Activities Net cash provided by operating activities totaled $4,285 in 2015 compared to $3,984 in 2014. Our cash flow provided by operations is primarily derived from net sales and membership fees. Our cash flow used in operations generally consists of payments to our merchandise vendors, warehouse operating costs including payroll and employee benefits, credit card processing fees, and utilities. Cash used in operations also includes payments for income taxes. The increase in net cash provided by operating activities for 2015 when compared to 2014 was primarily due to stronger earnings. Cash Flows from Operating Activities equivalents and short-term investments held at these subsidiaries and considered to be indefinitely reinvested totaled $1,196 at August 30, 2015. Our cash dividends paid in 2015 totaled $6.51 per share, as compared to $1.33 per share in 2014. In April 2015, our Board of Directors increased our quarterly cash dividend from $0.355 to $0.40 per share. Additionally, in 2015, our Board of Directors declared and paid a special cash dividend of $5.00 per share, totaling approximately $2,201. 31 Bank Credit Facilities and Commercial Paper Programs The Company has letter of credit facilities, for commercial and standby letters of credit, totaling $149. The outstanding commitments under these facilities at the end of 2015 totaled $90, including $89 in standby letters of credit with expiration dates within one year. The bank credit facilities have various expiration dates, all within one year, and we generally intend to renew these facilities prior to their expiration. 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. $6,545 $834 $1,855 $2,449 $1,407 Total 2021 and thereafter 2019 to 2020 2017 to 2018 2016 Purchase obligations (merchandise) (2) Operating leases (3). Contractual obligations Long-term debt (1) Payments Due by Fiscal Year As of August 30, 2015, our commitments to make future payments under contractual obligations were as follows: Contractual Obligations We maintain bank credit facilities for working capital and general corporate purposes. At August 30, 2015, we had borrowing capacity within these facilities of $407, of which $337 was maintained by our international operations. Of the $337, $153 is guaranteed by the Company. There were no outstanding short-term borrowings under the bank credit facilities at the end of 2015 and 2014. 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 have no current plans to repatriate for use in the U.S. cash and cash equivalents and short-term investments held by these non- U.S. consolidated subsidiaries whose earnings are considered indefinitely reinvested. Cash and cash During 2015, we repatriated a portion of the earnings in our Canadian operations that in 2014 were no longer considered indefinitely reinvested. In the fourth quarter of 2015, we changed our position regarding an additional portion of the undistributed earnings of our Canadian operations, which are no longer considered indefinitely reinvested. Current exchange rates compared to historical rates when these earnings were generated resulted in an immaterial U.S. tax benefit, which was recorded at the end of 2015. We have not provided for U.S. deferred taxes on cumulative undistributed earnings of certain non-U.S. consolidated subsidiaries because our subsidiaries have invested or will invest the undistributed earnings indefinitely, or the earnings if repatriated would not result in a deferred tax liability. This includes the remaining undistributed earnings of our Canadian operations that management maintains are indefinitely reinvested, or could be repatriated without resulting in a deferred tax liability. Deferred taxes are recorded for earnings of our foreign operations when we determine that such earnings are no longer indefinitely reinvested. 34.7% $1,109 2014 33.2% $1,195 2015 Effective tax rate Provision for income taxes Provision for Income Taxes and monetary liabilities during the year, primarily our Japanese subsidiary's U.S. dollar-denominated payables. 30 The increase in interest income in 2014 was primarily driven by higher average cash, cash equivalents, and short-term investments balances, primarily in our U.S. operations. The decrease in net foreign- currency transaction gains was primarily attributable to the revaluation or settlement of monetary assets 2014 vs. 2013 The increase in net foreign-currency transaction gains was primarily attributable to favorable mark-to- market adjustments for forward foreign exchange contracts compared to the prior year. See Derivatives and Foreign Currency sections in Note 1 to the consolidated financial statements included in this Report. The increase was also attributable to net gains on the revaluation or settlement of monetary assets and liabilities during the year. $97 2013 $990 32.4% Our provision for income taxes in 2015 and 2013 were favorably impacted by net tax benefits of $68 and $77, respectively, primarily due to tax benefits recorded in connection with special cash dividends paid to employees through our 401(K) Retirement Plan. Dividends paid on these shares are deductible for U.S. income tax purposes. There was no similar special cash dividend in 2014. Our primary sources of liquidity are cash flows generated from warehouse operations, cash and cash equivalents and short-term investment balances. Cash and cash equivalents and short-term investments were $6,419 and $7,315 at the end of 2015 and 2014, respectively. Of these balances, approximately $1,243 and $1,383 at the end of 2015 and 2014, respectively, represented debit and credit card receivables, primarily related to sales in the last week of our fiscal year. Cash and cash equivalents were negatively impacted by changes in exchange rates by $418 and $11, respectively. 44 (786) (2,324) (2,251) $3,437 $3,984 (2,093) 5 (2,480) 2013 2014 2015 Net cash (used in) provided by financing activities........ Net cash provided by operating activities.. The following table summarizes our significant sources and uses of cash and cash equivalents: LIQUIDITY AND CAPITAL RESOURCES $4,285 Franz E. Lazarus 38 Information related to our Executive Compensation and Director Compensation is incorporated herein by reference to Costco's Proxy Statement filed with the Securities and Exchange Commission. $4,644 2,286 116,199 112,640 105,156 Merchandise costs. 101,065 98,458 91,948 Selling, general and administrative. 11,445 10,899 10,104 Preopening expenses. 65 63 51 3,604 INCOME BEFORE INCOME TAXES. (99) 97 90 104 (113) 2,428 (124) 3,220 3,624 Interest income and other, net Interest expense OTHER INCOME (EXPENSE) Operating income 3,053 2,533 $102,870 $110,212 10,843 212 226 12,303 10,617 7,458 12,515 6,518 (1,121) 4,919 5,218 2 2 0 (76) 3,197 $33,440 The accompanying notes are an integral part of these consolidated financial statements. $113,666 2013 September 1, August 31, 2014 August 30, 2015 52 Weeks Ended $33,024 52 Weeks Ended 52 Weeks Ended OPERATING EXPENSES Total revenue Membership fees Net sales.. REVENUE 43 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: 3,051 Provision for income taxes. 1,195 (1,063) $2,061 52 Weeks Ended September 1, 2013 $2,088 2014 $2,409 49 52 Weeks Ended August 31, 52 Weeks Ended (amounts in millions) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME COSTCO WHOLESALE CORPORATION 44 The accompanying notes are an integral part of these consolidated financial statements. August 30, 2015 $8.17 (278) 2,137 45 The accompanying notes are an integral part of these consolidated financial statements. COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO Less: Comprehensive income attributable to noncontrolling interests Comprehensive income Foreign-currency translation adjustment and other, net.. 1,346 NET INCOME INCLUDING NONCONTROLLING INTERESTS $2,104 $1,332 22 33 14 1,783 $1,761 TOTAL LIABILITIES AND EQUITY. $1.33 CASH DIVIDENDS DECLARED PER COMMON SHARE. NET INCOME PER COMMON SHARE (22) $2,039 $2,058 $2,377 NET INCOME ATTRIBUTABLE TO COSTCO (30) ATTRIBUTABLE TO COSTCO: (32) 2,061 2,088 2,409 Net income including noncontrolling interests..... 990 1,109 Net income attributable to noncontrolling interests.. $6.51 Basic. Shares used in calculation (000's) 440,512 442,485 442,716 Diluted 435,741 438,693 Diluted 439,455 $4.63 $4.65 $5.37 $4.68 $4.69 $5.41 Basic.. Total equity Noncontrolling interests Total Costco stockholders' equity. We have audited Costco Wholesale Corporation's internal control over financial reporting as of August 30, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management's annual report on internal control over financial reporting included in Item 9A. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 30, 2015, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of August 30, 2015 and August 31, 2014, and the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the 52-week periods ended August 30, 2015, August 31, 2014 and September 1, 2013, and our report dated October 13, 2015 expressed an unqualified opinion on those consolidated financial statements. Seattle, Washington October 13, 2015 42 42 KPMG LLP COSTCO WHOLESALE CORPORATION CONSOLIDATED BALANCE SHEETS (amounts in millions, except par value and share data) August 30, 2015 August 31, 2014 ASSETS CURRENT ASSETS 748 Deferred income taxes and other current assets 8,456 8,908 Merchandise inventories. 1,148 Costco Wholesale Corporation: 1,224 1,577 1,618 Short-term investments. $5,738 $4,801 Cash and cash equivalents. Receivables, net. The Board of Directors and Stockholders REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP Cray Jack Under the supervision and with the participation of our management, we assessed the effectiveness of our internal control over financial reporting as of August 30, 2015, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control- Integrated Framework (2013). Based on its assessment, management has concluded that our internal control over financial reporting was effective as of August 30, 2015. The attestation of KPMG LLP, our independent registered public accounting firm, on the effectiveness of our internal control over financial reporting is included with the consolidated financial statements in this Report. 39 39 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of our assets; (2) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with appropriate authorizations; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. W. Craig Jelinek Management's Annual Report on Internal Control over Financial Reporting As of the end of the period covered by this Annual Report on Form 10-K, we performed an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities and Exchange Act of 1934 (the Exchange Act)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures are effective. Disclosure Controls and Procedures The consolidated financial statements have been audited by KPMG LLP, an independent registered public accounting firm, who conducted their audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). The independent registered public accounting firm's responsibility is to express an opinion as to the fairness with which such consolidated financial statements present our financial position, results of operations and cash flows in accordance with U.S. GAAP. Costco's management is responsible for the preparation, integrity and objectivity of the accompanying consolidated financial statements and the related financial information. The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP) and necessarily include certain amounts that are based on estimates and informed judgments. The Company's management is also responsible for the preparation of the related financial information included in this Annual Report on Form 10-K and its accuracy and consistency with the consolidated financial statements. Management's Report on the Consolidated Financial Statements MANAGEMENT'S REPORTS There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our fiscal quarter ended August 30, 2015, that has materially affected or is reasonably likely to materially affect our internal control over financial reporting. 669 President, Chief Executive Officer Rudd 24Q 41 October 13, 2015 Seattle, Washington We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Costco Wholesale Corporation's internal control over financial reporting as of August 30, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated October 13, 2015 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Costco Wholesale Corporation and subsidiaries as of August 30, 2015 and August 31, 2014, and the results of their operations and their cash flows for the 52-week periods ended August 30, 2015, August 31, 2014 and September 1, 2013, in conformity with U.S. generally accepted accounting principles. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. and Director We have audited the accompanying consolidated balance sheets of Costco Wholesale Corporation and subsidiaries as of August 30, 2015 and August 31, 2014, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the 52-week periods ended August 30, 2015, August 31, 2014, and September 1, 2013. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The Board of Directors and Stockholders REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 40 40 Executive Vice President, Chief Financial Officer and Director Richard A. Galanti Costco Wholesale Corporation: 45 Total current assets... 17,588 LONG-TERM DEBT, excluding current portion.. DEFERRED INCOME TAXES AND OTHER LIABILITIES. $9,011 $8,491 1,283 0 2,468 2,231 813 773 1,269 1,254 1,696 1,663 16,540 14,412 4,864 Retained earnings.. Accumulated other comprehensive loss Additional paid-in capital. 437,952,000 and 437,683,000 shares issued and outstanding Common stock $.005 par value; 900,000,000 shares authorized; Preferred stock $.005 par value; 100,000,000 shares authorized; no shares issued and outstanding.. Total current liabilities EQUITY Total liabilities 20,509 22,597 1,004 1,193 5,093 COMMITMENTS AND CONTINGENCIES Other current liabilities Deferred membership fees Accrued member rewards.. 23,664 592 811 Construction in progress. 4,845 5,274 22,675 Equipment and fixtures 12,618 Buildings and improvements. 4,716 4,961 Land. PROPERTY AND EQUIPMENT 12,522 17,299 Less accumulated depreciation and amortization. (7,845) Accrued salaries and benefits. Current portion of long-term debt. Accounts payable... CURRENT LIABILITIES LIABILITIES AND EQUITY $33,024 (8,263) $33,440 606 740 OTHER ASSETS 14,830 15,401 Net property and equipment. TOTAL ASSETS. COSTCO WHOLESALE CORPORATION COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (amounts in millions, except per share data) Common Stock Deferred income taxes Changes in operating assets and liabilities: Increase in merchandise inventories Increase in accounts payable. 394 327 285 (86) (61) (5) 22 (7) (101) (63) 7 (890) (563) (898) (2,572) (2,503) (1,501) 3,437 3,984 4,285 Other non-cash operating activities, net. Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Purchases of short-term investments.. 699 557 Other operating assets and liabilities, net... 718 529 880 386 Excess tax benefits on stock-based awards Stock-based compensation. 946 $226 $10,843 $10,617 Cash paid during the year for: Interest (reduced by $14, $11 and $12, interest capitalized in 2015, 2014 and 2013, respectively) $117 Income taxes, net.. The accompanying notes are an integral part of these consolidated financial statements. $1,186 $86 $1,001 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Property acquired under build-to-suit and capital leases.. $109 $0 $109 $869 Maturities and sales of short-term investments. 46 COSTCO WHOLESALE CORPORATION 1,029 1,127 $2,061 $2,088 $2,409 52 Weeks Ended September 1, 2013 46 52 Weeks Ended August 31, 2014 Depreciation and amortization to net cash provided by operating activities: Adjustments to reconcile net income including noncontrolling interests Net income including noncontrolling interests CASH FLOWS FROM OPERATING ACTIVITIES CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in millions) 52 Weeks Ended August 30, 2015 1,434 2,406 2,385 Net cash (used in) provided by financing activities... 14 34 34 Other financing activities, net.. (36) (3,560) (2,324) 61 (584) (2,865) Cash dividend payments. (334) (481) Repurchases of common stock. (121) 84 (786) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS $5,738 $4,801 CASH AND CASH EQUIVALENTS END OF YEAR.... 3,528 4,644 5,738 44 CASH AND CASH EQUIVALENTS BEGINNING OF YEAR 1,094 (937) Net (decrease) increase in cash and cash equivalents. (114) (11) (418) 1,116 $11 86 (164) CONSOLIDATED STATEMENTS OF EQUITY (amounts in millions) CASH FLOWS FROM FINANCING ACTIVITIES (2,251) (2,093) (2,480) Net cash used in investing activities Change in bank checks outstanding 19 (20) Other investing activities, net.... (2,083) (1,993) (2,393) Additions to property and equipment (3 Excess tax benefits on stock-based awards. (45) (70) (178) Minimum tax withholdings on stock-based awards. 3,717 117 1,125 Proceeds from issuance of long-term debt 96 326 51 Proceeds from short-term borrowings. (287) (103) (51) Repayments of short-term borrowings 68 The accompanying notes are an integral part of these consolidated financial statements. (84) COSTCO WHOLESALE CORPORATION 285 (278) 2,061 $157 $12,518 22 ---- 2,039 2,039 adjustment and other, net... Foreign-currency translation Net income. $12,361 $7,834 $156 $2 $4,369 432,350 BALANCE AT SEPTEMBER 2, 2012 Total Costco Stockholders' Noncontrolling Total Equity Interests Equity Retained Earnings Accumulated Additional Other Paid-in Comprehensive Income (Loss) | ---46 - Repurchases of common Stock options exercised, including tax effects.. Release of vested RSUs, including tax effects... Conversion of convertible notes... Stock-based compensation.... Foreign-currency translation adjustment and other, net... (278) Net income. BALANCE AT SEPTEMBER 1, Cash dividends declared 330 179 Shares (000's) Amount Capital 2013.. (278) 285 285 Repurchases of common stock (357) (4) (30) 3011 30 30 - - (3,560) 436,839 2 4,670 (122) 6,283 2,058 47 (34) (3,560) 327 802 Conversion of convertible -- 75 - 75 Stock-based compensation.... Stock options exercised, including tax effects... notes...... 1,435 Release of vested restricted stock units (RSUs), including tax effects.. 2,609 (85) (85) 75 971 - 58 58 10,833 2,058 (102) (2) - 437,952 (2,865) (2,865) (2,865) Cash dividends declared BALANCE AT AUGUST 30, 2015. (494) $2 $5,218 (494) (122) (122) 69 69 (42) 2,736 - (122) (3,456) (452) 989 - 69 $(1,121) 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2,770 (amounts in millions, except share, per share, and warehouse count data) Note 1―Summary of Significant Accounting Policies Description of Business Costco Wholesale Corporation (Costco or the Company), a Washington corporation, and its subsidiaries operate membership warehouses based on the concept that offering members low prices on a limited selection of nationally branded and private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. At August 30, 2015, Costco operated 686 warehouses worldwide: 480 United States (U.S.) locations (in 43 U.S. states, Washington, D.C., and Puerto Rico), 89 Canada locations, 36 Mexico locations, 27 United Kingdom (U.K.) locations, 23 Japan locations, 12 Korea locations, 11 Taiwan locations, 7 Australia locations, and 1 Spain location. The Company's online business operates websites in the U.S., Canada, U.K., and Mexico. $6,518 Basis of Presentation Fiscal Year End The Company operates on a 52/53 week fiscal year basis with the fiscal year ending on the Sunday closest to August 31. References to 2015, 2014, and 2013 relate to the 52-week fiscal years ended August 30, 2015, August 31, 2014, and September 1, 2013, respectively. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. Cash and Cash Equivalents The Company considers as cash and cash equivalents all cash on deposit, highly liquid investments with a maturity of three months or less at the date of purchase, and proceeds due from credit and debit card transactions with settlement terms of up to one week. Credit and debit card receivables were $1,243 and $1,383 at the end of 2015 and 2014, respectively. The consolidated financial statements include the accounts of Costco Wholesale Corporation, its wholly- owned subsidiaries, and subsidiaries in which it has a controlling interest. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company's equity. All material inter-company transactions between and among the Company and its consolidated subsidiaries have been eliminated in consolidation. The Company's net income excludes income attributable to noncontrolling interests in its operations in Taiwan and Korea. Unless otherwise noted, references to net income relate to net income attributable to Costco. Stock-based compensation.... Stock options exercised, including tax effects... Release of vested RSUs, including tax effects.. Repurchases of common stock.. 42 Net income (35) 1 (102) — (10 (102) 58 (299) 327 3 46 11,012 2,088 (34) (3,560) Foreign-currency translation adjustment and other, net... 30 49 (334) 327 on - (584) (584) Cash dividends declared (334) stock.. 394 (1,045) = (1,045) (18) (1,063) 18 -1 - -1 (2,915) (85) 212 12,515 32 2,409 12,303 2,377 7,458 (76) 2 4,919 ---- 2,377 437,683 (584) BALANCE AT AUGUST 31, 2014 51 Other Current Liabilities The Company's wholly-owned captive insurance subsidiary (the captive) receives direct premiums, which are netted against the Company's premium costs in selling, general and administrative expenses, in the consolidated statements of income. The captive participates in a reinsurance program that includes other third-party participants. The reinsurance agreement is one year in duration, and new agreements are entered into by each participant at their discretion at the commencement of the next calendar year. The participant agreements and practices of the reinsurance program limit any participating members' individual risk. Income statement adjustments related to the reinsurance program and related impacts to the consolidated balance sheets are recognized as information becomes known. In the event the Company leaves the reinsurance program, the Company is not relieved of its primary obligation to the policyholders for activity prior to the termination of the annual agreement. The Company uses a combination of insurance and self-insurance mechanisms, including for certain risks a wholly-owned captive insurance subsidiary and participation in a reinsurance program, to provide for potential liabilities for workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability, and employee health care benefits. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated, in part, by considering historical claims experience, demographic factors, severity factors, and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends. At the end of 2015 and 2014, these insurance liabilities were $993 and $815 in the aggregate, respectively, and were included in accrued salaries and benefits and other current liabilities in the consolidated balance sheets, classified based on their nature. Accrued sales, income, and other taxes Insurance/Self-Insurance Liabilities respectively, representing the excess of outstanding checks over cash on deposit at the banks on which the checks were drawn. Other current liabilities consist of the following at the end of 2015 and 2014: Property and equipment are stated at cost. In general, new building additions are classified into components, each with its own estimated useful life, generally five to fifty years for buildings and improvements and three to twenty years for equipment and fixtures. Depreciation and amortization expense is computed using the straight-line method over estimated useful lives or the lease term, if shorter. Leasehold improvements made after the beginning of the initial lease term are depreciated over the shorter of the estimated useful life of the asset or the remaining term of the initial lease plus any renewals that are reasonably assured at the date the leasehold improvements are made. Accounts Payable The Company evaluates long-lived assets for impairment on an annual basis, when relocating or closing a facility, or when events or changes in circumstances may indicate the carrying amount of the asset group, generally an individual warehouse, may not be fully recoverable. For asset groups held and used, including warehouses to be relocated, the carrying value of the asset group is considered recoverable when the estimated future undiscounted cash flows generated from the use and eventual disposition of the asset group exceed the respective carrying value. In the event that the carrying value is not considered recoverable, an impairment loss would be recognized for the asset group to be held and used equal to the excess of the carrying value above the estimated fair value of the asset group. For asset groups classified as held-for-sale (disposal group), the carrying value is compared to the disposal group's fair value less costs to sell. The Company estimates fair value by obtaining market appraisals from third party brokers or using other valuation techniques. Impairment charges, included in selling, general and administrative expenses in the consolidated statements of income, in 2015, 2014, and 2013 were immaterial. Repair and maintenance costs are expensed when incurred. Expenditures for remodels, refurbishments and improvements that add to or change the way an asset functions or that extend the useful life are capitalized. Assets that were removed during the remodel, refurbishment or improvement are retired. Assets classified as held-for-sale at the end of 2015 and 2014 were immaterial. The Company capitalizes certain computer software and software development costs incurred in developing or obtaining computer software for internal use. These costs are included in equipment and fixtures and amortized on a straight-line basis over the estimated useful lives of the software, generally three to seven years. Property and Equipment Due to net deflationary trends, a benefit of $27 was recorded to merchandise costs in both 2015 and 2013. Due to net inflationary trends in 2014, a charge of $28 was recorded to merchandise costs to increase the cumulative LIFO valuation on merchandise inventories. At the end of 2015 and 2014, the cumulative impact of the LIFO valuation on merchandise inventories was $82 and $109, respectively. The Company provides for estimated inventory losses between physical inventory counts as a percentage of net sales, using estimates based on the Company's experience. The provision is adjusted periodically to reflect actual physical inventory counts, which generally occur in the second and fourth fiscal quarters. Inventory cost, where appropriate, is reduced by estimates of vendor rebates when earned or as the Company progresses towards earning those rebates, provided that they are probable and reasonably estimable. Insurance-related liabilities.. 60 The Company's banking system provides for the daily replenishment of major bank accounts as checks are presented. Included in accounts payable at the end of 2015 and 2014 are $538 and $588, Deferred sales. 122 Returns reserve Derivatives 50 $1,663 $1,696 169 185 124 173 201 250 299 371 396 $578 $491 2014 2015 Other current liabilities. Other.. Cash card liability. 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 records an adjustment each quarter, if necessary, for the projected annual effect of inflation or deflation, and these estimates are adjusted to actual results determined at year-end, after actual inflation rates and inventory levels for the year have been determined. The Company believes the LIFO method more fairly presents the results of operations by more closely matching current costs with current revenues. Merchandise inventories for all foreign operations are primarily valued by the retail inventory method and are stated using the first-in, first-out (FIFO) method. Level 3: Significant unobservable inputs that are not corroborated by market data. Merchandise inventories Third-party pharmacy receivables. Reinsurance receivables. Vendor receivables.. Receivables consist of the following at the end of 2015 and 2014: Receivables, Net Current financial liabilities have fair values that approximate their carrying values. Long-term financial liabilities consist of long-term debt, which is recorded on the balance sheet at issuance price and adjusted for any applicable unamortized discounts or premiums. 49 49 The Company's valuation techniques used to measure the fair value of money market mutual funds are based on quoted market prices, such as quoted net asset values published by the fund as supported in an active market. Valuation methodologies used to measure the fair value of all other non-derivative financial instruments are based on independent external valuation information. The pricing process uses data from a variety of independent external valuation information providers, including trades, bid price or spread, two-sided markets, quotes, benchmark curves including but not limited to treasury benchmarks and Libor and swap curves, discount rates, and market data feeds. All are observable in the market or can be derived principally from or corroborated by observable market data. The Company reports transfers in and out of Levels 1, 2, and 3, as applicable, using the fair value of the individual securities as of the beginning of the reporting period in which the transfer(s) occurred. data. Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market Level 1: Quoted market prices in active markets for identical assets or liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying a fair value hierarchy, which requires maximizing the use of observable inputs when measuring fair value. The three levels of inputs are: The Company accounts for certain assets and liabilities at fair value. The carrying value of the Company's financial instruments, including cash and cash equivalents, receivables and accounts payable, approximate fair value due to their short-term nature or variable interest rates. See Notes 2, 3, and 4 for the carrying value and fair value of the Company's investments, derivative instruments, and fixed-rate debt, respectively. Fair Value of Financial Instruments The Company periodically evaluates unrealized losses in its investment securities for other-than- temporary impairment, using both qualitative and quantitative criteria. In the event a security is deemed to be other-than-temporarily impaired, the Company recognizes the credit loss component in interest income and other, net in the consolidated statements of income. In general, short-term investments have a maturity at the date of purchase of three months to five years. Investments with maturities beyond five years may be classified, based on the Company's determination, as short-term based on their highly liquid nature and because they represent the investment of cash that is available for current operations. Short-term investments classified as available-for-sale are recorded at fair value using the specific identification method with the unrealized gains and losses reflected in accumulated other comprehensive income (loss) until realized. Realized gains and losses from the sale of available-for-sale securities, if any, are determined on a specific identification basis and are recorded in interest income and other, net in the consolidated statements of income. Short-term investments classified as held-to-maturity are financial instruments that the Company has the intent and ability to hold to maturity and are reported net of any related amortization and are not remeasured to fair value on a recurring basis. Short-Term Investments The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of business. It manages these fluctuations, in part, through the use of forward foreign-exchange contracts, seeking to economically hedge the impact of fluctuations of foreign exchange on known future expenditures denominated in a non-functional foreign-currency. The contracts relate primarily to U.S. dollar merchandise inventory expenditures made by the Company's international subsidiaries, whose functional currency is not the U.S. dollar. These contracts do not qualify for derivative hedge accounting. The Company seeks to mitigate risk with the use of these contracts and does not intend to engage in Other receivables, net.... $8,908 $8,456 Receivables, net.. 2014 2,481 2,504 $6,427 $5,952 2014 2015 United States Foreign.... Merchandise inventories consist of the following at the end of 2015 and 2014: Merchandise Inventories Receivables are recorded net of an allowance for doubtful accounts. The allowance is based on historical experience and application of the specific identification method. Write-offs of receivables were immaterial for fiscal years 2015, 2014, and 2013. Vendor receivables include volume rebates or other purchase discounts. Balances are generally presented on a gross basis, separate from any related payable due. In certain circumstances, these receivables may be settled against the related payable to that vendor. Reinsurance receivables are held by the Company's wholly-owned captive insurance subsidiary. The balance primarily represents amounts ceded through reinsurance arrangements and are reflected on a gross basis, separate from the amounts assumed under reinsurance, which are presented on a gross basis within other current liabilities in the consolidated balance sheets. Third-party pharmacy receivables generally relate to amounts due from members' insurance companies. Other receivables primarily consist of amounts due from governmental entities, mostly tax-related items. $1,148 $1,224 104 119 87 103 253 273 $704 $729 2015 52 60 The unrealized gains or losses recognized in interest income and other, net in the accompanying consolidated statements of income relating to the net changes in the fair value of unsettled forward foreign-exchange contracts was a net gain of $12 for 2015, and immaterial for 2014 and 2013. $1 $1,405 4 0 4 1,408 $1,404 1,409 155 13 13 168 168 $1,576 155 $1 Basis Recorded $4 $1,618 2014: Available-for-sale: Government and agency securities Asset and mortgage-backed securities. Gains, Net Total available-for-sale... Certificates of deposit Bankers' acceptances. Total held-to-maturity Total short-term investments. Cost Basis Unrealized Held-to-maturity: $1,614 $1,577 The proceeds from sales of available-for-sale securities were $246, $116, and $244 during 2015, 2014, and 2013, respectively. Gross realized gains or losses from sales of available-for-sale securities were not material in 2015, 2014, and 2013. Money market mutual funds (1) Investment in government and agency securities Investment in asset and mortgage-backed securities. Forward foreign-exchange contracts, in asset position (2) Forward foreign-exchange contracts, in (liability) position (2) Total 58 50 Level 1 $306 2015: Level 2 5 16 0 (4) $306 $1,415 $0 1,398 Gross unrealized gains and losses on available-for-sale securities were not material in 2015, 2014, and 2013. At the end of 2015 and 2014, the Company's available-for-sale securities that were in a continuous unrealized-loss position were not material, and at the end of 2013, the Company had none. There were no gross unrealized gains and losses on cash equivalents at the end of 2015, 2014, or 2013. The tables below present information at the end of 2015 and 2014, respectively, regarding the Company's financial assets and financial liabilities that are measured at fair value on a recurring basis and indicate the level within the fair value hierarchy reflecting the valuation techniques utilized to determine such fair value. $215 The maturities of available-for-sale and held-to-maturity securities at the end of 2015, were as follows: Due in one year or less. Due after one year through five years Total.. Note 3-Fair Value Measurement Available-For-Sale Assets and Liabilities Measured at Fair Value on a Recurring Basis Cost Basis $300 1,061 $301 1,064 $215 38 $1,399 38 $1,403 Fair Value Held-To-Maturity speculative transactions. These contracts do not contain any credit-risk-related contingent features. The aggregate notional amounts of open, unsettled forward foreign-exchange contracts were $889 and $585 at the end of 2015 and 2014, respectively. While the Company seeks to manage counterparty risk associated with these contracts by limiting transactions to counterparties with which the Company has an established banking relationship, there can be no assurance that this practice is effective. The contracts are limited to less than one year in duration. See Note 3 for information on the fair value of unsettled forward foreign-exchange contracts at the end of 2015 and 2014. 215 1,403 54 54 Stock-Based Compensation Restricted stock units (RSUs) granted to employees generally vest over five years and allow for quarterly vesting of the pro-rata number of stock-based awards that would vest on the next anniversary of the grant date in the event of retirement or voluntary termination. The Company does not reduce stock-based compensation for an estimate of forfeitures, which are inconsequential in light of historical experience and considering the awards vest on a quarterly basis. Actual forfeitures are recognized as they occur. Compensation expense for all stock-based awards granted is predominantly recognized using the straight-line method over the requisite service period for the entire award. The terms of the Company's stock-based awards for employees and non-employee directors provide for accelerated vesting of a portion of outstanding shares based on reaching certain cumulative years of service with the Company. Compensation expense for the accelerated shares is recognized upon achievement of the long service term. The cumulative amount of compensation cost recognized at any point in time equals at least the portion of the grant-date fair value of the award that is vested at that date. The fair value of RSUs is calculated as the market value of the common stock on the measurement date less the present value of the expected dividends forgone during the vesting period. Stock-based compensation expense is predominantly included in selling, general and administrative expenses in the consolidated statements of income. See Note 7 for additional information on the Company's stock-based compensation plans. Leases The Company's 401(k) Retirement Plan is available to all U.S. employees who have completed 90 days of employment. The plan allows pre-tax deferrals, a portion of which the Company matches. In addition, the Company provides each eligible participant an annual discretionary contribution. The Company also has a defined contribution plan for Canadian employees and contributes a percentage of each employee's salary. Certain subsidiaries in the Company's Other International operations have defined benefit and defined contribution plans that are not material. Amounts expensed under all plans were $454, $436, and $409 for 2015, 2014, and 2013, respectively, and are included in selling, general and administrative expenses and merchandise costs in the accompanying consolidated statements of income. The Company leases land and/or buildings at warehouses and certain other office and distribution facilities, primarily under operating leases. Operating leases expire at various dates through 2064, with the exception of one lease in the Company's U.K. subsidiary, which expires in 2151. These leases generally contain one or more of the following options, which the Company can exercise at the end of the initial lease term: (a) renewal of the lease for a defined number of years at the then-fair market rental rate or rate stipulated in the lease agreement; (b) purchase of the property at the then-fair market value; or (c) right of first refusal in the event of a third-party purchase offer. The Company has capital leases for certain warehouse locations, expiring at various dates through 2040. Capital lease assets are included in land, buildings, and improvements in the accompanying consolidated balance sheets. Amortization expense on capital lease assets is recorded as depreciation expense and is predominately included in selling, general and administrative expenses. Capital lease liabilities are recorded at the lesser of the estimated fair market value of the leased property or the net present value of the aggregate future minimum lease payments and are included in other current liabilities and deferred income taxes and other liabilities in the accompanying consolidated balance sheets. Interest on these obligations is included in interest expense in the consolidated statements of income. The Company records an asset and related financing obligation for the estimated construction costs under build-to-suit lease arrangements where it is considered the owner for accounting purposes, to the extent the Company is involved in the construction of the building or structural improvements or has construction risk prior to commencement of a lease. Upon occupancy, the Company assesses whether 55 59 these arrangements qualify for sales recognition under the sale-leaseback accounting guidance. If the Company continues to be the deemed owner, it accounts for the arrangement as a financing lease. The Company's asset retirement obligations (ARO) are primarily related to leasehold improvements that at the end of a lease must be removed in order to comply with the lease agreement. These obligations are recorded as a liability with an offsetting asset at the inception of the lease term based upon the estimated fair value of the costs to remove the leasehold improvements. These liabilities are accreted over time to the projected future value of the obligation using the Company's incremental borrowing rate. The ARO assets are depreciated using the same depreciation method as the respective leasehold improvement assets and are included with buildings and improvements. Estimated ARO liabilities associated with these leases amounted to $54 and $55 at the end of 2015 and 2014, respectively, and are included in deferred income taxes and other liabilities in the accompanying consolidated balance sheets. The Company accounts for its lease expense with free rent periods and step-rent provisions on a straight- line basis over the original term of the lease and any extension options that the Company more likely than not expects to exercise, from the date the Company has control of the property. Certain leases provide for periodic rental increases based on price indices, or the greater of minimum guaranteed amounts or sales volume. Preopening Expenses Retirement Plans Selling, General and Administrative Expenses The Company is exposed to fluctuations in prices for the energy it consumes, particularly electricity and natural gas, which it seeks to partially mitigate through the use of fixed- and variable-price contracts for certain of its warehouses and other facilities, primarily in the U.S. and Canada. The Company also enters into variable-priced contracts for purchases of fuel for its gas stations. These contracts meet the characteristics of derivative instruments, but generally qualify for the "normal purchases or normal sales" exception under authoritative guidance and thus require no mark-to-market adjustment. Foreign Currency The functional currencies of the Company's international subsidiaries are the local currency of the country in which the subsidiary is located. Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Translation adjustments are recorded in accumulated other comprehensive income (loss). Revenues and expenses of the Company's consolidated foreign operations are translated at average exchange rates prevailing during the year. The Company recognizes foreign-currency transaction gains and losses related to revaluing or settling monetary assets and liabilities denominated in currencies other than the functional currency in interest income and other, net in the accompanying consolidated statements of income. Generally, this includes the U.S. dollar cash and cash equivalents and the U.S. dollar payables of consolidated subsidiaries to their functional currency. Also included are realized foreign-currency gains or losses from settlements of forward foreign-exchange contracts. These items resulted in net gains of $35, $25, and $37 for 2015, 2014, and 2013, respectively. Revenue Recognition The Company generally recognizes sales, which include shipping fees where applicable, net of returns, at the time the member takes possession of merchandise or receives services. When the Company collects payments from customers prior to the transfer of ownership of merchandise or the performance of services, the amounts received are generally recorded as deferred sales, included in other current liabilities in the consolidated balance sheets, until the sale or service is completed. The Company reserves for estimated sales returns based on historical trends in merchandise returns and reduces sales and merchandise costs accordingly. The sales returns reserve is based on an estimate of the net realizable value of merchandise inventories to be returned. Amounts collected from members for sales or value added taxes are recorded on a net basis. Selling, general and administrative expenses consist primarily of salaries, benefits and workers' compensation costs for warehouse employees, other than fresh foods departments and certain ancillary businesses, as well as all regional and home office employees, including buying personnel. Selling, general and administrative expenses also include substantially all building and equipment depreciation, bank charges, utilities, and stock-based compensation expense as well as other operating costs incurred to support warehouse operations. The Company evaluates whether it is appropriate to record the gross amount of merchandise sales and related costs or the net amount earned. Generally, when Costco is the primary obligor, is subject to inventory risk, has latitude in establishing prices and selecting suppliers, can influence product or service specifications, or has several but not all of these indicators, revenue is recorded on a gross basis. If the Company is not the primary obligor and does not possess other indicators of gross reporting as noted above, it records the net amounts earned, which is reflected in net sales. The Company records related shipping fees on a gross basis. The Company accounts for membership fee revenue, net of refunds, on a deferred basis, ratably over the one-year membership period. The Company's Executive members qualify for a 2% reward on qualified purchases (up to a maximum reward of approximately $750 per year), which can be redeemed only at Costco warehouses. The Company accounts for this reward as a reduction in sales. The sales reduction and corresponding liability (classified as accrued member rewards in the consolidated balance sheets) are computed after giving effect to the estimated impact of non-redemptions based on historical data. The net reduction in sales was $1,128, $1,051, and $970 in 2015, 2014, and 2013, respectively. Merchandise Costs Merchandise costs consist of the purchase price of inventory sold, inbound and outbound shipping charges and all costs related to the Company's depot operations, including freight from depots to selling warehouses, and are reduced by vendor consideration. Merchandise costs also include salaries, benefits, depreciation, and utilities on production equipment in fresh foods and certain ancillary departments. Vendor Consideration The Company has agreements with vendors to receive funds for volume rebates, certain ongoing programs, and other vendor consideration. Volume rebates or other purchase discounts are evidenced by signed agreements that are reflected in the carrying value of the inventory when earned or as the Company progresses towards earning the rebate or discount, and as a component of merchandise costs as the merchandise is sold. Other vendor consideration is generally recorded as a reduction of merchandise costs upon completion of contractual milestones, terms of the related agreement, or by another systematic approach. 53 215 Preopening expenses related to new warehouses, new regional offices and other startup operations are expensed as incurred. The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credits and loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts that are more likely than not expected to be realized. Total short-term investments. 57 Cost Basis Unrealized Gains, Net Recorded Basis Certificates of deposit. $1,394 $1,398 5 0 5 1,399 4 $4 Income Taxes Held-to-maturity: Asset and mortgage-backed securities. The determination of the Company's provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits of uncertain tax positions are recorded in the Company's consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from tax authorities. Additionally, certain of our cumulative foreign undistributed earnings are considered indefinitely reinvested. These earnings would be subject to U.S. income tax if we changed our position and could result in a U.S. tax liability. When facts and circumstances change, the Company reassesses these probabilities and records any changes in the consolidated financial statements as appropriate. See Note 8 for additional information. Net Income per Common Share Attributable to Costco The computation of basic net income per share uses the weighted average number of shares that were outstanding during the period. The computation of diluted net income per share uses the weighted average number of shares in the basic net income per share calculation plus the number of common shares that would be issued assuming vesting of all potentially dilutive common shares outstanding using the treasury stock method for shares subject to RSUs and the “if converted” method for the convertible note securities. 56 Stock Repurchase Programs Repurchased shares of common stock are retired, in accordance with the Washington Business Corporation Act. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par is deducted by allocation to both additional paid-in capital and retained earnings. The amount allocated to additional paid-in capital is calculated as the current value of additional paid-in capital per share outstanding and is applied to the number of shares repurchased. Any remaining amount is allocated to retained earnings. See Note 6 for additional information. Total available-for-sale..... Recent Accounting Pronouncements Not Yet Adopted In May 2014, the FASB issued new guidance on the recognition of revenue from contracts with customers. The guidance converges the requirements for reporting revenue in addition to requiring disclosures sufficient to describe the nature, amount, timing, and uncertainty of revenue and cash flows arising from these contracts. Companies can transition to the standard either retrospectively or as a cumulative effect adjustment as of the date of adoption. The new standard is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The Company plans to adopt this guidance at the beginning of its first quarter of fiscal year 2019. The Company is evaluating the impact of this standard on its consolidated financial statements and disclosures. Note 2-Investments The Company's investments at the end of 2015 and 2014 were as follows: 2015: Available-for-sale: Government and agency securities In April 2014, the Financial Accounting Standards Board (FASB) issued guidance that changed the criteria for reporting discontinued operations, as well as requiring new disclosures regarding discontinued operations and disposals that do not qualify for discontinued operations reporting. This guidance is effective for fiscal years beginning after December 15, 2014, with early adoption permitted for disposals that have not been reported in financial statements previously issued. The Company will adopt this guidance at the beginning of fiscal year 2016. Adoption is not expected to have a material impact on the Company's consolidated financial statements or disclosures. Due after five years 68 2020. (275) 296 (10) $286 Thereafter Total. Less amount representing interest... Net present value of minimum lease payments. Less current installments (1). 571 Long-term capital lease obligations less current installments (2). (2) Included in deferred income taxes and other liabilities in the accompanying consolidated balance sheets. (3) Includes build-to-suit lease obligations. Note 6-Stockholders' Equity Dividends The Company's current quarterly dividend rate is $0.40 per share. In February 2015, the Company paid a special cash dividend of $5.00 per share, totaling approximately $2,201. Stock Repurchase Programs The Company's stock repurchase program is conducted under a $4,000 authorization by the Board of Directors approved on April 17, 2015, which expires April 17, 2019. This authorization revoked previously authorized but unused amounts, totaling $2,528. As of the end of 2015, the total amount repurchased on the new authorization was $301. The following table summarizes the Company's stock repurchase activity: 2015.. 2014 2013. (1) Included in other current liabilities in the accompanying consolidated balance sheets. Shares Repurchased $2,964 2,097 Capital and Build-to-Suit Leases Gross assets recorded under capital and build-to-suit leases were $300 and $200 at the end of 2015 and 2014, respectively. These assets are recorded net of accumulated amortization of $42 and $35 at the end of 2015 and 2014, respectively. 61 At the end of 2015, future minimum payments, net of sub-lease income of $131 for all years combined, under non-cancelable operating leases with terms of at least one year and capital leases were as follows: 2016. 2017 2018. 2019. Operating Leases 452 Capital Leases (3) $24 183 24 176 24 166 23 155 24 $187 The aggregate rental expense for 2015, 2014, and 2013 was $252, $230, and $225, respectively. Sub- lease income, included in interest income and other, net in the accompanying consolidated statements of income, and contingent rents were not material in 2015, 2014, and 2013, respectively. (000's) Total Cost Vested and delivered.. Number of Units (in 000's) 9,117 Weighted-Average Grant Date Fair Value $86.92 4,017 125.68 (4,103) Granted. 87.33 102.09 376 N/A Forfeited. Special cash dividend Outstanding at the end of 2015 9,233 $99.72 The weighted-average grant date fair value of RSUs granted during 2015, 2014, and 2013 was $125.68, $113.64, and $90.99, respectively. The remaining unrecognized compensation cost related to non-vested RSUs at the end of 2015 was $640 and the weighted-average period of time over which this cost will be recognized is 1.7 years. Included in the outstanding balance at the end of 2015 were approximately 2,811,000 RSUs vested but not yet delivered. (174) Average Price per Share Outstanding at the end of 2014 63 3,456 $142.87 $494 114.45 334 357 96.41 34 These amounts may differ from the stock repurchase balances in the accompanying consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of each fiscal year. The following table summarizes RSU transactions during 2015: 62 Note 7-Stock-Based Compensation Plans The Company grants stock-based compensation to employees and non-employee directors. Stock option awards were granted until the fourth quarter of fiscal 2006, when the Company began awarding RSUs. Beginning in 2009, RSU grants to all executive officers have been performance-based. Through a series of shareholder approvals, there have been amended and restated plans and new provisions implemented by the Company. RSUs held by employees and non-employee directors are subject to quarterly vesting upon certain terminations of employment or service. Employees who attain certain years of service with the Company receive shares under accelerated vesting provisions on the annual vesting date rather than upon retirement. The Seventh Restated 2002 Stock Incentive Plan (Seventh Plan), amended in the second quarter of fiscal 2015, is the Company's only stock-based compensation plan with shares available for grant at the end of 2015. Each share issued in respect of stock awards is counted as 1.75 shares toward the limit of shares made available under the Seventh Plan. The Seventh Plan authorized the issuance of 23,500,000 shares (13,429,000 RSUs) of common stock for future grants in addition to the shares authorized under the previous plan. The Company issues new shares of common stock upon exercise of stock options and upon vesting of RSUs. Shares for vested RSUs are generally delivered to participants annually, net of shares equal to the minimum statutory withholding taxes. As required by the Company's Seventh Plan, in conjunction with the special cash dividend discussed in Note 6, adjustments were made to awards outstanding on the dividend record date to preserve their value following the dividend, as follows: (i) the number of shares subject to outstanding RSUs was increased; and (ii) the exercise prices of outstanding stock options were reduced and the number of shares subject to such options was increased. Approximately 410,000 stock options were adjusted, and approximately 8,956,000 RSUs were adjusted. These adjustments did not result in additional stock-based compensation expense, as the fair value of the outstanding awards did not change. As further required by the Seventh Plan, the maximum number of shares issuable under the Seventh Plan was proportionally adjusted, which resulted in an additional 750,000 RSU shares available to be granted. Summary of Restricted Stock Unit Activity RSUS granted to employees and to non-employee directors generally vest over five years and three years, respectively. Additionally, the terms of the RSUs, including performance-based awards, provide for accelerated vesting for employees and non-employee directors who have attained 25 or more years and five or more years of service with the Company, respectively, and provide for vesting upon certain terminations of employment or service. Recipients are not entitled to vote or receive dividends on non- vested and undelivered shares. At the end of 2015, 18,308,000 shares were available to be granted as RSUS under the Seventh Plan. The following awards were outstanding at the end of 2015: • • 8,698,000 time-based RSUs that vest upon continued employment over specified periods of time; 535,000 performance-based RSUs, of which 281,000 were granted to executive officers subject to the certification of the attainment of specified performance targets for 2015. This certification occurred in September 2015, at which time a portion vested as a result of the long service of all executive officers. The awards vest upon continued employment over specified periods of time. 62 Operating Leases Note 5-Leases $6,147 Long-Term Debt On February 17, 2015, the Company issued $1,000 in aggregate principal amount of Senior Notes (February 2015 Notes), as follows: $500 of 1.75% Senior Notes due February 15, 2020; and $500 of 2.25% Senior Notes due February 15, 2022. Interest is due semi-annually on February 15 and August 15; the first payment was made on August 15, 2015. The Company, at its option, may redeem the February 2015 Notes at any time, in whole or in part, at the redemption price plus accrued and unpaid interest to 59 the date of redemption. The redemption price is equal to the greater of 100% of the principal amount of the notes to be redeemed or the sum of the present value of the remaining scheduled payments of principal and interest to maturity. The Company will be required to offer to purchase the February 2015 Notes, at a price of 101% of the principal amount plus accrued and unpaid interest to the date of repurchase, upon certain events as defined by the terms of the February 2015 Notes. The discount and issuance costs associated with the February 2015 Notes are being amortized to interest expense over the term of the notes, which are valued using Level 2 inputs. In December 2012, the Company issued $3,500 in aggregate principal amount of Senior Notes (December 2012 Notes) as follows: $1,200 of 0.65% Senior Notes due December 7, 2015; $1,100 of 1.125% Senior Notes due December 15, 2017; and $1,200 of 1.7% Senior Notes due December 15, 2019. Interest is payable semi-annually. The Company, at its option, may redeem the December 2012 Notes at any time, in whole or in part, at a redemption price plus accrued interest. The redemption price is equal to the greater of 100% of the principal amount of the December 2012 Notes to be redeemed or the sum of the present value of the remaining scheduled payments of principal and interest to maturity. Additionally, the Company will be required to make an offer to purchase the December 2012 Notes at a price of 101% of the principal amount plus accrued and unpaid interest to the date of repurchase, upon certain events as defined by the terms of the December 2012 Notes. The discount and issuance costs associated with the December 2012 Notes are being amortized to interest expense over the terms of the notes. The December 2012 Notes are valued using Level 2 inputs. In February 2007, the Company issued $1,100 of 5.5% Senior Notes due March 15, 2017 (2007 Senior Note). Interest is payable semi-annually. The Company, at its option, may redeem the 2007 Senior Note at any time, in whole or in part, at a redemption price plus accrued interest. The redemption price is equal to the greater of 100% of the principal amount of the 2007 Senior Note to be redeemed or the sum of the present value of the remaining scheduled payments of principal and interest to maturity. Additionally, the Company will be required to make an offer to purchase the 2007 Senior Note at a price of 101% of the principal amount plus accrued and unpaid interest to the date of repurchase, upon certain events as defined by the terms of the 2007 Senior Note. The discount and issuance costs associated with the 2007 Senior Note are being amortized to interest expense over the term of the note. This note is valued using Level 2 inputs. Other long-term debt consisted primarily of promissory notes and term loans issued by the Company's Japanese subsidiary. These notes and term loans are valued primarily using Level 3 inputs. In May 2015, the Company's Japanese subsidiary issued approximately $125 of 0.79% promissory notes through a private placement, which are included in other long-term debt in the table below. Interest is payable semi- annually, and principal is due in May 2025. These notes are valued using Level 3 inputs. 60 60 In 2015, the maximum and average amounts outstanding during the fiscal year under all short-term borrowing arrangements were immaterial. In 2014, maximum and average amounts outstanding for Japan bank borrowings were $93 and $67, respectively, and had a weighted average interest rate of 0.55% during the fiscal year. The maximum and average amounts outstanding for the U.K. bank overdraft facility during 2014 were $18 and $7, respectively, and had a weighted average interest rate of 1.54% during the fiscal year. The estimated fair value of the Company's debt was based primarily on reported market values, recently completed market transactions, and estimates based upon interest rates, maturities, and credit. The carrying value and estimated fair value at the end of 2015 and 2014 consisted of the following: 2014 Carrying Value Fair Value Carrying Value Fair Value 0.65% Senior Notes due December 2015 $1,200 $1,201 $1,199 $1,203 5.5% Senior Notes due March 2017. 2015 1,099 The Company enters into various short-term bank credit facilities, totaling $407 and $451 in 2015 and 2014, respectively. At the end of 2015 and 2014, there were no outstanding borrowings under these credit facilities. Note 4-Debt 2014: (1) Money market mutual funds (1 Investment in government and agency securities Investment in asset and mortgage-backed securities. Forward foreign-exchange contracts, in asset position Forward foreign-exchange contracts, in (liability) position (2) Total. Level 1 Level 2 $312 $0 Short-Term Borrowings 1,405 0 (3) $312 $1,409 (1) Included in cash and cash equivalents in the accompanying consolidated balance sheets. (2) The asset and the liability values are included in deferred income taxes and other current assets and other current liabilities, respectively, in the accompanying consolidated balance sheets. See Note 1 for additional information on derivative instruments. During and at the end of both 2015 and 2014, the Company did not hold any Level 3 financial assets and liabilities that were measured at fair value on a recurring basis. There were no transfers in or out of Level 1, 2, or 3 during 2015 and 2014. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis Financial assets measured at fair value on a nonrecurring basis include held-to-maturity investments that are carried at amortized cost and are not remeasured to fair value on a recurring basis. There were no fair value adjustments to these financial assets during 2015 and 2014. See Note 4 for discussion on the fair value of long-term debt. Nonfinancial assets measured at fair value on a nonrecurring basis include items such as long-lived assets that are measured at fair value resulting from an impairment, if deemed necessary. Fair value adjustments to nonfinancial assets during 2015 and 2014 were immaterial. 3 1,171 1,099 1,223 1.125% Senior Notes due December 2017 1,284 0 Long-term debt, excluding current portion ...... $4,864 $4,904 $5,093 $5,217 Maturities of long-term debt during the next five fiscal years and thereafter are as follows: 2016. 2017 1,283 2018. 2020. Thereafter Total $1,283 1,100 1,178 83 1,698 805 2019.. Less current portion 5,217 5,093 1,100 1,097 1,100 1,095 1.7% Senior Notes due December 2019 1,198 1,186 1,198 1,186 1.75% Senior Notes due February 2020. 500 494 2.25% Senior Notes due February 2022. 499 484 Other long-term debt.. 551 555 497 510 Total long-term debt 6,147 6,188 Summary of Stock-Based Compensation The following table summarizes stock-based compensation expense and the related tax benefits under the Company's plans: 2,915 Stock-based compensation expense, net of income taxes 98 641 607 107 19 (560) (529) (200) (193) $168 90 $87 The Company has not provided for U.S. deferred taxes on cumulative undistributed earnings of certain non-U.S. consolidated subsidiaries because its subsidiaries have invested or will invest the undistributed earnings indefinitely, or the earnings if repatriated would not result in a deferred tax liability. This includes the remaining undistributed earnings of the Canadian operations that the Company maintains are indefinitely reinvested, or could be repatriated without resulting in a deferred tax liability. Deferred taxes are recorded for earnings of foreign operations when it is determined that such earnings are no longer indefinitely reinvested. During 2015, the Company repatriated a portion of the earnings in the Canadian operations that, in 2014, the Company determined were no longer considered indefinitely reinvested. In the fourth quarter of 2015, the Company changed its position regarding an additional portion of the undistributed earnings of the Canadian operations, which are no longer considered indefinitely reinvested. Current exchange rates compared to historical rates when these earnings were generated resulted in an immaterial U.S. benefit, which was recorded at the end of 2015. The Company has not provided for U.S. deferred taxes on cumulative undistributed earnings of $2,845 and $3,619 at the end of 2015 and 2014, respectively, of certain non-U.S. consolidated subsidiaries as such earnings are deemed by the Company to be indefinitely reinvested or the earnings if repatriated would not result in a deferred tax liability. Because of the availability of U.S. foreign tax credits and complexity of the computation, it is not practicable to determine the U.S. federal income tax liability that would be associated with such earnings if such earnings were not deemed to be indefinitely reinvested. The Company believes that its U.S. current and projected asset position is sufficient to meet its U.S. liquidity requirements and has no current plans to repatriate for use in the U.S. the cash and cash equivalents and short-term investments held by these non-U.S. subsidiaries whose earnings are considered indefinitely reinvested. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2015 and 2014 is as follows: Stock-based compensation expense before income taxes Less recognized income tax benefit.... Gross increases-tax positions in prior years... Gross decreases-tax positions in prior years Settlements.. Lapse of statute of limitations Gross unrecognized tax benefit at end of year The deferred tax accounts at the end of 2015 and 2014 include current deferred income tax assets of $521 and $448 respectively, included in deferred income taxes and other current assets; non-current deferred income tax assets of $109 and $68, respectively, included in other assets; and non-current deferred income tax liabilities of $462 and $429, respectively, included in deferred income taxes and other liabilities. Included in non-current deferred tax assets for 2015 are $33 of foreign tax credits which expire in 2025. 2015 $85 2014 0.6 8 0.2 Total $1,195 33.2% $1,109 34.7% $990 32.4% The Company's provision for income taxes for 2015 and 2013 was favorably impacted by a $57 and $62 tax benefit in connection with the special cash dividend of $5.00 and $7.00 per share, respectively. These dividends were paid by the Company to employees, who through the Company's 401(k) Retirement Plan owned 29,000,000 and 22,600,000 shares of Company stock through an ESOP in 2015 and 2013, respectively. Dividends paid on these shares are deductible for U.S. income tax purposes. There was no similar special cash dividend in 2014. $90 The components of the deferred tax assets (liabilities) are as follows: Deferred income/membership fees. Accrued liabilities and reserves. Other.. Property and equipment. Merchandise inventories.. Net deferred tax assets. 99 65 2015 Equity compensation... 2014 $75 $80 $2,058 $2,039 Weighted average number of common shares used in basic net income per common share 439,455 RSUs Conversion of convertible notes. 3,249 12 438,693 3,771 21 435,741 $2,377 4,552 219 442,716 442,485 440,512 Note 10-Commitments and Contingencies Legal Proceedings The Company is involved in a number of claims, proceedings and litigation arising from its business and property ownership. In accordance with applicable accounting guidance, the Company establishes an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. There may be exposure to loss in excess 200 67 of any amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss (taking into account where applicable indemnification arrangements concerning suppliers and insurers) and the accrued amount, if any, thereof, and adjusts the amount as appropriate. As of the date of this report, the Company has not recorded an accrual with respect to any matter described below. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. In each case, there is a reasonable possibility that a loss may be incurred, including a loss in excess of the applicable accrual. For matters where no accrual has been recorded, the possible loss or range of loss (including any loss in excess of the accrual) cannot in our view be reasonably estimated because, among other things: (i) the remedies or penalties sought are indeterminate or unspecified; (ii) the legal and/or factual theories are not well developed; and/or (iii) the matters involve complex or novel legal theories or a large number of parties. The Company is a defendant in the following matters, among others: Numerous putative class actions have been brought around the United States against motor fuel retailers, including the Company, alleging that they have been overcharging consumers by selling gasoline or diesel that is warmer than 60 degrees without adjusting the volume sold to compensate for heat-related expansion or disclosing the effect of such expansion on the energy equivalent received by the consumer. The Company is named in the following actions: Raphael Sagalyn, et al., v. Chevron USA, Inc., et al., Case No. 07-430 (D. Md.); Phyllis Lerner, et al., v. Costco Wholesale Corporation, et al., Case No. 07- 1216 (C.D. Cal.); Linda A. Williams, et al., v. BP Corporation North America, Inc., et al., Case No. 07-179 (M.D. Ala.); James Graham, et al. v. Chevron USA, Inc., et al., Civil Action No. 07-193 (E.D. Va.); Betty A. Delgado, et al., v. Allsups, Convenience Stores, Inc., et al., Case No. 07-202 (D.N.M.); Gary Kohut, et al. v. Chevron USA, Inc., et al., Case No. 07-285 (D. Nev.); Mark Rushing, et al., v. Alon USA, Inc., et al., Case No. 06-7621 (N.D. Cal.); James Vanderbilt, et al., v. BP Corporation North America, Inc., et al., Case No. 06-1052 (W.D. Mo.); Zachary Wilson, et al., v. Ampride, Inc., et al., Case No. 06-2582 (D. Kan.); Diane Foster, et al., v. BP North America Petroleum, Inc., et al., Case No. 07-02059 (W.D. Tenn.); Mara Redstone, et al., v. Chevron USA, Inc., et al., Case No. 07-20751 (S.D. Fla.); Fred Aguirre, et al. v. BP West Coast Products LLC, et al., Case No. 07-1534 (N.D. Cal.); J.C. Wash, et al., v. Chevron USA, Inc., et al.; Case No. 4:07cv37 (E.D. Mo.); Jonathan Charles Conlin, et al., v. Chevron USA, Inc., et al.; Case No. 07 0317 (M.D. Tenn.); William Barker, et al. v. Chevron USA, Inc., et al.; Case No. 07-cv-00293 (D.N.M.); Melissa J. Couch, et al. v. BP Products North America, Inc., et al., Case No. 07cv291 (E.D. Tex.); S. Garrett Cook, Jr., et al., v. Hess Corporation, et al., Case No. 07cv750 (M.D. Ala.); Jeff Jenkins, et al. v. Amoco Oil Company, et al., Case No. 07-cv-00661 (D. Utah); and Mark Wyatt, et al., v. B. P. America Corp., et al., Case No. 07-1754 (S.D. Cal.). On June 18, 2007, the Judicial Panel on Multidistrict Litigation assigned the action, entitled In re Motor Fuel Temperature Sales Practices Litigation, MDL Docket No 1840, to Judge Kathryn Vratil in the United States District Court for the District of Kansas. On April 12, 2009, the Company agreed to settle the actions in which it is named as a defendant. Under the settlement, which was subject to final approval by the court, the Company agreed, to the extent allowed by law and subject to other terms and conditions in the agreement, to install over five years from the effective date of the settlement temperature-correcting dispensers in the States of Alabama, Arizona, California, Florida, Georgia, Kentucky, Nevada, New Mexico, North Carolina, South Carolina, Tennessee, Texas, Utah, and Virginia. Other than payments to class representatives, the settlement does not provide for cash payments to class members. On September 22, 2011, the court preliminarily approved a revised settlement, which did not materially alter the terms. On April 24, 2012, the court granted final approval of the revised settlement. A class member who objected has filed a notice of appeal from the order approving the settlement. Plaintiffs have moved for an award of $10 in attorneys' fees, as well as an Weighted average number of common shares and dilutive potential of common stock used in diluted net income per share.. Net income available to common stockholders after assumed conversions of dilutive securities. 2013 2014 26 9 63 10 (1) (11) (3) (11) (2) $158 $75 Included in the balance at the end of 2015 and 2014, are $50 and $38, respectively, of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the 66 disallowance of these tax positions would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. The Company has recorded an offsetting long-term asset of $48 for amounts included in the balance at the end of 2015. Offsetting long-term assets were not material at the end of 2014. The total amount of such unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods is $98 and $47 at the end of 2015 and 2014, respectively. Accrued interest and penalties related to income tax matters are classified as a component of income tax expense. Interest and penalties recognized by the Company were not material in 2015 and 2014. Accrued interest and penalties were not material at the end of 2015 and 2014. The Company is currently under audit by several taxing jurisdictions in the United States and in several foreign countries. Some audits may conclude in the next 12 months and the unrecognized tax benefits we have recorded in relation to the audits may differ from actual settlement amounts. is not practical to estimate the effect, if any, of any amount of such change during the next 12 months to previously recorded uncertain tax positions in connection with the audits. The Company does not anticipate that there will be a material increase or decrease in the total amount of unrecognized tax benefits in the next 12 months. The Company files income tax returns in the United States, various state and local jurisdictions, in Canada and in several other foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local examination for years before fiscal 2007. The Company is currently subject to examination in Canada for fiscal years 2011 to present and in California for fiscal years 2007 to present. No other examinations are believed to be material. Note 9-Net Income per Common and Common Equivalent Share The following table shows the amounts used in computing net income per share and the effect on net income and the weighted average number of shares of potentially dilutive common shares outstanding (shares in 000's): 2015 20 1.2 Gross unrecognized tax benefit at beginning of year. Gross increases-current year tax positions.. Other..... 2013 $766 $696 $572 (12) (105) 16 754 591 2014 588 State: Current Deferred Total state Foreign: Current Deferred Total foreign... Total provision for income taxes Total federal. 131 2015 Current Note 8-Income Taxes Income before income taxes is comprised of the following: 2015 2014 39 $394 $327 $285 (131) (109) (94) $263 $218 $191 Domestic (including Puerto Rico). Foreign Deferred Total ... 2015 2014 2013 $2,574 $2,145 $2,070 1,030 1,052 981 $3,604 $3,197 $3,051 The provisions for income taxes for 2015, 2014, and 2013 are as follows: Federal: 64 107 2013 1 85 2.3 66 2.1 66 2.1 Foreign taxes, net. (125) (3.5) State taxes, net (85) (87) (2.8) Employee stock ownership plan (ESOP). (66) (1.8) (0.3) (65) (2.1) 109 (2.7) 35.0% $1,119 35.0% $1,068 35.0% (11) Federal taxes at statutory rate. $1,262 132 104 399 369 302 (90) 45 (13) 113 414 2013 309 2014 2015 Tax benefits associated with the exercise of employee stock programs were allocated to equity attributable to Costco in the amount of $86, $84, and $59, in 2015, 2014, and 2013, respectively. The reconciliation between the statutory tax rate and the effective rate for 2015, 2014, and 2013 is as follows: 4 $1,109 $1,195 289 $990 4,892 755 124 150 1,029 Additions to property and equipment.. 1,245 204 1,993 Net property and equipment. (425) 313-8100 1,662 14,830 Total assets... 6,203 Depreciation and amortization.. 21,929 544 3,036 2014 544 10,815 Net property and equipment. 33,024 1,381 3,205 15,401 Total assets.. 23,397 3,608 6,435 33,440 Total revenue.. $80,477 $17,943 $14,220 $112,640 Operating income. 1,880 796 3,220 2013 1,621 $75,493 20,608 4,529 5,146 30,283 The following table summarizes the percentage of net sales by major item category: Foods. Sundries Hardlines Total assets.. Fresh Foods Ancillary and Other. 70 70 2015 2014 2013 22% 22% 21% 21% 21% 22% 16% 16% 16% 14% 13% 13% 2,393 Softlines.... 13,881 2,608 9,652 $17,179 $12,484 $105,156 Operating income. 1,810 756 487 3,053 Depreciation and amortization.. 696 123 127 946 Additions to property and equipment.. 1,090 186 807 2,083 Net property and equipment... Total revenue.. 671 999 Lake Drive Issaquah, WA 98027 1,574 Boulevard Magnocentro #4 Mexico Region 28906 Getafe, Madrid, Spain Gavilanes Calle Agustín de Betancourt, 17 Polígono Empresarial Los Spain Region 91190 Saint-Aubin, France Parc des Algorithmes Col. San Fernando Route de l'Orme des Merisiers Immeuble le Thalés 17-21 Parramatta Rd. Lidcombe, NSW, 2141, Australia Australia Region 255 Min Shan Street Neihu, Taipei, Taiwan 114 Taiwan Region Gyeonggi-do, 14347, Korea Gwangmyeong-si 40, Iljik-ro Korea Region France Region La Herradura 52760 Huixquilucan, Mexico Costco Shareholder Relations P. O. Box 30170 11% 11% 11% FSC® C101537 responsible sources Paper from MIX www.fsc.org FSC WHOLESALE COSTCO (This page intentionally left blank) 75 Stock Symbol: COST The NASDAQ Global Select Market Stock Exchange Listing Website: https://www.computershare.com/investor Outside U.S.: (201) 680-6578 TDD for Hearing Impaired: (800) 490-1493 Telephone: (800) 249-8982 College Station, TX 77842-3170 Computershare 148 Transfer Agent Japan Region Total 2015 Total revenue.. $84,351 $17,341 $14,507 $116,199 Operating income. Other International Operations 2,308 545 3,624 Depreciation and amortization. 848 119 160 1,127 Additions to property and equipment.. 771 Canadian Operations United States Operations The Company and its subsidiaries are principally engaged in the operation of membership warehouses in the U.S., Canada, Mexico, U.K., Japan, Australia, and Spain and through majority-owned subsidiaries in Taiwan and Korea. The Company's reportable segments are largely based on management's organization of the operating segments for operational decisions and assessments of financial performance, which considers geographic locations. The material accounting policies of the segments are the same as described in Note 1. All material inter-segment net sales and expenses have been eliminated in computing total revenue and operating income. Certain operating expenses, predominantly stock-based compensation, are incurred on behalf of the Company's Canadian and Other International operations, but are included in the U.S. operations because those costs are not allocated internally and generally come under the responsibility of the Company's U.S. management team. INTERNATIONAL DIVISION United Kingdom Region 213 Hartspring Lane Watford, England WD25 8JS 4500 Still Creek Drive, Unit A Burnaby, BC V5C 0E5, Canada Western Region 415 West Hunt Club Road West Ottawa, ON K2E 1C5, Canada Eastern Region CANADIAN DIVISION 3980 Venture Drive NW, #W100 Duluth, GA 30096 Southeast Region 45940 Horseshoe Drive, Suite 150 Sterling, VA 20166 Northeast Region EASTERN DIVISION Division and Regional Offices 69 69 award of costs and payments to class representatives. The Company has opposed the motion. On March 20, 2014, the Company filed a notice invoking a “most favored nation” provision under the settlement, under which it seeks to adopt provisions in later settlements with certain other defendants, an invocation that class counsel opposed. The motion was denied on January 23, 2015. Final judgment was entered on September 22, 2015, and the Company intends to appeal. The Company has received notices from most states stating that they have appointed an agent to conduct an examination of the books and records of the Company to determine whether it has complied with state unclaimed property laws. In addition to seeking the turnover of unclaimed property subject to escheat laws, the states may seek interest, penalties, costs of examinations, and other relief. Certain states have separately also made requests for payment by the Company concerning a specific type of property, some of which have been paid in immaterial amounts. The Company has received from the Drug Enforcement Administration subpoenas and administrative inspection warrants concerning the Company's fulfillment of prescriptions related to controlled substances and related practices. Offices of the United States Attorney in various districts have communicated to the Company their belief that the Company has committed civil regulatory violations concerning these subjects. The Company is seeking to cooperate with these processes. The Company does not believe that any pending claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company's financial position; however, it is possible that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be material to the results of an individual fiscal quarter. Note 11-Segment Reporting 3-1-4 Ikegami-Shincho Kawasaki-ku Kawasaki-shi Kanagawa, 210-0832 Japan 16% 17% 17% 10,132 Note 12-Quarterly Financial Data (Unaudited) Executive Vice President, COO - Southwest Division & Mexico Senior Vice President, General Manager - Texas Region Dennis R. Zook Richard L. Webb Senior Vice President, Real Estate Ron M. Vachris Senior Vice President, Depots & Traffic Executive Vice President, COO - Merchandising John D. Thelan Douglas W. Schutt Senior Vice President, Information Systems James W. Rutherford Senior Vice President, General Manager - Southeast Region Yoram B. Rubanenko Manufacturing & Business Centers Executive Vice President, Ancillary Businesses, Timothy L. Rose Senior Vice President, Ecommerce, Publishing & Costco Travel Ginnie Roeglin Executive Vice President, Chief Information Officer James P. Murphy Executive Vice President, COO - International Richard J. Olin Senior Vice President, General Counsel Mario Omoss 73 Senior Vice President, General Manager - Northwest Region Stephen M. Pappas David S. Petterson Senior Vice President, Corporate Controller Joseph P. Portera Executive Vice President, COO - Eastern & Canadian Divisions and Chief Diversity Officer Pierre Riel Senior Vice President, General Manager - Eastern Canada Region Senior Vice President, General Manager - Europe Paul G. Moulton Jeffrey Abadir GMM Corporate Non-Foods International Ecommerce Frank Farcone GMM-Softlines - Canadian Division Liz Elsner Debbie Ells Country Manager - Korea Operations - Western Canada Region Preston Draper Operations - Eastern Canada Region Heather Downie Operations - Southeast Region Gino Dorico Gerard J. Dempsey Northwest Region GMM - Foods & Sundries - Operations Midwest Region Russ Decaire - Operations - Southeast Region Wendy Davis Gasoline, Car Wash & Mini-labs Julie L. Cruz Operations - Texas Region Jeffrey M. Cole Michael G. Casebier GMM - Foods - San Diego Region Jim Andruski GMM - Foods & Sundries - Western Canada Region Marc-André Bally GMM - Business Centers - Canadian Division Operations - Bay Area Region Claudine Adamo Bryan Blank Operations - Northwest Region Timothy Bowersock Information Systems Kimberly F. Brown Operations - Texas Region Deborah Calhoun Operations - San Diego Region Christopher Bolves Operations - Los Angeles Region Senior Vice President, Construction Senior Vice President, General Manager - Western Canada Region Senior Vice President, Human Resources and Patrick J. Callans Senior Vice President, International Ecommerce Donald E. Burdick Chairman of the Board Jeffrey H. Brotman Senior Vice President, National Merchandising - Canadian Division EXECUTIVE AND SENIOR OFFICERS (c) Nominating and Governance Committee * 2015 Committee Chair (b) Compensation Committee (a) Audit Committee Executive Chairman of Frontier Communications Board Committees Maggie A. Wilderotter Chairman of Trilogy International Partners, Inc.; Chairman of Trilogy Equity Partners Co-Founder, former President and CEO, Costco John W. Stanton Director, various non-profit organizations James D. Sinegal Jill S. Ruckelshaus (b)(c) President and Chief Operating Officer, The Blackstone Group W. Craig Jelinek President and Chief Executive Officer, Costco Richard M. Libenson A Founder, former Director and Executive Officer of Risk Management The Price Company President of MCM, A Meisenbach Company Andree T. Brien Charles T. Munger(a)*(b) Vice Chairman of the Board of Berkshire Hathaway Inc.; Chairman of the Board of Daily Journal Corporation Jeffrey S. Raikes (c)* Founder and CEO of the Raikes Foundation; Former CEO of the Bill and Melinda Gates Foundation John W. Meisenbach Ali Moayeri Roger A. Campbell Senior Vice President, International Operations Executive Vice President, COO - Northern Division Russ D. Miller Senior Vice President, Merchandising - Fresh Foods John D. McKay Jeffrey B. Lyons Senior Vice President, General Manager - Northeast Region Jeffrey R. Long Executive Vice President, Administration Senior Vice President, Membership, Marketing & Services Franz E. Lazarus Senior Vice President, Merchandising - Foods & Sundries Paul W. Latham Dennis E. Knapp Senior Vice President, Merchandising - Non-Foods & Ecommerce James Klauer President and Chief Executive Officer Senior Vice President, General Manager - Bay Area Region W. Craig Jelinek (12 Weeks) Robert D. Hicok Senior Vice President, General Manager - Los Angeles Region Bruce Greenwood Senior Vice President, General Manager - Asia Richard C. Chavez Senior Vice President, Costco Wholesale Industries & Business Development Victor A. Curtis Senior Vice President, Pharmacy Richard Chang Richard Delie John B. Gaherty Senior Vice President, General Manager - Midwest Region Richard A. Galanti Executive Vice President, Chief Financial Officer Jaime Gonzalez Senior Vice President, General Manager – Mexico Senior Vice President, Merchandising – Non-Foods & Ecommerce Timothy K. Farmer GMM - Corporate Non-Foods Christopher E. Fleming Operations - Western Canada Region Murray T. Fleming Diane Tucci Operations Mexico Adrian Thummler Construction Todd Thull Construction & Gasoline - Canadian Division Keith H. Thompson GMM-Optical, Optical Labs, Mini-labs Yves Thomas Country Manager - Japan Ken J. Theriault Chief Financial Officer - Mexico Mauricio Talayero Country Manager - France Gary Swindells - Operations Ecommerce GMM-Corporate Non-Foods Louie Silveira Operations - Midwest Region David L. Skinner Operations - Eastern Canada Region James Stafford Country Manager - Spain GMM-Foods - Northeast Region Operations Pharmacy Kimberley L. Suchomel GMM - International John Sullivan Associate General Counsel & Chief Compliance Officer Steve Supkoff Richard Stephens GMM - Fresh Foods - Canadian Division Geoff Shavey Azmina K. Virani GMM Corporate Non-Foods Corporate Office 1918 Eighth Avenue, Suite 2900 Seattle, WA 98101 Independent Public Accountants KPMG LLP Bellevue, Washington 98004 900 Bellevue Way NE Hyatt Regency Bellevue Friday, January 29, 2016 at 4:00 PM Annual Meeting 1701 Dallas Parkway, Suite 201 Plano, TX 75093 Texas Region San Diego, CA 92117 4649 Morena Blvd. San Diego Region 11000 Garden Grove Blvd., #201 Garden Grove, CA 92843 Los Angeles Region SOUTHWEST DIVISION 1901 West 22nd Street, 2nd Floor Oak Brook, IL 60523 Shannon West GMM-Corporate Non-Foods Rich Wilcox Operations - Northeast Region Craig Wilson Food Safety & Quality Assurance Charlie A. Winters - Operations Fresh Meat, Produce & Service Deli GMM - Non-Foods - Canadian Division Jack Weisbly Earl Wiramanaden 74 ADDITIONAL INFORMATION A copy of Costco's annual report to the Securities and Exchange Commission on Form 10-K and quarterly reports on Form 10-Q will be provided to any shareholder upon written request directed to Investor Relations, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, Washington 98027. Internet users can access recent sales and earnings releases, the annual report and SEC filings, as well as our Costco Online web site, at http://www.costco.com. E-mail users may direct their investor relations questions to investor@costco.com. All of the Company's filings with the SEC may be obtained at the SEC's Public Reference Room at Room 1580, 100 F Street NE, Washington, DC 20549. For information regarding the operation of the SEC's Public Reference Room, please contact the SEC at 1-800-SEC- 0330. Additionally, the SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. NORTHERN DIVISION Northwest Region 1045 Lake Drive Issaquah, WA 98027 Bay Area Region 2820 Independence Drive Livermore, CA 94551 Midwest Region GMM - Fresh Foods - Asia/Australia Janet Shanks Operations - Los Angeles Region Debbie Sarter Financial Accounting Controller Daniel M. Hines GMM - Ecommerce - Canadian Division Graham E. Hillier - Northwest Region Operations - James Hayes Information Systems Operations - Northwest Region Timothy Haser GMM - Foods - Southeast Region David Harruff Doris E. Harley GMM - Foods - Midwest Region GMM-Costco Travel William Hanson Peter Gruening VICE PRESIDENTS GMM - Non-Foods - Canadian Division Martin Groleau GMM - Hardlines - Canadian Division Anthony Fontana Operations - Northeast Region Thomas J. Fox GMM - Bakery & Food Court Jack S. Frank Mitzi Hu Real Estate Development - West Marketing - - Canadian Division Joseph Grachek III Merchandise Accounting Controller Darby Greek Operations Bay Area Region Nancy Griese GMM - Corporate Foods Lorelle S. Gilpin GMM - Imports Ross A. Hunt Human Resources, Finance & IS - Canadian Division GMM - Foods & Sundries, Quality Assurance, Food Safety & Business Delivery Canadian Division Patrick J. Noone Country Manager - Australia Frank Padilla GMM-Corporate Produce & Fresh Meat Daniel Parent Operations - Eastern Canada Region Shawn Parks Operations - Los Angeles Region Financial Planning & Investor Relations Pietro Nenci Michael Parrott Operations - Southeast Region Paul Pulver Operations - Northeast Region Aldyn J. Royes Operations - Southeast Region Chris Rylance Information Systems Drew Sakuma Operations - Bay Area Region GMM-Corporate Non-Foods Steven D. Powers Hamilton E. James GMM - Foods - Texas Region Robert E. Nelson Tim Murphy Jeff Ishida Real Estate - Eastern Division Arthur D. Jackson, Jr. Administration & Community Giving Harold E. Kaplan Corporate Treasurer Gary Kotzen GMM Global Sourcing William Koza Operations - Midwest Region Robert Leuck GMM - Foods - Bay Area Region Robert Murvin Operations - Northeast Region Steve Mantanona GMM - Corporate Foods Mark Maushund Operations - Los Angeles Region Susan McConnaha Operations - Bakery & Food Court Daniel McMurray Operations Midwest Region David Messner Real Estate Development Sarah Mogk Operations - Depots GMM - Merchandising - Mexico Tracy Mauldin-Avery Officer, Costco Senior Vice President, General Manager - San Diego Region Dennis A. Hoover Richard A. Galanti Basic... COSTCO: SHARE ATTRIBUTABLE TO NET INCOME PER COMMON $2,377 $767 $516 $598 $496 TO COSTCO. NET INCOME ATTRIBUTABLE (32) (11) (3) (9) (9) noncontrolling interests. Provision for income taxes. 274 263 (1) 280 378 1,195 $1.13 Net income including 505 607 519 778 2,409 Executive Vice President and Chief Financial noncontrolling interests. 3,604 $1.36 $1.75 52 Weeks Ended August 31, 2014 Note 12-Quarterly Financial Data (Unaudited) (Continued) 71 (2) Includes the special cash dividend of $5.00 per share paid in February 2015. (1) Includes a $57 tax benefit recorded in the second quarter in connection with the special cash dividend paid to employees through the Company's 401(k) Retirement Plan. $6.51 $0.40 $0.40 (2) $5.355 $0.355 PER COMMON SHARE CASH DIVIDENDS DECLARED 442,716 439,455 438,835 442,404 440,070 443,132 $5.41 Diluted $1.12 $1.35 $1.17 $1.73 $1.17 $5.37 Basic... 438,760 440,384 Diluted 442,210 442,896 Shares used in calculation (000's) 1,156 799 870 31,096 22,687 23,897 23,385 Merchandise costs OPERATING EXPENSES 2,533 116,199 35,778 26,101 27,454 26,866 Total revenue.. 785 584 582 582 $113,666 The two tables that follow reflect the unaudited quarterly results of operations for 2015 and 2014. First Quarter 52 Weeks Ended August 30, 2015 Fourth Quarter (16 Weeks) Second Quarter (12 Weeks) Third Quarter (12 Weeks) 101,065 Total (52 Weeks) Net sales.. Membership fees.. $26,284 $26,872 $25,517 $34,993 REVENUE Selling, general and administrative 2,696 (26) (27) (31) (40) (124) Interest income and other, net. Interest expense. 35 9 40 104 INCOME BEFORE INCOME TAXES 779 20 First Quarter OTHER INCOME (EXPENSE) 1,156 2,671 2,579 3,499 11,445 Preopening expenses. 15 3,624 9 27 65 Operating income. 770 877 821 14 (12 Weeks) Net income attributable to Third Quarter (12 Weeks) $0.96 Diluted $4.69 $1.59 $1.08 $1.05 $0.97 Basic.... COSTCO: SHARE ATTRIBUTABLE TO NET INCOME PER COMMON $2,058 $697 $473 $463 $425 TO COSTCO.. noncontrolling interests. 431 473 479 705 2,088 $1.05 Net income attributable to (6) (10) (6) (8) (30) NET INCOME ATTRIBUTABLE noncontrolling interests. Net income including $1.07 $4.65 Senator and Governor of the State of Washington Chairman, Daniel J. Evans Associates; Former U.S. BOARD OF DIRECTORS DIRECTORS AND OFFICERS Daniel J. Evans (a)(c) Former President of Yahoo! Inc. Principal of Deck3 Ventures LLC; Susan L. Decker (a) Co-Founder, Chairman of the Board, Costco Jeffrey H. Brotman 72 $1.33 $0.355 Second Quarter (12 Weeks) $0.31 $0.31 PER COMMON SHARE Shares used in calculation (000's) Basic.. 437,970 439,776 439,446 437,875 $1.58 438,693 442,420 442,829 442,720 441,887 442,485 CASH DIVIDENDS DECLARED Diluted 1,109 $0.355 245 3,380 2,487 2,531 2,501 administrative Selling, general and 98,458 31,037 22,554 23,043 21,824 Merchandise costs OPERATING EXPENSES 2,428 112,640 35,523 25,794 26,306 381 Fourth Quarter (16 Weeks) Total (52 Weeks) REVENUE Net sales. Membership fees. 10,899 $24,468 550 $25,233 561 $34,755 768 $110,212 Total revenue. 25,017 549 Preopening expenses.. $25,756 8 30 12 30 90 INCOME BEFORE INCOME TAXES 18 659 724 3,197 Provision for income taxes. 228 24 255 728 Interest income and other, net. 1,086 (35) (113) 16 63 15 668 724 737 Operating income 1,091 3,220 OTHER INCOME (EXPENSE) Interest expense. (27) (26) (25) Kaminoyama Markham YUCATÁN (1) Watford Caguas Carolina North London London Thurrock Iruma Izumi Wembly Forward-Looking Statements E. Bayamón W. Bayamón VERACRUZ (2) Veracruz Xalapa BUSINESS OVERVIEW 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, modernization of information systems, and the demand for our products and services. Forward-looking statements may also be identified by the words "believe," "project," "expect," "anticipate,” “estimate,” “intend,” “strategy,” “future," "opportunity,” “plan,” “may,” “should," "will," "would," "will be," "will continue," "will likely result,” and similar expressions. 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, including, without limitation, the factors set forth in the section titled "Risk Factors", and other factors noted in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the consolidated financial statements and related notes in this Report. Forward-looking statements speak only as of the date they are made, and we do not undertake to update them, except as required by law. General Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983 in Seattle, Washington. We are principally engaged in the operation of membership warehouses in the United States (U.S.) and Puerto Rico, Canada, United Kingdom (U.K.), Mexico, Japan, Australia, Spain, and through majority-owned subsidiaries in Taiwan and Korea. Costco operated 715, 686, and 663 warehouses worldwide at August 28, 2016, August 30, 2015, and August 31, 2014, respectively. Our common stock trades on the NASDAQ Global Select Market, under the symbol "COST." We report on a 52/53-week fiscal year, consisting of thirteen, four-week periods and ending on the Sunday nearest the end of August. The first three quarters consist of three periods each, and the fourth quarter consists of four periods (five weeks in the thirteenth period in a 53-week year). The material seasonal impact in our operations is an increased level of net sales and earnings during the winter holiday season. References to 2016, 2015, and 2014 relate to the 52-week fiscal years ended August 28, 2016, August 30, 2015, and August 31, 2014, respectively. We operate membership warehouses 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 generally sell inventory before we are required to pay for it, even while taking advantage of early payment discounts when available. To the extent that sales increase and inventory turnover becomes more rapid, more inventory is financed through payment terms provided by suppliers rather than by our working capital. Sunbury We buy most of our merchandise directly from manufacturers and route it to a cross-docking consolidation point (depot) or directly to our warehouses. Our depots receive large shipments from manufacturers and quickly ship these goods to our individual warehouses. This process maximizes freight volume and handling efficiencies, eliminating many of the costs associated with traditional multiple-step distribution channels. Mérida Imizu Culiacan Sheffield Southampton Our average warehouse space is approximately 144,000 square feet, with newer units slightly larger. Floor plans are designed for economy and efficiency in the use of selling space, the handling of merchandise, and the control of inventory. Because shoppers are attracted principally by the quality of merchandise and the Gifu Hashima Farnborough Liverpool Manchester Milton Keynes Oldham Reading Querétaro QUINTANA ROO (1) Cancún SAN LUIS POTOSÍ (1) San Luis Potosí SINALOA (1) Kitchener SONORA (1) Pewaukee Pleasant Prairie Sun Prairie WASHINGTON, D.C. (1) Washington, D.C. Guelph Hiroshima Kanata Hisayama PUERTO RICO (4) Kingston Hitachinaka Hermosillo 6 2014 Marketing activities for new locations generally include community outreach to local businesses in new and existing markets and direct mail to prospective new members. Ongoing promotional programs primarily relate to coupon mailers, The Costco Connection (a magazine we publish for our members), and promotional e- mails to members. Total cardholders...... 2016 2015 36,800 10,800 34,000 31,600 86,700 10,600 10,400 47,600 44,600 42,000 39,100 36,700 81,300 34,400 76,400 Paid cardholders are eligible to upgrade to an Executive membership in the U.S. and Canada, for an additional annual fee of $55, and in Mexico and the U.K., for which the additional annual fee varies. Executive members earn a 2% reward on qualified purchases (up to a maximum reward of $750 per year in our U.S. and Canadian operations and varies in our Other International operations), which can be redeemed only at Costco warehouses. This program also offers (except in Mexico) additional savings and benefits on various business and consumer services, such as auto and home insurance, the Costco auto purchase program and check printing services. The services are generally provided by third-parties and vary by state and country. Executive members represented 39% of paid cardholders at the end of 2016, 2015, and 2014. Executive members generally spend more than other members, and where executive memberships are offered the percentage of our net sales attributable to these members continues to increase. Labor Household cards. Our employee count was as follows: Part-time employees Total employees.. 2016 2015 2014 126,000 117,000 112,000 92,000 88,000 83,000 218,000 205,000 195,000 Approximately 15,000 employees, in a minority of our locations, are represented by the International Brotherhood of Teamsters. We consider our employee relations to be very good. Competition Our industry is highly competitive, based on factors such as price, merchandise quality and selection, location, and customer service. We compete on a worldwide basis with global, national, and regional 8 Chiba New Town Chubu Full-time employees. availability of low prices, our warehouses are not elaborate. By strictly controlling the entrances and exits of our warehouses and using a membership format, we have limited inventory losses (shrinkage) to amounts well below those of typical discount retail operations. Total paid members. Gold Star Our warehouses on average operate on a seven-day, 70-hour week. Gasoline operations generally have extended hours. Because the hours of operation are shorter than other retailers, and due to other efficiencies inherent in a warehouse-type operation, labor costs are lower relative to the volume of sales. Merchandise is generally stored on racks above the sales floor and displayed on pallets containing large quantities, thereby reducing labor required. In general, with variations by country, our warehouses accept certain debit and credit cards, co-branded Costco credit cards, cash, or checks. Our strategy is to provide our members with a broad range of high-quality merchandise at prices we believe are consistently lower than elsewhere. We seek to limit specific items in each product line to fast-selling models, sizes, and colors. We carry an average of approximately 3,700 active stock keeping units (SKUs) per warehouse in our core warehouse business, significantly less than other broadline retailers. Many consumable products are offered for sale in case, carton, or multiple-pack quantities only. In keeping with our policy of member satisfaction, we generally accept returns of merchandise. On certain electronic items, we typically have a 90-day return policy and provide, free of charge, technical support services, as well as an extended warranty. Additional third-party warranty coverage is sold on certain electronic items. We offer merchandise in the following categories: • Foods (including dry foods, packaged foods, and groceries) • • Sundries (including snack foods, candy, alcoholic and nonalcoholic beverages, and cleaning supplies) Hardlines (including major appliances, electronics, health and beauty aids, hardware, and garden and patio) Softlines (including apparel and small appliances) • Business, including add-ons. Fresh Foods (including meat, produce, deli, and bakery) • Other (including gas stations and pharmacy) Ancillary businesses within or next to our warehouses provide expanded products and services and encourage members to shop more frequently. We sell gasoline in all countries except Mexico, Korea, and Taiwan and operated 508, 472, and 445 gas stations at the end of 2016, 2015, and 2014, respectively. Ancillary businesses also include optical dispensing centers, food courts, and hearing-aid centers. Our online businesses, which include e-commerce, business delivery, and travel, operate websites in all countries except Japan, Australia, and Spain. They provide our members additional products and services, typically not found in our warehouses. Net sales for our online business were approximately 4% of our net sales in 2016 and 3% in 2015 and 2014, respectively. We have direct buying relationships with many producers of national brand-name merchandise. We do not obtain a significant portion of merchandise from any one supplier. We generally have not experienced difficulty in obtaining sufficient quantities of merchandise, and believe that if one or more of our current sources of supply became unavailable, we would be able to obtain alternative sources without substantial disruption of our business. We also purchase private label merchandise, as long as quality and member demand are comparable and the value to our members is greater as compared to brand-name items. 7 Certain financial information for our segments and geographic areas is included in Note 11 to the consolidated financial statements included in this Report. Membership Our members may utilize their memberships at any of our warehouses worldwide. Gold Star memberships are available to individuals; Business memberships are limited to businesses, including individuals with a business license, retail sales license or other evidence of business existence. Business members have the ability to add additional cardholders (add-ons). Add-ons are not available for Gold Star members. Our annual fee for these memberships is $55 in our U.S. and Canadian operations and varies by country in our Other International operations. All paid memberships include a free household card. Our member renewal rate was 90% in the U.S. and Canada, and 88% on a worldwide basis in 2016. The majority of members renew within six months following their renewal date. Therefore, our renewal rate is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date. Our membership was made up of the following (in thousands): • Gloucester 85 Amagasaki Montgomery Mobile Huntsville Hoover ALABAMA (4) U.S.A. (506) 2 723 LOCATIONS A ALASKA (3) Anchorage N. Anchorage Juneau HAWAII AUSTRALIA JAPAN TAIWAN SOUTH KOREA WHOLESALE COSTCO 3 President and Chief Executive Officer ALASKA Craig Jelinek ARIZONA (18) Cave Creek Road Merced Manteca Los Feliz Livermore Lodi La Quinta Lancaster Lake Elsinore Laguna Niguel Avondale Laguna Marketplace Lakewood La Habra Inglewood Irvine Huntington Beach Hayward Bus. Ctr. Hawthorne Bus. Ctr. Hayward Gilbert Chandler La Mesa Mission Valley Cray Jelek Ску Jeff Brotman Chairman of the Board Dear Costco Shareholders, 2014 2015 2016 Fiscal Year 2012 2013 0 10.40% 9.4% 9.6% 9.8% December 15, 2016 9.81% 9.82% 10.0% 10.07% 10.2% 10.4% 10.6% Selling, General and Administrative Expenses At Fiscal Year End 2016 9.89% سلسلول - A record $2.65 billion was invested in our business in 2016. Thirty-three warehouses including four relocations were opened; our depot (distribution) and transportation systems were expanded; numerous remodels and facilities upgrades were completed; and the upgrading of our IT infrastructure continued. In addition, over $1.2 billion was returned to shareholders in the form of dividends ($746 million) and stock buy-backs ($486 million). Янва Best Regards, As always, we extend our best wishes to you and your families for a joyous holiday season and a happy, healthy and prosperous New Year! We appreciate the trust you, our shareholders, have placed in our management team; and on behalf of our 225,000 employees around the world, we thank you for your continued support. Preserving and enhancing our Costco culture and core values developed over the past forty years was a pervasive theme throughout 2016, and remains a primary emphasis as Costco moves into its fifth decade of operations. We seek to exceed the expectations of all our stakeholders. This is our challenge for 2017 and beyond; and we are confident that the entrepreneurial and innovative spirit at every level and in every region of our global company will sustain our growth and allow us to continue to perform at the same high levels achieved historically. We continue to seek to build and operate our business in a responsible and sustainable manner. In this regard, we are committed to enhancing the sustainability of our business, which involves many dimensions, including our workforce, a continuing supply of merchandise, a supply chain that protects the environment as well as the workers and animals in the supply chain, and the efficient use and reuse of resources associated with our operations. Our members, employees, shareholders, and others are increasingly focused on sustainability; as are we. An updated and expanded review of our current efforts and activities, entitled "Sustainability Commitment", is available on our Costco.com website. Earlier this year, Jill Ruckelshaus retired from our Board of Directors after twenty years of dedicated service. We want to thank Jill for the significant contributions she made during her two decades on our Board. Our ancillary businesses, encompassing gas station operations, pharmacies, optical and hearing aid centers, food courts, one-hour photo labs, car washes and travel are all key components of our warehouses. These operations produced strong sales and profits performance in 2016; and helped drive incremental sales throughout the warehouse. We include many of these ancillary offerings in new warehouse openings, whenever possible; as well as add these operations to existing locations, as part of planned remodels and relocations. Costco's e-commerce business grew 15% in 2016 to nearly $4 billion in sales. We began the fiscal year operating online sites in the U.S., Canada, the U.K. and Mexico; and launched our Korea and Taiwan sites during this fiscal year. During the year and into fiscal 2017 we continue to focus on three primary areas of our e-commerce business. First has been improving merchandising. We have added more exciting, higher-end branded merchandise on an everyday basis; and we have improved our in-stock availability on high velocity items, with more planned into the upcoming calendar year. Second, we are continuing to improve the member experience and functionality of our site, including better search capability, a streamlined checkout process, a simpler and more automated returns process and easier member tracking of orders. Third, we have improved our distribution logistics, increasing the number of distribution points from where we fulfill online orders, for closer and faster delivery times. Forty years ago the membership warehouse club was born in a converted aircraft building in San Diego, California under the Price Club name. That same building produced annual sales in fiscal 2016 of nearly $250 million part of Costco's record sales of $116.1 billion - generated by 715 warehouses, each averaging $159 million in annual sales, and operating globally in several countries throughout the world. These results were achieved in a year of retail volatility, along with weaker foreign currencies and falling prices in our gasoline operations - factors that together negatively impacted both sales and net income by over 4%. Total sales in 2016 still increased two percent; and comparable sales, while flat year-over- year on a reported basis, increased four percent excluding the impacts of gasoline prices and foreign currencies. Net income remained strong in 2016, coming in at $2.35 billion or $5.33 per share. Kirkland Signature golf ball, and several apparel items including girls activewear and expanded womens activewear. A number of new Kirkland Signature food items were also introduced, with a strong emphasis on organics, including: nut bars, protein bars, quinoa, raw honey, Greek yogurt, and hummus, as well as a couple of organic pet supplies. New branded items now offered at Costco include apparel items under the Spyder brand name and kitchen and bath products under the Kohler name. On the merchandising front, we continue to expand our Kirkland Signature product offerings, as well as offerings of brand-named items. This past year, new Kirkland Signature items included the launch of our In 2016, our membership base grew by 7% to nearly 48 million member households, representing more than 87 million Costco cardholders worldwide. Importantly, member loyalty remained strong in 2016. Our U.S. and Canada members, representing over 85% of total Company sales, renewed at a 90% annual rate; and members worldwide at an 88% annual rate. Total membership revenue in 2016 amounted to $2.6 billion; and our Executive Member program continues to grow. It is now offered in the U.S., Canada, Mexico, and the U.K., and represents nearly one-third of our member base and two-thirds of total Company sales. This past June, we successfully completed the transition to our new co-branded Citi/Visa Anywhere Card, and began accepting all Visa cards in the U.S. and Puerto Rico. We are very excited about this new program; and are pleased with the results to date. It significantly increases the cash rewards earned by Costco members using the new card for purchases at Costco and elsewhere; and it lowers our effective costs of card acceptance. Now three months into the new fiscal year, our 2017 plans call for 31 new openings, and extending our global footprint into two more countries: France and Iceland; bringing us to nearly 750 warehouses operating worldwide by fiscal year end. All told, in fiscal 2017 we plan to open 16 new warehouses in the U.S., eight in Canada, and one each in Taiwan, Korea, Japan, Australia, and Mexico; as well as France (near Paris) and Iceland (near Reykjavik) openings. Of the twenty-nine new locations opened in 2016, twenty-one of these were in the U.S., including four Costco Business Centers. Two new locations were opened in both Canada and Japan; and one new warehouse was opened in the U.K., Taiwan, Australia, and Spain. Last April, we opened in Tulsa, Oklahoma, which had record new member sign-ups for a U.S. opening. We are now operating in 44 states and Puerto Rico, as well as in Canada, Mexico, the U.K., Spain, Korea, Japan, Taiwan, and Australia. Additionally, we now operate ecommerce websites in the U.S., Canada, the U.K., Mexico, Korea and Taiwan. - - Costco's growth and evolution to the forefront of retailing has been accomplished with the same mission and set of core values that we have adhered to since the opening of our first warehouse: to continually provide quality goods and services to our members at the lowest possible prices. The execution of this mission has become increasingly demanding as we expand globally, encounter aggressive and new forms of competition – both domestically and abroad and comply with the varied rules and regulations of each country in which we operate; all while taking care of our members and our employees, and establishing and growing relationships with our many suppliers throughout the world. 2 Modesto Montclair Montebello Pacoima S.W. Tucson Westminster Oxnard N.W. Tucson Timnath Novato Tucson Palm Desert Thornton Superior Thomas Road Northridge Tempe Sheridan Scottsdale Parker Prescott Norwalk N. Phoenix CALIFORNIA (122) Almaden Cypress Danville Corona Culver City Concord Commerce Bus. Ctr. Clovis City of Industry Citrus Heights Chula Vista Alhambra Chino Hills Carmel Mountain Carlsbad Cal Expo Burbank S.W. Bakersfield Bakersfield Azusa Antioch Chico Phoenix Bus. Ctr. Phoenix Paradise Valley Kauai Westminster - Bus. Ctr. Kapolei Westlake Village Kailua-Kona Vista Iwilei Visalia Woodland Hawaii Kai Town Center Perimeter Morrow Bus. Ctr. Gwinnett Mall of Georgia Fort Oglethorpe Vacaville Vallejo Van Nuys Victorville Tustin Ranch Morena HAWAII (7) Maui Woodland Hills Waipio Mesa Glendale S.E. Gilbert Douglas County Gypsum S.W. Denver Bus. Ctr. Denver East Colorado Springs Colorado Springs Twin Falls Pocatello Nampa Aurora Coeur d'Alene Arvada Boise COLORADO (14) IDAHO (5) Yorba Linda 2015 2014 2013 2012 6% 7% 7% 8% 37 Price Changes Price Changes W/FX & Gas 6% W/O FX & Gas 39 Comparable Sales Growth Fiscal Year At Fiscal Year End 2016 2015 2014 2013 10% 2012 35 4% 34.000 31.600 28.900 Gold Star Members Membership 25 25 27 -26.700 6% 29 31 33 Millions 4% -4% -2% 0% 2% 29 2016 2015 2014 686 634 600 608 625 650 663 675 FINANCIAL HIGHLIGHTS Warehouses in Operation 725 Number of Warehouses Percent Increase 65 2 № 3 3 3 2 6 6 67 42 37 700 (723 at 12/31/16) 125 715 2013 2012 0 0 90 95 100 97.062 102.870 105 110 110.212 113.666 115 116.073 2,300 2,500 Net Sales 120 $ Billions $ Millions El Camino Net Income 2,039 *First year sales annualized. 2011-2016 results include Mexico. Fiscal Year $130 $137 $131 $139 $146 $155 $160 $164 $162 $159 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 715 Totals 151 139 139 148 $94 106 122 135 144 $100 107 130 146 155 157 158 155 $86 83 99 116 128 136 144 146 147 140 135 144 151 160 168 175 175 174 1 $130 26 2008 20 2009 13 2010 $103 120 130 136 21 2007 & Before 512 2011 Percent of Net Sales 6.8 7.100 7.300 6.900 6.0 6.2 6.4 6.400 6.6 Millions 6.600 Fiscal Year 2016 2014 2015 2013 2012 0 2,350 2,377 Business Members 130 $105 115 124 128 15 2013 2012 2016 2015 2014 2013 2012 0 2014 7.0 7.4 36.800 7.6 1,500 1,700 1,709 1,900 2,058 7,2 2015 2016 Fiscal Year 2012 116 $99 109 113 26 2013 $108 109 115 30 2014 $83 23 2015 $87 29 2016 # of Whses Year Opened (Sales In Millions) Average Sales Per Warehouse* At Fiscal Year End 2,100 Moreno Valley Mountain View Poway Rancho Cordova Kalispell Missoula Holbrook Lawrence S. Orlando KENTUCKY (4) Manhattan OREGON (13) S. Orlando E. Orlando Bus. Ctr. Palm Beach Gardens Lexington Pembroke Pines Pompano Beach NEBRASKA (2) La Vista Omaha NEVADA (7) Carson City Melville Albany Nanuet Nesconset New Rochelle Florence Aloha Commack Overland Park Wichita El Centro Eureka Fairfield Folsom Fontana Foster City Fountain Valley Fremont Helena Fresno Santee Signal Hill Royal Palm Beach Sarasota Square Mall Tallahassee GEORGIA (11) Alpharetta Augusta Brookhaven Cumberland Mall Cumming Louisville Louisville II LOUISIANA (3) Baton Rouge Lafayette New Orleans MARYLAND (10) Arundel Mills Beltsville Brandywine Columbia Santa Maria Santa Rosa Bend Clackamas Port Chester Wilsonville S OF DECEMBER 31, 2016 NEWFOUNDLAND UNITED KINGDOM SPAIN SCOTLAND (3) Aberdeen Edinburgh 10 3 Yonkers PUERTO Glasgow WALES (1) Cardiff SPAIN (2) Getafe Seville CANADA (94) ALBERTA (16) E. Calgary N. Calgary RICO Warrenton Westbury NEW HAMPSHIRE (1) Nashua Eugene Centennial Queens Hillsboro Henderson Rego Park Medford Las Vegas Bus. Ctr. Riverhead Portland Reno Rochester Roseburg Sparks Staten Island Salem Summerlin Syracuse Tigard Tustin N.W. Calgary S. Calgary Hawthorne Hanford MINNESOTA (8) Baxter Burnsville Coon Rapids Eden Prairie Maple Grove Maplewood Rochester St. Louis Park MISSOURI (5) Independence Kansas City Manchester S. St. Louis St. Peters MONTANA (5) Billings NEW JERSEY (19) Brick Township Bridgewater N. Brunswick Clifton Edison Shelby Township Wyoming Flemington E. Hanover Hazlet Manahawkin Marlboro Mount Laurel Ocean Township N. Plainfield Princeton Teterboro Union Wayne Wharton Hackensack Bus. Ctr. NEW MEXICO (3) Albuquerque Madison Heights Pittsfield Township Roseville Livonia I Schaumburg INDIANA (6) Castleton Fort Wayne N.W. Indianapolis S. Indianapolis Merrillville Mishawaka IOWA (2) Coralville Des Moines KANSAS (3) Lenexa Frederick Gaithersburg Glen Burnie Wheaton White Marsh Woodmore Twn Ctr. MASSACHUSETTS (6) Avon Livonia II Danvers Everett W. Springfield Waltham MICHIGAN (13) Auburn Hills Bloomfield Commerce Township Grand Rapids Green Oak Township Kalamazoo Dedham N.W. Albuquerque S.E. Albuquerque NEW YORK (18) OKLAHOMA (1) Tulsa Bozeman Naples Santa Clara Santa Clarita Santa Cruz Simi Valley Toledo N. Fresno Fullerton Sunnyvale Garden Grove Temecula Gilroy Torrance Goleta Tracy Stockton Strongsville Springdale Perrysburg Brooklyn 3 MÉXICO 11 NORTH CAROLINA (8) Apex Charlotte Durham Greensboro Matthews Raleigh Wilmington Winston-Salem NORTH DAKOTA (1) West Fargo OHIO (12) Avon Boston Heights Centerville Columbus N.W. Columbus Deerfield Township Easton Mayfield Heights Turlock 35 Edmonton E. Markham Mississauga Central Mississauga North Mississauga South Nepean Newmarket Oshawa Peterborough Richmond Hill St. Catharines Scarborough Southlake Gig Harbor Kelowna Issaquah Langford Montgomeryville Robinson Sanatoga Kamloops West Homestead Charleston Columbia Greenville Myrtle Beach Spartanburg SOUTH DAKOTA (1) Sioux Falls TENNESSEE (5) Brentwood SOUTH CAROLINA (5) Farragut Fife - Bus. Ctr. Courtenay Toluca Taichung Tainan Taoyuan West Plano PENNSYLVANIA (11) Bucks County Concordville Cranberry Harrisburg King of Prussia Lancaster Sonterra Park Lower Macungie Willowbrook The Woodlands Rockwall Covington Everett N.W. San Antonio Selma Federal Way Sugar Land Orland Park East Peoria Niles Oak Brook Lincoln Park Melrose Park Mettawa Mount Prospect Naperville CONNECTICUT (6) San Luis Obispo San Marcos Sand City San Juan Capistrano San Leandro N.E. San Jose San Jose S. San Francisco San Francisco San Dimas Brookfield S.E. San Diego San Bernardino Salinas Sacramento Roseville Redwood City Richmond Rohnert Park Redding Rancho del Rey Rancho Cucamonga San Diego Bus. Ctr. Enfield Milford New Britain Lake Zurich Lake in the Hills Chicago South Loop Glenview Bedford Park-Bus. Ctr. Bloomingdale Bolingbrook ILLINOIS (19) Miami Lakes N. Miami Beach Miami Lantana Kendall E. Jacksonville Fort Myers Estero Davie Clearwater Brandon Altamonte Springs Boca Raton Norwalk Waterbury DELAWARE (1) Christiana FLORIDA (23) Barrhaven Barrie Brampton Burlington Downsview Etobicoke Shih Chih N. Edmonton Satélite North Kaohsiung Neihu Anjou Boisbriand Boucherville Brossard Candiac Chicoutimi Red Deer Rocky View Sherwood Park Drummondville QUÉBEC (21) St. Albert Laval Levis BRITISH COLUMBIA (14) Abbotsford Burnaby Marché Central Montréal Pointe Claire Gatineau Québec Okotoks Lethbridge Sudbury Vaughan Waterloo Windsor Kanazawa Seaside Kawasaki Kitakyushu Kobe Seishin Maebashi Gunma Medicine Hat Makuhari Sapporo Shin Misato Tamasakai Tomiya Tsukuba Yawata Kyoto Zama S. Edmonton W. Edmonton Grande Prairie Nonoichi Sainte-Foy Saint-Hubert Saint-Jérôme Chihuahua Juarez COAHUILA (1) Saltillo GUANAJUATO (3) Celaya León León II JALISCO (3) Guadalajara Guadalajara II Puerto Vallarta MÉXICO (4) Arboledas Terrebonne CHIHUAHUA (2) Chiayi Chung Ho Vaudreuil Chungli South Hsinchu SASKATCHEWAN (3) Kaohsiung Regina Saskatoon Trois-Rivières-Ouest Cabo San Lucas SUR (1) BAJA CALIFORNIA Sherbrooke SOUTH KOREA (12) Busan Cheonan Daegu Daejeon Euijeongbu Gongse Gwangmyeong Ilsan Sangbong Ulsan Yangjae Yangpyung TAIWAN (12) Beitou MÉXICO (36) AGUASCALIENTES (1) Aguascalientes BAJA CALIFORNIA (4) Ensenada Mexicali Tijuana Tijuana II Interlomas St. Charles N. Riverside East Plano S. Jordan W. Bountiful UTAH (11) Pharr Pearland Lubbock Lehi Lewisville Houston Galleria Frisco N. Fort Worth Fort Worth El Paso Humble Bunker Hill Cedar Park Duncanville Murray Kennewick Spanish Fork Spokane Sandy Silverdale Salt Lake City Sequim S. Ogden St. George Seattle Marysville Lynnwood Bus. Ctr. Lynnwood Lacey Kirkland Orem N. Spokane N.E. Memphis S.E. Memphis W. Nashville TEXAS (27) Arlington Austin S. Austin COSTCO Market for Costco Common Stock, Dividend Policy and Stock Repurchase Program... Five Year Operating and Financial Highlights. 18 20 Management's Discussion and Analysis of Financial Condition and Results of Operations Executive Officers and Corporate Governance... Management's Reports ....... 17 Reports of Independent Registered Public Accounting Firm... Notes to Consolidated Financial Statements. Directors and Officers of the Company. Additional Information 21 33 34 Consolidated Financial Statements...... Annual Report 2016 9 4 WHOLESALE FISCAL YEAR ENDED AUGUST 28, 2016 2016 THE COMPANY Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983 in Seattle, Washington. In October 1993, Costco merged with The Price Company, which had pioneered the membership warehouse concept in 1976, to form Price/Costco, Inc., a Delaware corporation. In January 1997, after the spin-off of most of its non-warehouse assets to Price Enterprises, Inc., the Company changed its name to Costco Companies, Inc. On August 30, 1999, the Company reincorporated from Delaware to Washington and changes its name to Costco Wholesale Corporation, which trades on the NASDAQ Global Select Market under the symbol "COST." As of December 2016, the company operated a chain of 723 warehouse in 44 states, Washington, D.C., and Puerto Rico (506 locations), nine Canadian provinces (94 locations), Mexico (36 locations), the United Kingdom (28 locations), Japan (25 Locations), Korea (12 locations), Taiwan (12 locations, through a 55%- owned subsidiary), Australia (eight locations) and Spain (two locations). The Company's online business operates websites in the U.S, Canada, U.K., Mexico, Korea and Taiwan. 6 CONTENTS Letter to Shareholders Map of Warehouse Locations Business Overview....... Risk Factors. Properties: Warehouses, Administration and Merchandise Distribution Properties.......... 2 Financial Highlights West Valley Puyallup Redmond VERMONT (1) Colchester VIRGINIA (17) Chantilly Charlottesville Chesterfield Fairfax Fredericksburg Harrisonburg Adelaide Chingford SOUTH AUSTRALIA (1) Chester Bristol North Lakes Monterrey III Tacoma Sydney Monterrey II Monterrey NUEVO LEÓN (3) MORELOS (1) Cuernavaca Morelia QUEENSLAND (1) Coventry PUEBLA (1) VICTORIA (3) Leicester Leeds Hayes JAPAN (25) Haydock Ancaster Gateshead Ringwood QUERÉTARO (1) Moorabbin ONTARIO (31) Ajax Derby Melbourne Puebla Croydon MICHOACÁN (1) MÉXICO, D.F. (3) Соара Mixcoac Polanco Birmingham KINGDOM (28) Richmond Prince George Port Coquitlam Langley Nanaimo Bellevue Grafton Grand Chute Menemonee Falls Middleton New Berlin Tukwila Tumwater Union Gap Vancouver E. Vancouver E. Wenatchee Woodinville WISCONSIN (9) Clarkston ENGLAND (24) Bellingham Aurora Village WASHINGTON (31) Winchester Sterling Pentagon City Potomac Mills W. Henrico Leesburg Manassas Mount Vernon Newington Newport News Norfolk Surrey Vancouver Burlington MANITOBA (3) Winnipeg Willingdon UNITED Auburn NEW SOUTH WALES (2) AUSTRALIA (8) S. Saskatoon NOVA SCOTIA (2) Dartmouth Halifax AUS CAP TER (1) Canberra NEWFOUNDLAND Fredericton Moncton Saint John NEW BRUNSWICK (3) S. Winnipeg AND LABRADOR (1) St. John's E. Winnipeg We may not timely identify or effectively respond to consumer trends, which could negatively affect our relationship with our members, the demand for our products and services, and our market share. It is difficult to consistently and successfully predict the products and services our members will desire. Our success depends, in part, on our ability to identify and respond to trends in demographics and consumer preferences. Failure to timely identify or effectively respond to changing consumer tastes, preferences (including those relating to sustainability of product sources and animal welfare) and spending patterns could negatively affect our relationship with our members, the demand for our products and services and our market share. If we are not successful at predicting our sales trends and adjusting our purchases accordingly, we Imay have excess inventory, which could result in additional markdowns and reduce our operating performance. This could have an adverse effect on net sales, gross margin and operating income. If our merchandise offerings, including food and prepared food products for human consumption, drugs, children's products, pet products, and durable goods, do not meet or are perceived not to meet applicable safety standards or our members' expectations regarding safety, we could experience lost sales, increased costs, and legal and reputational losses. The sale of these items involves the risk of health-related illness or injury to our members. Such illnesses or injuries could result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, manufacturing, storage, handling and transportation phases, or faulty design. Our vendors are generally contractually required to comply with product safety laws, and we are dependent on them to ensure that the products we buy comply with all safety standards. While we are subject to governmental inspection and regulations and work to comply in all material respects with applicable laws and regulations, we cannot be sure that consumption or use of our products will not cause a health-related illness or injury in the future or that we will not be subject to claims, lawsuits, or government investigations relating to such matters resulting in costly product recalls and other liabilities that could adversely affect our business and results of operations. Even if a product liability claim is unsuccessful or is not fully pursued, related negative publicity could adversely affect our reputation with existing and potential members and our corporate and brand image, and these effects could be long term. We might sell unsafe products, resulting in illness or injury to our members, harm to our reputation, and litigation. subject to additional rules, regulations, compliance requirements, and higher fraud losses. For certain payment methods, we pay interchange and other related card acceptance fees, along with additional transaction processing fees. We rely on third parties to provide payment transaction processing services, including the processing of credit and debit cards, and our proprietary cash card, and it could disrupt our business if these companies become unwilling or unable to provide these services to us. We are also subject to payment card association rules and network operating rules, including data security rules, certification requirements and rules governing electronic funds transfers, which could change over time. For example, we are subject to Payment Card Industry Data Security Standards ("PCI DSS"), which contain compliance guidelines and standards with regard to our security surrounding the physical and electronic storage, processing and transmission of individual cardholder data. As of October 1, 2015, the payment card industry shifted the liability of certain credit card transactions to retailers who are not able to process Europay, MasterCard, Visa ("EMV”) chip-enabled card transactions. As a result, before our implementation of the EMV technology is complete, we may be liable for costs incurred by payment card issuing banks or other third parties for fraudulent transactions initiated through EMV chip-enabled cards before our implementation of EMV chip technology. Implementation of the EMV chip technology and receipt of final certification is subject to hardware installation, software modification, and certification with our third-party transaction service providers. If we fail to comply with these rules or transaction processing requirements, we may not be able to accept certain payment methods. In addition, if our internal systems are breached or compromised, we may be liable for card re-issuance costs, subject to fines and higher transaction fees and lose our ability to accept credit and/or debit card payments from our members, and our business and operating results could be adversely affected. We accept payments using a variety of methods, including cash and checks, a select variety of credit and debit cards, and our proprietary cash card. As we offer new payment options to our members, we may be We are subject to payment-related risks. The use of data by our business and our business associates is regulated at the national and state or local level in all of our operating countries. Privacy and information security laws and regulations change, and compliance with them may result in cost increases due to necessary systems changes and the development of new processes. If we or those with whom we share information fail to comply with these laws and regulations, our reputation could be damaged, possibly resulting in lost future business, and we could be subjected to additional legal risk as a result of non-compliance. 12 Our security measures may be undermined due to the actions of outside parties, employee error, internal or external malfeasance, or otherwise, and, as a result an unauthorized party may obtain access to our data systems and misappropriate business and personal information. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may not immediately produce signs of intrusion, we may be unable to anticipate these techniques, timely discover or counter them, or implement adequate preventative measures. Any such breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation, and potentially have an adverse effect on our business. 11 If we do not successfully develop and maintain a relevant multichannel experience for our members, our results of operations could be adversely impacted. General economic factors, domestically and internationally, may adversely affect our business, financial condition, and results of operations. Inability to attract, train and retain highly qualified employees could adversely impact our business, financial condition and results of operations. Our success depends on the continued contributions of members of our senior management and other key operations, merchandising and administrative personnel, and the loss of these contributions could have a material adverse effect on our business. We must attract, train and retain a large and growing number of qualified employees, while controlling related labor costs and maintaining our core values. Our ability to control labor and benefit costs is subject to numerous external factors, including regulatory changes, prevailing wage rates, and healthcare and other insurance costs. We compete with other retail and non-retail businesses for these employees and invest significant resources in training and motivating them. There is no assurance that we will be able to attract or retain highly qualified employees in the future, which could have a material adverse effect on our business, financial condition and results of operations. Market and Other External Risks We face strong competition from other retailers and warehouse club operators, which could adversely affect our business, financial condition and results of operations. The retail business is highly competitive. We compete for members, employees, sites, products and services and in other important respects with a wide range of local, regional and national wholesalers and retailers, both in the United States and in foreign countries, including other warehouse club operators, supermarkets, supercenters, department and specialty stores, gasoline stations, and internet retailers. Such retailers and warehouse club operators compete in a variety of ways, including merchandise pricing, selection and availability, services, location, convenience, store hours, and the attractiveness and ease of use of websites and mobile applications. The evolution of retailing in online and mobile channels has improved the ability of customers to comparison shop with digital devices, which has enhanced competition. Some competitors may have greater financial resources, better access to merchandise and greater market penetration than we do. Our inability to respond effectively to competitive pressures, changes in the retail markets and member expectations could result in lost market share and negatively affect our financial results. Higher energy and gasoline costs, inflation, levels of unemployment, healthcare costs, consumer debt levels, foreign-currency exchange rates, unsettled financial markets, weaknesses in housing and real estate markets, reduced consumer confidence, changes related to government fiscal and tax policies, sovereign debt crises, and other economic factors could adversely affect demand for our products and services or require a change in the mix of products we sell. Prices of certain commodity products, including gasoline and other food products, are historically volatile and are subject to fluctuations arising from changes in domestic and international supply and demand, labor costs, competition, market speculation, government regulations, taxes and periodic delays in delivery. Rapid and significant changes in commodity prices may affect our sales and profit margins. These factors could also increase our merchandise costs and selling, general and administrative expenses, and otherwise adversely affect our operations and financial results. General 13 economic conditions can also be affected by the outbreak of war, acts of terrorism, or other significant national or international events. We receive, retain, and transmit personal information about our members and entrust that information to third- party business associates, including cloud service providers that perform activities for us. Our warehouse and online businesses depend upon the secure transmission of encrypted confidential information over public networks, including information permitting cashless payments. A compromise of our security systems or those of our business associates, that results in our members' information being obtained by unauthorized persons, could adversely affect our reputation with our members and others, as well as our operations, results of operations, financial condition and liquidity, and could result in litigation against us or the imposition of penalties. In addition, a breach could require that we expend significant additional resources related to the security of information systems and could disrupt our operations. Vendors may be unable to supply us with quality merchandise at the right prices in a timely manner or may fail to adhere to our high standards, resulting in adverse effects on our business, merchandise inventories, sales, and profit margins. Multichannel retailing is rapidly evolving and we must keep pace with changing member expectations and new developments by our competitors. Our members, especially younger members, are increasingly using computers, tablets, mobile phones, and other devices to shop and to interact with us through social media. As part of our multichannel strategy, we are making technology investments in our websites and mobile applications. If we are unable to make, improve, or develop relevant member-facing technology in a timely manner, our ability to compete and our results of operations could be adversely affected. If we do not maintain the privacy and security of member-related and other business information, we could damage our reputation with members, incur substantial additional costs, and become subject to litigation. Total Warehouses in Operation Given the very high volume of transactions we process each year it is important that we maintain uninterrupted operation of our business-critical computer systems. Our computer systems, including our back- up systems, are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, internal or external security breaches, catastrophic events such as fires, earthquakes, tornadoes and hurricanes, and errors by our employees. If our systems are damaged or cease to function properly, we may have to make significant investments to fix or replace them, and we may suffer interruptions in our operations in the interim. Any material interruption in our computer systems could have a material adverse effect on our business and results of operations. We depend heavily on our ability to purchase merchandise in sufficient quantities at competitive prices. As these quantities continue to grow, we have no assurances of continued supply, pricing or access to new products, and any vendor could at any time change the terms upon which it sells to us or discontinue selling to us. Member demands may lead to out-of-stock positions of our merchandise leading to loss of sales and profits. Total wholesalers and retailers, including supermarkets, supercenters, department and specialty stores, gasoline stations, internet retailers, and operators selling a single category or narrow range of merchandise. Competitors such as Wal-Mart, Target, Kroger, and Amazon.com are among our significant general merchandise retail competitors. We also compete with warehouse club operations (primarily Wal-Mart's Sam's Club and BJ's Wholesale Club), and nearly every major U.S. metropolitan area has multiple club operations. Intellectual Property We believe that, to varying degrees, our trademarks, trade names, copyrights, proprietary processes, trade secrets, patents, trade dress, domain names and similar intellectual property add significant value to our business and are important to our success. We have invested significantly in the development and protection of our well-recognized brands, including the Costco WholesaleⓇ series of trademarks and our private label brand, Kirkland Signature®. We believe that Kirkland Signature products are premium products, offered to our members at prices that are generally lower than those for similar national brand products and that they help lower costs, differentiate our merchandise offerings from other retailers, and generally earn higher margins. We expect to continue to increase the sales penetration of our private label items. We rely on trademark and copyright laws, trade secret protection, and confidentiality, license and other agreements with our suppliers, employees and others to protect our intellectual property rights. The availability and duration of trademark registrations vary by country; however, trademarks are generally valid and may be renewed indefinitely as long as they are in use and their registrations are properly maintained. RISK FACTORS The risks described below could materially and adversely affect our business, financial condition and results of operations. These risks are not the only risks that we face. We could also be affected by additional factors that apply to all companies operating in the U.S. and globally, as well as other risks that are not presently known to us or that we currently consider to be immaterial. These Risk Factors should be carefully reviewed in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes in this Report. Business and Operating Risks We are highly dependent on the financial performance of our U.S. and Canadian operations. Our financial and operational performance is highly dependent on our U.S. and Canadian operations, which comprised 87% and 84% of net sales and operating income in 2016, respectively. Within the U.S., we are highly dependent on our California operations, which comprised 31% of U.S. net sales in 2016. Our California market, in general, has a larger percentage of higher volume warehouses as compared to our other domestic markets. Any substantial slowing or sustained decline in these operations could materially adversely affect our business and financial results. Declines in financial performance of our U.S. operations, particularly in California, and our Canadian operations could arise from, among other things: slow growth or declines in comparable warehouse sales (comparable sales); negative trends in operating expenses, including increased labor, healthcare and energy costs; failing to meet targets for warehouse openings; cannibalizing existing locations with new warehouses; shifts in sales mix toward lower gross margin products; changes or uncertainties in economic conditions in our markets, including higher levels of unemployment and depressed home values; and failing to consistently provide high quality products and innovative new products to retain our existing member base and attract new members. We are currently making, and will continue to make, significant technology investments to improve or replace critical information systems and processing. Failure to monitor and choose the right investments and implement them at the right pace would be harmful. The risk of system disruption is increased when significant system changes are undertaken, although we believe that our change management process will mitigate this risk. Excessive technological change could impact the effectiveness of adoption, and could make it more difficult for us to realize benefits from the technology. Targeting the wrong opportunities, failing to make the best investments, or making an investment commitment significantly above or below our needs could result in the loss of our competitive position and adversely impact our financial condition and results of operations. Additionally, the potential problems and interruptions associated with implementing technology initiatives could disrupt or reduce the efficiency of our operations in the short term. These initiatives might not provide the anticipated benefits or may provide them on a delayed schedule or at a higher cost. We may be unsuccessful implementing our growth strategy, including expanding our business, both in existing markets and in new markets, which could have an adverse impact on our business, financial condition and results of operations. Our growth is dependent, in part, on our ability to acquire property and build or lease new warehouses and regional depots. We compete with other retailers and businesses for suitable locations. Local land use and other regulations restricting the construction and operation of our warehouses and depots, as well as local community actions opposed to the location of our warehouses or depots at specific sites and the adoption of local laws restricting our operations and environmental regulations, may impact our ability to find suitable locations, and increase the cost of sites and of constructing, leasing and operating our warehouses and depots. We also may have difficulty negotiating leases or purchase agreements on acceptable terms. In addition, certain jurisdictions have enacted or proposed laws and regulations that would prevent or restrict the operation or expansion plans of certain large retailers and warehouse clubs, including us, within their jurisdictions. Failure to effectively manage these and other similar factors may affect our ability to timely build or lease and operate new warehouses and depots, which could have a material adverse effect on our future growth and profitability. We seek to expand in existing markets to attain a greater overall market share. A new warehouse may draw members away from our existing warehouses and adversely affect comparable sales performance and member traffic at those existing warehouses. We also intend to continue to open warehouses in new markets. Associated risks include: difficulties in attracting members due to a lack of familiarity with us, attracting members of other wholesale club operators, our lack of familiarity with local member preferences, and seasonal differences in the market. In addition, entry into new markets may bring us into competition with new competitors or with existing competitors with a large, established market presence. We cannot ensure that our new warehouses and new websites will be profitably deployed and, as a result, our future profitability could be delayed or otherwise materially adversely affected. Our failure to maintain membership loyalty and brand recognition could adversely affect our results of operations. Membership loyalty and growth are essential to our business model. 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. Damage to our brands or reputation may negatively impact comparable sales, diminish member trust, and reduce member renewal rates and, accordingly, net sales and membership fee revenue, negatively impacting our results of operations. In addition, we sell many products under our private label Kirkland Signature brand. Maintaining consistent product quality, competitive pricing, and availability of our Kirkland Signature products for our members is essential to developing and maintaining member loyalty. These products also generally carry higher margins than national brand products carried in our warehouses and represent a growing portion of our overall sales. If the Kirkland Signature brand experiences a loss of member acceptance or confidence, our sales and gross margin results could be adversely affected. Disruptions in our depot operations could adversely affect sales and member satisfaction. We depend on the orderly operation of the merchandise receiving and distribution process, primarily through our depots. Although we believe that our receiving and distribution process is efficient, unforeseen disruptions in operations due to fires, tornadoes and hurricanes, earthquakes or other catastrophic events, labor issues or other shipping problems may result in delays in the delivery of merchandise to our warehouses, which could adversely affect sales and the satisfaction of our members. We rely extensively on computer systems to process transactions, compile results, and manage our business. Failure or disruption of our primary and back-up systems could adversely affect our business. A failure to adequately update our existing systems and implement new systems could harm our business and adversely affect our results of operations. 10 9 We purchase our merchandise from numerous domestic and foreign manufacturers and importers and have thousands of vendor relationships. Our inability to acquire suitable merchandise on acceptable terms or the loss of key vendors could negatively affect us. We may not be able to develop relationships with new vendors, and products from alternative sources, if any, may be of a lesser quality or more expensive than those from existing vendors. Because of our efforts to adhere to high quality standards for which available supply may be limited, particularly for certain food items, the large volume we demand may not be consistently available. Our suppliers (and those they depend upon for materials and services) are subject to risks, including labor disputes, union organizing activities, financial liquidity, inclement weather, natural disasters, supply constraints, and general economic and political conditions that could limit their ability to timely provide us with acceptable merchandise. For these or other reasons, one or more of our suppliers might not adhere to our quality control, legal, regulatory, labor, environmental or animal welfare standards. These deficiencies may delay or preclude delivery of merchandise to us and might not be identified before we sell such merchandise to our members. This failure could lead to recalls and litigation, and otherwise damage our reputation and our brands, increase our costs, and otherwise adversely impact our business. Cash Dividends Declared We may pay for products we purchase for sale in our warehouses around the world with a currency other than the local currency of the country in which the goods will be sold. Currency fluctuations may increase our cost of goods and may not be passed on to members. Consequently, fluctuations in currency exchange rates may adversely affect our results of operations. 17 MARKET FOR COSTCO COMMON STOCK Market Information and Dividend Policy Our common stock is traded on the NASDAQ Global Select Market under the symbol "COST." On October 4, 2016, we had 8,572 stockholders of record. The following table shows the quarterly high and low closing prices as reported by NASDAQ for each quarter during the last two fiscal years and the quarterly cash dividend declared per share of our common stock. 2016: Fourth Quarter. Third Quarter Second Quarter.. First Quarter At the end of 2016, our warehouses contained approximately 103.2 million square feet of operating floor space: 73.3 million in the U.S.; 12.6 million in Canada; and 17.3 million in Other International locations. Additionally, we operate regional depots for the consolidation and distribution of most merchandise shipments to the warehouses, and various processing, packaging, and other facilities to support ancillary and other businesses, which includes our online business. We operate 24 depots consisting of approximately 10.1 million square feet. Our executive offices are located in Issaquah, Washington, and we operate 18 regional offices in the U.S., Canada and Other International locations. 2015: Third Quarter. Second Quarter.... First Quarter (1) Includes a special cash dividend of $5.00 per share. Price Range High Low Other International ..$ 169.04 $ 141.29 $ 0.450 Fourth Quarter.. 158.25 (1) Net of closings and relocations. 123 2015. 12 1 10 23 686 2016. 21 2 723 6 715 2017 (expected through 12/31/2016)... 5 3 8 723 Total 506 94 29 146.44 0.450 168.87 August 1-August 28, 2016. Total fourth quarter.. Total Number of Shares Purchased 416,000 Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Program 416,000 1111 234,000 July 4-July 31, 2016. $146.08 154.81 66,000 $3,256 66,000 164.12 $3,245 140,000 167.34 140,000 Fluctuations in foreign exchange rates may adversely affect our results of operations. During 2016, our international operations, including Canada, generated 27% and 39% of our net sales and operating income, respectively. Our international operations have accounted for an increasingly larger portion of our warehouses and we plan to continue expanding them. Our operations in countries other than the U.S. are conducted primarily in the local currencies of those countries. Our consolidated financial statements are denominated in U.S. dollars, and to prepare those financial statements we must translate the financial statements of our international operations from local currencies into U.S. dollars using exchange rates for the current period. Future fluctuations in currency exchange rates over time that are unfavorable to us may adversely affect the financial performance of our Canadian and Other International operating segments and have a corresponding adverse period-over-period effect on our results of operations. As we continue to expand internationally, our exposure to fluctuations in foreign exchange rates may increase. 234,000 June 6-July 3, 2016 May 9-June 5, 2016 Period 143.28 0.400 163.10 138.30 0.400 146.89 132.71 0.400 153.14 143.05 0.400 155.92 137.31 5.355 (1) 140.01 121.35 0.355 Payment of future dividends is subject to declaration by the Board of Directors. Factors considered in determining dividends include our profitability and expected capital needs. Subject to these qualifications, we presently expect to continue to pay dividends on a quarterly basis. Issuer Purchases of Equity Securities The following table sets forth information on our common stock repurchase program activity for the fourth quarter of fiscal 2016 (dollars in millions, except per share data): 663 29 Maximum Dollar Value of Shares that May Yet be Purchased under the Program $3,292 3 At August 28, 2016 we operated 715 membership warehouses: United States and Puerto Rico. Canada. Mexico United Kingdom.......... Japan Korea Taiwan Australia PROPERTIES Spain.. NUMBER OF WAREHOUSES (1) 98 of the 147 leases are land-only leases, where Costco owns the building. Own Land and Building 407 80 36 22 11 Lease Land and/or Total Warehouse Properties 16 Our business requires compliance with many laws and regulations. Failure to achieve compliance could subject us to lawsuits and other proceedings, and lead to damage awards, fines, penalties, and remediation costs. We are, or may become involved, in a number of legal proceedings and audits including grand jury investigations, government and agency investigations, and consumer, employment, tort, unclaimed property laws, and other litigation (see discussion of Legal Proceedings in Note 10 to the consolidated financial statements included in this Report). We cannot predict with certainty the outcomes of these legal proceedings and other contingencies, including environmental remediation and other proceedings commenced by governmental authorities. The outcome of some of these legal proceedings, audits, unclaimed property laws, and other contingencies could require us to take, or refrain from taking, actions which could negatively affect our operations or could require us to pay substantial amounts of money, adversely affecting our financial condition and results of operations. Additionally, defending against these lawsuits and proceedings may involve significant expense and diversion of management's attention and resources. Natural disasters or other catastrophic events could negatively affect our business, financial condition, and results of operations. 9 Natural disasters, such as hurricanes, typhoons or earthquakes, particularly in California or Washington state, where our centralized operating systems and administrative personnel are located, could negatively affect our operations and financial performance. Such events could result in physical damage to one or more of our properties, the temporary closure of one or more warehouses or depots, the temporary lack of an adequate work force in a market, the temporary or long-term disruption in the supply of products from some local or 14 overseas suppliers, the temporary disruption in the transport of goods to or from overseas, delays in the delivery of goods to our warehouses or depots within the countries in which we operate, and the temporary reduction in the availability of products in our warehouses. Public health issues, whether occurring in the U.S. or abroad, could disrupt our operations, disrupt the operations of suppliers or members, or have an adverse impact on consumer spending and confidence levels. These events could also reduce demand for our products or make it difficult or impossible to receive products from suppliers. We may be required to suspend operations in some or all of our locations, which could have a material adverse effect on our business, financial condition and results of operations. Factors associated with climate change could adversely affect our business. We use natural gas, diesel fuel, gasoline, and electricity in our distribution and warehouse operations. Increased U.S. and foreign government and agency regulations to limit carbon dioxide and other greenhouse gas emissions may result in increased compliance costs and legislation or regulation affecting energy inputs that could materially affect our profitability. In addition, climate change could affect our ability to procure needed commodities at costs and in quantities we currently experience. We also sell a substantial amount of gasoline, the demand for which could be impacted by concerns about climate change and which also could face increased regulation. Climate change may be associated with extreme weather conditions, such as more intense hurricanes, thunderstorms, tornadoes, and snow or ice storms, as well as rising sea levels. Extreme weather conditions increase our costs and resulting damage to our properties may not be fully insured. Failure to meet market expectations for our financial performance could adversely affect the market price and volatility of our stock. Legal and Regulatory Risks Our international operations subject us to risks associated with the legislative, judicial, accounting, regulatory, political and economic factors specific to the countries or regions in which we operate which could adversely affect our business, financial condition and results of operations. During 2016, we operated 214 warehouses in eight countries outside of the U.S. and we plan to continue expanding our international operations. Future operating results internationally could be negatively affected by a variety of factors, many similar to those we face in the U.S., certain of which are beyond our control. These factors include political conditions, economic conditions, regulatory constraints, currency regulations, and other matters in any of the countries or regions in which we operate, now or in the future. Other factors that may impact international operations include foreign trade, monetary and fiscal policies and the laws and regulations of the U.S. and foreign governments, agencies and similar organizations, and risks associated with having major facilities located in countries which have been historically less stable than the U.S. Risks inherent in international operations also include, among others, the costs and difficulties of managing international operations, adverse tax consequences, and greater difficulty in enforcing intellectual property rights. Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial condition and results of operations. Accounting principles and related pronouncements, implementation guidelines, and interpretations we apply to a wide range of matters that are relevant to our business, including, but not limited to, revenue recognition, merchandise inventories, vendor rebates and other vendor consideration, impairment of long-lived assets, 15 self-insurance liabilities, and income taxes are highly complex and involve many subjective assumptions, estimates and judgments by our management. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance. Provisions for losses related to self-insured risks are generally based upon independent actuarially determined estimates. The assumptions underlying the ultimate costs of existing claim losses can be highly unpredictable, which can affect the liability recorded for such claims. For example, variability in health care cost inflation rates inherent in these claims can affect the amounts recognized. Similarly, changes in legal trends and interpretations, as well as changes in the nature and method of how claims are settled can impact ultimate costs. Although our estimates of liabilities incurred do not anticipate significant changes in historical trends for these variables, any changes could have a considerable effect upon future claim costs and currently recorded liabilities and could materially impact our consolidated financial statements. We could be subject to additional income tax liabilities. We compute our income tax provision based on enacted tax rates in the countries in which we operate. As the tax rates vary among countries, a change in earnings attributable to the various jurisdictions in which we operate could result in an unfavorable change in our overall tax provision. Additionally, changes in the enacted tax rates, adverse outcomes in tax audits, including transfer pricing disputes, or any change in the pronouncements relating to accounting for income taxes could have a material adverse effect on our financial condition and results of operations. Significant changes in, or failure to comply with, federal, state, regional, local and international laws and regulations relating to the use, storage, discharge and disposal of hazardous materials, hazardous and non-hazardous wastes and other environmental matters could adversely impact our business, financial condition and results of operations. We are subject to a wide variety of federal, state, regional, local and international laws and regulations relating to the use, storage, discharge and disposal of hazardous materials, hazardous and non-hazardous wastes and other environmental matters. Failure to comply with these laws could result in significant costs to satisfy environmental compliance, remediation or compensatory requirements, or the imposition of severe penalties or restrictions on operations by governmental agencies or courts that could adversely affect our business, financial condition and results of operations. We are involved in a number of legal proceedings and audits and some of these outcomes could adversely affect our business, financial condition and results of operations. Building (1) We believe that the price of our stock generally reflects high market expectations for our future operating results. Any failure to meet or delay in meeting these expectations, including our comparable sales growth rates, membership renewal rates, gross margin, earnings, earnings per share, new warehouse openings, or dividend or stock repurchase policies could cause the market price of our stock to decline. Total Canada 18 Information related to our Equity Compensation Plans is incorporated herein by reference to Costco's Proxy Statement filed with the Securities and Exchange Commission. Equity Compensation Plans (1) Our repurchase program is conducted under a $4,000 authorization approved by our Board of Directors in April 2015, which expires in April 2019. 856,000 $153.34 856,000 $3,222 United States 439 87 608 608 2013. 12 11 26 2012 and prior. 634 2014. 82 Openings by Fiscal Year(1) 3 5 94 501 11 - The following schedule shows warehouse openings for the past five fiscal years and expected warehouse openings through December 31, 2016: 91 111 5 61723 36 28 14 17 12 25 568 715 2 2 147 8 12 - 12,079 Net property and equipment Total assets. 4 % 7% 6% 6% 6% .$ 17,043 BALANCE SHEET DATA 4,061 $ 15,401 33,017 4,852 $ 14,830 $ 13,881 $ 12,961 32,662 5,084 29,936 4,986 26,827 33,163 Total Company.. Increase in Total Company comparable sales 5% 6% $ 10,617 7% (3)% (5)% 2% 9% excluding the impact of changes in foreign currency and gasoline prices.. 8% (3)% 3% 3% 0 % 1 % 4% 6% 7% (3)% 1% 30 1,380 $ 12,361 (3) (1) 0 (1) 715 686 663 634 608 47,600 44,600 42,000 39,000 36,900 (2) Includes 50% of the results of Costco Mexico's operations in fiscal 2012 prior to the July acquisition of our former joint venture partner's 50% equity interest. The remainder of fiscal 2012 and thereafter include 100% of Costco Mexico's results of operations. (3) Includes net sales from warehouses and websites operating for more than one year. For fiscal 2013 and 2012, the prior year includes the comparable 52 and 53 weeks, respectively. 3 % (4) Includes warehouse relocations and closures. (4) $ 12,303 $ 10,833 17 26 Long-term debt, excluding current portion ..... Costco stockholders' equity WAREHOUSE INFORMATION Warehouses in Operation Beginning of year. Opened(4) Closed (4) End of year MEMBERSHIP INFORMATION Total paid members (000's)..... (1) Net sales less merchandise costs. 686 663 634 608 592 33 26 1 % Membership fees. Canada. Our U.S. internet website is www.costco.com. We make available through the Investor Relations section of that site, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and Forms 3, 4 and 5, and any amendments to those reports, as soon as reasonably practicable after filing such materials with, or furnishing such documents to, the Securities and Exchange Commission (SEC). The information found on our website is not part of this or any other report filed with or furnished to the SEC. In addition, the public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers, such as the Company, that file electronically with the SEC at www.sec.gov. 19 FIVE YEAR OPERATING AND FINANCIAL HIGHLIGHTS The following table sets forth information concerning our consolidated financial condition, operating results, and key operating metrics. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, included in this Report, and our consolidated financial statements and notes thereto, included in this Report. SELECTED FINANCIAL DATA (dollars in millions, except per share data) Aug. 28, 2016 As of and for the year ended (52 weeks) Aug. 30, 2015 (52 weeks) Aug. 31, 2014 (52 weeks) Sept. 1, 2013 (52 weeks) Sept. 2, 2012 (53 weeks) RESULTS OF OPERATIONS Net sales. 116,073 2,646 $ 113,666 2,533 Available Information $ 110,212 2,428 The graph assumes the investment of $100 in Costco common stock, the S&P 500 Index and the Peer Group Index on August 28, 2011 and reinvestment of all dividends. Costco Wholesale Corporation 20 COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG COSTCO WHOLESALE CORPORATION, S&P 500 INDEX AND PEER GROUP INDEX Dollars 300 250 200 150 100 50 0 8/28/11 9/2/12 9/1/13 8/31/14 8/30/15 8/28/16 --Peer Group Index ----S&P 500 $ 102,870 2,286 $ 97,062 2,075 2,039 1,709 Net income per diluted common share attributable to Costco 5.33 5.37 4.65 4.63 3.89 Cash dividends declared per common share. 1.70 6.51 1.33 8.17 1.03 Changes in comparable sales (3) United States 2,058 2,377 2,350 Net income attributable to Costco (2) Gross margin (1) as a percentage of net sales 11.35 % 11.09 % 10.66% 10.62% 10.55% Selling, general and administrative expenses as a percentage of net sales..... 10.40 % Other International.. 10.07 % 9.82% 9.81% Operating income 3,672 $ 3,624 $ 3,220 $ 3,053 $ 2,759 9.89% 20 U.S.. (amounts in millions, except per share, membership fee, and warehouse count data) Preopening Expenses Preopening expenses Warehouse openings, including relocations United States Canada. Other International.. 2016 2015 2014 $ 78 $ 65 $ 63 25 14 17 2 1 SG&A expenses as a percentage of net sales increased 18 basis points, mostly due to the negative impact of gasoline price deflation on net sales. Excluding this impact, SG&A expenses as a percentage of adjusted net sales were 9.82%, an improvement of seven basis points. This was due to lower warehouse operating costs of 16 basis points, primarily from improvements in payroll expenses in our core business as a result of leveraging increased sales. This improvement was partially offset by higher central operating costs of five basis points, predominantly due to increased depreciation and service contract costs associated with our information systems modernization projects that were placed into service during the year, primarily incurred by our U.S. operations. Higher stock compensation expense also negatively impacted our SG&A expenses by four basis points, due to an appreciation in the trading price of our stock at the time of grant. Changes in foreign currencies relative to the U.S. dollar decreased our SG&A expenses by approximately $282 in 2015. 3 11 10 33 26 30 Total warehouse openings, including relocations.......... Preopening expenses include costs for startup operations related to new warehouses, including relocations, development in new international markets, and expansions at existing warehouses. Preopening expenses vary due to the number of warehouse openings, the timing of the opening relative to our year-end, whether the warehouse is owned or leased, and whether the opening is in an existing, new, or international market. Interest Expense Interest expense 2016 2015 2014 133 $ 124 $ 6 2015 vs. 2014 25 25 12,601 $ 11,754 11.35% 11.09% 10.66% 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 13 basis points, primarily due to increases in these categories other than fresh foods. 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 26 basis points compared to 2015. Excluding the impact of gasoline price deflation on net sales, gross margin as a percentage of adjusted net sales was 11.14%, an increase of five basis points. A larger LIFO benefit in 2016 compared to 2015 positively contributed three basis points. The LIFO benefit resulted largely from lower costs for merchandise inventories, primarily in food and sundries and gasoline. Our core merchandise categories positively contributed one basis point, primarily due to an increase in hardlines, partially offset by food and sundries due to a decrease in sales penetration. Warehouse 24 24 ancillary and other business gross margin positively contributed one basis point, primarily due to hearing aids and e-commerce businesses, partially offset by our gasoline business. Changes in foreign currencies relative to the U.S. dollar negatively impacted gross margin by approximately $286 in 2016. Gross margin on a segment basis, when expressed as a percentage of the segment's own sales and excluding the impact of gasoline price deflation on net sales (segment gross margin percentage), increased in our U.S. operations, predominately due to a positive contribution from our core merchandise categories, primarily hardlines and softlines, and the LIFO benefit discussed above. The segment gross margin percentage in our Canadian operations decreased, primarily due to a decrease in all core merchandise categories, except hardlines, partially offset by increases in warehouse ancillary and other businesses, primarily pharmacy and e-commerce businesses. The segment gross margin percentage in Other International operations decreased in all merchandise categories, except fresh foods, which was higher. 2015 vs. 2014 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, increased five basis points, primarily due to increases in softlines and food and sundries, partially offset by a decrease in fresh foods. Our gross margin percentage increased 43 basis points compared to 2014 and most of the improvement was derived from the impact of gasoline price deflation on net sales. Excluding this impact, gross margin as a percentage of adjusted net sales was 10.81%, an increase of 15 basis points from the prior year. This increase was predominantly due to: an increase in our warehouse ancillary and other business gross margin of 23 basis points, due primarily to our gasoline business; partially offset by a negative contribution from core merchandise categories of 12 basis points, as a result of a decrease in their sales penetration. A LIFO benefit in 2015 compared to a charge in 2014 positively contributed five basis points. The LIFO benefit resulted largely from lower costs of gasoline. Changes in foreign currencies relative to the U.S. dollar negatively impacted gross margin by approximately $359 in 2015. Segment gross margin percentage increased in our U.S. operations, primarily due to our gasoline business and the LIFO benefit discussed above. The segment gross margin percentage in our Canadian operations decreased across our core merchandise categories. The segment gross margin percentage in our Other International operations decreased, primarily in food and sundries. Selling, General and Administrative Expenses SG&A expenses as a percentage of net sales increased 33 basis points compared to 2015. Excluding the negative impact of gasoline price deflation on net sales, SG&A expenses as a percentage of adjusted net sales were 10.20%, an increase of 13 basis points. This was largely due to: higher central operating costs of six basis points, predominantly due to costs associated with our information systems modernization, including increased depreciation for projects placed in service, incurred by our U.S. operations; and higher stock compensation expense of four basis points, due to appreciation in the trading price of our stock at the time of grant. Our investment in modernizing our information systems is ongoing and expected to continue to negatively impact SG&A expenses. Charges for non-recurring legal and regulatory matters during 2016 negatively impacted SG&A expenses by two basis points. Our warehouse operating costs were higher by one basis point due to higher payroll and employee benefit costs, primarily health care, in our U.S. operations. This increase was partially offset by lower payroll expense as a percentage of net sales in our Canadian operations. Changes in foreign currencies relative to the U.S. dollar decreased our SG&A expenses by approximately $211 in 2016. 9.89% 10.07% 10,899 $ 11,445 113 $ 2014 2015 2016 2016 vs. 2015 SG&A expenses as a percentage of net sales. SG&A expenses. 12,068 10.40% $ Interest expense in 2016 primarily relates to Senior Notes issued by the Company (described in further detail under the heading "Cash Flows from Financing Activities" and in Note 4 to the consolidated financial statements included in this Report). The increase in interest expense is primarily due to the Senior Notes issued in February 2015. Interest income... In 2015, our provision was favorably impacted by net tax benefits of $68, primarily due to a tax benefit recorded in connection with a special cash dividend paid to employees through our 401(K) Retirement Plan. Dividends paid on these shares are deductible for U.S. income tax purposes. LIQUIDITY AND CAPITAL RESOURCES The following table summarizes our significant sources and uses of cash and cash equivalents: Net cash provided by operating activities..... Net cash used in investing activities. Net cash used in financing activities. 2016 2015 2014 3,292 $ (2,345) (2,419) 4,285 $ (2,480) 3,984 (2,093) (2,324) (786) Our primary sources of liquidity are cash flows generated from warehouse operations, cash and cash equivalents and short-term investments. Cash and cash equivalents and short-term investments were $4,729 and $6,419 at the end of 2016 and 2015, respectively. Of these balances, approximately $1,071 and $1,243 at the end of 2016 and 2015, respectively, represented unsettled credit and debit card receivables. These receivables generally settle within one week. Cash and cash equivalents were positively impacted by changes in exchange rates by $50 in 2016 and negatively impacted by $418 and $11 in 2015 and 2014, respectively. We have not provided for U.S. deferred taxes on cumulative undistributed earnings of certain non-U.S. consolidated subsidiaries, including the remaining undistributed earnings of our Canadian operations, because our subsidiaries have invested or will invest the undistributed earnings indefinitely, or the earnings, if repatriated would not result in an adverse tax consequence. Although we have historically asserted that certain non-U.S. undistributed earnings will be permanently reinvested, we may repatriate such earnings to the extent we can do so without an adverse tax consequence. If we determine that such earnings are no longer indefinitely reinvested, deferred taxes, to the extent required and applicable, are recorded at that time. During 2016, we repatriated the earnings in our Canadian operations that in 2015 were no longer considered indefinitely reinvested. Subsequent to the end of the fiscal year, we determined that a portion of the undistributed earnings in our Canadian operations could be repatriated without adverse tax consequences. Accordingly, we no longer consider that portion to be indefinitely reinvested. 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 have no current plans to repatriate for use in the U.S. cash and cash equivalents and short-term investments held by these non-U.S. consolidated subsidiaries whose earnings are considered indefinitely reinvested. Cash and cash equivalents and short- term investments held at these subsidiaries with earnings considered to be indefinitely reinvested totaled $1,535 at August 28, 2016. 34.7% 27 Net cash provided by operating activities totaled $3,292 in 2016, compared to $4,285 in 2015. Our cash flow provided by operations is primarily derived from net sales and membership fees. Cash flow used in operations generally consists of payments to our merchandise vendors, warehouse operating costs including payroll and employee benefits, credit and debit card processing fees, and utilities. Cash used in operations also includes payments for income taxes. The decrease in net cash provided by operating activities for 2016 when compared to 2015 was primarily due to accelerated vendor payments of approximately $1,700 made in the last week of fiscal 2016, in advance of implementing our modernized accounting system at the beginning of fiscal 2017. Cash Flows from Investing Activities Net cash used in investing activities totaled $2,345 in 2016 compared to $2,480 in 2015. Cash flow used in investing activities is primarily related to funding warehouse expansion and remodeling activities. Net cash flows from investing activities also included purchases and maturities of short-term investments. Capital Expenditure Plans We opened 29 new warehouses and relocated four warehouses in 2016 and plan to open up to 31 new warehouses and relocate up to three warehouses in 2017. Our primary requirement for capital is acquiring land, buildings, and equipment for new and remodeled warehouses. To a lesser extent, capital is required for initial warehouse operations, the modernization of our information systems, and working capital. In 2016 we spent $2,649 on capital expenditures, and it is our current intention to spend approximately $2,600 to $2,800 during fiscal 2017. These expenditures are expected to be financed with cash from operations, existing cash and cash equivalents, and short-term investments. 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 $2,419 in 2016 compared to $2,324 in 2015. The primary uses of cash in 2016 were related to the $1,200 repayment of our 0.65% Senior Notes in December 2015, dividend payments of $746, repurchases of common stock, and payment of withholding taxes on stock-based awards. Net cash used in financing activities in 2015 included a $5.00 per share special cash dividend, totaling approximately $2,201, partially offset by the issuance of $1,000 in Senior Notes. In March 2016, our Japanese subsidiary issued approximately $103 of 0.63% Guaranteed Senior Notes through a private placement. Additionally, in June 2016, our Japanese subsidiary issued approximately $93 of zero percent Guaranteed Senior Notes through a private placement. Interest on both issuances are payable semi-annually, and principal is due in March 2026 and June 2021, respectively. Stock Repurchase Programs During 2016 and 2015, we repurchased 3,184,000 and 3,456,000 shares of common stock, at an average price of $149.90 and $142.87, totaling approximately $477 and $494, respectively. The remaining amount available to be purchased under our approved plan was $3,222 at the end of 2016. 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 Cash dividends paid in 2016 totaled $1.70 per share, as compared to $6.51 per share in 2015, which included a special cash dividend of $5.00 per share. In April 2016, our Board of Directors increased our quarterly cash dividend from $0.40 to $0.45 per share. 28 The following graph compares the cumulative total shareholder return (stock price appreciation plus dividends) on our common stock for the last five years with the cumulative total return of the S&P 500 Index and the following group of peer companies (based on weighted market capitalization) selected by the Company: Amazon.com, Inc.; The Home Depot, Inc.; Lowe's Companies; Best Buy Co., Inc.; Staples Inc.; Target Corporation; Kroger Company; and Wal-Mart Stores, Inc. The information provided is from August 28, 2011 through August 28, 2016. Cash Flows from Operating Activities 1,109 1,195 $ 33.2% 2014 Foreign-currency transaction gains, net.... Other, net. Interest income and other, net.. 2016 vs. 2015 2016 2015 2014 41 $ 28 50 $ 47 52 26 11 7 12 .$ 80 $ 104 $ 2015 34.3% 1,243 2016 Effective tax rate Provision for income taxes Interest Income and Other, Net Provision for Income Taxes 2015 vs. 2014 of monetary assets and liabilities by our Canadian and Other International operations. See Derivatives and Foreign Currency sections in Note 1 of this Report. 26 26 The decrease in interest income in 2016 is attributable to lower average cash and investment balances, due in part to the payment of the outstanding principal balance and interest on the 0.65% Senior Notes in the second quarter of 2016 (see discussion in Note 4 of this Report). Foreign-currency transaction gains, net include mark-to-market adjustments for forward foreign-exchange contracts and the revaluation or settlement 90 The increase in net foreign-currency transaction gains was primarily attributable to favorable mark-to-market adjustments for forward foreign exchange contracts compared to the prior year. The increase was also attributable to net gains on the revaluation or settlement of monetary assets and liabilities during the year. 13,172 98,458 101,065 2015 2014 Net Sales.. Changes in net sales: Canada.. .$ 116,073 $ 113,666 $ 110,212 3 % 5 % 7% (2)% (3)% 2016 5% 4 % 2 % 14% Total Company 2 % 3 % 7% Changes in comparable sales: U.S.. Canada. Other International. Total Company. Increases in comparable sales excluding the impact of changes in foreign currency and gasoline prices: U.S.. Other International.. Net Sales RESULTS OF OPERATIONS 22 OVERVIEW 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 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); and changes in the cost of gasoline and associated competitive conditions (primarily impacting our U.S. and Canadian operations). 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, 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. 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. Our philosophy is to provide our members with quality goods and services at the most 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" - 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, all 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 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 increasingly less significant relative 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 online business growth both domestically and internationally has also increased our sales. Our membership format is an integral part of our business model 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 penetration of our Executive members, and sustain high renewal rates, materially influences our profitability. Our financial performance depends heavily on our ability to control costs. While we believe that we have achieved successes in this area historically, some significant costs are partially outside our control, most particularly health care and utility expenses. With respect to expenses relating to the compensation of our employees, our philosophy is not to seek to minimize their wages and benefits. Rather, we believe that achieving our longer-term objectives of reducing employee turnover and enhancing employee satisfaction 21 24 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 11 to the consolidated financial statements included in this Report). Certain countries in the Other International segment have relatively higher rates of square footage growth, lower wages and benefit costs as a percentage of country sales, and/or less or no direct membership warehouse competition. Additionally, we operate our lower-margin gasoline business in all countries except Mexico, Korea, and Taiwan. In discussions of our consolidated operating results, we refer to the impact of changes in foreign currencies relative to the U.S. dollar, which are references 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. Fiscal years 2016, 2015 and 2014 were 52-week fiscal years ending on August 28, 2016, August 30, 2015 and August 31, 2014, 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. Highlights for fiscal year 2016 included: • • • • 22 In June 2016, we transitioned to our new Citibank-Visa exclusive co-branded credit card in the U.S. (described in further detail in this Report). In December 2015, we paid the outstanding principal balance and associated interest on the 0.65% Senior Notes of approximately $1,204, from our cash and cash equivalents and short-term investments; The Board of Directors approved an increase in the quarterly cash dividend from $0.40 to $0.45 per share in April 2016; and Changes in foreign currencies relative to the U.S. dollar adversely impacted diluted earnings per share by $0.24, largely driven by changes in the Canadian dollar and Mexican peso; Net income decreased 1% to $2,350, or $5.33 per diluted share compared to $2,377, or $5.37 per diluted share in 2015. The 2015 results were positively impacted by a $57 tax benefit, or $0.13 per diluted share, in connection with the special cash dividend paid to the Company's 401(k) Plan participants; Selling, general and administrative (SG&A) expenses as a percentage of net sales increased 33 basis points, largely driven by the impact of gasoline price deflation on net sales; Canada. Gross margin percentage increased 26 basis points, primarily from the impact of gasoline price deflation on net sales; We opened 29 net new warehouses in 2016, 21 in the U.S., two in Canada, and six in our Other International segment, compared to 23 net new warehouses in 2015; • • • • • Net sales increased 2% to $116,073, driven by sales at new warehouses opened in 2015 and 2016, while comparable sales were flat. Net and comparable sales results were negatively impacted by changes in most foreign currencies relative to the U.S. dollar and decreases in the price of gasoline; Membership fee revenue increased 4% to $2,646, primarily due to membership sign-ups at existing and new warehouses and executive membership upgrades, partially offset by the negative impact of changes in most foreign currencies relative to the U.S. dollar; Other International...... Total Company. 2016 vs. 2015 Membership Fees Membership fees Membership fees increase Membership fees as a percentage of net sales 2016 vs. 2015 2016 2,646 4% 2.28% 2015 2,533 4% 2.23% 2014 2,428 6% 2.20% The increase in membership fees was primarily due to membership sign-ups at existing and new warehouses and increased number of upgrades to our higher-fee Executive Membership program. These increases were partially offset by changes in foreign currencies relative to the U.S. dollar, which negatively impacted membership fees by approximately $52 in 2016. At the end of 2016, our member renewal rates were 90% in the U.S. and Canada and 88% worldwide. 110,212 113,666 116,073 $ 2014 2015 2016 Comparable sales increased 1% during 2015 and were positively impacted by an increase in shopping frequency partially offset by a decrease in the average ticket. The average ticket and comparable sales results were negatively impacted by changes in foreign currencies relative to the U.S. dollar and a decrease in gasoline prices. Changes in comparable sales also includes the negative impact of cannibalization. 2016 vs. 2015 Gross margin..... Less merchandise costs Net sales. Gross Margin Membership fees increased 4% in 2015. This increase was primarily due to membership sign-ups at existing and new warehouses and increased number of upgrades to our higher-fee Executive Membership program. These increases were partially offset by changes in foreign currencies relative to the U.S. dollar, which negatively impacted membership fees by approximately $76 in 2015. 2015 vs. 2014 Gross margin percentage.. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Comparable Sales 23 Net Sales 1 % 3 % 5% (3)% (5)% 2% (3)% (3)% 3% 0 % 1 % 4% 3 % 6 % 5% 8 % Net sales increased $3,454 or 3% during 2015. This was attributable to sales at new warehouses opened in 2014 and 2015 and a 1% increase in comparable sales. Changes in foreign currencies relative to the U.S. dollar negatively impacted net sales by approximately $3,344, or 303 basis points, compared to 2014. The negative impact was attributable to all foreign countries in which we operate, predominantly Canada of Net Sales 2015 vs. 2014 Comparable sales were flat during 2016 and were positively impacted by an increase in shopping frequency offset by a decrease in the average ticket. The average ticket and comparable sales results were negatively impacted by changes in foreign currencies relative to the U.S. dollar and a decrease in gasoline prices. Changes in comparable sales also includes the negative impact of cannibalization (established warehouses losing sales to our newly opened locations). Comparable Sales Net sales increased $2,407 or 2% during 2016. This was attributable to sales at new warehouses opened in 2015 and 2016. Comparable sales were flat. Changes in foreign currencies relative to the U.S. dollar negatively impacted net sales by approximately $2,690, or 237 basis points, compared to 2015. The negative impact was attributable to most foreign countries in which we operate, predominantly Canada of $1,646, Mexico of $550, and UK of $224. Changes in gasoline prices negatively impacted net sales by approximately $2,194, or 193 basis points, due to a 19% decrease in the average sales price per gallon. $2,027, Mexico of $385, and Japan of $368. Changes in gasoline prices negatively impacted net sales by approximately $2,902, or 263 basis points, due to a 22% decrease in the average sales price per gallon. 6% 4 % 4% 6 % 4 % 9% 8 % 7 % 102,901 Performance Graph 38 59 59 Paul G. Moulton... James P. Murphy. Joseph P. Portera Timothy L. Rose. Ron M. Vachris... Dennis R. Zook Executive Vice President, Chief Information Officer. Mr. Moulton was Executive Vice President, Real Estate Development from 2001 until March 2010. Executive Vice President, Chief Operating Officer, International. Mr. Murphy was Senior Vice President, International, from 2004 to October 2010. Executive Vice President, Chief Operating Officer, Eastern and Canadian Divisions. Mr. Portera has held these positions since 1994, and has been the Chief Diversity Officer since 2010. Executive Vice President, Ancillary Businesses, Manufacturing, and Business Centers. Mr. Rose was Senior Vice President, Merchandising, Food and Sundries and Private Label from 1995 to December 2012. Executive Vice President, Chief Operating Officer, Merchandising. Mr. Vachris was Senior Vice President, Real Estate Development, from August 2015 to June 2016, and Senior Vice President, General Manager, Northwest Region from 2010 to July 2015. Executive Vice President, Chief Operating Officer, Southwest Division and Mexico. 2001 99 65 2011 63 1994 64 2013 2010 64 Executive Vice President, Chief Operating Officer, Northern Division. Mr. McKay was Senior Vice President, General Manager, Northwest Region from 2000 to March 2010. 2012 69 We are exposed to fluctuations in prices for energy that we consume, particularly electricity and natural gas, which we seek to partially mitigate through fixed-price contracts for certain of our warehouses and other facilities, predominately in the U.S. and Canada. We also enter into variable-priced contracts for some purchases of electricity and natural gas, in addition to fuel for our gas stations, on an index basis. These contracts meet the characteristics of derivative instruments, but generally qualify for the "normal purchases or normal sales" exception under authoritative guidance and require no mark-to-market adjustment. Other Information In February 2015, we entered into a Co-Branded Credit Card Program Agreement (the "Program Agreement") with Citibank, N.A. ("Citi”). Under the terms of the Program Agreement, Citi became the exclusive issuer of our co-branded credit cards to our members. Additionally, Visa U.S.A. Inc. became the credit card network for Costco in the United States and Puerto Rico. Citi purchased the current co-branded credit card portfolio from American Express in June 2016. On June 20, 2016, we began accepting all Visa cards, including the Citi co- branded credit cards, replacing American Express. We receive various forms of consideration under the Program Agreement. The initial term of the Program Agreement is ten years. Under the Program Agreement, Costco earns a royalty on purchases made with the co-branded card other than from Costco ("external spend"). The royalty varies based on the amount of external spend in relation to total spend. In addition, Costco will fund a portion of the loyalty reward cardholders earn under the program on external spend. Loyalty rewards under the program are as follows: 4% on eligible gasoline purchases, 3% on restaurant and eligible travel purchases, 2% on all purchases from Costco and Costco.com, and 1% on all other purchases. These rewards may be adjusted over the term of the program. The loyalty rewards earned by co-branded cardholders will be in the form of certificates redeemable at Costco, for cash or merchandise. Costco also receives a bounty on approved new credit card accounts acquired through Costco channels. Additionally, the base discount Costco pays related to Visa acceptance is lower than previously paid for American Express acceptance. 32 2 EXECUTIVE OFFICERS AND CORPORATE GOVERANCE The executive officers of Costco, their position, and ages are listed below. All executive officers have 25 or more years of service with the Company. Name W. Craig Jelinek. Position President and Chief Executive Officer. Mr. Jelinek has been President and Chief Executive Officer since January 2012 and a director since February 2010. He was President and Chief Operating Officer from February 2010 to December 2011. Prior to that he was Executive Vice President, Chief Operating Officer, Merchandising since 2004. Jeffrey H. Brotman......... Chairman of the Board. Mr. Brotman is a co-founder of Costco and has been a director since its inception. Richard A. Galanti Executive Vice President and Chief Financial Officer. Mr. Galanti has been a director since January 1995. Franz E. Lazarus Executive Vice President, Administration. Mr. Lazarus was Senior Vice President, Administration-Global Operations from 2006 to September 2012. Executive Officer Since 1995 Age 64 1983 74 1993 660 John D. McKay.. Commodity Price Risk 2016 1993 67 We have audited the accompanying consolidated balance sheets of Costco Wholesale Corporation and subsidiaries as of August 28, 2016 and August 30, 2015, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the 52-week periods ended August 28, 2016, August 30, 2015 and August 31, 2014. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Costco Wholesale Corporation and subsidiaries as of August 28, 2016 and August 30, 2015, and the results of their operations and their cash flows for the 52-week periods ended August 28, 2016, August 30, 2015 and August 31, 2014, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Costco Wholesale Corporation's internal control over financial reporting as of August 28, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated October 11, 2016 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. Seattle, Washington October 11, 2016 35 55 KPMG LLP REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Costco Wholesale Corporation: We have audited Costco Wholesale Corporation's internal control over financial reporting as of August 28, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management's annual report on internal control over financial reporting included in Item 9A. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 28, 2016, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of August 28, 2016 and August 30, 2015, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the 52-week periods ended August 28, 2016, August 30, 2015 and August 31, 2014, and our report dated October 11, 2016 expressed an unqualified opinion on those consolidated financial statements. Seattle, Washington October 11, 2016 36 KPMG LLP COSTCO WHOLESALE CORPORATION Costco Wholesale Corporation: 51 The Board of Directors and Stockholders 34 We have adopted a code of ethics for senior financial officers pursuant to Section 406 of the Sarbanes- Oxley Act. Copies of the code are available free of charge, by writing to Secretary, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, WA 98027. If the Company makes any amendments to this code (other than technical, administrative, or non-substantive amendments) or grants any waivers, including implicit waivers, from this code to the CEO, chief financial officer or principal accounting officer and controller, we will disclose (on our website or in a Form 8-K report filed with the SEC) the nature of the amendment or waiver, its effective date, and to whom it applies. Executive Compensation Information related to our Executive Compensation and Director Compensation is incorporated herein by reference to Costco's Proxy Statement filed with the Securities and Exchange Commission. 33 33 MANAGEMENT'S REPORTS Management's Report on the Consolidated Financial Statements Costco's management is responsible for the preparation, integrity and objectivity of the accompanying consolidated financial statements and the related financial information. The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP) and necessarily include certain amounts that are based on estimates and informed judgments. The Company's management is also responsible for the preparation of the related financial information included in this Annual Report on Form 10-K and its accuracy and consistency with the consolidated financial statements. The consolidated financial statements have been audited by KPMG LLP, an independent registered public accounting firm, who conducted their audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). The independent registered public accounting firm's responsibility is to express an opinion as to the fairness with which such consolidated financial statements present our financial position, results of operations and cash flows in accordance with U.S. GAAP. Disclosure Controls and Procedures As of the end of the period covered by this Annual Report on Form 10-K, we performed an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities and Exchange Act of 1934 (the Exchange Act)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures are effective. There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our fiscal quarter ended August 28, 2016, that has materially affected or is reasonably likely to materially affect our internal control over financial reporting. Management's Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of our assets; (2) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with appropriate authorizations; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Under the supervision and with the participation of our management, we assessed the effectiveness of our internal control over financial reporting as of August 28, 2016, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on its assessment, management has concluded that our internal control over financial reporting was effective as of August 28, 2016. The attestation of KPMG LLP, our independent registered public accounting firm, on the effectiveness of our internal control over financial reporting is included with the consolidated financial statements in this Report. Cray Jelek W. Craig Jelinek President, Chief Executive Officer and Director Rudd 24Q Richard A. Galanti Executive Vice President, Chief Financial Officer and Director 34 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Our foreign subsidiaries conduct certain transactions in their non-functional currencies, which exposes us to fluctuations in exchange rates. We manage these fluctuations, in part, through the use of forward foreign- exchange contracts, seeking to economically hedge the impact of these fluctuations on known future expenditures denominated in a non-functional foreign-currency. The contracts are intended primarily to economically hedge exposure to U.S. dollar merchandise inventory expenditures made by our international subsidiaries whose functional currency is other than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. We seek to mitigate risk with the use of these contracts and do not intend to engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features. We seek to manage counterparty risk associated with these contracts by limiting transactions to counterparties with which we have established banking relationships. There can be no assurance that this practice is effective. These contracts are limited to less than one year. See Note 1 and Note 3 to the consolidated financial statements included in this Report for additional information on the fair value of unsettled forward foreign-exchange contracts at the end of 2016 and 2015. A hypothetical 10% strengthening of the functional currency compared to the non-functional currency exchange rates at August 28, 2016 would have decreased the fair value of the contracts by $56 and resulted in an unrealized loss in the consolidated statements of income for the same amount. Foreign Currency-Exchange Risk The nature and amount of our long-term debt may vary as a result of business requirements, market conditions, and other factors. As of the end of 2016, the majority of our long-term debt is fixed rate Senior Notes, carried at $4,390. Fluctuations in interest rates may affect the fair value of the fixed-rate debt. See Note 4 to the consolidated financial statements included in this Report for more information on our long-term debt. 5,456 200 379 337 2,204 3,120 obligations. Capital lease obligations (4). 700 31 159 160 57 | 757 63 593 748 Purchase obligations (equipment services and other) Other (6) 998 Total 1,845 $ 88 Bank Credit Facilities and Commercial Paper Programs We maintain bank credit facilities for working capital and general corporate purposes. At August 28, 2016, we had borrowing capacity within these facilities of $429, of which $358 was maintained by our international operations. Of the $358, $177 is guaranteed by the Company. There were no outstanding short-term borrowings under the bank credit facilities at the end of 2016 and 2015. The Company has letter of credit facilities, for commercial and standby letters of credit, totaling $153. The outstanding commitments under these facilities at the end of 2016 totaled $96, including $94 in standby letters of credit with expiration dates within one year. The bank credit facilities have various expiration dates, all within one year, and we generally intend to renew these facilities prior to their expiration. 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 August 28, 2016, our commitments to make future payments under contractual obligations were as follows: Payments Due by Fiscal Year Contractual obligations 2017 2018 to 2019 2020 to 2021 2022 and thereafter Total Purchase obligations (merchandise) Long-term debt (2). Operating leases (3) Construction and land 6,828 $ 1,221 3 $ 1,392 - 6,831 458 98 61 We evaluate whether it is appropriate to record the gross amount of merchandise sales and related costs or a net amount. Generally, when we are the primary obligor, subject to inventory risk, have latitude in establishing prices and selecting suppliers, influence product or service specifications, or have several but not all of these indicators, revenue is recorded on a gross basis. If we are not the primary obligor and do not possess other indicators of gross reporting as noted above, we record a net amount, which is reflected in net sales. We record related shipping fees on a gross basis. We account for membership fee revenue, net of refunds, on a deferred basis, whereby revenue is recognized ratably over one year. Our Executive members qualify for a 2% reward on qualified purchases (up to a maximum reward of approximately $750 per year in the U.S. and Canada and varies in our Other International operations), which can be redeemed only at Costco warehouses. We account for this reward as a reduction in sales. The sales reduction and corresponding liability are computed after giving effect to the estimated impact of non-redemptions based on historical data. Merchandise Inventories Merchandise inventories are valued at the lower of cost or market, as determined primarily by the retail inventory method, and are stated using the last-in, first-out (LIFO) method for substantially all U.S. merchandise inventories. Merchandise inventories for all foreign operations are primarily valued by the retail inventory method and are stated using the first-in, first-out (FIFO) method. We record an adjustment each quarter, if necessary, for the estimated effect of inflation or deflation, and these estimates are adjusted to actual results determined at year-end. We believe the LIFO method more fairly presents the results of operations by more closely matching current costs with current revenues. We provide for estimated inventory losses (shrink) between physical inventory counts as a percentage of net sales. The provision is adjusted to reflect results of the actual physical inventory counts, which generally occur in the second and fourth quarters of the year. Inventory cost, where appropriate, is reduced by estimates of vendor rebates when earned or as we progress toward earning those rebates, provided they are probable and reasonably estimable. Other consideration received from vendors is generally recorded as a reduction of merchandise costs upon completion of contractual milestones, terms of agreement, or other systematic approaches. Impairment of Long-Lived Assets We evaluate our long-lived assets for impairment on an annual basis, when relocating or closing a facility, or when events or changes in circumstances occur that may indicate the carrying amount of the asset group, generally an individual warehouse, may not be fully recoverable. Our judgments are based on existing market 30 50 and operational conditions. Future events could cause us to conclude that impairment factors exist, requiring a downward adjustment of these assets to their then-current fair value. Insurance/Self-Insurance Liabilities We use a combination of insurance and self-insurance mechanisms, including for certain risks, a wholly- owned captive insurance subsidiary and participation in a reinsurance program, to provide for potential liabilities for workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability, and employee health care benefits. Liabilities associated with the risks that we retain are not discounted and are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends. Income Taxes The determination of our provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits associated with uncertain tax positions are recorded in our consolidated financial statements only after determining a more-likely-than-not probability that the positions will withstand challenge from tax authorities. When facts and circumstances change, we reassess these positions and record any changes in the consolidated financial statements as appropriate. Additionally, our cumulative foreign undistributed earnings were considered indefinitely reinvested as of August 28, 2016. These earnings would be subject to U.S. income tax if we changed our position and could result in a U.S. deferred tax liability. Although we have historically asserted that certain non-U.S. undistributed earnings will be permanently reinvested, we may repatriate such earnings to the extent we can do so without an adverse tax consequence. Recent Accounting Pronouncements See Note 1 to the consolidated financial statements included in this Report for a detailed description of recent accounting pronouncements. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (amounts in millions) Our exposure to financial market risk results from fluctuations in interest rates and foreign currency exchange rates. We do not engage in speculative or leveraged transactions or hold or issue financial instruments for trading purposes. Interest Rate Risk Our exposure to market risk for changes in interest rates relates primarily to our investment holdings that are diversified among various instruments considered to be cash equivalents as defined in Note 1 to the consolidated financial statements included in this Report, as well as short-term investments in government and agency securities, and asset and mortgage-backed securities with effective maturities of generally three months to five years at the date of purchase. The primary objective of our investment activities is to preserve principal and secondarily to generate yields. The majority of our short-term investments are in fixed interest rate securities. These securities are subject to changes in fair value due to interest rate fluctuations. Our policy limits investments in the U.S. to direct U.S. government and government agency obligations, repurchase agreements collateralized by U.S. government and government agency obligations, and U.S. government and government agency money market funds. Our wholly-owned captive insurance subsidiary invests in U.S. government and government agency obligations, corporate notes and bonds, and asset and mortgage-backed securities with a minimum overall portfolio average credit rating of AA+. Our Canadian and Other International subsidiaries' investments are primarily in money market funds, bankers' acceptances, and bank certificates of deposit, generally denominated in local currencies. 31 A 100 basis-point change in interest rates as of the end of 2016 would have an incremental change in fair market value of $22. For those investments that are classified as available-for-sale, the unrealized gains or losses related to fluctuations in market volatility and interest rates are reflected within stockholders' equity in accumulated other comprehensive income. We generally recognize sales, which include shipping fees where applicable, net of returns, at the time the member takes possession of merchandise or receives services. When we collect payment from members prior to the transfer of ownership of merchandise or the performance of services, the amount is generally recorded as deferred sales in the consolidated balance sheets until the sale or service is completed. We provide for estimated sales returns based on historical trends and reduce sales and merchandise costs accordingly. Our sales returns reserve is based on an estimate of the net realizable value of merchandise inventories to be returned. Amounts collected from members for sales and value added taxes are recorded on a net basis. Revenue Recognition The preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles (U.S. GAAP) requires that we make estimates and judgments, including those related to revenue recognition, merchandise inventory valuation, impairment of long-lived assets, insurance/self- insurance liabilities, and income taxes. We base our estimates on historical experience and on assumptions that we believe to be reasonable, and we continue to review and evaluate these statements. For further information on significant accounting policies, see discussion in Note 1 to the consolidated financial statements included in this Report. Critical Accounting Estimates 618 18 26 11 71 126 ..$ 9,456 $ 2,016 $ 2,317 $ CONSOLIDATED BALANCE SHEETS 3,867 $ (1) Includes only open merchandise purchase orders. Includes contractual interest payments and excludes deferred issuance costs. (3) Operating lease obligations exclude amounts for common area maintenance, taxes, and insurance and have been reduced by $129 to reflect sub-lease income. (4) Includes build-to-suit lease obligations and contractual interest payments. (5) The amounts exclude certain services negotiated at the individual warehouse or regional level that are not significant and generally contain clauses allowing for cancellation without significant penalty. (6) Includes $64 in asset retirement obligations, and $62 in deferred compensation obligations. The total amount excludes $51 of non-current unrecognized tax contingencies and $29 of other obligations due to uncertainty regarding the timing of future cash payments. Off-Balance Sheet Arrangements In the opinion of management, we have no off-balance sheet arrangements, that have had, or are reasonably likely to have, a material current or future effect on our financial condition or financial statements other than the operating leases included in the table above and discussed in Note 1 and Note 5 to the consolidated financial statements included in this Report. 29 29 17,656 (amounts in millions, except par value and share data) Diluted August 28, 2016 2,646 2,533 2,428 118,719 116,199 112,640 Merchandise costs. 102,901 101,065 98,458 Selling, general and administrative. 12,068 11,445 10,899 Preopening expenses 78 65 63 Operating income 3,672 3,624 $110,212 3,220 $113,666 August 31, 2014 6,518 12,079 10,617 253 226 12,332 10,843 $33,163 $33,017 The accompanying notes are an integral part of these consolidated financial statements. 37 REVENUE Net sales... Membership fees Total revenue OPERATING EXPENSES COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (amounts in millions, except per share data) 52 Weeks Ended 52 Weeks Ended August 28, 2016 August 30, 2015 52 Weeks Ended $116,073 OTHER INCOME (EXPENSE) Interest expense..... (133) Basic.... Shares used in calculation (000's) $5.36 $5.41 $4.69 $5.33 $5.37 $4.65 Basic. Diluted 438,585 439,455 438,693 441,263 442,716 442,485 CASH DIVIDENDS DECLARED PER COMMON SHARE.. $1.70 $6.51 $1.33 The accompanying notes are an integral part of these consolidated financial statements. ASSETS NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO: $2,058 $2,377 $2,350 (124) (113) Interest income and other, net 80 104 90 3,619 3,604 3,197 Provision for income taxes. 7,686 1,243 1,109 Net income including noncontrolling interests..... 2,376 2,409 2,088 Net income attributable to noncontrolling interests... (26) (32) (30) NET INCOME ATTRIBUTABLE TO COSTCO 1,195 (1,121) INCOME BEFORE INCOME TAXES. 5,218 4,961 13,994 12,618 Equipment and fixtures 6,077 5,274 Construction in progress..... 701 811 26,167 23,664 Less accumulated depreciation and amortization. (9,124) (8,263) Net property and equipment. 17,043 15,401 OTHER ASSETS. 902 837 TOTAL ASSETS. 5,395 $33,163 16,779 268 2015 August 30, (1,099) CURRENT ASSETS Cash and cash equivalents. Short-term investments.. Receivables, net. Merchandise inventories. Other current assets Total current assets.. PROPERTY AND EQUIPMENT Land... Buildings and improvements. $3,379 $4,801 1,350 1,618 1,252 1,224 8,969 8,908 15,218 $33,017 228 CURRENT LIABILITIES Total liabilities COMMITMENTS AND CONTINGENCIES EQUITY 1,195 783 20,831 22,174 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; Additional paid-in capital.. OTHER LIABILITIES Accumulated other comprehensive loss Total Costco stockholders' equity. Noncontrolling interests Total equity TOTAL LIABILITIES AND EQUITY. 0 0 LIABILITIES AND EQUITY 2 5,490 2 Retained earnings..... 4,852 437,524,000 and 437,952,000 shares issued and outstanding. 16,539 $9,011 $7,612 Accounts payable.... Current portion of long-term debt... 4,061 1,100 1,283 Accrued salaries and benefits. 2,468 Accrued member rewards.. 869 2,629 Deferred membership fees Other current liabilities Total current liabilities LONG-TERM DEBT, excluding current portion... 1,362 15,575 1,695 813 1,269 2,003 (494) (494) 6,518 (1,121) 2 437,952 (2,865) (2,865) 10,617 5,218 226 4 --- 2,350 2,350 26 2,376 22 22 26 459 459 | (452) (2,865) 459 10,843 (42) 2,377 (122) 4,919 4 (76) 7,458 12,303 212 12,515 2,377 32 2,409 (1,045) (1,045) (3,456) (18) 394 394 394 ... 989 69 69 69 69 2,736 - ( (122) (122) (1,063) (146) $2,376 (146) 40 COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts 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 52 Weeks Ended 52 Weeks Ended 52 Weeks Ended 40 August 28, 2016 August 31, 2014 $2,409 $2,088 1,255 1,127 1,029 459 394 327 Excess tax benefits on stock-based awards. Other non-cash operating activities, net 2 August 30, 2015 (146) The accompanying notes are an integral part of these consolidated financial statements. BALANCE AT AUGUST 28, 3 ----- -- (41) 45 (436) (477) (477) (746) (3) (749) 437,524 $2 2016 $5,490 $12,079 $253 $12,332 Release of vested RSUs, including tax effects 2,749 Conversion of convertible notes Repurchases of common stock (3,184) Cash dividends declared and other.. $(1,099) $7,686 437,683 2,137 (584) CONSOLIDATED STATEMENTS OF EQUITY (amounts in millions) Common Stock Accumulated Additional Other Shares Paid-in Comprehensive (000's) Amount Capital Income (Loss) COSTCO WHOLESALE CORPORATION Retained Earnings Equity Noncontrolling Interests Total Equity BALANCE AT SEPTEMBER 1, 2013 436,839 $2 $4,670 $(122) $6,283 $10,833 Total Costco Stockholders' $179 39 $2,104 COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (amounts in millions) NET INCOME INCLUDING NONCONTROLLING INTERESTS Foreign-currency translation adjustment and other, net. Comprehensive income Less: Comprehensive income attributable to noncontrolling interests COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO 52 Weeks Ended August 28, 2016 52 Weeks Ended August 30, 2015 52 Weeks Ended August 31, 2014 The accompanying notes are an integral part of these consolidated financial statements. $2,376 $2,088 26 (1,063) 49 2,402 1,346 Deferred income taxes... 30 14 33 $2,372 $1,332 $2,409 (584) $11,012 - notes 18 - 1 1 1 Repurchases of common stock (2,915) (35) (299) (334) (334) Stock-based compensation -- Cash dividends declared.... Net income Foreign-currency translation adjustment and other, net.. Stock options exercised, including tax effects Release of vested RSUs, including tax effects Repurchases of common stock Cash dividends declared BALANCE AT AUGUST 30, 2015 Net income Foreign-currency translation adjustment and other, net.. Stock-based compensation ... Stock options exercised, including tax effects (584) BALANCE AT AUGUST 31, 2014 Net income (102) (102) - - - 2,058 2,058 30 2,088 Foreign-currency translation adjustment and other, net.. 46 46 3 49 (102) Stock-based compensation ... 327 327 Stock options exercised, including tax effects .... 971 - 58 -- 58 58 Release of vested restricted stock units (RSUs), including tax effects Conversion of convertible 2,770 327 Changes in operating assets and liabilities: $4,801 (86) Receivables, net.. 2016 2015 .$ 755 $ 729 270 273 99 103 128 119 .$ 1,252 $ 1,224 Vendor receivables include volume rebates or other purchase discounts. Balances are generally presented on a gross basis, separate from any related payable due. In certain circumstances, these receivables may be settled against the related payable to that vendor. Reinsurance receivables are held by the Company's wholly- owned captive insurance subsidiary. The balance primarily represents amounts ceded through reinsurance arrangements gross of the amounts assumed under reinsurance, which are presented within other current liabilities in the consolidated balance sheets. Third-party pharmacy receivables generally relate to amounts due from members' insurance companies. Other receivables primarily consist of amounts due from governmental entities, mostly tax-related items. Receivables are recorded net of an allowance for doubtful accounts. The allowance is based on historical experience and application of the specific identification method. Write-offs of receivables were immaterial for fiscal years 2016, 2015, and 2014. Merchandise Inventories Merchandise inventories consist of the following at the end of 2016 and 2015: 2016 2015 United States. Foreign Merchandise inventories .$ 6,422 $ 6,427 2,547 2,481 .$ 8,969 $ 8,908 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. Merchandise inventories for all foreign operations are primarily valued by the retail inventory method and are stated using the first-in, first-out (FIFO) method. The Company believes the LIFO method more fairly presents the results of operations by more closely matching current costs with current revenues. The Company records an adjustment each quarter, if necessary, for the projected annual effect of inflation or deflation, and these estimates are adjusted to actual results determined at year-end, after actual inflation rates and inventory levels for the year have been determined. Due to net deflationary trends, a benefit of $64 and $27 was recorded to merchandise costs in 2016 and 2015, respectively. Due to net inflationary trends in 2014, a charge of $28 was recorded to merchandise costs to increase the cumulative LIFO valuation on merchandise inventories. At the end of 2016 and 2015, the cumulative impact of the LIFO valuation on merchandise inventories was immaterial and $82, respectively. The Company provides for estimated inventory losses between physical inventory counts as a percentage of net sales, using estimates based on the Company's experience. The provision is adjusted periodically to reflect actual physical inventory counts, which generally occur in the second and fourth fiscal quarters. Inventory cost, where appropriate, is reduced by estimates of vendor rebates when earned or as the Company progresses towards earning those rebates, provided that they are probable and reasonably estimable. 44 Property and Equipment Other receivables, net.. Third-party pharmacy receivables.... Reinsurance receivables. Vendor receivables. Costco Wholesale Corporation (Costco or the Company), a Washington corporation, and its subsidiaries operate membership warehouses based on the concept that offering members low prices on a limited selection of nationally branded and private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. At August 28, 2016, Costco operated 715 warehouses worldwide: 501 United States (U.S.) locations (in 44 U.S. states, Washington, D.C., and Puerto Rico), 91 Canada locations, 36 Mexico locations, 28 United Kingdom (U.K.) locations, 25 Japan locations, 12 Korea locations, 12 Taiwan locations, eight Australia locations, and two Spain locations. The Company's online business operates websites in all countries except Japan, Australia, and Spain. Basis of Presentation The consolidated financial statements include the accounts of Costco Wholesale Corporation, its wholly- owned subsidiaries, and subsidiaries in which it has a controlling interest. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company's equity. All material inter-company transactions between and among the Company and its consolidated subsidiaries have been eliminated in consolidation. The Company's net income excludes income attributable to noncontrolling interests in its operations in Taiwan and Korea. Unless otherwise noted, references to net income relate to net income attributable to Costco. Fiscal Year End The Company operates on a 52/53 week fiscal year basis with the fiscal year ending on the Sunday closest to August 31. References to 2016, 2015, and 2014 relate to the 52-week fiscal years ended August 28, 2016, August 30, 2015, and August 31, 2014, respectively. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. Reclassifications Certain reclassifications have been made to prior fiscal year amounts or balances to conform to the presentation in the current fiscal year. These reclassifications did not have a material impact on the Company's previously reported consolidated financial statements. Cash and Cash Equivalents The Company considers as cash and cash equivalents all cash on deposit, highly liquid investments with a maturity of three months or less at the date of purchase, and proceeds due from credit and debit card transactions with settlement terms of up to one week. Credit and debit card receivables were $1,071 and $1,243 at the end of 2016 and 2015, respectively. 42 Property and equipment are stated at cost. In general, new building additions are classified into components, each with its own estimated useful life, generally five to fifty years for buildings and improvements and three to twenty years for equipment and fixtures. Depreciation and amortization expense is computed using the straight-line method over estimated useful lives or the lease term, if shorter. Leasehold improvements made after the beginning of the initial lease term are depreciated over the shorter of the estimated useful life of the asset or the remaining term of the initial lease plus any renewals that are reasonably assured at the date the leasehold improvements are made. Short-Term Investments The Company periodically evaluates unrealized losses in its investment securities for other-than-temporary impairment, using both qualitative and quantitative criteria. In the event a security is deemed to be other-than- temporarily impaired, the Company recognizes the credit loss component in interest income and other, net in the consolidated statements of income. Fair Value of Financial Instruments The Company accounts for certain assets and liabilities at fair value. The carrying value of the Company's financial instruments, including cash and cash equivalents, receivables and accounts payable, approximate fair value due to their short-term nature or variable interest rates. See Notes 2, 3, and 4 for the carrying value and fair value of the Company's investments, derivative instruments, and fixed-rate debt, respectively. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying a fair value hierarchy, which requires maximizing the use of observable inputs when measuring fair value. The three levels of inputs are: Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. Level 3: Significant unobservable inputs that are not corroborated by market data. The Company's valuation techniques used to measure the fair value of money market mutual funds are based on quoted market prices, such as quoted net asset values published by the fund as supported in an active market. Valuation methodologies used to measure the fair value of all other non-derivative financial instruments are based on independent external valuation information. The pricing process uses data from a variety of independent external valuation information providers, including trades, bid price or spread, two- sided markets, quotes, benchmark curves including but not limited to treasury benchmarks and Libor and swap curves, discount rates, and market data feeds. All are observable in the market or can be derived principally from or corroborated by observable market data. The Company reports transfers in and out of Levels 1, 2, and 3, as applicable, using the fair value of the individual securities as of the beginning of the reporting period in which the transfer(s) occurred. Current financial liabilities have fair values that approximate their carrying values. Long-term financial liabilities consist of long-term debt, which is recorded on the balance sheet at issuance price and adjusted for any applicable unamortized discounts or premiums and debt issuance costs. 43 Receivables, Net Receivables consist of the following at the end of 2016 and 2015: In general, short-term investments have a maturity at the date of purchase of three months to five years. Investments with maturities beyond five years may be classified, based on the Company's determination, as short-term based on their highly liquid nature and because they represent the investment of cash that is available for current operations. Short-term investments classified as available-for-sale are recorded at fair value using the specific identification method with the unrealized gains and losses reflected in accumulated other comprehensive income (loss) until realized. Realized gains and losses from the sale of available-for- sale securities, if any, are determined on a specific identification basis and are recorded in interest income and other, net in the consolidated statements of income. Short-term investments classified as held-to-maturity are financial instruments that the Company has the intent and ability to hold to maturity and are reported net of any related amortization and are not remeasured to fair value on a recurring basis. The Company capitalizes certain computer software and software development costs incurred in developing or obtaining computer software for internal use. These costs are included in equipment and fixtures and amortized on a straight-line basis over the estimated useful lives of the software, generally three to seven years. Repair and maintenance costs are expensed when incurred. Expenditures for remodels, refurbishments and improvements that add to or change the way an asset functions or that extend the useful life are capitalized. Assets that were removed during the remodel, refurbishment or improvement are retired. Assets classified as held-for-sale at the end of 2016 and 2015 were immaterial. The Company evaluates long-lived assets for impairment on an annual basis, when relocating or closing a facility, or when events or changes in circumstances may indicate the carrying amount of the asset group, generally an individual warehouse, may not be fully recoverable. For asset groups held and used, including warehouses to be relocated, the carrying value of the asset group is considered recoverable when the estimated future undiscounted cash flows generated from the use and eventual disposition of the asset group exceed the respective carrying value. In the event that the carrying value is not considered recoverable, an impairment loss would be recognized for the asset group to be held and used equal to the excess of the carrying value above the estimated fair value of the asset group. For asset groups classified as held-for-sale (disposal group), the carrying value is compared to the disposal group's fair value less costs to sell. The Company estimates fair value by obtaining market appraisals from third party brokers or using other valuation techniques. There were no impairment charges recognized in 2016, and charges were immaterial and included in selling, general and administrative expenses in the consolidated statements of income in 2015 and 2014. The unrealized gains or losses recognized in interest income and other, net in the accompanying consolidated statements of income relating to the net changes in the fair value of unsettled forward foreign-exchange contracts were immaterial in 2016 and 2014, respectively, and a net gain of $12 in 2015. The Company is exposed to fluctuations in prices for the energy it consumes, particularly electricity and natural gas, which it seeks to partially mitigate through the use of fixed-price contracts for certain of its warehouses and other facilities, primarily in the U.S. and Canada. The Company also enters into variable- priced contracts for some purchases of natural gas, in addition to fuel for its gas stations, on an index basis. These contracts meet the characteristics of derivative instruments, but generally qualify for the “normal purchases or normal sales" exception under authoritative guidance and require no mark-to-market adjustment. 46 46 Foreign Currency The functional currencies of the Company's international subsidiaries are the local currency of the country in which the subsidiary is located. Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Translation adjustments are recorded in accumulated other comprehensive loss. Revenues and expenses of the Company's consolidated foreign operations are translated at average exchange rates prevailing during the year. The Company recognizes foreign-currency transaction gains and losses related to revaluing or settling monetary assets and liabilities denominated in currencies other than the functional currency in interest income and other, net in the accompanying consolidated statements of income. Generally, these include the U.S. dollar cash and cash equivalents and the U.S. dollar payables of consolidated subsidiaries revalued to their functional currency. Also included are realized foreign-currency gains or losses from settlements of forward foreign-exchange contracts. These items resulted in net gains of $38, $35, and $25 for 2016, 2015, and 2014, respectively. Revenue Recognition The Company generally recognizes sales, which include shipping fees where applicable, net of returns, at the time the member takes possession of merchandise or receives services. When the Company collects payments from members prior to the transfer of ownership of merchandise or the performance of services, the amounts received are generally recorded as deferred sales, included in other current liabilities in the consolidated balance sheets, until the sale or service is completed. The Company reserves for estimated sales returns based on historical trends in merchandise returns and reduces sales and merchandise costs accordingly. The sales returns reserve is based on an estimate of the net realizable value of merchandise inventories to be returned. Amounts collected from members for sales or value added taxes are recorded on a net basis. The Company evaluates whether it is appropriate to record the gross amount of merchandise sales and related costs or the net amount earned. Generally, when Costco is the primary obligor, is subject to inventory risk, has latitude in establishing prices and selecting suppliers, can influence product or service specifications, or has several but not all of these indicators, revenue is recorded on a gross basis. If the Company is not the primary obligor and does not possess other indicators of gross reporting as noted above, it records the net amounts earned, which is reflected in net sales. The Company records related shipping fees on a gross basis. The Company accounts for membership fee revenue, net of refunds, on a deferred basis, ratably over the one-year membership period. The Company's Executive members qualify for a 2% reward on qualified purchases (up to a maximum reward of approximately $750 per year), which can be redeemed only at Costco warehouses. The Company accounts for this reward as a reduction in sales. The sales reduction and corresponding liability (classified as accrued member rewards in the consolidated balance sheets) are computed after giving effect to the estimated impact of non-redemptions based on historical data. The net reduction in sales was $1,172, $1,128, and $1,051 in 2016, 2015, and 2014, respectively. Merchandise Costs Merchandise costs consist of the purchase price of inventory sold, inbound and outbound shipping charges and all costs related to the Company's depot operations, including freight from depots to selling warehouses, and are reduced by vendor consideration. Merchandise costs also include salaries, benefits, depreciation, and utilities in fresh foods and certain ancillary departments. The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of business. It manages these fluctuations, in part, through the use of forward foreign-exchange contracts, seeking to economically hedge the impact of fluctuations of foreign exchange on known future expenditures denominated in a non-functional foreign-currency. The contracts relate primarily to U.S. dollar merchandise inventory expenditures made by the Company's international subsidiaries, with functional currencies other than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. The Company seeks to mitigate risk with the use of these contracts and does not intend to engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features. The aggregate notional amounts of open, unsettled forward foreign-exchange contracts were $572 and $889 at the end of 2016 and 2015, respectively. The Company seeks to manage counterparty risk associated with these contracts by limiting transactions to counterparties with which the Company has an established banking relationship. There can be no assurance that this practice is effective. The contracts are limited to less than one year in duration. See Note 3 for information on the fair value of unsettled forward foreign-exchange contracts at the end of 2016 and 2015. Vendor Consideration 47 consideration is generally recorded as a reduction of merchandise costs upon completion of contractual milestones, terms of the related agreement, or by another systematic approach. Selling, General and Administrative Expenses Selling, general and administrative expenses consist primarily of salaries, benefits and workers' compensation costs for warehouse employees, other than fresh foods departments and certain ancillary businesses, as well as all regional and home office employees, including buying personnel. Selling, general and administrative expenses also include substantially all building and equipment depreciation, credit and debit card processing fees, utilities, and stock-based compensation expense as well as other operating costs incurred to support warehouse operations. Retirement Plans The Company's 401(k) Retirement Plan is available to all U.S. employees who have completed 90 days of employment. The plan allows pre-tax deferrals, a portion of which the Company matches. In addition, the Company provides each eligible participant an annual discretionary contribution. The Company also has a defined contribution plan for Canadian employees and contributes a percentage of each employee's salary. Certain subsidiaries in the Company's Other International operations have defined benefit and defined contribution plans that are not material. Amounts expensed under all plans were $489, $454, and $436 for 2016, 2015, and 2014, respectively, and are included in selling, general and administrative expenses and merchandise costs in the accompanying consolidated statements of income. Stock-Based Compensation Restricted stock units (RSUs) granted to employees generally vest over five years and allow for quarterly vesting of the pro-rata number of stock-based awards that would vest on the next anniversary of the grant date in the event of retirement or voluntary termination. The Company does not reduce stock-based compensation for an estimate of forfeitures, which are inconsequential in light of historical experience and considering the awards vest on a quarterly basis. Actual forfeitures are recognized as they occur. Compensation expense for all stock-based awards granted is predominantly recognized using the straight-line method over the requisite service period for the entire award. The terms of the Company's stock-based awards for employees and non-employee directors provide for accelerated vesting of a portion of outstanding shares based on reaching certain cumulative years of service with the Company. Compensation expense for the accelerated shares is recognized upon achievement of the long service term. The cumulative amount of compensation cost recognized at any point in time equals at least the portion of the grant-date fair value of the award that is vested at that date. The fair value of RSUs is calculated as the market value of the common stock on the measurement date less the present value of the expected dividends forgone during the vesting period. Stock-based compensation expense is predominantly included in selling, general and administrative expenses in the consolidated statements of income. See Note 7 for additional information on the Company's stock-based compensation plans. Leases The Company leases land and/or buildings at warehouses and certain other office and distribution facilities, primarily under operating leases. Operating leases expire at various dates through 2064, with the exception of one lease in the Company's U.K. subsidiary, which expires in 2151. These leases generally contain one or more of the following options, which the Company can exercise at the end of the initial lease term: (a) renewal of the lease for a defined number of years at the then-fair market rental rate or rate stipulated in the lease agreement; (b) purchase of the property at the then-fair market value; or (c) right of first refusal in the event of a third-party purchase offer. 48 The Company has agreements with vendors to receive funds for volume rebates and a variety of other programs. Volume rebates or other purchase discounts are evidenced by signed agreements that are reflected in the carrying value of the inventory when earned or as the Company progresses towards earning the rebate or discount, and as a component of merchandise costs as the merchandise is sold. Other vendor Description of Business .$ 2,003 $ 1,695 314 Accounts Payable The Company's banking system provides for the daily replenishment of major bank accounts as checks are presented. Included in accounts payable at the end of 2016 and 2015 are $619 and $538, respectively, representing the excess of outstanding checks over cash on deposit at the banks on which the checks were drawn. The Company accelerated vendor payments of approximately $1,700 in the last week of fiscal 2016 in advance of implementing its modernized accounting system at the beginning of fiscal 2017. Insurance/Self-Insurance Liabilities The Company uses a combination of insurance and self-insurance mechanisms, including for certain risks a wholly-owned captive insurance subsidiary and participation in a reinsurance program, to provide for potential liabilities for workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability, and employee health care benefits. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated, in part, by considering historical claims experience, demographic factors, severity factors, and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends. At the end of 2016 and 2015, these insurance liabilities were $1,021 and $993 in the aggregate, respectively, and were included in accrued salaries and benefits and other current liabilities in the consolidated balance sheets, classified based on their nature. 45 The Company's wholly-owned captive insurance subsidiary (the captive) receives direct premiums, which are netted against the Company's premium costs in selling, general and administrative expenses, in the consolidated statements of income. The captive participates in a reinsurance program that includes other third-party participants. The reinsurance agreement is one year in duration, and new agreements are entered into by each participant at their discretion at the commencement of the next calendar year. The participant agreements and practices of the reinsurance program limit any participating members' individual risk. Income statement adjustments related to the reinsurance program and related impacts to the consolidated balance sheets are recognized as information becomes known. In the event the Company leaves the reinsurance program, the Company is not relieved of its primary obligation to the policyholders for activity prior to the termination of the annual agreement. Other Current Liabilities Other current liabilities consist of the following at the end of 2016 and 2015: Accrued sales, income, and other taxes Insurance-related liabilities... Deferred sales. Cash card liability.. 185 Returns reserve Other current liabilities. Derivatives 2016 532 $ 490 401 396 365 299 254 201 137 124 Other.......... Note 1-Summary of Significant Accounting Policies (amounts in millions, except share, per share, and warehouse count data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1,434 (2,393) 2,406 Other investing activities, net 27 (20) Net cash used in investing activities (2,345) (2,480) (1,993) (3) (2,093) CASH FLOWS FROM FINANCING ACTIVITIES Change in bank checks outstanding 81 1,709 (2,649) (45) Repayments of short-term borrowings (106) (51) (103) Proceeds from short-term borrowings. 106 51 68 Proceeds from issuance of long-term debt 185 1,125 117 96 Repayments of long-term debt... Additions to property and equipment .... (2,503) (84) 17 (5) 22 269 (101) (63) Merchandise inventories (25) (890) (563) Accounts payable.. Maturities and sales of short-term investments..... (1,532) 529 Other operating assets and liabilities, net 547 557 699 Net cash provided by operating activities. 3,292 4,285 3,984 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of short-term investments... (1,432) (1,501) 880 (74) (1,288) Minimum tax withholdings on stock-based awards.. 1,094 CASH AND CASH EQUIVALENTS BEGINNING OF YEAR 4,801 5,738 4,644 CASH AND CASH EQUIVALENTS END OF YEAR.... $3,379 $5,738 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest (reduced by $19, $14, and $11, interest capitalized in 2016, 2015, and 2014, respectively) $123 (937) Income taxes, net..... $117 $1,186 $109 $869 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Property acquired under build-to-suit and capital leases.. $15 $109 60 $0 The accompanying notes are an integral part of these consolidated financial statements. 41 COSTCO WHOLESALE CORPORATION $953 (1) (1,422) (11) (220) (178) 0 (164) Excess tax benefits on stock-based awards. 74 86 84 Repurchases of common stock. (486) (481) (334) Cash dividend payments. Net change in cash and cash equivalents.... (746) (584) Other financing activities, net... (19) 35 34 Net cash used in financing activities (2,419) (2,324) (786) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS. 50 (418) (2,865) 2015 These amounts may differ from the stock repurchase balances in the accompanying consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of each fiscal year. (1.8) (281) 8,326 $ (4,147) 3,521 Weighted-Average Grant Date Fair Value 9,233 $ (in 000's) Number of Units Outstanding at the end of 2016 Forfeited. Vested and delivered.. Granted. 99.72 Outstanding at the end of 2015 7,878,000 time-based RSUs that vest upon continued employment over specified periods of time; 448,000 performance-based RSUs, of which 236,000 were granted to executive officers subject to the certification of the attainment of specified performance targets for 2016. This certification occurred in September 2016, at which time a portion vested as a result of the long service of all executive officers. The remaining awards vest upon continued employment over specified periods of time. • RSUS granted to employees and to non-employee directors generally vest over five years and three years, respectively. Additionally, the terms of the RSUs, including performance-based awards, provide for accelerated vesting for employees and non-employee directors who have attained 25 or more years and five or more years of service with the Company, respectively, and provide for vesting upon certain terminations of employment or service. Recipients are not entitled to vote or receive dividends on non-vested and undelivered shares. At the end of 2016, 15,068,000 shares were available to be granted as RSUs under the Seventh Plan. The following awards were outstanding at the end of 2016: Summary of Restricted Stock Unit Activity terminations of employment or service. Employees who attain certain years of service with the Company receive shares under accelerated vesting provisions on the annual vesting date rather than upon retirement. The Seventh Restated 2002 Stock Incentive Plan (Seventh Plan), amended in the second quarter of fiscal 2015, is the Company's only stock-based compensation plan with shares available for grant at the end of 2016. Each share issued in respect of stock awards is counted as 1.75 shares toward the limit of shares made available under the Seventh Plan. The Seventh Plan authorized the issuance of 23,500,000 shares (13,429,000 RSUs) of common stock for future grants in addition to the shares authorized under the previous plan. The Company issues new shares of common stock upon vesting of RSUs. Shares for vested RSUs are generally delivered to participants annually, net of shares equal to the minimum statutory withholding taxes. As required by the Company's Seventh Plan, in conjunction with the special cash dividend discussed in Note 6, adjustments were made to awards outstanding on the dividend record date to preserve their value following the dividend, as follows: (i) the number of shares subject to outstanding RSUs was increased; and (ii) the exercise prices of outstanding stock options were reduced and the number of shares subject to such options was increased. Approximately 410,000 stock options were adjusted, and approximately 8,956,000 RSUs were adjusted. These adjustments did not result in additional stock-based compensation expense, as the fair value of the outstanding awards did not change. As further required by the Seventh Plan, the maximum number of shares issuable under the Seventh Plan was proportionally adjusted, which resulted in an additional 750,000 RSU shares available to be granted. 55 55 The Company grants stock-based compensation to employees and non-employee directors. Beginning in 2009, RSU grants to all executive officers have been performance-based. Through a series of shareholder approvals, there have been amended and restated plans and new provisions implemented by the Company. RSUS held by employees and non-employee directors are subject to quarterly vesting upon certain Note 7-Stock-Based Compensation Plans 334 114.45 The following table summarizes RSU transactions during 2016: 2,915 153.46 115.69 2015 2016 Federal: ..$ 3,619 $ 3,604 $ 3,197 ..$ 2,622 $ 2,574 $ 2,145 997 1,030 1,052 The provisions for income taxes for 2016, 2015, and 2014 are as follows: Total. Foreign. Domestic (including Puerto Rico). 2014 2015 102.43 2016 2014 2015 2016 ..$ 459 $ 394 $ 327 (150) (131) (109) Income before income taxes comprised of the following: Note 8 Income Taxes Stock-based compensation expense, net of income taxes Stock-based compensation expense before income taxes Less recognized income tax benefit... The following table summarizes stock-based compensation expense and the related tax benefits under the Company's plans: 56 The weighted-average grant date fair value of RSUs granted was $153.46, $125.68, and $113.64 in 2016, 2015, and 2014, respectively. The remaining unrecognized compensation cost related to non-vested RSUs at the end of 2016 was $690 and the weighted-average period of time over which this cost will be recognized is 1.6 years. Included in the outstanding balance at the end of 2016 were approximately 2,602,000 RSUs vested but not yet delivered. 120.56 ..$ 309 $ 263 $ 218 494 142.87 3,456 200 $ Leases (1) Capital Operating Leases Dividends Note 6-Stockholders' Equity (3) Included in other liabilities in the accompanying consolidated balance sheets. (2) Included in other current liabilities in the accompanying consolidated balance sheets. (1) Includes build-to-suit lease obligations. Long-term capital lease obligations less current installments (3). Less current installments (2). 31 Net present value of minimum lease payments Total. Thereafter 2021 2020. 2019 2018 2017. At the end of 2016, future minimum payments, net of sub-lease income of $129 for all years combined, under non-cancelable operating leases with terms of at least one year and capital leases were as follows: 54 54 Gross assets recorded under capital and build-to-suit leases were $392 and $300 at the end of 2016 and 2015, respectively. These assets are recorded net of accumulated amortization of $63 and $42 at the end of 2016 and 2015, respectively. Less amount representing interest..... 195 31 184 477 149.90 $ Total Cost Average Price per Share (000's) 3,184 $ Shares Repurchased 2014 2016. 2015. The Company's stock repurchase program is conducted under a $4,000 authorization by the Board of Directors approved on April 17, 2015, which expires April 17, 2019. This authorization revoked previously authorized but unused amounts, totaling $2,528. As of the end of 2016, the remaining amount available for stock repurchases under the approved plan was $3,222. The following table summarizes the Company's stock repurchase activity: Stock Repurchase Programs The Company's current quarterly dividend rate is $0.45 per share. In February 2015, the Company paid a special cash dividend of $5.00 per share, totaling approximately $2,201. 364 (10) 374 (374) 748 3,120 $ 593 2,204 32 166 31 171 30 2014 Capital and Build-to-Suit Leases Current State: Accrued liabilities and reserves. Deferred income/membership fees.... Equity compensation... The components of the deferred tax assets (liabilities) are as follows: The Company's provision for income taxes for 2015 was favorably impacted by a $57 tax benefit in connection with the special cash dividend of $5.00 per share paid by the Company to employees, through shares owned in the Company's 401(k) Retirement Plan. Dividends paid on these shares are deductible for U.S. income tax purposes. There was no similar special cash dividend in 2016 and 2014. 57 34.7% 33.2% $ 1,109 34.3% $ 1,195 ..$ 1,243 Total Other (1) 0.6 1.2 39 (2.1) (77) (0.3) (11) (66) (0.5) (17) (2.7) (85) 20 (3.5) Property and equipment. Net deferred tax (liabilities)/assets... 59 58 The Company believes that its U.S. current and projected asset position is sufficient to meet its U.S. liquidity requirements and has no current plans to repatriate for use in the U.S. the cash and cash equivalents and short-term investments held by these non-U.S. subsidiaries whose earnings are considered indefinitely reinvested. The Company has not provided for U.S. deferred taxes on cumulative undistributed earnings of $3,280 and $2,845 at the end of 2016 and 2015, respectively, of certain non-U.S. consolidated subsidiaries because the subsidiaries have invested or will invest the undistributed earnings indefinitely, or the earnings, if repatriated would not result in an adverse tax consequence. Because of the availability of U.S. foreign tax credits and complexity of the computation, it is not practicable to determine the U.S. federal income tax liability that would be associated with such earnings if such earnings were not deemed to be indefinitely reinvested. During 2015, the Company repatriated a portion of the earnings in the Canadian operations that, in 2014, the Company determined were no longer considered indefinitely reinvested. In the fourth quarter of 2015, the Company changed its position regarding an additional portion of the undistributed earnings of the Canadian operations, which are no longer considered indefinitely reinvested. These earnings were distributed in 2016. Current exchange rates compared to historical rates when these earnings were generated resulted in an immaterial U.S. benefit, which was recorded at the end of 2015. Subsequent to the end of fiscal 2016, the Company determined that a portion of the undistributed earnings of its Canadian operations could be repatriated without adverse tax consequences. Accordingly, the Company no longer considers that portion to be indefinitely reinvested. The Company has not provided for U.S. deferred taxes on cumulative undistributed earnings of certain non- U.S. consolidated subsidiaries as such earnings are deemed by the Company to be indefinitely reinvested because its subsidiaries have invested or will invest the undistributed earnings indefinitely, or the earnings if repatriated would not result in an adverse tax consequence. Deferred taxes are recorded for earnings of foreign operations when it is determined that such earnings are no longer indefinitely reinvested. (1) Includes foreign tax credits of $78 and $33 for 2016 and 2015, respectively, which will expire beginning in 2025. The deferred tax accounts at the end of 2016 and 2015 include non-current deferred income tax assets of $202 and $219, respectively, included in other assets; and non-current deferred income tax liabilities of $297 and $51, respectively, included in other liabilities. 168 (95) $ .$ (200) Merchandise inventories.. (256) (779) 107 63 641 601 90 177 90 99 $ 2015 2016 (560) (0.6) (125) (21) Other... 129 (3) 21 107 131 108 591 754 701 (105) (12) 132 233 468 $ 766 $ $ Total provision for income taxes Total foreign... Deferred Current Total state Foreign: Deferred Current Total federal. 696 104 398 399 Employee stock ownership plan (ESOP). Foreign taxes, net.. 2.1 66 2.3 35.0% 35.0% $ 1,119 35.0% $ 1,262 2.5 85 91 State taxes, net. $ 1,267 Federal taxes at statutory rate. 2014 2015 2016 The reconciliation between the statutory tax rate and the effective rate for 2016, 2015, and 2014 is as follows: Tax benefits associated with the exercise of employee stock programs were allocated to equity attributable to Costco in the amount of $74, $86, and $84, in 2016, 2015, and 2014, respectively. ..$ 1,243 $ 1,195 $ 1,109 414 309 413 45 (90) 15 369 Deferred The aggregate rental expense for 2016, 2015, and 2014 was $250, $252, and $230, respectively. Sub-lease income and contingent rent was not material in 2016, 2015, and 2014, respectively. Summary of Stock-Based Compensation Note 5-Leases 1,618 4 $ 215 215 ..$ 1,614 $ 1,403 4 1,399 5 0 5 1,398 Gross unrealized gains and losses on available-for-sale securities were not material in 2016, 2015, and 2014. At the end of 2016, the Company had no available-for-sale securities in a continuous unrealized-loss position, and in 2015 and 2014, they were not material. There were no gross unrealized gains and losses on cash equivalents at the end of 2016, 2015, or 2014. 4 $ Recorded Basis Unrealized Gains, Net Cost Basis Total short-term investments.. Certificates of deposit Held-to-maturity: Total available-for-sale.... Asset and mortgage-backed securities. Government and agency securities. Available-for-sale: 2015: ..$ 1,394 $ 1,350 51 The proceeds from sales of available-for-sale securities were $291, $246, and $116 during 2016, 2015, and 2014, respectively. Gross realized gains or losses from sales of available-for-sale securities were not material in 2016, 2015, and 2014. 1,035 $ 1,029 $ ..$ 0 53 52 0 751 746 315 231 $ 555 $ Held-To-Maturity Fair Value Cost Basis Available-For-Sale Note 3-Fair Value Measurement Total. years Due after five Due after one year through five years. Due in one year or less. The maturities of available-for-sale and held-to-maturity securities at the end of 2016, were as follows: 231 6 $ ..$ 1,344 $ Total short-term investments.. In March 2016, the FASB issued new guidance on stock compensation, which is intended to simplify accounting for share-based payment transactions. The guidance will change several aspects of the accounting for share-based payment award transactions, including accounting for income taxes, forfeitures, and minimum statutory tax withholding requirements. The new standard is effective for fiscal years and interim periods within those years beginning after December 15, 2016, with early adoption permitted. The Company plans to adopt this guidance at the beginning of its first quarter of fiscal year 2018. In February 2016, the FASB issued new guidance on leases, which will require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms greater than twelve months. The standard is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. The Company plans to adopt this guidance at the beginning of its first quarter of fiscal year 2020. Companies can transition to the standard either retrospectively or as a cumulative effect adjustment as of the date of adoption. The new standard is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The Company plans to adopt this guidance at the beginning of its first quarter of fiscal year 2019. Operating Leases In May 2014, the FASB issued new guidance on the recognition of revenue from contracts with customers. The guidance converges the requirements for reporting revenue and requires disclosures sufficient to describe the nature, amount, timing, and uncertainty of revenue and cash flows arising from these contracts. Recent Accounting Pronouncements Not Yet Adopted In April 2014, the FASB issued guidance that changed the criteria for reporting discontinued operations, as well as requiring new disclosures regarding discontinued operations and disposals that do not qualify for discontinued operations reporting. This guidance became effective for fiscal years beginning after December 15, 2014. The Company adopted this guidance at the beginning of fiscal year 2016. Adoption did not have an impact on the Company's consolidated financial statements or disclosures. In April 2015, the FASB issued guidance to simplify the presentation of debt issuance costs by recording deferred debt issuance costs as a direct deduction from the carrying amount of the related debt liability. The guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. The Company elected to early adopt the guidance at the beginning of its first quarter of fiscal year 2016 on a retrospective basis. The Company reclassified deferred issuance costs from other assets to the respective debt liability. Adoption of this guidance and prior fiscal year reclassifications had an immaterial impact on previously reported consolidated financial statements and an immaterial impact on the total assets by segment as disclosed in Note 11. In November 2015, the Financial Accounting Standards Board (FASB) issued guidance on the presentation of deferred tax assets and liabilities by jurisdiction, along with any related valuation allowance. The guidance requires companies to classify all deferred tax assets and liabilities as non-current on the balance sheet on either a prospective or retrospective basis. The guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016, with early adoption permitted. The Company elected to early adopt the guidance at the beginning of the second quarter of fiscal year 2016 on a retrospective basis and reclassified deferred tax assets and liabilities from current to non-current. The reclassifications reduced other current assets and other liabilities by $520 and $410, respectively, increased other assets by $109, and had an immaterial impact on other current liabilities in the accompanying consolidated balance sheet for the fiscal year ended August 30, 2015. Adoption of this guidance also had an immaterial impact on the total assets by segment as disclosed in Note 11. Recently Adopted Accounting Pronouncements Repurchased shares of common stock are retired, in accordance with the Washington Business Corporation Act. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is deducted by allocation to additional paid-in capital and retained earnings. The amount allocated to additional paid-in capital is the current value of additional paid-in capital per share outstanding and is applied to the number of shares repurchased. Any remaining amount is allocated to retained earnings. See Note 6 for additional information. The Company is evaluating the impact of these standards on its consolidated financial statements and disclosures. The computation of basic net income per share uses the weighted average number of shares that were outstanding during the period. The computation of diluted net income per share uses the weighted average number of shares in the basic net income per share calculation plus the number of common shares that would be issued assuming vesting of all potentially dilutive common shares outstanding using the treasury stock method for shares subject to RSUs and the "if converted" method for the convertible note securities. Stock Repurchase Programs indefinitely reinvested as of August 28, 2016. These earnings would be subject to U.S. income tax if we changed our position and could result in a U.S. tax liability. Although the Company has historically asserted that certain non-U.S. undistributed earnings will be permanently reinvested, it may repatriate such earnings to the extent it can do so without an adverse tax consequence. See Note 8 for additional information. 49 49 The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credits and loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts that are more likely than not expected to be realized. The determination of the Company's provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits of uncertain tax positions are recorded in the Company's consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from tax authorities. When facts and circumstances change, the Company reassesses these probabilities and records any changes in the consolidated financial statements as appropriate. Additionally, certain of the Company's cumulative foreign undistributed earnings were considered Income Taxes Preopening expenses related to new warehouses, new regional offices and other startup operations are expensed as incurred. Preopening Expenses The Company's asset retirement obligations (ARO) are primarily related to leasehold improvements that at the end of a lease must be removed in order to comply with the lease agreement. These obligations are recorded as a liability with an offsetting asset at the inception of the lease term based upon the estimated fair value of the costs to remove the leasehold improvements. These liabilities are accreted over time to the projected future value of the obligation using the Company's incremental borrowing rate. The ARO assets are depreciated using the same depreciation method as the respective leasehold improvement assets and are included with buildings and improvements. Estimated ARO liabilities associated with these leases amounted to $64 and $54 at the end of 2016 and 2015, respectively, and are included in other liabilities in the accompanying consolidated balance sheets. The Company records an asset and related financing obligation for the estimated construction costs under build-to-suit lease arrangements where it is considered the owner for accounting purposes, to the extent the Company is involved in the construction of the building or structural improvements or has construction risk prior to commencement of a lease. Upon occupancy, the Company assesses whether these arrangements qualify for sales recognition under the sale-leaseback accounting guidance. If the Company continues to be the deemed owner, it accounts for the arrangement as a financing lease. The Company has capital leases for certain warehouse locations, expiring at various dates through 2054. Capital lease assets are included in land and buildings and improvements in the accompanying consolidated balance sheets. Amortization expense on capital lease assets is recorded as depreciation expense and is predominately included in selling, general and administrative expenses. Capital lease liabilities are recorded at the lesser of the estimated fair market value of the leased property or the net present value of the aggregate future minimum lease payments and are included in other current liabilities and other liabilities in the accompanying consolidated balance sheets. Interest on these obligations is included in interest expense in the consolidated statements of income. The Company accounts for its lease expense with free rent periods and step-rent provisions on a straight-line basis over the original term of the lease and any extension options that the Company more likely than not expects to exercise, from the date the Company has control of the property. Certain leases provide for periodic rental increases based on price indices, or the greater of minimum guaranteed amounts or sales volume. Net Income per Common Share Attributable to Costco Note 2-Investments The Company's investments at the end of 2016 and 2015 were as follows: 2016: 315 315 9 9 306 306 1,035 6 1,029 1 0 1 1,034 6 $ ..$ 1,028 $ Recorded Basis Unrealized Gains, Net Cost Basis Total held-to-maturity Bankers' acceptances.. Certificates of deposit Held-to-maturity: Asset and mortgage-backed securities. Total available-for-sale. Government and agency securities Available-for-sale: 315 Assets and Liabilities Measured at Fair Value on a Recurring Basis 50 2016: Other long-term debt. 484 496 512 497 2.25% Senior Notes due February 2022. 494 497 508 498 1.75% Senior Notes due February 2020. 771 1,186 1,219 1,196 1,097 1,098 1,103 1,099 1,099 1,171 1,100 1,129 1,200 $ 1,201 0 $ 0 $ 0.65% Senior Notes due December 2015 5.5% Senior Notes due March 2017. 1.125% Senior Notes due December 2017. 1.7% Senior Notes due December 2019 1,195 Value 803 555 The tables below present information at the end of 2016 and 2015, respectively, regarding the Company's financial assets and financial liabilities that are measured at fair value on a recurring basis and indicate the level within the fair value hierarchy reflecting the valuation techniques utilized to determine such fair value. Total. Thereafter $ 5,171 978 100 1,698 100 ..$ 1,100 1,195 2021 2020. 550 2018. Maturities of long-term debt during the next five fiscal years and thereafter, excluding deferred issuance costs, are as follows: ..$ 4,061 $ 4,144 $ 4,852 $ 4,904 Long-term debt, excluding current portion......... 1,283 1,284 1,100 1,130 Less current portion. 6,188 6,135 5,274 5,161 Total long-term debt. 2017. Fair 2019. Fair Value 306 $ 0 .$ Level 2 Level 1 $ 222 $1,033 (13) 0 11 0 1 1,034 0 0 222 $ .$ Level 2 Level 1 Total. Investment in government and agency securities Investment in asset and mortgage-backed securities. Forward foreign-exchange contracts, in asset position (2) Forward foreign-exchange contracts, in (liability) position Money market mutual funds (1) Investment in government and agency securities Investment in asset and mortgage-backed securities. Forward foreign-exchange contracts, in asset position (2) Forward foreign-exchange contracts, in (liability) position Total... Money market mutual funds (1) Carrying Value 2015: 0 1,398 (2) 16 2015 5 Carrying Value 2016 The estimated fair value of the Company's debt was based primarily on reported market values, recently completed market transactions, and estimates based upon interest rates, maturities, and credit. The carrying value and estimated fair value at the end of 2016 and 2015 consisted of the following: the Company's Japanese subsidiary issued approximately $103 of 0.63% Guaranteed Senior Notes through a private placement. Interest is payable semi-annually, and principal is due in March 2026. Additionally in June 2016, the Company's Japanese subsidiary issued approximately $93 of zero percent Guaranteed Senior Notes through a private placement. Interest is payable semi-annually, and principal is due in June 2021. Both notes are included in other long-term debt in the table below. Other long-term debt consisted primarily of promissory notes and term loans issued by the Company's Japanese subsidiary. These notes and term loans are valued primarily using Level 3 inputs. In March 2016, In February 2007, the Company issued $1,100 of 5.5% Senior Notes due March 15, 2017 (2007 Senior Note). Interest is payable semi-annually. The Company, at its option, may redeem the 2007 Senior Note at any time, in whole or in part, at a redemption price plus accrued interest. The redemption price is equal to the greater of 100% of the principal amount of the 2007 Senior Note to be redeemed or the sum of the present value of the remaining scheduled payments of principal and interest to maturity. Additionally, the Company will be required to make an offer to purchase the 2007 Senior Note at a price of 101% of the principal amount plus accrued and unpaid interest to the date of repurchase, upon certain events as defined by the terms of the 2007 Senior Note. The discount and issuance costs associated with the 2007 Senior Note are being amortized to interest expense over the term of the note. This note is valued using Level 2 inputs. On February 17, 2015, the Company issued $1,000 in aggregate principal amount of Senior Notes (February 2015 Notes), as follows: $500 of 1.75% Senior Notes due February 15, 2020; and $500 of 2.25% Senior Notes due February 15, 2022. Interest is due semi-annually on February 15 and August 15; the first payment was made on August 15, 2015. The Company, at its option, may redeem the February 2015 Notes at any time, in whole or in part, at the redemption price plus accrued and unpaid interest to the date of redemption. The redemption price is equal to the greater of 100% of the principal amount of the notes to be redeemed or the sum of the present value of the remaining scheduled payments of principal and interest to maturity. The Company will be required to offer to purchase the February 2015 Notes, at a price of 101% of the principal amount plus accrued and unpaid interest to the date of repurchase, upon certain events as defined by the terms of the February 2015 Notes. The discount and issuance costs associated with the February 2015 Notes are being amortized to interest expense over the term of the notes, which are valued using Level 2 inputs. In December 2012, the Company issued $3,500 in aggregate principal amount of Senior Notes (December 2012 Notes) as follows: $1,200 of 0.65% Senior Notes due December 7, 2015; $1,100 of 1.125% Senior Notes due December 15, 2017; and $1,200 of 1.7% Senior Notes due December 15, 2019. Interest is payable semi-annually. The Company, at its option, may redeem the December 2012 Notes at any time, in whole or in part, at a redemption price plus accrued interest. The redemption price is equal to the greater of 100% of the principal amount of the December 2012 Notes to be redeemed or the sum of the present value of the remaining scheduled payments of principal and interest to maturity. Additionally, the Company will be required to make an offer to purchase the December 2012 Notes at a price of 101% of the principal amount plus accrued and unpaid interest to the date of repurchase, upon certain events as defined by the terms of the December 2012 Notes. The discount and issuance costs associated with the December 2012 Notes are being amortized to interest expense over the terms of the notes. In December 2015, the Company paid the outstanding principal balance and interest on the 0.65% Senior Notes with existing sources of cash and cash equivalents and short term investments. The remaining December 2012 Notes are valued using Level 2 inputs. In 2016, the average and maximum short term borrowings in Japan were $99 and $110, respectively, and had a weighted average interest rate of 0.52% during the year. All other short term borrowings during the year were immaterial. In 2015, the average and maximum short term borrowings were immaterial. Long-Term Debt The Company enters into various short-term bank credit facilities, totaling $429 and $407 in 2016 and 2015, respectively. At the end of 2016 and 2015, there were no outstanding borrowings under these credit facilities. Short-Term Borrowings 53 Nonfinancial assets measured at fair value on a nonrecurring basis include items such as long-lived assets that are measured at fair value resulting from an impairment, if deemed necessary. There were no fair value adjustments to nonfinancial assets during 2016 and these adjustments were immaterial during 2015. 0 (4) Note 4-Debt 306 $ 1,415 (1) Included in cash and cash equivalents in the accompanying consolidated balance sheets. (2) The asset and the liability values are included in other current assets and other current liabilities, respectively, in the accompanying consolidated balance sheets. See Note 1 for additional information on derivative instruments. During and at the end of both 2016 and 2015, the Company did not hold any Level 3 financial assets and liabilities that were measured at fair value on a recurring basis. There were no transfers in or out of Level 1 or 2 during 2016 and 2015. .$ Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis Financial assets measured at fair value on a nonrecurring basis include held-to-maturity investments that are carried at amortized cost and are not remeasured to fair value on a recurring basis. There were no fair value adjustments to these financial assets during 2016 and 2015. See Note 4 for discussion on the fair value of long-term debt. 52 59 84,351 $ 1,381 17,341 $ 14,507 $ 116,199 2,308 771 545 3,624 119 10,815 160 1,127 1,574 148 671 2,393 3,205 848 $ 1,823 7,172 86,579 $ 17,028 $ 15,112 $ 118,719 15,401 2,326 778 568 3,672 946 109 33,163 200 299 527 2,649 11,745 1,628 3,670 17,043 22,511 3,480 1,255 22,988 4,889 6,421 6,187 32,662 The following table summarizes the percentage of net sales by merchandise category: Foods Sundries. Hardlines. Fresh Foods. Softlines.. Other 62 62 2016 2015 2014 22% 22% 22% 21% 21% 21% 16% 16% 16% 14% 14% 13% 12% 11% 11% 15% 16% 17% Note 12-Quarterly Financial Data (Unaudited) $ The two tables that follow reflect the unaudited quarterly results of operations for 2016 and 2015. 21,586 3,608 14,830 1,662 33,017 $ 80,477 $ 17,943 $ 14,220 $ 112,640 1,880 796 544 3,220 755 124 150 1,029 1,245 204 544 1,993 10,132 3,036 Total 2015 Canadian Operations (2) .$ 52 $ 158 The gross unrecognized tax benefit includes tax positions for which the ultimate deductibility is highly certain but there is uncertainty about the timing of such deductibility. At the end of 2016 and 2015, these amounts were immaterial and $50, respectively. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of these tax positions would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. At the end of 2015, the Company recorded an offsetting long-term asset of $48. There was no offsetting long-term asset at the end of 2016. The total amount of such unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods is $46 and $98 at the end of 2016 and 2015, respectively. Accrued interest and penalties related to income tax matters are classified as a component of income tax expense. Interest and penalties recognized by the Company were not material in 2016 and 2015. Accrued interest and penalties were not material at the end of 2016 and 2015. The Company is currently under audit by several taxing jurisdictions in the United States and in several foreign countries. Some audits may conclude in the next 12 months and the unrecognized tax benefits we have recorded in relation to the audits may differ from actual settlement amounts. It is not practical to estimate the effect, if any, of any amount of such change during the next 12 months to previously recorded uncertain tax positions in connection with the audits. The Company does not anticipate that there will be a material increase or decrease in the total amount of unrecognized tax benefits in the next 12 months. The Company files income tax returns in the United States, various state and local jurisdictions, in Canada and in several other foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local examination for years before fiscal 2013. The Company is currently subject to examination in Canada for fiscal years 2012 to present and in California for fiscal years 2007 to present. No other examinations are believed to be material. 59 59 Note 9-Net Income per Common and Common Equivalent Share The following table shows the amounts used in computing net income per share and the effect on net income and the weighted average number of shares of potentially dilutive common shares outstanding (shares in 000's): 2016 2014 Net income available to common stockholders after assumed conversions of dilutive securities Weighted average number of common shares used in basic net income per common share RSUs Conversion of convertible notes Weighted average number of common shares and dilutive potential of common stock used in diluted net income per share. (37) Note 10 Commitments and Contingencies (3) (1) 52 Weeks Ended August 28, 2016 A copy of Costco's annual report to the Securities and Exchange Commission on Form 10-K and quarterly reports on Form 10-Q will be provided to any shareholder upon written request directed to Investor Relations, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, Washington 98027. Internet users can access recent sales and earnings releases, the annual report and SEC filings, as well as our Costco Online web site, at http://www.costco.com. E-mail users may direct their investor relations questions to investor@costco.com. All of the Company's filings with the SEC may be obtained at the SEC's Public Reference Room at Room 1580, 100 F Street NE, Washington, DC 20549. For information regarding the operation of the SEC's Public Reference Room, please contact the SEC at 1-800-SEC-0330. Additionally, the SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2016 and 2015 is as follows: Gross unrecognized tax benefit at beginning of year. Gross increases-current year tax positions.... Gross increases-tax positions in prior years.. Gross decreases-tax positions in prior years Settlements......... Lapse of statute of limitations Gross unrecognized tax benefit at end of year. 2016 2015 158 $ 75 2 26 1 63 (47) (25) Other International Operations Legal Proceedings 438,585 2,668 Depreciation and amortization.. Additions to property and equipment.. Net property and equipment.. Total assets...... 2015 Total revenue. Operating income Depreciation and amortization.. Additions to property and equipment.... Net property and equipment. Total assets.. 2014 Total revenue... Operating income Depreciation and amortization. Additions to property and equipment.. Net property and equipment.. Total assets..... United States Operations Operating income .$ 2,350 $ 2,377 $ 2,058 Total revenue. The Company and its subsidiaries are principally engaged in the operation of membership warehouses in the U.S., Canada, Mexico, U.K., Japan, Australia, and Spain and through majority-owned subsidiaries in Taiwan and Korea. The Company's reportable segments are largely based on management's organization of the operating segments for operational decisions and assessments of financial performance, which considers geographic locations. The material accounting policies of the segments are the same as described in Note 1. All material inter-segment net sales and expenses have been eliminated in computing total revenue and operating income. Certain operating expenses, predominantly stock-based compensation, are incurred on behalf of the Company's Canadian and Other International operations, but are included in the U.S. operations because those costs are not allocated internally and generally come under the responsibility of the Company's U.S. management team. 439,455 438,693 3,249 10 12 3,771 21 441,263 442,716 442,485 The Company is involved in a number of claims, proceedings and litigation arising from its business and property ownership. In accordance with applicable accounting guidance, the Company establishes an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. There may be exposure to loss in excess of any amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss (taking into account where applicable indemnification arrangements concerning suppliers and insurers) and the accrued amount, if any, thereof, and adjusts the amount as appropriate. As of the date of this Report, the Company has recorded an immaterial accrual with respect to two matters described below. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. In each case, there is a reasonable possibility that a loss may be incurred, including a loss in excess of the applicable accrual. For matters where no accrual has been recorded, the possible loss or range of loss (including any loss in excess of the accrual) cannot in our view be reasonably estimated because, among other things: (i) the remedies or penalties sought are indeterminate or unspecified; (ii) the legal and/or factual theories are not well developed; and/or (iii) the matters involve complex or novel legal theories or a large number of parties. The Company is a defendant in the following matters, among others: Numerous putative class actions have been brought around the United States against motor fuel retailers, including the Company, alleging that they have been overcharging consumers by selling gasoline or diesel that is warmer than 60 degrees without adjusting the volume sold to compensate for heat-related expansion or disclosing the effect of such expansion on the energy equivalent received by the consumer. The Company is named in the following actions: Raphael Sagalyn, et al., v. Chevron USA, Inc., et al., Case No. 07-430 (D. Md.); Phyllis Lerner, et al., v. Costco Wholesale Corporation, et al., Case No. 07-1216 (C.D. Cal.); Linda A. Williams, et al., v. BP Corporation North America, Inc., et al., Case No. 07-179 (M.D. Ala.); James Graham, et al. v. Chevron USA, Inc., et al., Civil Action No. 07-193 (E.D. Va.); Betty A. Delgado, et al., v. Allsups, Convenience Stores, Inc., et al., Case No. 07-202 (D.N.M.); Gary Kohut, et al. v. Chevron USA, Inc., et al., Case No. 07-285 (D. Nev.); Mark Rushing, et al., v. Alon USA, Inc., et al., Case No. 06-7621 (N.D. Cal.); James Vanderbilt, et al., v. BP Corporation North America, Inc., et al., Case No. 06-1052 (W.D. Mo.); Zachary Wilson, et al., v. Ampride, Inc., et al., Case No. 06-2582 (D. Kan.); Diane Foster, et al., v. BP North America Petroleum, Inc., et al., Case No. 07-02059 (W.D. Tenn.); Mara Redstone, et al., v. Chevron USA, Inc., et al., Case No. 07-20751 (S.D. Fla.); Fred Aguirre, et al. v. BP West Coast Products LLC, et al., Case No. 07-1534 60 60 (N.D. Cal.); J.C. Wash, et al., v. Chevron USA, Inc., et al.; Case No. 4:07cv37 (E.D. Mo.); Jonathan Charles Conlin, et al., v. Chevron USA, Inc., et al.; Case No. 07 0317 (M.D. Tenn.); William Barker, et al. v. Chevron USA, Inc., et al.; Case No. 07-cv-00293 (D.N.M.); Melissa J. Couch, et al. v. BP Products North America, Inc., et al., Case No. 07cv291 (E.D. Tex.); S. Garrett Cook, Jr., et al., v. Hess Corporation, et al., Case No. 07cv750 (M.D. Ala.); Jeff Jenkins, et al. v. Amoco Oil Company, et al., Case No. 07-cv-00661 (D. Utah); and Mark Wyatt, et al., v. B. P. America Corp., et al., Case No. 07-1754 (S.D. Cal.). On June 18, 2007, the Judicial Panel on Multidistrict Litigation assigned the action, entitled In re Motor Fuel Temperature Sales Practices Litigation, MDL Docket No 1840, to Judge Kathryn Vratil in the United States District Court for the District of Kansas. On April 12, 2009, the Company agreed to settle the actions in which it is named as a defendant. Under the settlement, which was subject to final approval by the court, the Company agreed, to the extent allowed by law and subject to other terms and conditions in the agreement, to install over five years from the effective date of the settlement temperature-correcting dispensers in the States of Alabama, Arizona, California, Florida, Georgia, Kentucky, Nevada, New Mexico, North Carolina, South Carolina, Tennessee, Texas, Utah, and Virginia. Other than payments to class representatives, the settlement does not provide for cash payments to class members. On September 22, 2011, the court preliminarily approved a revised settlement, which did not materially alter the terms. On April 24, 2012, the court granted final approval of the revised settlement. A class member who objected has filed a notice of appeal from the order approving the settlement. Plaintiffs have moved for an award of $10 in attorneys' fees, as well as an award of costs and payments to class representatives. A report and recommendation has been issued in favor of a fee award of $3.8, to which the Company is objecting. On August 24, 2016, the district court affirmed the report and recommendation. On March 20, 2014, the Company filed a notice invoking a "most favored nation" provision under the settlement, under which it seeks to adopt provisions in later settlements with certain other defendants. The motion was denied on January 23, 2015. Final judgment was entered on September 22, 2015, and the Company has filed a notice of appeal. The Company received notices from most states stating that they have appointed an agent to conduct an examination of the books and records of the Company to determine whether it has complied with state unclaimed property laws. In addition to seeking the turnover of unclaimed property subject to escheat laws, the states may seek interest, penalties, costs of examinations, and other relief. Certain states have separately also made requests for payment by the Company concerning a specific type of property, some of which have been paid in immaterial amounts. The Company has received from the Drug Enforcement Administration subpoenas and administrative inspection warrants concerning the Company's fulfillment of prescriptions related to controlled substances and related practices. Offices of the United States Attorney in various districts have communicated to the Company their belief that the Company has committed civil regulatory violations concerning these subjects. The Company is seeking to cooperate with these processes and is holding discussions concerning a potential resolution. The Company does not believe that any pending claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company's financial position; however, it is possible that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be material to the results of an individual fiscal quarter. 119 61 Note 11-Segment Reporting 2016 First Quarter (12 Weeks) NORTHERN DIVISION Northwest Region 1045 Lake Drive Issaquah, WA 98027 Third Quarter (12 Weeks) Mike Cho Country Manager - Korea Jeffrey M. Cole Gasoline, Car Wash & Mini-labs Julie L. Cruz Operations - Southeast Region Wendy Davis Operations Midwest Region Russ Decaire GMM - Foods & Sundries - Northwest Region Gino Dorico Operations - Eastern Canada Region Heather Downie Operations - Western Canada Region Debbie Ells GMM - Softlines - Canadian Division Liz Elsner Operations Texas Region Michael G. Casebier GMM Foods - San Diego Region Deborah Calhoun GMM - Corporate Non-Foods James J. Andruski GMM - Foods & Sundries - Western Canada Region Marc-André Bally GMM - Business Centers - Canadian Division International Ecommerce Tiffany Barbre - Operations San Diego Region Christopher Bolves Operations - Northwest Region Timothy Bowersock Information Systems Kimberly F. Brown Operations - Texas Region Financial Accounting Controller Bryan Blank Frank Farcone - Operations Los Angeles Region Timothy K. Farmer GMM- Non-Foods - Canadian Division Peter Gruening Costco Travel Doris Harley GMM - Foods - Southeast Region Eric Harris Warehouse Operations & Facilities Jim Harrison Transportation David Harruff Martin Groleau Operations Northwest Region Information Systems James Hayes Operations Northwest Region - Graham E. Hillier GMM-Ecommerce - Canadian Division Scott Howe Timothy Haser Claudine Adamo GMM - Corporate Foods Operations Bay Area Region GMM-Corporate Non-Foods Christopher E. Fleming Operations - Western Canada Region Murray T. Fleming GMM-Hardlines - Canadian Division Anthony Fontana Operations - Northeast Region Thomas J. Fox Nancy Griese GMM-Bakery & Food Court Real Estate Development - West Lorelle S. Gilpin Marketing Canadian Division ― Joseph Grachek III Merchandise Accounting Controller Darby Greek Jack S. Frank Internal Audit VICE PRESIDENTS Executive Vice President, COO - Southwest Division & Mexico Senior Vice President, General Manager - Los Angeles Region John B. Gaherty Senior Vice President, General Manager - Midwest Region Richard A. Galanti Executive Vice President, Chief Financial Officer Jaime Gonzalez Senior Vice President, General Manager - Mexico William Hanson Senior Vice President, Merchandising - Foods & Sundries Daniel M. Hines Senior Vice President, Corporate Controller W. Craig Jelinek President and Chief Executive Officer James Klauer Senior Vice President, Merchandising - Non-Foods & Ecommerce Paul W. Latham Senior Vice President, Membership, Marketing, Franz E. Lazarus Caton Frates Senior Vice President, Merchandising - Non-Foods & Ecommerce Richard Delie Senior Vice President, Pharmacy Andree T. Brien Senior Vice President, National Merchandising - Canadian Division Jeffrey H. Brotman Chairman of the Board Donald E. Burdick Senior Vice President, Ecommerce and Travel Services & Publishing Patrick J. Callans Risk Management Richard Chang Senior Vice President, General Manager - Asia Richard C. Chavez Senior Vice President, Costco Wholesale Industries & Business Development Victor A. Curtis Senior Vice President, Human Resources and Executive Vice President, Administration Jeffrey R. Long Senior Vice President, General Manager - Northeast Region Manufacturing & Business Centers Yoram B. Rubanenko Senior Vice President, General Manager - Southeast Region James W. Rutherford Senior Vice President, Information Systems John Sullivan Senior Vice President, General Counsel & Executive Vice President, Ancillary Businesses, Chief Compliance Officer Senior Vice President, Depots & Traffic Ron M. Vachris Executive Vice President, COO - Merchandising Richard L. Webb Senior Vice President, General Manager - Texas Region Richard Wilcox Senior Vice President, General Manager - San Diego Region Dennis R. Zook John D. Thelan 65 Timothy L. Rose Pierre Riel Jeffrey B. Lyons Senior Vice President, Merchandising - Fresh Foods John D. McKay Executive Vice President, COO - Northern Division David Messner Senior Vice President, Real Estate Development Russ D. Miller Senior Vice President, General Manager - Western Canada Region Ali Moayeri Senior Vice President, Construction Senior Vice President, General Manager - Eastern Canada Region Paul G. Moulton Executive Vice President, COO - International Division Mario Omoss Senior Vice President, General Manager - Northwest Region Stephen M. Pappas Senior Vice President, General Manager - Europe David S. Petterson Senior Vice President, Accounting Joseph P. Portera Executive Vice President, COO - Eastern & Canadian Divisions and Chief Diversity Officer Executive Vice President, Chief Information Officer James P. Murphy Bay Area Region Mitzi Hu Ross A. Hunt Costco Shareholder Relations Computershare Transfer Agent 1918 Eighth Avenue, Suite 2900 Seattle, WA 98101 Independent Public Accountants KPMG LLP Bellevue, Washington 98004 11100 NE 6th Street Thursday, January 26, 2017 at 4:00 PM Meydenbauer Center Annual Meeting La Herradura 52760 Huixquilucan, Mexico Col. San Fernando Boulevard Magnocentro #4 Mexico Region Polígono Empresarial Los Gavilanes 28906 Getafe, Madrid, Spain Calle Agustín de Betancourt, 17 P. O. Box 30170 College Station, TX 77842-3170 Telephone: (800) 249-8982 TDD for Hearing Impaired: (800) 490-1493 66 ADDITIONAL INFORMATION FSC® C132107 responsible sources Paper from MIX www.fsc.org Spain Region FSC COSTCO 67 Stock Symbol: COST The NASDAQ Global Select Market Stock Exchange Listing Website: https://www.computershare.com/investor Outside U.S.: (201) 680-6578 WHOLESALE 91190 Saint-Aubin, France Parc des Algorithmes Route de l'Orme des Merisiers Immeuble le Thalés Division and Region Offices (425) 313-8100 999 Lake Drive Issaquah, WA 98027 Corporate Office 1701 Dallas Parkway, Suite 201 Plano, TX 75093 Texas Region San Diego, CA 92117 EASTERN DIVISION Northeast Region 4649 Morena Blvd. 11000 Garden Grove Blvd., #201 Garden Grove, CA 92843 Los Angeles Region SOUTHWEST DIVISION 1901 West 22nd Street, 2nd Floor Oak Brook, IL 60523 Midwest Region 2820 Independence Drive Livermore, CA 94551 Bay Area Region San Diego Region GMM - Fresh Foods - Asia/Australia 45940 Horseshoe Drive, Suite 150 Sterling, VA 20166 3980 Venture Drive NW, #W100 Duluth, GA 30096 France Region 17-21 Parramatta Rd. Lidcombe, NSW, 2141, Australia Australia Region 255 Min Shan Street Neihu, Taipei 114, Taiwan Taiwan Region Gyeonggi-do, 14347, Korea Gwangmyeong-si Southeast Region Korea Region 40, Iljik-ro Japan Region INTERNATIONAL DIVISION United Kingdom Region 213 Hartspring Lane Watford, England WD25 8JS 4500 Still Creek Drive, Unit A Burnaby, BC V5C 0E5, Canada Western Region 415 West Hunt Club Road Ottawa, ON K2E 1C5, Canada Eastern Region CANADIAN DIVISION 3-1-4 Ikegami-Shincho Kawasaki-ku Kawasaki-shi Kanagawa, 210-0832 Japan GMM - Imports Earl Wiramanaden - - Country Manager - Australia Frank Padilla GMM-Corporate Produce & Fresh Meat Daniel Parent Operations - Eastern Canada Region Shawn Parks Operations - Los Angeles Region Michael Parrott GMM- Corporate Non-Foods Steven D. Powers Operations - Southeast Region Paul Pulver Operations - Northeast Region Giro Rizzuti GMM - Non-Foods - Canadian Division Aldyn J. Royes Operations - Southeast Region Chris Rylance Information Systems GMM Foods & Sundries, Quality Assurance, Food Safety & Business Delivery Canadian Division Patrick J. Noone Pietro Nenci Investor Relations Treasury, Financial Planning & Human Resources, Finance & IS - Canadian Division Jeff Ishida Real Estate - Eastern Division Arthur D. Jackson, Jr. Administration & Community Giving Gary Kotzen GMM Global Sourcing William Koza Drew Sakuma Operations - Midwest Region Robert Leuck GMM - Merchandising – Mexico Mark Maushund Operations - Los Angeles Region Susan McConnaha Operations Bakery & Food Court Daniel McMurray Operations - Midwest Region Tim Murphy GMM-Foods - Bay Area Region Robert Murvin GMM Foods - Texas Region Robert E. Nelson Operations - Northeast Region Steve Mantanona Operations Bay Area Region Debbie Sarter Operations - Los Angeles Region Operations Midwest Region Yves Thomas GMM-Optical, Optical Labs, Mini-labs & Gasoline - Canadian Division Keith H. Thompson Construction Todd Thull Construction Adrian Thummler Operations Mexico Diane Tucci - Second Quarter (12 Weeks) Sr. GMM-Non-Foods - Canadian Division Sarah Wehling GMM - Food & Sundries - Los Angeles Region Jack Weisbly GMM Corporate Non-Foods Shannon West GMM Corporate Non-Foods Craig Wilson Food Safety & Quality Assurance Charlie A. Winters Azmina K. Virani Operations Fresh Meat, Produce & Service Deli Country Manager - Japan Brian Thomas Country Manager - France Mauricio Talayero Adam Self Operations Northeast Region Janet Shanks GMM-Fresh Foods - Canadian Division Geoff Shavey GMM Corporate Non-Foods Louie Silveira Chief Financial Officer - Mexico Ken J. Theriault Manager Taiwan Operations - Eastern Canada Region Monica Smith Corporate Tax and Customs Compliance James Stafford GMM - Foods - Northeast Region Richard Stephens Operations Pharmacy Kimberley L. Suchomel GMM - International Steve Supkoff Operations Ecommerce Gary Swindells David L. Skinner Senior Vice President, General Manager - Country Manager - Spain * 2016 Committee Chair $ 1.10 Diluted $ 1.09 SA | SA $ 1.24 $ 69 | 69 $ 1.24 1.24 $ 1.24 SA SA $ 1.78 $ 5.36 Basic............ COSTCO: SHARE ATTRIBUTABLE TO NET INCOME PER COMMON Net income attributable to noncontrolling interests. (7) (9) (4) (6) NET INCOME ATTRIBUTABLE $ 1.77 $ TO COSTCO.. 480 $ 546 $ 545 $ 779 $ 2,350 $ 5.33 Shares used in calculation (000's) Basic... Second Quarter (12 Weeks) Third Quarter (12 Weeks) Fourth Quarter (16 Weeks) Total (52 Weeks) REVENUE Net sales.... $ 26,284 $ 26,872 First Quarter (12 Weeks) $ 25,517 $ 113,666 Membership fees. 582 582 584 785 2,533 $ 34,993 2,376 52 Weeks Ended August 30, 2015 83 438,342 Diluted 441,386 439,648 441,559 438,815 441,066 437,809 440,868 438,585 441,263 Note 12-Quarterly Financial Data (Unaudited) (Continued) CASH DIVIDENDS DECLARED $ 0.40 $ 0.40 $ 0.45 $ 0.45 $ 1.70 63 PER COMMON SHARE Total revenue. 785 555 OPERATING EXPENSES Merchandise costs 23,621 24,469 23,162 31,649 102,901 Selling, general and administrative 2,806 2,835 2,731 3,696 12,068 Preopening expenses.. 118,719 36,560 26,769 28,170 EXECUTIVE AND SENIOR OFFICERS Total (52 Weeks) REVENUE Net sales. $ 26,627 $ 27,567 $ 26,151 $ 35,728 26 $ 116,073 593 603 618 832 2,646 Total revenue. 27,220 Membership fees. 10 18 24 INCOME BEFORE INCOME TAXES 762 841 835 1,181 3,619 80 Provision for income taxes. 286 286 396 1,243 Net income including noncontrolling interests. 487 275 549 29 16 78 Operating income. 767 856 858 1,191 3,672 7 OTHER INCOME (EXPENSE) (33) (31) (30) (39) (133) Interest income and other, net.. 28 Interest expense. 26,866 (26) 26,101 5.37 Shares used in calculation (000's) Basic. 438,760 Diluted 442,210 440,384 442,896 1.73 $ 440,070 443,132 439,455 442,716 CASH DIVIDENDS DECLARED PER COMMON SHARE 0.355 5.355 (2) $ 0.40 $ 0.40 438,835 442,404 $ $ 1.35 $ 2,377 NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO: Basic........... .$ 1.13 $ 1.17 EA 1.17 $ 1.75 $ 5.41 Diluted $ 1.12 $ 1.36 $ 767 $ 6.51 (2) Includes the special cash dividend of $5.00 per share paid in February 2015. Richard M. Libenson A Founder, former Director and Executive Officer of The Price Company Jeffrey Abadir John W. Meisenbach President of MCM, A Meisenbach Company Charles T. Munger (a)*(b) Vice Chairman of the Board of Berkshire Hathaway Inc.; Chairman of the Board of Daily Journal Corporation Jeffrey S. Raikes President and Chief Executive Officer, Costco (c)* 27,454 Chairman of Trilogy International Partners, Inc.; Chairman of Trilogy Equity Partners Maggie A. Wilderotter (c) Former Executive Chairman of Frontier Communications Board Committees (a) Audit Committee (b) Compensation Committee (c) Nominating and Governance Committee Founder and CEO of the Raikes Foundation; Former CEO of the Bill and Melinda Gates Foundation James D. Sinegal (1) Includes a $57 tax benefit recorded in the second quarter in connection with the special cash dividend paid to employees through the Company's 401(k) Retirement Plan. W. Craig Jelinek President and Chief Operating Officer, 49 64 Jeffrey H. Brotman Co-Founder, Chairman of the Board, Costco Susan L. Decker(a) Principal of Deck3 Ventures LLC; Former President of Yahoo! Inc. The Blackstone Group Fourth Quarter (16 Weeks) DIRECTORS AND OFFICERS BOARD OF DIRECTORS Chairman, Daniel J. Evans Associates; Former U.S. Senator and Governor of the State of Washington Richard A. Galanti Executive Vice President and Chief Financial Officer, Costco Hamilton E. James Daniel J. Evans (a)(c) $ Co-Founder, former President and CEO, Costco John W. Stanton (b)* 516 65 Operating income. 770 877 821 1,156 3,624 OTHER INCOME (EXPENSE) Interest expense. (26) (27) (31) (40) (124) Interest income and other, net.. 27 14 9 15 SA 116,199 OPERATING EXPENSES 23,385 23,897 22,687 31,096 35 101,065 administrative 2,696 2,671 2,579 3,499 11,445 Preopening expenses.. Selling, general and 20 Merchandise costs 40 778 2,409 Net income attributable to noncontrolling interests. (9) (9) (3) (11) (32) NET INCOME ATTRIBUTABLE TO COSTCO. 496 $ 598 9 $ 519 607 35,778 noncontrolling interests. 505 INCOME BEFORE INCOME TAXES 779 870 799 1,156 3,604 104 Provision for income taxes. 1,195 378 280 Net income including (1) 274 263 SINALOA (1) MIYAGI (1) UNITED KYOTO (1) YUCATÁN (1) VERACRUZ (2) KANAGAWA (3) HYOGO (2) HOKKAIDO (1) AICHI (1) CHIBA (2) FUKUOKA (2) GIFU (1) GUNMA (1) HIROSHIMA (1) JAPAN (26) SONORA (1) PUEBLA (1) QUERÉTARO (1) QUINTANA ROO (1) SAN LUIS POTOSÍ (1) IBARAKI (2) ISHIKAWA (1) KINGDOM (28) COSTCO.CO.UK SAITAMA (2) GYEONGGI-DO (4) DAEJEON (1) DAEGU (1) CHUNGCHEONGNAM-D0 (1) BUSAN (1) COSTCO.CO.KR SOUTH KOREA (13) YAMAGATA (1) WALES (1) NUEVO LEÓN (3) ENGLAND (24) TOYAMA (1) TOKYO (1) SHIZUOKA (1) INCHEON (1) OSAKA (1) SCOTLAND (3) 3 FRANCE NEW BRUNSWICK (3) BRITISH COLUMBIA (14) MANITOBA (3) COSTCO.CA ALBERTA (16) CANADA (98) VERMONT (1) VIRGINIA (17) WASHINGTON (31) WISCONSIN (9) WASHINGTON, D.C. (1) PUERTO RICO (4) TENNESSEE (5) TEXAS (28) UTAH (11) NEWFOUNDLAND AND LABRADOR (1) SOUTH DAKOTA (1) OHIO (12) OKLAHOMA (1) OREGON (13) PENNSYLVANIA (11) NORTH CAROLINA (8) NORTH DAKOTA (1) NEW HAMPSHIRE (1) NEW JERSEY (19) NEW MEXICO (3) NEW YORK (19) SEOUL (3) KANSAS (3) KENTUCKY (4) LOUISIANA (3) MARYLAND (10) NEBRASKA (3) NEVADA (7) SOUTH CAROLINA (5) NOVA SCOTIA (2) ONTARIO (35) QUÉBEC (21) SASKATCHEWAN (3 MÉXICO (37) SPAIN UNITED KINGDOM ICELAND NEWFOUNDLAND PUERTO RICO 2 8 11 3 3 F DECEMBER 31, 2017 MÉXICO, D.F. (3) JALISCO (3) MÉXICO (5) GUANAJUATO (3) COSTCO.COM.MX AGUASCALIENTES (1) MICHOACÁN (1) MORELOS (1) BAJA CALIFORNIA (4) BAJA CALIFORNIA SUR (1) CHIHUAHUA (2) COAHUILA (1) Ancillary businesses within or next to our warehouses provide expanded products and services, encouraging members to shop more frequently. These businesses include our gas stations, pharmacy, optical dispensing centers, food courts, and hearing-aid centers. We sell gasoline in all countries except Korea and France, with the number of warehouses with gas stations varying significantly by country. We operated 536, 508, and 472 gas stations at the end of 2017, 2016, and 2015, respectively. TAIWAN (13) 38,600 2015 2016 2017 Total cardholders Household cards 36,800 Total paid members.. Gold Star Our membership was made up of the following (in thousands): Our member renewal rate was 90% in the U.S. and Canada and 87% on a worldwide basis in 2017. The majority of members renew within six months following their renewal date. Therefore, our renewal rate is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date. Our members may utilize their memberships at any of our warehouses worldwide. Gold Star memberships are available to individuals; Business memberships are limited to businesses, including individuals with a business license, retail sales license or comparable evidence. Business members have the ability to add additional cardholders (add-ons). Add-ons are not available for Gold Star members. Effective June 1, 2017, we increased our annual membership fees in the U.S. and Canada for Gold Star (individual), Business and Business add-on by $5 to $60 per year. The Executive membership fee increased from $110 to $120 (annual membership fee of $60, plus Executive upgrade of $60), and the maximum annual 2% reward, which is earned on qualified purchases and can be redeemed only at Costco warehouses, increased from $750 to $1,000. Our annual membership fees in our Other International operations vary by country. All paid memberships include a free household card. Membership Certain financial information for our segments and geographic areas is included in Note 11 to the consolidated financial statements included in this Report. Business, including add-ons 34,000 10,800 10,800 10,600 INDIANA (6) IOWA (2) 8 Approximately 15,600 employees are union employees. We consider our employee relations to be very good. Total employees 2015 2016 126,000 117,000 2017 133,000 98,000 92,000 88,000 231,000 218,000 205,000 Part-time employees Full-time employees Our employee count was as follows: Paid cardholders (except Business add-ons) are eligible to upgrade to an Executive membership in the U.S., Canada, Mexico and the U.K. for an additional annual fee, which varies by country. Executive members have access to additional savings and benefits on various business and consumer services (except in Mexico), such as auto and home insurance, the Costco auto purchase program and check printing services. The services are generally provided by third-parties and vary by state and country. Executive members represented 38% of paid members at the end of 2017. Executive members generally spend more than other members, and the percentage of our net sales attributable to these members continues to increase. Labor 90,300 86,700 81,300 40,900 39,100 36,700 47,600 44,600 49,400 7 ULSAN (1) We have direct buying relationships with many producers of national brand-name merchandise. We do not obtain a significant portion of merchandise from any one supplier. We generally have not experienced difficulty in obtaining sufficient quantities of merchandise and believe that if one or more of our current sources of supply became unavailable, we would be able to obtain alternative sources without substantial disruption of our business. We also purchase private-label merchandise, as long as quality and member demand are comparable and the value to our members is significant. Ancillary (including gas stations and pharmacy) Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983, in Seattle, Washington. We are principally engaged in the operation of membership warehouses in the United States (U.S.) and Puerto Rico, Canada, United Kingdom (U.K.), Mexico, Japan, Australia, Spain, France, Iceland and through majority-owned subsidiaries in Taiwan and Korea. Costco operated 741, 715, and 686 warehouses worldwide at September 3, 2017, August 28, 2016, and August 30, 2015, respectively. Our common stock trades on the NASDAQ Global Select Market, under the symbol "COST." General 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, modernization of information systems, and the demand for our products and services. Forward-looking statements may also be identified by the words “believe,” “project,” "expect," "anticipate,” “estimate,” “intend,” “strategy," "future,” “opportunity,"” “plan,” “may,” “should," "will," "would," "will be,” “will continue," "will likely result," and similar expressions. 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, including, without limitation, the factors set forth in the section titled "Risk Factors", and other factors noted in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the consolidated financial statements and related notes in this Report. Forward-looking statements speak only as of the date they are made, and we do not undertake to update them, except as required by law. Forward-Looking Statements BUSINESS OVERVIEW 5 We report on a 52/53-week fiscal year, consisting of thirteen, four-week periods and ending on the Sunday nearest the end of August. The first three quarters consist of three periods each, and the fourth quarter consists of four periods (five weeks in the thirteenth period in a 53-week year). The material seasonal impact in our operations is increased net sales and earnings during the winter holiday season. References to 2017 relate to the 53-week fiscal year ended September 3, 2017. References to 2016 and 2015 relate to the 52- week fiscal years ended August 28, 2016, and August 30, 2015, respectively. LO ICELAND (1) SPAIN (2) AUSTRALIA CAPITAL TERRITORY (1) NEW SOUTH WALES (3) QUEENSLAND (1) SOUTH AUSTRALIA (1) VICTORIA (3) AUSTRALIA (9) TAIPEI CITY (2) TAOYUAN CITY (2) COSTCO.CO.TW CHIAYI CITY (1) HSINCHU CITY (1) KAOHSIUNG CITY (2) NEW TAIPEI CITY (3) TAICHUNG CITY (1) TAINAN CITY (1) FRANCE (1) We operate membership warehouses 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 generally sell inventory before we are required to pay for it, even while taking advantage of early payment discounts when available. We buy most of our merchandise directly from manufacturers and route it to cross-docking consolidation points (depots) or directly to our warehouses. Our depots receive large shipments from manufacturers and quickly ship these goods to individual warehouses. This process creates freight volume and handling efficiencies, eliminating many costs associated with traditional multiple-step distribution channels. 6 Our average warehouse space is approximately 145,000 square feet, with newer units slightly larger. Floor plans are designed for economy and efficiency in the use of selling space, the handling of merchandise, and the control of inventory. Because shoppers are attracted principally by the quality of merchandise and low prices, our warehouses are not elaborate. By strictly controlling the entrances and exits of our warehouses and using a membership format, we have inventory losses (shrinkage) well below those of typical retail operations. • Softlines (including apparel and small appliances) • Fresh Foods (including meat, produce, deli, and bakery) • Hardlines (including major appliances, electronics, health and beauty aids, hardware, and garden and patio) Sundries (including snack foods, candy, alcoholic and nonalcoholic beverages, and cleaning supplies) • • Foods (including dry foods, packaged foods, and groceries) • We offer merchandise in the following categories: In keeping with our policy of member satisfaction, we generally accept returns of merchandise. On certain electronic items, we typically have a 90-day return policy and provide, free of charge, technical support services, as well as an extended warranty. Additional third-party warranty coverage is sold on certain electronic items. Our strategy is to provide our members with a broad range of high-quality merchandise at prices we believe are consistently lower than elsewhere. We seek to limit items to fast-selling models, sizes, and colors. We carry an average of approximately 3,800 active stock keeping units (SKUs) per warehouse in our core warehouse business, significantly less than other broadline retailers. Many consumable products are offered for sale in case, carton, or multiple-pack quantities only. Our warehouses on average operate on a seven-day, 70-hour week. Gasoline operations generally have extended hours. Because the hours of operation are shorter than other retailers, and due to other efficiencies inherent in a warehouse-type operation, labor costs are lower relative to the volume of sales. Merchandise is generally stored on racks above the sales floor and displayed on pallets containing large quantities, reducing labor required. In general, with variations by country, our warehouses accept certain credit, including the Costco co-branded card, and debit cards, cash, and checks. Our online businesses, which include e-commerce, business delivery, and travel, vary by country. In the U.S. and Canada, we offer all of our online businesses. We operate e-commerce websites in all countries except Japan, Australia, Spain, Iceland, and France. Online businesses provide our members additional products and services, many not found in our warehouses. Net sales for our online business were approximately 4% of our total net sales in 2017 and 2016, respectively, and 3% in 2015. HAWAII (7) IDAHO (5) ILLINOIS (19) 22° FLORIDA (25) 44.6 29 2016 47.6 50 49.4 42.0 26 Whses # of Year Opened 60 Executive Paid Membership 2017 Millions 2015 39.0 21 2011 15 2012 30 13.5 23 26 14.8 16.1 30 2014 17.4 18.5 40 2013 Provided below is information related to our Membership and Sales per Warehouse which supplement additional key metrics found on page 21. KEY FINANCIAL METRICS 18 Management's Discussion and Analysis of Financial Condition and Results of Operation Market for Costco Common Stock, Dividend Policy and Stock Repurchase Program Five Year Operating and Financial Highlights . Properties: Warehouses, Administration and Merchandise Distribution Properties. Risk Factors Business Overview Map of Warehouse Locations Executive Officers and Corporate Governance Letter to Shareholders. CONTENTS A commitment to quality and value at 746 locations and on Costco.com WHOLESALE COSTCO Annual Report 2017 GEORGIA (11) Tribute to our Co-Founder and Chairman Management's Reports Reports of Independent Registered Public Accounting Firm. Consolidated Financial Statements. 9 19 35 22 36 37 44 39 67 21 W W W & N N ∞o CO 4 2 Directors and Officers of the Company Notes to Consolidated Financial Statements. 20 10 21 13 JAPAN ALASKA TAIWAN SOUTH KOREA HAWAII до AUSTRALIA WHOLESALE 3 President and Chief Executive Officer Craig Jelinek Cray Jelek Sincerely, Also retiring from the Costco Board next month will be Jim Sinegal. Jim, along with Jeff Brotman, co-founded Costco nearly 35 years ago; and ran Costco as President and CEO until just a few years ago. To say that Jim has been a mentor, a friend and an incredibly positive inspiration to literally thousands of Costco associates over these years is an understatement. His vision, his passion and his tireless work ethic have impacted so many; and paved the way for Costco's philosophy and the values it represents to make Costco the great company it is today and will continue to be into the future. Thank you, Jim, for all you have done; and thank you for allowing me to be one of those lucky thousands that you mentored, befriended and inspired. As the year comes to a close, I extend my appreciation to the 239,000 employees and over 90 million members worldwide who help make Costco the undisputed leader in membership warehouse clubs. I thank you for your continued trust in and support of Costco, and wish you and your families a joyous holiday season, and a happy, healthy, and prosperous New Year. COSTCO Changes to our Board of Directors this year included the appointment of Hamilton (Tony) James, who has been a board member since 1988, to Chairman, and the addition of Ken Denman. Ken is a Venture Partner at Sway Ventures and former President and Chief Executive Officer of Emotient, Inc. He serves on several boards, and offers extensive knowledge in the areas of technology and communications. Retiring from our Board in January 2018 will be Dan Evans. Dan has been a director of the Company since January 2003, and we thank him for his 15 years of dedication and service. 8 14 DELAWARE (1) 2010 CONNECTICUT (6) COLORADO (14) MONTANA (5) CALIFORNIA (125) 2 MISSOURI (6) MASSACHUSETTS (6) MICHIGAN (15) MINNESOTA (9) ALASKA (3) COSTCO.COM ALABAMA (4) U.S.A. (518) MÉXICO 3 ARIZONA (18) We continue to focus on sourcing our merchandise in a sustainable manner. Sustainability to us is remaining a profitable business while doing the right thing. We are committed to lessening our environmental impact, decreasing our carbon footprint, sourcing our products responsibly, and working with our suppliers, manufacturers, and farmers to preserve natural resources. This will remain at the forefront of our business practices; and more information can be found on our Costco.com website under "Sustainability Commitment." In delivering greater and greater value to our members and striving to be generous to our employees, we have been able to drive stronger sales and earnings for our shareholders. Along with strong earnings growth, we have been able to generate cash flows greater than the funds required to expand and grow our business. These cash flows have allowed us to give back to our shareholders in the form of both dividends and share repurchases. In just the past five years, we have rewarded our shareholders with aggregate dividends of $26.61 per share, of which $19.00 related to three special dividends, translating to a dividend payout of $11.7 billion. In 2017 alone, $3.9 billion in dividends were paid out, including a special cash dividend of $7.00 per share. Additionally, stock buy-backs over the past five years totaled $1.8 billion of which $473 million related to 2017. 746 LOCATIONS AS O In 2017, we identified additional opportunities to grow our core warehouse business globally, including the openings of 26 new warehouses. We expanded into two new countries, as we opened our first warehouses in Iceland and France; and we opened our first Business Center in Canada. In 2018, we expect to open 20-25 new warehouses and relocate up to six warehouses. $99 109 113 116 124 $105 115 124 128 130 139 $103 120 130 136 139 139 148 $94 106 122 135 144 148 151 155 $100 107 130 146 155 157 158 155 162 $108 109 115 125 94 $83 85 97 $121 Average Sales Per Warehouse* (Sales In Millions) *First year sales annualized. At Fiscal Year End 2013 2014 2015 2016 2017 Totals 2008 & Before At Costco, we foster a climate of inclusion and diversity, as well as provide a positive work environment that encourages opportunities for growth and advancement to our employees globally. These initiatives, among others, result in a consistently efficient and loyal employee base, with one of the lowest turnover rates in the industry. In recognition, Costco was named in a survey published by Forbes as America's best large employer in 2017. 20 2009 538 $137 132 141 149 159 167 173 174 173 178 741 $137 $131 $139 $146 $155 $160 $164 $162 $159 $163 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Fiscal Year $87 Dear Costco Shareholders, Since the June 2016 launch of our Costco Anywhere Visa® Card by Citi, 1.8 million new member accounts (approximately 2.4 million new credit cards) were opened. The enhanced cash-back rewards include earning 4% on gas, 3% on restaurant, hotel and eligible travel, 2% at Costco and Costco.com, and 1% on all other purchases, exceeding our previous credit card offering. Executive Members using this card maximize value by additionally earning the Executive Member 2% Reward on qualified purchases. Costco remains competitively strong in an ever-evolving retail environment, outpacing other retailers while maintaining our core values and member-focused initiatives. Despite a challenging retail climate, we continue to grow sales, add warehouses both domestically and abroad, and provide great value to our members. Costco buyers and operators work tirelessly to maintain low prices for our members on everyday items in our warehouses around the world, as well as on our ecommerce sites. Our Kirkland Signature brand is now recognized around the world, and is synonymous with high quality and great value. In 2017, Kirkland Signature sales exceeded $35 billion, as we expanded our offerings in apparel, sporting goods, fresh food and organic food items. Organics are a fast-growing category in both fresh and grocery, and our buyers are dedicated to growing the available selection. In certain merchandise initiatives centered on low prices, quality and sustainable merchandise, we have pursued increased vertical integration. We are currently under construction on a meat plant in Illinois, and we recently broke ground on a poultry plant in Nebraska. Since its inception, our business has been to grow our membership and drive the value proposition that keeps members returning to the warehouse. Improving sales, comps, and member shopping frequency reaffirm that brick-and-mortar continues to be strong. Yet we recognize that technology has changed the retail landscape, now enabling us to connect with our members through multiple channels. We strive to create an easy, efficient and engaging way for members to shop with us in our warehouses and online. Maintaining our commitment to providing exceptional service and value to our members when shopping online, improvements were made in merchandise offerings, site functionality, search capability, checkout, and delivery times. Additionally, two exciting online offerings were recently introduced with the launch of Costco Grocery, a two-day delivery on dry grocery items, and a same-day delivery offering both fresh and dry grocery items through partnering with Instacart. Do the right thing. It is a philosophy embedded in our culture; one that was established and cultivated by our co-founders. Although we lost one of these great leaders this past year, members of our leadership team and beyond realize the key to long-term success is not high margins; rather it is how you treat, engage, and include people: our members, our employees and our suppliers alike. Thus our commitment to our core values will remain strong in Jeff Brotman's legacy and we will continue to offer the highest quality and best value to our more than 90 million loyal members, who recognize our leadership in the market. By focusing on these values, we achieved another strong financial performance in fiscal 2017. Net sales for the 53-week fiscal year totaled $126.2 billion, an increase of nine percent from $116.1 billion in the 52-week 2016 fiscal year, with a comparable sales increase of four percent. Net income for the 53-week fiscal year was $2.68 billion, or $6.08 per share, compared to $2.35 billion, or $5.33 per share, in the 52-week prior year. Revenue from membership fees increased eight percent to $2.85 billion. 2 December 14, 2017 1 He is greatly missed. Jeff's commitment to business, civic, and philanthropic causes, combined with his natural leadership and genuine warmth, created an immense and lasting impact. Jeff believed strongly in and worked tirelessly toward giving back. He was especially proud of the Costco Scholarship Fund, which has raised millions of dollars for underrepresented minority students, and made it possible for them to attend the University of Washington or Seattle University. Together with his wife Susan, Jeff was involved in and supported myriad organizations in the community. Simply put, Jeff was dedicated to making the world a better place. Jeff was Costco's Chairman of the Board for more than 33 years. In addition to his duties as Chairman, Jeff was deeply involved in the Company's real estate endeavors, driving Costco's expansion efforts worldwide. Jeff was born in Tacoma, Washington, to a family of retailers, where he learned the business by following the strict ethics and practices his father established in his own clothing stores. Jeff went on to earn two degrees from the University of Washington, and later lead numerous UW boards and initiatives. The Costco family was profoundly saddened by the unexpected death of Jeff Brotman, Costco's co-founder and Chairman of the Board. A man of quiet strength and personal integrity, Jeff along with partner, friend and co-founder Jim Sinegal, helped direct the Company with a vision and passion unparalleled in the retail industry. TRIBUTE TO OUR CO-FOUNDER AND CHAIRMAN Among our highlights this year is Costco Travel, where we have expanded the offerings, providing even greater value to our members. Recently, we introduced hotel-only booking reservations. Costco Travel's rental car rates are consistently some of the lowest in the marketplace and are now available to members in Canada and the UK, extending Costco Travel's international presence. Additionally, the annual 2% Reward now applies to Costco Travel purchases in the U.S. and Canada, further enhancing the value of Executive Membership. 2012-2017 results include Mexico 15 We use natural gas, diesel fuel, gasoline, and electricity in our distribution and warehouse operations. U.S. and foreign government regulations limiting carbon dioxide and other greenhouse gas emissions may result in increased compliance costs and legislation or regulation affecting energy inputs that could materially affect our profitability. Climate change could affect our ability to procure needed commodities at costs and in quantities we currently experience. We also sell a substantial amount of gasoline, the demand for which could be impacted by concerns about climate change and which could face increased regulation. Climate change may be associated with extreme weather conditions, such as more intense hurricanes, thunderstorms, tornadoes, and snow or ice storms, as well as rising sea levels. Higher energy and gasoline costs, inflation, levels of unemployment, healthcare costs, consumer debt levels, foreign-currency exchange rates, unsettled financial markets, weaknesses in housing and real estate markets, reduced consumer confidence, changes and uncertainties related to government fiscal and tax policies including increased duties, tariffs, or other restrictions, sovereign debt crises, and other economic factors could adversely affect demand for our products and services, require a change in product mix, or impact the cost of or ability to purchase inventory. Prices of certain commodity products, including gasoline and other food products, are historically volatile and are subject to fluctuations arising from changes in domestic and international supply and demand, labor costs, competition, market speculation, government regulations, taxes and periodic delays in delivery. Rapid and significant changes in commodity prices and our ability and desire to pass them through to our members may affect our sales and profit margins. These factors could also increase our merchandise costs and selling, general and administrative expenses, and otherwise adversely affect our operations and financial results. General economic conditions can also be affected by significant events like the outbreak of war or acts of terrorism. We believe that the price of our stock currently reflects high market expectations for our future operating results. Any failure to meet or delay in meeting these expectations, including our warehouse and e-commerce comparable sales growth rates, membership renewal rates, new member sign-ups, gross margin, earnings, earnings per share, new warehouse openings, or dividend or stock repurchase policies could cause the market price of our stock to decline. Factors associated with climate change could adversely affect our business. Legal and Regulatory Risks Failure to meet market expectations for our financial performance could adversely affect the market price and volatility of our stock. Natural disasters, such as hurricanes, typhoons or earthquakes, particularly in California or Washington state, where our centralized operating systems and administrative personnel are located, could negatively affect our operations and financial performance. Such events could result in physical damage to one or more of our properties, the temporary closure of one or more warehouses, depots, manufacturing or home office facilities, the temporary lack of an adequate work force in a market, the temporary or long-term disruption in the supply of products from some local or overseas suppliers, the temporary disruption in the transport of goods to or from overseas, delays in the delivery of goods to our warehouses or depots within the countries in which we operate, and the temporary reduction in the availability of products in our warehouses. Public health issues, whether occurring in the U.S. or abroad, could disrupt our operations, disrupt the operations of suppliers or members, or have an adverse impact on consumer spending and confidence levels. These events could also reduce demand for our products or make it difficult or impossible to procure products. We may be required to suspend operations in some or all of our locations, which could have a material adverse effect on our business, financial condition and results of operations. We buy from numerous domestic and foreign manufacturers and importers. Our inability to acquire suitable merchandise on acceptable terms or the loss of key vendors could negatively affect us. We may not be able to develop relationships with new vendors, and products from alternative sources, if any, may be of a lesser quality or more expensive than those from existing vendors. Because of our efforts to adhere to high quality standards for which available supply may be limited, particularly for certain food items, the large volume we demand may not be consistently available. We may pay for products we purchase for sale in our warehouses around the world with a currency other than the local currency of the country in which the goods will be sold. Currency fluctuations may increase our cost of goods and may not be passed on to members. Consequently, fluctuations in currency exchange rates may adversely affect our results of operations. Fluctuations in foreign exchange rates may adversely affect our results of operations. During 2017, our international operations, including Canada, generated 27% and 36% of our net sales and operating income, respectively. Our international operations have accounted for an increasing portion of our warehouses, and we plan to continue international growth. To prepare our consolidated financial statements, we must translate the financial statements of our international operations from local currencies into U.S. dollars using exchange rates for the current period. Future fluctuations in currency exchange rates over time that are unfavorable to us may adversely affect the financial performance of our Canadian and Other International operations and have a corresponding adverse period-over-period effect on our results of operations. As we continue to expand internationally, our exposure to fluctuations in foreign exchange rates may increase. Our suppliers (and those they depend upon for materials and services) are subject to risks, including labor disputes, union organizing activities, financial liquidity, inclement weather, natural disasters, supply constraints, and general economic and political conditions that could limit their ability to timely provide us with acceptable merchandise. For these or other reasons, one or more of our suppliers might not adhere to our quality control, legal, regulatory, labor, environmental or animal welfare standards. These deficiencies may delay or preclude delivery of merchandise to us and might not be identified before we sell such merchandise to our members. This failure could lead to recalls and litigation, and otherwise damage our reputation and our brands, increase our costs, and otherwise adversely impact our business. 14 General economic factors, domestically and internationally, may adversely affect our business, financial condition, and results of operations. We depend heavily on our ability to purchase quality merchandise in sufficient quantities at competitive prices. As the quantities we require continue to grow, we have no assurances of continued supply, appropriate pricing or access to new products, and any vendor has the ability to change the terms upon which they sell to us or discontinue selling to us. Member demands may lead to out-of-stock positions of our merchandise leading to loss of sales and profits. Vendors may be unable to supply us with quality merchandise at competitive prices in a timely manner or may fail to adhere to our high standards, resulting in adverse effects on our business, merchandise inventories, sales, and profit margins. Our international operations subject us to risks associated with the legislative, judicial, accounting, regulatory, political and economic factors specific to the countries or regions in which we operate which could adversely affect our business, financial condition and results of operations. Natural disasters or other catastrophes could negatively affect our business, financial condition, and results of operations. During 2017, we operated 227 warehouses in 10 countries outside of the U.S., and we plan to continue expanding our international operations. Future operating results internationally could be negatively affected by a variety of factors, many similar to those we face in the U.S., certain of which are beyond our control. These factors include political and economic conditions, regulatory constraints, currency regulations, policy changes such as the U.K.'s vote to withdraw from the European Union, commonly known as "Brexit", and other matters in any of the countries or regions in which we operate, now or in the future. Other factors that may impact international operations include foreign trade, monetary and fiscal policies and the laws and regulations of the U.S. and foreign governments, agencies and similar organizations, and risks associated with having major facilities located in countries which have been historically less stable than the U.S. Risks inherent in international operations also include, among others, the costs and difficulties of managing international operations, adverse tax consequences, and greater difficulty in enforcing intellectual property rights. United States and Puerto Rico Accounting principles and related pronouncements, implementation guidelines, and interpretations we apply to a wide range of matters that are relevant to our business, including, but not limited to, revenue recognition, merchandise inventories, vendor rebates and other vendor consideration, impairment of long-lived assets, self-insurance liabilities, and income taxes are highly complex and involve subjective assumptions, estimates and judgments by our management. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance. Japan The retail business is highly competitive. We compete for members, employees, sites, products and services and in other important respects with a wide range of local, regional and national wholesalers and retailers, both in the United States and in foreign countries, including other warehouse club operators, supermarkets, supercenters, internet retailers, gasoline stations, hard discounters, and department and specialty stores. Such retailers and warehouse club operators compete in a variety of ways, including merchandise pricing, selection and availability, services, location, convenience, store hours, and the attractiveness and ease of use of websites and mobile applications. The evolution of retailing in online and mobile channels has improved the ability of customers to comparison shop with digital devices, which has enhanced competition. Some competitors may have greater financial resources, better access to merchandise and greater market penetration than we do. Our inability to respond effectively to competitive pressures, changes in the retail markets and member expectations could result in lost market share and negatively affect our financial results. United Kingdom Mexico Canada At September 3, 2017 we operated 741 membership warehouses: Warehouse Properties PROPERTIES 17 Our business requires compliance with many laws and regulations. Failure to achieve compliance could subject us to lawsuits and other proceedings, and lead to damage awards, fines, penalties, and remediation costs. We are, or may become involved, in a number of legal proceedings and audits including grand jury investigations, government and agency investigations, and consumer, employment, tort, unclaimed property laws, and other litigation. We cannot predict with certainty the outcomes of these proceedings and other contingencies, including environmental remediation and other proceedings commenced by governmental authorities. The outcome of some of these proceedings, audits, unclaimed property laws, and other contingencies could require us to take, or refrain from taking, actions which could negatively affect our operations or could require us to pay substantial amounts of money, adversely affecting our financial condition and results of operations. Additionally, defending against these lawsuits and proceedings may involve significant expense and diversion of management's attention and resources. We are involved in a number of legal proceedings and audits and some of these outcomes could adversely affect our business, financial condition and results of operations. We are subject to a wide variety of federal, state, regional, local and international laws and regulations relating to the use, storage, discharge and disposal of hazardous materials, hazardous and non-hazardous wastes and other environmental matters. Failure to comply with these laws could result in harm to our members, employees or others, significant costs to satisfy environmental compliance, remediation or compensatory requirements, or the imposition of severe penalties or restrictions on operations by governmental agencies or courts that could adversely affect our business, financial condition and results of operations. Significant changes in, or failure to comply with, federal, state, regional, local and international laws and regulations relating to the use, storage, discharge and disposal of hazardous materials, hazardous and non-hazardous wastes and other environmental matters could adversely impact our business, financial condition and results of operations. We compute our income tax provision based on enacted tax rates in the countries in which we operate. As tax rates vary among countries, a change in earnings attributable to the various jurisdictions in which we operate could result in an unfavorable change in our overall tax provision. Additionally, changes in the enacted tax rates, adverse outcomes in tax audits, including transfer pricing disputes, or any change in the pronouncements relating to accounting for income taxes could have a material adverse effect on our financial condition and results of operations. We could be subject to additional income tax liabilities. 16 Provisions for losses related to self-insured risks are generally based upon independent actuarially determined estimates. The assumptions underlying the ultimate costs of existing claim losses can be highly unpredictable, which can affect the liability recorded for such claims. For example, variability in health care cost inflation rates inherent in these claims can affect the amounts recognized. Similarly, changes in legal trends and interpretations, as well as changes in the nature and method of how claims are settled can impact ultimate costs. Although our estimates of liabilities incurred do not anticipate significant changes in historical trends for these variables, any changes could have a considerable effect upon future claim costs and currently recorded liabilities and could materially impact our consolidated financial statements. Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial condition and results of operations. We face strong competition from other retailers and warehouse club operators, which could adversely affect our business, financial condition and results of operations. We are highly dependent on the financial performance of our U.S. and Canadian operations. Our financial and operational performance is highly dependent on our U.S. and Canadian operations, which comprised 87% and 85% of net sales and operating income in 2017, respectively. Within the U.S., we are highly dependent on our California operations, which comprised 30% of U.S. net sales in 2017. Our California market, in general, has a larger percentage of higher volume warehouses as compared to our other domestic markets. Any substantial slowing or sustained decline in these operations could materially adversely affect our business and financial results. Declines in financial performance of our U.S. operations, particularly in California, and our Canadian operations could arise from, among other things: slow growth or declines in comparable warehouse sales (comparable sales); negative trends in operating expenses, including increased labor, healthcare and energy costs; failing to meet targets for warehouse openings; cannibalizing existing locations with new warehouses; shifts in sales mix toward lower gross margin products; changes or uncertainties in economic conditions in our markets, including higher levels of unemployment and depressed home values; and failing to consistently provide high quality and innovative new products to retain our existing member base and attract new members. 13 We rely extensively on information technology to process transactions, compile results, and manage our businesses. Failure or disruption of our primary and back-up systems could adversely affect our businesses. A failure to adequately update our existing systems and implement new systems could harm our businesses and adversely affect our results of operations. 10 10 We sell many products under our Kirkland Signature brand. Maintaining consistent product quality, competitive pricing, and availability of these products is essential to developing and maintaining member loyalty. These products also generally carry higher margins than national brand products carried in our warehouses and represent a growing portion of our overall sales. If the Kirkland Signature brand experiences a loss of member acceptance or confidence, our sales and gross margin results could be adversely affected. Disruptions in our merchandise distribution could adversely affect sales and member satisfaction. We depend on the orderly operation of the merchandise receiving and distribution process, primarily through our depots. Although we believe that our receiving and distribution process is efficient, unforeseen disruptions in operations due to fires, tornadoes and hurricanes, earthquakes or other catastrophic events, labor issues or other shipping problems may result in delays in the delivery of merchandise to our warehouses, which could adversely affect sales and the satisfaction of our members. Membership loyalty and growth are essential to our business model. 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. Damage to our brands or reputation may negatively impact comparable sales, diminish member trust, and reduce member renewal rates and, accordingly, net sales and membership fee revenue, negatively impacting our results of operations. Our failure to maintain membership loyalty and brand recognition could adversely affect our results of operations. We intend to continue to open warehouses in new markets. Associated risks include difficulties in attracting members due to a lack of familiarity with us, attracting members of other wholesale club operators, our lack of familiarity with local member preferences, and seasonal differences in the market. Entry into new markets may bring us into competition with new competitors or with existing competitors with a large, established market presence. We cannot ensure that new warehouses and new websites will be profitably deployed and, as a result, future profitability could be delayed or otherwise materially adversely affected. We seek to expand in existing markets to attain a greater overall market share. A new warehouse may draw members away from our existing warehouses and adversely affect their comparable sales performance and member traffic. Our growth is dependent, in part, on our ability to acquire property and build or lease new warehouses and regional depots. We compete with other retailers and businesses for suitable locations. Local land use and other regulations restricting the construction and operation of our warehouses and depots, as well as local community actions opposed to the location of our warehouses or depots at specific sites and the adoption of local laws restricting our operations and environmental regulations, may impact our ability to find suitable locations, and increase the cost of sites and of constructing, leasing and operating our warehouses and depots. We also may have difficulty negotiating leases or purchase agreements on acceptable terms. In addition, certain jurisdictions have enacted or proposed laws and regulations that would prevent or restrict the operation or expansion plans of certain large retailers and warehouse clubs, including us, within their jurisdictions. Failure to effectively manage these and other similar factors may affect our ability to timely build or lease and operate new warehouses and depots, which could have a material adverse effect on our future growth and profitability. We may be unsuccessful implementing our growth strategy, including expanding our business in existing markets and new markets, which could have an adverse impact on our business, financial condition and results of operations. Business and Operating Risks The risks described below could materially and adversely affect our business, financial condition and results of operations. We could also be affected by additional risks that apply to all companies operating in the U.S. and globally, as well as other risks that are not presently known to us or that we currently consider to be immaterial. These Risk Factors should be carefully reviewed in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes in this Report. RISK FACTORS We rely on trademark and copyright laws, trade-secret protection, and confidentiality, license and other agreements with our suppliers, employees and others to protect our intellectual property rights. The availability and duration of trademark registrations vary by country; however, trademarks are generally valid and may be renewed indefinitely as long as they are in use and their registrations are properly maintained. We believe that, to varying degrees, our trademarks, trade names, copyrights, proprietary processes, trade secrets, patents, trade dress, domain names and similar intellectual property add significant value to our business and are important to our success. We have invested significantly in the development and protection of our well-recognized brands, including the Costco Wholesale® trademarks and our private-label brand, Kirkland Signature®. We believe that Kirkland Signature products are high quality products, offered to our members at prices that are generally lower than those for similar national brand products and that they help lower costs, differentiate our merchandise offerings from other retailers, and generally earn higher margins. We expect to continue to increase the sales penetration of our private label items. Intellectual Property Korea Given the very high volume of transactions we process each year it is important that we maintain uninterrupted operation of our business-critical computer systems. Our systems, including our back-up systems, are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, internal or external security breaches, catastrophic events such as fires, earthquakes, tornadoes and hurricanes, and errors by our employees. If our systems are damaged or cease to function properly, we may have to make significant investments to fix or replace them, and we may suffer interruptions in our operations in the interim. Any material interruption in these systems could have a material adverse effect on our business and results of operations. Market and Other External Risks We are currently making, and will continue to make, significant technology investments to improve or replace critical information systems and processing capabilities. Failure to monitor and choose the right investments and implement them at the right pace would be harmful. The risk of system disruption is increased when significant system changes are undertaken, although we believe that our change management process will mitigate this risk. Excessive technological change could impact the effectiveness of adoption, and could make it more difficult for us to realize benefits. Targeting the wrong opportunities, failing to make the best investments, or making an investment commitment significantly above or below our needs could result in the loss of our competitive position and adversely impact our financial condition and results of operations. Additionally, the potential problems and interruptions associated with implementing technology initiatives could disrupt or reduce the efficiency of our operations. These initiatives might not provide the anticipated benefits or may provide them on a delayed schedule or at a higher cost. 18 We are primarily self-insured as it relates to property damage, due to the substantial premiums required for insurance coverage over physical losses caused by certain natural disasters, as well as the limitations on available coverage for such losses. Although we maintain specific coverages for losses from physical damages in excess of certain amounts to guard against catastrophic losses, we still bear the risk of losses incurred as a result of any physical damage to, or the destruction of, any warehouses, depots, manufacturing or home office facilities, loss or spoilage of inventory, and business interruption caused by any such events to the extent they are below catastrophic levels of coverage, as well as any losses to the extent they exceed our aggregate limits of applicable coverages. Such losses could materially impact our cash flow and results of operations. We are predominantly self-insured, with insurance coverage for certain catastrophic risks, for employee health care benefits, workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability and inventory loss. The types and amounts of insurance may vary from time to time based on our decisions with respect to risk retention and regulatory requirements. The occurrence of significant claims, a substantial rise in costs to maintain our insurance or the failure to maintain adequate insurance coverage could have an adverse impact on our financial condition and results of operations. We may incur property, casualty or other losses not covered by our insurance. We must attract, train and retain a large and growing number of qualified employees, while controlling related labor costs and maintaining our core values. Our ability to control labor and benefit costs is subject to numerous internal and external factors, including regulatory changes, prevailing wage rates, and healthcare and other insurance costs. We compete with other retail and non-retail businesses for these employees and invest significant resources in training and motivating them. There is no assurance that we will be able to attract or retain highly qualified employees in the future, which could have a material adverse effect on our business, financial condition and results of operations. Our success depends on the continued contributions of members of our senior management and other key operations, merchandising and administrative personnel. Failure to identify and implement a succession plan for key senior management could negatively impact the business. Inability to attract, train and retain highly qualified employees could adversely impact our business, financial condition and results of operations. Multichannel retailing is rapidly evolving and we must keep pace with changing member expectations and new developments by our competitors. Our members are increasingly using mobile phones, tablets, computers, and other devices to shop and to interact with us through social media. We are making technology investments in our websites and mobile applications. If we are unable to make, improve, or develop relevant member-facing technology in a timely manner, our ability to compete and our results of operations could be adversely affected. If we do not successfully develop and maintain a relevant multichannel experience for our members, our results of operations could be adversely impacted. 12 We may not timely identify or effectively respond to consumer trends, which could negatively affect our relationship with our members, the demand for our products and services, and our market share. It is difficult to consistently and successfully predict the products and services that our members will desire. Our success depends, in part, on our ability to identify and respond to trends in demographics and consumer preferences. Failure to identify timely or effectively respond to changing consumer tastes, preferences (including those relating to sustainability of product sources and animal welfare) and spending patterns could negatively affect our relationship with our members, the demand for our products and services and our market share. If we are not successful at predicting our sales trends and adjusting our purchases accordingly, we may have excess inventory, which could result in additional markdowns and reduce our operating performance. This could have an adverse effect on net sales, gross margin and operating income. If our merchandise offerings, such as food and prepared food products for human consumption, drugs, children's products, pet products, and durable goods, do not meet or are perceived not to meet applicable safety standards or our members' expectations regarding safety, we could experience lost sales, increased costs, litigation or reputational harm. The sale of these items involves the risk of health-related illness or injury to our members. Such illnesses or injuries could result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, manufacturing, storage, handling and transportation phases, or faulty design. Our vendors are generally contractually required to comply with product safety laws, and we are dependent on them to ensure that the products we buy comply with all safety standards. While we are subject to governmental inspection and regulations and work to comply in all material respects with applicable laws and regulations, we cannot be sure that consumption or use of our products will not cause a health-related illness or injury in the future or that we will not be subject to claims, lawsuits, or government investigations relating to such matters resulting in costly product recalls and other liabilities that could adversely affect our business and results of operations. Even if a product liability claim is unsuccessful or is not fully pursued, negative publicity could adversely affect our reputation with existing and potential members and our corporate and brand image, and these effects could be long term. We might sell products that cause unexpected illness or injury to our members, harm to our reputation, and expose us to litigation. We accept payments using a variety of methods, including cash and checks, a select variety of credit and debit cards, and our proprietary cash card. As we offer new payment options to our members, we may be subject to additional rules, regulations, compliance requirements, and higher fraud losses. For certain payment methods, we pay interchange and other related card acceptance fees, along with additional transaction processing fees. We rely on third parties to provide payment transaction processing services, including the processing of credit and debit cards, and our proprietary cash card, and it could disrupt our business if these companies become unwilling or unable to provide these services to us. We are also subject to payment card association and network operating rules, including data security rules, certification requirements and rules governing electronic funds transfers, which could change over time. For example, we are subject to Payment Card Industry Data Security Standards ("PCI DSS"), which contain compliance guidelines and standards with regard to our security surrounding the physical and electronic storage, processing and transmission of individual cardholder data. In addition, if our internal systems are breached or compromised, we may be liable for card re-issuance costs, subject to fines and higher transaction fees and lose our ability to accept credit and/or debit card payments from our members, and our business and operating results could be adversely affected. We are subject to payment-related risks. 11 Our security measures may be undermined due to the actions of outside parties, employee error, internal or external malfeasance, or otherwise, and, as a result an unauthorized party may obtain access to our data systems and misappropriate business and personal information. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may not immediately produce signs of intrusion, we may be unable to anticipate these techniques, timely discover or counter them, or implement adequate preventative measures. Any such breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation, and potentially have an adverse effect on our business. The use of data by our business and our business associates is regulated at the national and state or local level in all of our operating countries. Privacy and information-security laws and regulations change, and compliance with them may result in cost increases due to necessary systems changes and the development of new processes. If we or those with whom we share information fail to comply with these laws and regulations, our reputation could be damaged, possibly resulting in lost future business, and we could be subjected to additional legal risk as a result of non-compliance. If we do not maintain the privacy and security of member-related and other business information, we could damage our reputation with members, incur substantial additional costs, and become subject to litigation. Taiwan 741 Spain 21 2016 686 23 10 1 12 2015 663 29 9 3 17 2014 634 634 98 2 85 6 715 Our industry is highly competitive, based on factors such as price, merchandise quality and selection, location, convenience, distribution strategy, and customer service. We compete on a worldwide basis with global, national, and regional wholesalers and retailers, including supermarkets, supercenters, internet retailers, gasoline stations, hard discounters, department and specialty stores, and operators selling a single category or narrow range of merchandise. Wal-Mart, Target, Kroger, and Amazon.com are among our significant general merchandise retail competitors. We also compete with warehouse club operations (primarily Wal- Mart's, Sam's Club and BJ's Wholesale Club), and nearly every major U.S. and Mexico metropolitan area has multiple club operations. At the end of fiscal 2017, our warehouses contained approximately 107.3 million square feet of operating floor space: 75.4 million in the U.S.; 13.5 million in Canada; and 18.4 million in Other International. We operate depots for the consolidation and distribution of most merchandise shipments to the warehouses, and various processing, packaging, and other facilities to support ancillary and other businesses, including our online business. We operate 24 depots, consisting of approximately 11.0 million square feet. Our executive offices are located in Issaquah, Washington, and we maintain 18 regional offices in the U.S., Canada and Other International locations. 746 130 98 518 Total .. 746 5 1 4 2018 (expected through 12/31/2017). 26 7 6 13 2017 29 451 2013 and prior Total Warehouses in Operation 37 97 12 98 514 Total Building and/or (1) Lease Land 12 22 37 85 416 Own Land and Building Total France Iceland 111 602 6 28 Total Other International Canada United States The following schedule shows warehouse openings, net of closings and relocations, and expected openings through December 31, 2017: (1) 102 of the 154 leases are land-only leases, where Costco owns the building. 741 154 Australia 587 9 3 13 13 13 7 26 14 2 Competition We receive, retain, and transmit personal information about our members and entrust that information to third-party business associates, including cloud service providers that perform activities for us. Our warehouse and online businesses depend upon the secure transmission of encrypted confidential information over public networks, including information permitting cashless payments. A compromise of our security systems or those of our business associates, that results in our members' information being obtained by unauthorized persons, could adversely affect our reputation with our members and others, as well as our operations, results of operations, financial condition and liquidity, and could result in litigation against us or the imposition of penalties. In addition, a breach could require that we expend significant additional resources related to the security of information systems and could disrupt our operations. 28 2,039 Net income per diluted common share attributable to Costco 6.08 5.33 5.37 4.65 4.63 Cash dividends declared per common share 8.90 1.70 6.51 2,058 1.33 Changes in comparable sales (2) United States Canada Other International Total Company. Increase in Total Company comparable sales 4% 1 % 3% 5% 6% 5% 8.17 2,377 2,350 2,679 2,853 2,646 2,533 2,428 2,286 Gross margin (1) as a percentage of net sales Selling, general and administrative 11.33% 11.09 % 10.66% 10.62% expenses as a percentage of net sales 10.26% 10.40 % 10.07 % 9.89% 9.82% Operating income. $ 4,111 $ 3,672 $ 3,624 $ 3,220 $ 3,053 Net income attributable to Costco (3)% $102,870 (5)% 9% Costco stockholders' equity. $ 10,778 $ 12,079 $ 10,617 $ 12,303 $ 10,833 WAREHOUSE INFORMATION Warehouses in Operation.. Beginning of year 715 686 663 4,986 634 Opened.... 28 33 26 30 26 Closed due to relocation (2) (4) (3) (1) 0 608 29,936 32,662 5,084 33,017 4,852 2% (3)% (3)% 3% 1% 4% 0 % 1 % 4% 6% excluding the impact of changes in foreign currency and gasoline prices. 4% 4 % 7 % 6% 6% BALANCE SHEET DATA Net property and equipment. $ 18,161 Total assets 36,347 Long-term debt, excluding current portion . . 6,573 $ 17,043 33,163 4,061 $ 15,401 $ 14,830 $ 13,881 2% $ 110,212 $113,666 $116,073 158.25 146.44 0.450 168.87 143.28 0.400 163.10 138.30 0.400 (1) Includes a special cash dividend of $7.00 per share. Payment of future dividends is subject to declaration by the Board of Directors. Factors considered in determining dividends include our profitability and expected capital needs. Subject to these qualifications, we presently expect to continue to pay dividends on a quarterly basis. Issuer Purchases of Equity Securities $ 169.04 $ 141.29 $ 0.450 The following table sets forth information on our common stock repurchase program activity for the fourth quarter of fiscal 2017 (dollars in millions, except per share data): Period May 8-June 4, 2017 of Shares Purchased Average Price Paid per Share 92,000 $ 171.87 Total Number of Shares Purchased as Part of Publicly Announced Program(1) 92,000 $ Maximum Dollar Value of Shares that May Yet be Purchased under the Program 2,973 June 5-July 2, 2017 Total Number 0.450 142.24 163.98 In 2017 and 2015, our provision was favorably impacted by net tax benefits of $104 and $68, respectively, primarily due to tax benefits recorded in connection with the May 2017 and February 2015 special cash dividends paid to employees through our 401(K) Retirement Plan of $82 and $57, respectively. These dividends are deductible for U.S. income tax purposes. MARKET FOR COSTCO COMMON STOCK Market Information and Dividend Policy Our common stock is traded on the NASDAQ Global Select Market under the symbol "COST." On October 10, 2017, we had 8,629 stockholders of record. The following table shows the quarterly high and low closing prices of our common stock as reported by NASDAQ for each quarter during the last two fiscal years and the quarterly cash dividend declared per share. 2017: Fourth Quarter. Third Quarter Second Quarter First Quarter. . 2016: Fourth Quarter Third Quarter Second Quarter First Quarter. Price Range High Cash Low Dividends Declared $ 182.20 $ 150.44 $ 0.500 182.45 164.55 7.500 (1) 172.00 150.11 0.450 573,000 162.00 573,000 2,881 8/31/14 Costco Wholesale Corporation Peer Group Index 8/30/15 8/28/16 9/3/17 S&P 500 The graph assumes the investment of $100 in Costco common stock, the S&P 500 Index and the Peer Group Index on September 2, 2012 and reinvestment of all dividends. Available Information Our U.S. internet website is www.costco.com. We make available through the Investor Relations section of that site, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and Forms 3, 4 and 5, and any amendments to those reports, as soon as reasonably practicable after filing such materials with, or furnishing such documents to, the Securities and Exchange Commission (SEC). The information found on our website is not part of this or any other report filed with or furnished to the SEC. In addition, the public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers, such as the Company, that file electronically with the SEC at www.sec.gov. 20 20 FIVE YEAR OPERATING AND FINANCIAL HIGHLIGHTS The following table sets forth information concerning our consolidated financial condition, operating results, and key operating metrics. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, included in this Report, and our consolidated financial statements and notes thereto, included in this Report. SELECTED FINANCIAL DATA (dollars in millions, except per share data) Sept. 3, 2017 As of and for the year ended RESULTS OF OPERATIONS (53 weeks) Aug. 28, 2016 (52 weeks) Aug. 30, 2015 (52 weeks) Aug. 31, 2014 (52 weeks) Sept. 1, 2013 (52 weeks) Net sales Membership fees $ 126,172 9/1/13 End of year. S&P 500 INDEX AND PEER GROUP INDEX 9/2/12 July 3-July 30, 2017 451,000 155.06 451,000 2,811 July 31-September 3, 2017 396,000 156.95 396,000 2,749 Total fourth quarter. 1,512,000 $ 159.21 1,512,000 (1) The repurchase program is conducted under a $4,000 authorization approved by our Board of Directors in April 2015, which expires in April 2019. Equity Compensation Plans Information related to our Equity Compensation Plans is incorporated herein by reference to Costco's Proxy Statement filed with the Securities and Exchange Commission. 19 Performance Graph The following graph compares the cumulative total shareholder return (stock price appreciation plus dividends) on our common stock for the last five years with the cumulative total return of the S&P 500 Index and the following group of peer companies (based on weighted market capitalization) selected by the Company: Amazon.com Inc.; The Home Depot, Inc.; Lowe's Companies, Best Buy Co., Inc.; Staples Inc.; Target Corporation; Kroger Company; and Wal-Mart Stores, Inc. The information provided is from September 2, 2012 through September 3, 2017. Dollars 250 200 150 100 50 0 COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG COSTCO WHOLESALE CORPORATION, 741 11.35 % 686 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 due to increases in these categories other than fresh foods. This measure eliminates the impact of changes in sales penetration and gross margins from our warehouse ancillary and other businesses. Total gross margin percentage decreased two basis points compared to 2016. Excluding the impact of gasoline price inflation on net sales, gross margin as a percentage of adjusted net sales was 11.40%, an increase of five basis points. This increase was primarily due to amounts earned under the co-branded credit card arrangement in the U.S. of 15 basis points and a benefit of three basis points from non-recurring legal settlements and other matters. The improvement in terms in our current co-brand agreement as compared to the prior co-brand arrangement led to substantial year over year benefits in fiscal 2017. Changes of comparable magnitude will not occur in subsequent years. These increases were partially offset by a six basis point decrease in our core merchandise categories, primarily due to food and sundries as a result of a decrease in sales penetration. The gross margin percentage was also negatively impacted by five basis points due to a LIFO benefit in 2016 and one basis point in warehouse ancillary and other businesses. Changes in foreign currencies relative to the U.S. dollar had an immaterial impact on gross margin in 2017. 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, due to amounts earned under the co-branded credit card arrangement and non-recurring legal settlements and other matters as discussed above. These increases were partially offset by a decrease in core merchandise categories, predominantly food and sundries as a result of a decrease in sales penetration, and a LIFO benefit in 2016. The segment gross margin percentage in our Canadian operations increased, primarily due to increases in warehouse ancillary and other businesses, primarily our pharmacy business, partially offset by a decrease in our core merchandise categories, largely fresh foods. The segment gross margin percentage increased in our Other International operations due to increases across all core merchandise categories, except fresh foods. 2016 vs. 2015 The gross margin of our core merchandise categories, when expressed as a percentage of core merchandise sales, increased 13 basis points, primarily due to increases in these categories other than fresh foods. Total gross margin percentage increased 26 basis points compared to 2015. Excluding the impact of gasoline price deflation on net sales, gross margin as a percentage of adjusted net sales was 11.14%, an increase of five basis points. A larger LIFO benefit in 2016 compared to 2015 positively contributed three basis points. The LIFO benefit resulted largely from lower costs for merchandise inventories, primarily in food and sundries and gasoline. Our core merchandise categories positively contributed one basis point, primarily due to an increase in hardlines, partially offset by food and sundries due to a decrease in sales penetration. Warehouse ancillary and other business gross margin positively contributed one basis point, primarily due to hearing aids and e-commerce businesses, partially offset by our gasoline business. Changes in foreign currencies relative to the U.S. dollar negatively impacted gross margin by approximately $286 in 2016. 26 26 Segment gross margin percentage increased in our U.S. operations predominantly due to a positive contribution from our core merchandise categories, primarily hardlines and softlines, and the LIFO benefit discussed above. The segment gross margin percentage in our Canadian operations decreased, primarily due to a decrease in all core merchandise categories, except hardlines, partially offset by increases in warehouse ancillary and other businesses, primarily pharmacy and e-commerce businesses. The segment gross margin percentage in Other International operations decreased in all merchandise categories, except fresh foods, which was higher. Selling, General and Administrative Expenses SG&A expenses. 2017 2016 12,950 Gross Margin $ 12,068 10.40% 2015 11,445 SG&A expenses as a percentage of net sales.. 2017 vs. 2016 10.07% SG&A expenses as a percentage of net sales decreased 14 basis points compared to 2016. Excluding the impact of gasoline price inflation on net sales, SG&A expenses as a percentage of adjusted net sales was 10.33%, a decrease of seven basis points. Operating costs related to warehouses, ancillary, and other businesses, which includes e-commerce and travel, were lower by nine basis points, primarily due to lower costs associated with the co-branded credit card arrangement in the U.S. of 18 basis points. The improvement in terms in our current co-brand agreement as compared to the prior co-brand arrangement led to substantial year over year benefits in fiscal 2017. Changes of comparable magnitude will not occur in subsequent years. This was partially offset by higher payroll and employee benefit expenses of 11 basis points, primarily in our U.S. operations. Central operating costs were higher by one basis point, primarily due to increased costs associated with our information systems modernization, including increased depreciation for projects placed in service, incurred by our U.S. operations. Stock compensation expense was also higher by one basis point. Changes in foreign currencies relative to the U.S. dollar had an immaterial impact in 2017. 2016 vs. 2015 SG&A expenses as a percentage of net sales increased 33 basis points compared to 2015. Excluding the negative impact of gasoline price deflation on net sales, SG&A expenses as a percentage of adjusted net sales were 10.20%, an increase of 13 basis points. This was largely due to: higher central operating costs of six basis points, predominantly due to costs associated with our information systems modernization, including increased depreciation for projects placed in service, incurred by our U.S. operations; and higher stock compensation expense of four basis points, due to appreciation in the trading price of our stock at the time of grant. Charges for non-recurring legal and regulatory matters during 2016 negatively impacted SG&A expenses by two basis points. Operating costs related to warehouses, ancillary, and other businesses, which includes e-commerce and travel, were higher by one basis point due to higher payroll and employee benefit costs, primarily health care, in our U.S. operations. This increase was partially offset by lower payroll expense as a percentage of net sales in our Canadian operations. Changes in foreign currencies relative to the U.S. dollar decreased our SG&A expenses by approximately $211 in 2016. Preopening Expenses Preopening expenses Warehouse openings, including relocations United States 10.26% 2017 vs. 2016 11.09% 12,601 2015 2,533 4% 2.23% The increase in membership fees was primarily due to membership sign-ups at existing and new warehouses, an extra week of membership fee revenue, the annual fee increase (discussed below), and an increased number of upgrades to our higher-fee Executive Membership program. At the end of 2017, our member renewal rates were 90% in the U.S. and Canada and 87% worldwide. In the first fiscal quarter of 2017, we increased our annual membership fees in certain of our Other International operations. Effective June 1, 2017, we also increased our annual membership fees in the U.S. and Canada for Gold Star (individual), Business and Business add-on by $5 to $60 and for Executive Membership from $110 to $120 (annual membership fee of $60, plus the Executive upgrade of $60); and the maximum 2% reward associated with Executive Membership increased from $750 to $1,000 annually. 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 membership fee revenues during 2017 of approximately $23 and will positively impact the next several quarters. We expect these increases to positively impact membership fee revenue by approximately $175 in fiscal 2018. 2016 vs. 2015 The increase in membership fees was primarily due to membership sign-ups at existing and new warehouses and increased upgrades to our higher-fee Executive Membership program. These increases were partially offset by changes in foreign currencies relative to the U.S. dollar, which negatively impacted fees by approximately $52 in 2016. 25 25 2017 2016 2015 Net sales $ 126,172 $ 116,073 $ 113,666 Less merchandise costs 111,882 102,901 101,065 Gross margin... $ Gross margin percentage 14,290 $ 11.33% 13,172 $ 11.35% Canada Other International. Total warehouse openings, including relocations. 2017 $ 50 $ 41 $ 59 Foreign-currency transaction gains (losses), net. Other, net. . (5) 47 17 11 7 Interest income and other, net. $ 62 $ 80 $ 104 2017 vs. 2016 Foreign-currency transaction gains (losses), net include the revaluation or settlement of monetary assets and liabilities and mark-to-market adjustments for forward foreign-exchange contracts by our Canadian and Other International operations. See Derivatives and Foreign Currency sections in Note 1 of this Report. 2016 vs. 2015 The decrease in interest income in 2016 is attributable to lower average cash and investment balances, due in part to the payment of the outstanding principal balance and interest on the 0.65% Senior Notes in the second quarter of 2016. Provision for Income Taxes Provision for income taxes 715 2017 2016 $ 1,325 $ 32.8% 1,243 34.3% 2015 1,195 33.2% Interest income 2017 vs. 2016 2015 2017 2016 2015 $ 82 $ 78 $ 65 15 25 14 6 2 1 7 6 11 28 33 26 27 Preopening expenses include costs for startup operations related to new warehouses, including relocations, development in new international markets, and expansions at existing warehouses. In 2017, we entered into two new international markets, Iceland and France. Preopening expenses vary due to the number of warehouse openings, the timing of the opening relative to our year-end, whether the warehouse is owned or leased, and whether the opening is in an existing, new, or international market. Interest Expense 2017 2016 2015 134 $ 133 $ 124 Interest expense Interest expense primarily relates to Senior Notes issued by the Company (described in further detail under the heading "Cash Flows from Financing Activities” and in Note 4 to the consolidated financial statements included in this Report). Interest Income and Other, Net 2016 2.28% Effective tax rate 8% 2.26% • Gross margin percentage decreased two basis points; SG&A expenses as a percentage of net sales decreased 14 basis points, driven by lower costs associated with the co-branded credit card arrangement in the U.S.; Net income increased 14% to $2,679, or $6.08 per diluted share compared to $2,350, or $5.33 per diluted share in 2016. The 2017 results were positively impacted by a $82 tax benefit, or $0.19 per diluted share, in connection with the special cash dividend paid to the Company's 401(k) Plan participants and other net benefits of approximately $51, or $0.07 per diluted share, for non-recurring net legal and other matters; In 2017, we re-paid long-term debt totaling $2,200 representing the aggregate principal balances of the 5.5% and 1.125% Senior Notes; we issued $3,800 in aggregate principal amount of Senior Notes which funded a special cash dividend of $7.00 per share paid in May 2017 (approximately $3,100); and In April 2017, the Board of Directors approved an increase in the quarterly cash dividend from $0.45 to $0.50 per share. 23 23 RESULTS OF OPERATIONS Net Sales Net Sales Changes in net sales: U.S. Canada. Other International Total Company ... Changes in comparable sales: U.S. Canada.. Other International 2017 2016 $ 126,172 $ 116,073 2015 $ 113,666 8% 3 % Net sales increased 9% to $126, 172, driven by a 4% increase in comparable sales, sales at new warehouses opened in 2016 and 2017, and the benefit of one additional week of sales in 2017; Membership fee revenue increased 8% to $2,853, primarily due to membership sign-ups at existing and new warehouses, an extra week of membership fees in 2017, the annual fee increase, and executive membership upgrades; 5% We opened 26 net new warehouses in 2017: 13 in the U.S., six in Canada, and seven in our Other International segment, compared to 29 net new warehouses in 2016; • 663 4% 634 MEMBERSHIP INFORMATION Total paid members (000's) 49,400 44,600 42,000 39,000 (1) Net sales less merchandise costs. (2) Includes net sales from warehouses and websites operating for more than one year. For fiscal 2017, the prior year includes the comparable 53 weeks. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (amounts in millions, except per share, membership fee, and warehouse count data) OVERVIEW 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); and changes in the cost of gasoline and associated competitive conditions (primarily impacting our U.S. and Canadian operations). 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, 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. 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. - Our philosophy is to provide our members with quality goods and services at the most 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” – 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, all 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 operate our lower-margin gasoline business in all countries except Korea and France. 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 increasingly less significant relative 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 both domestically and internationally has also increased our sales. Our membership format is an integral part of our business model 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 penetration of our Executive members, and sustain high renewal rates, materially influences our profitability. 22 Our financial performance depends heavily on our ability to control costs. While we believe that we have achieved successes in this area historically, some significant costs are partially outside our control, most particularly health care and utility expenses. With respect to expenses relating to the compensation of our employees, our philosophy is not to seek to minimize their wages and benefits. Rather, we believe that achieving our longer-term objectives of 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 gross margins, modest changes in various items in the income statement, particularly merchandise costs and SG&A 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 11 to the consolidated financial statements included in this Report). Certain countries in the Other International segment have relatively higher rates of square footage growth, lower wages and benefit 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 are references 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. Fiscal year 2017 was a 53-week fiscal year ending on September 3, 2017, while 2016 and 2015 were 52-week fiscal years ending on August 28, 2016, and August 30, 2015, 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. Highlights for fiscal year 2017 included: • • • 10% 47,600 (3)% 6% Total Company 4% 4 % 7% 2017 vs. 2016 Net Sales Net sales increased $10,099 or 9% during 2017, primarily due to a 4% increase in comparable sales, new warehouses opened in 2016 and 2017, and the benefit of one additional week of sales in 2017. Changes in gasoline prices positively impacted net sales by approximately $785, or 68 basis points, due to an 8% increase in the average sales price per gallon. Changes in foreign currencies relative to the U.S. dollar negatively impacted net sales by approximately $295, or 25 basis points, compared to 2016. The negative impact was driven by Other International operations, partially offset by positive impacts attributable to our Canadian operations. Comparable Sales Comparable sales increased 4% during 2017 and were positively impacted by an increase in shopping frequency and, to a lesser extent, an increased average ticket. The average ticket and comparable sales results were positively impacted by an increase in gasoline prices, offset by decreases in foreign currencies relative to the U.S. dollar. Changes in comparable sales includes the negative impact of cannibalization (established warehouses losing sales to our newly opened locations). 24 2016 vs. 2015 4 % Net Sales Comparable Sales Comparable sales were flat during 2016, with an increase in shopping frequency offset by a decrease in the average ticket. The average ticket and comparable sales results were negatively impacted by changes in foreign currencies relative to the U.S. dollar and a decrease in gasoline prices. Changes in comparable sales includes the negative impact of cannibalization (established warehouses losing sales to our newly opened locations). Membership Fees 2017 2016 Membership fees $ 2,853 2,646 (2)% Membership fees as a percentage of net sales. Membership fees increase. Net sales increased $2,407 or 2% during 2016. This was attributable to sales at new warehouses opened in 2015 and 2016. Comparable sales were flat. Changes in foreign currencies relative to the U.S. dollar negatively impacted net sales by approximately $2,690, or 237 basis points, compared to 2015. The negative impact was primarily attributable to our Canadian operations and within certain of our Other International operations. Changes in gasoline prices negatively impacted net sales by approximately $2,194, or 193 basis points, due to a 19% decrease in the average sales price per gallon. 4% $ 8% 4 % Other International 9% 2% 3 % 4% 1 % 3 % 8% 5% (3)% (5)% 2% 2% (3)% 4% 0% 1 % Total Company. Increases in comparable sales excluding the impact of changes in foreign currency and gasoline prices: U.S. 4% 4% 3 % 6% Canada... (3)% 8% The following table summarizes our significant sources and uses of cash and cash equivalents: LIQUIDITY AND CAPITAL RESOURCES 117 Other (6) Total 541 2017 42 and other) 2016 4,285 Net cash provided by operating activities. Net cash used in investing activities Net cash used in financing activities $ 6,726 $ (2,366) (3,218) 3,292 $ (2,345) (2,480) (2,419) (2,324) Our primary sources of liquidity are cash flows generated from warehouse operations, cash and cash equivalents and short-term investments. Cash and cash equivalents and short-term investments were $5,779 and $4,729 at the end of 2017 and 2016, respectively. Of these balances, approximately $1,255 and $1,071 represented unsettled credit and debit card receivables, respectively. These receivables generally settle within four days. Cash and cash equivalents were positively impacted by changes in exchange rates of $25 and $50 in 2017 and 2016, respectfully, and negatively impacted by $418 in 2015. We have not provided for U.S. deferred taxes on cumulative undistributed earnings of certain non-U.S. consolidated subsidiaries, including the remaining undistributed earnings of our Canadian operations, because our subsidiaries have invested or will invest the undistributed earnings indefinitely, or the earnings if repatriated would not result in an adverse tax consequence. Although we have historically asserted that certain non-U.S. undistributed earnings will be permanently reinvested, we may repatriate such earnings to the extent we can do so without an adverse tax consequence. If we determine that such earnings are no longer indefinitely reinvested, deferred taxes, to the extent required and applicable, are recorded at that time. During 2017, we changed our position regarding an additional portion of the undistributed earnings of our Canadian operations, as we determined such earnings could be repatriated without adverse tax consequences. Subsequent to the end of 2017, we repatriated a portion of our undistributed earnings in our Canadian operations without adverse tax consequences. 700 Cash Flows from Operating Activities 2015 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 have no current plans to repatriate for use in the U.S. cash and cash equivalents and short-term investments held by non-U.S. consolidated subsidiaries whose earnings are considered indefinitely reinvested. Cash and cash equivalents and short-term investments held at these subsidiaries with earnings considered to be indefinitely reinvested totaled $1,463 at September 3, 2017. (2) Includes contractual interest payments and excludes deferred issuance costs. 17 Merchandise inventories are stated at the lower of cost or market. U.S. merchandise inventories are valued by the cost method of accounting, using the last-in, first-out (LIFO) basis. The Company believes the LIFO method more fairly presents the results of operations by more closely matching current costs with current revenues. The Company records an adjustment each quarter, if necessary, for the projected annual effect of inflation or deflation, and these estimates are adjusted to actual results determined at year-end, after actual inflation rates and inventory levels for the year have been determined. Canadian and Other International merchandise inventories are predominantly valued using the cost and retail inventory methods, respectively, using the first-in, first-out (FIFO) basis. Merchandise Inventories Net cash provided by operating activities totaled $6,726 in 2017, compared to $3,292 in 2016. Our cash flow provided by operations is primarily derived from net sales and membership fees. Cash flow used in operations generally consists of payments to our merchandise vendors, warehouse operating costs including payroll and employee benefits, utilities, and credit and debit card processing fees. Cash used in operations also includes payments for income taxes. The increase in net cash provided by operating activities for 2017 when compared to 2016 was primarily due to accelerated vendor payments of approximately $1,700 made in the last week of fiscal 2016, in advance of implementing our modernized accounting system. We account for membership fee revenue, net of refunds, on a deferred basis, whereby revenue is recognized ratably over one year. Our Executive members qualify for a 2% reward on qualified purchases (up to a maximum reward of approximately $1,000 per year in the U.S. and Canada and varies in our Other International operations), which can be redeemed only at Costco warehouses. We account for this reward as a reduction in sales. The sales reduction and corresponding liability are computed after giving effect to the estimated impact of non-redemptions, based on historical data. We evaluate whether it is appropriate to record the gross amount of merchandise sales and related costs or a net amount. Generally, when we are the primary obligor, subject to inventory risk, have latitude in establishing prices and selecting suppliers, influence product or service specifications, or have several but not all of these indicators, revenue is recorded on a gross basis. If we are not the primary obligor and do not possess other indicators of gross reporting as noted above, we record a net amount, which is reflected in net sales. We generally recognize sales, which includes gross shipping fees where applicable, net of returns, at the time the member takes possession of merchandise or receives services. When we collect payment from members prior to the transfer of ownership of merchandise or the performance of services, the amount is generally recorded as deferred sales in the consolidated balance sheets until the sale or service is completed. We provide for estimated sales returns based on historical trends and reduce sales and merchandise costs accordingly. Our sales returns reserve is based on an estimate of the net realizable value of merchandise inventories to be returned. Amounts collected from members for sales and value added taxes are recorded on a net basis. Revenue Recognition 31 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, including those related to revenue recognition, merchandise inventory valuation, impairment of long-lived assets, insurance/self- insurance liabilities, and income taxes. We base our estimates on historical experience and on assumptions that we believe to be reasonable, and we continue to review and evaluate these estimates. For further information on significant accounting policies, see discussion in Note 1 to the consolidated financial statements included in this Report. Critical Accounting Estimates In the opinion of management, we have no off-balance sheet arrangements that have had, or are reasonably likely to have, a material current or future effect on our financial condition or financial statements other than operating leases, included in the table above and discussed in Note 1 and Note 5 to the consolidated financial statements included in this Report. Off-Balance Sheet Arrangements 38 (6) Includes asset retirement obligations, deferred compensation obligations and current liabilities for unrecognized tax contingencies. The total amount excludes $35 of non-current unrecognized tax contingencies and $29 of other obligations due to uncertainty regarding the timing of future cash payments. (4) Includes build-to-suit lease obligations and contractual interest payments. (3) Operating lease obligations exclude amounts for common area maintenance, taxes, and insurance and have been reduced by $112 to reflect sub-lease income. (1) Includes only open merchandise purchase orders. 20,929 5,427 $ 3,058 $ 2,774 $ 9,670 $ $ 140 72 13 (5) The amounts exclude certain services negotiated at the individual warehouse or regional level that are not significant and generally contain clauses allowing for cancellation without significant penalty. Cash Flows from Investing Activities 6 $ 29 2,588 2,650 7,528 Operating leases (3) 216 429 345 2,123 3,113 Construction and land obligations. 2,060 584 32 885 80 4 668 65 99 66 582 We provide for estimated inventory shrinkage between physical inventory counts as a percentage of net sales. The provision is adjusted to reflect results of the actual physical inventory counts, which generally occur in the second and fourth quarters. 745 Capital lease obligations (4) 230 Long-term debt (2). 8,035 29 Capital Expenditure Plans Our primary requirement for capital is acquiring land, buildings, and equipment for new and remodeled warehouses. To a lesser extent, capital is required for initial warehouse operations, our information systems, and working capital. We opened 26 new warehouses and relocated 2 warehouses in 2017 and plan to open up to 24 new warehouses and relocate up to six warehouses in 2018. In 2017 we spent $2,502 on capital expenditures, and it is our current intention to spend approximately $2,500 to $2,700 during fiscal 2018. These expenditures are expected to be financed with cash from operations, existing cash and cash equivalents, and short-term investments. 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 $3,218 in 2017, compared to $2,419 in 2016. The primary uses of cash in 2017 were related to dividend payments, predominantly the special dividend paid in May 2017, and the repayments of debt totaling $2,200 representing the aggregate principal balances of the 5.5% and 1.125% Senior Notes. Net cash used in financing activities in 2016 includes a $1,200 repayment of our 0.65% Senior Notes in December 2015. In May 2017, we issued $3,800 in aggregate principal amount of Senior Notes. The proceeds received were net of a discount and used to pay the special cash dividend and a portion of the redemption of the 1.125% Senior Notes. Stock Repurchase Programs During 2017 and 2016, we repurchased 2,998,000 and 3,184,000 shares of common stock, at average prices of $157.87 and $149.90, totaling approximately $473 and $477, respectively. The remaining amount available to be purchased under our approved plan was $2,749 at the end of 2017. These amounts may differ from the stock repurchase balances in the accompanying consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of each fiscal year. 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 Cash dividends paid in 2017 totaled $8.90 per share, which included a special cash dividend of $7.00 per share, as compared to $1.70 per share in 2016. In April 2017, our Board of Directors increased our quarterly cash dividend from $0.45 to $0.50 per share. Bank Credit Facilities and Commercial Paper Programs We maintain bank credit facilities for working capital and general corporate purposes. At September 3, 2017, we had borrowing capacity under these facilities of $833, including a $400 revolving line of credit entered into by our U.S. operations in June 2017 with an expiration date of one year. The Company currently has no plans to draw upon the new revolving line of credit. Our international operations maintain $349 of the total borrowing capacity under bank credit facilities, of which $166 is guaranteed by the Company. There were no outstanding short-term borrowings under the bank credit facilities at the end of 2017 and 2016. The Company has letter of credit facilities, for commercial and standby letters of credit, totaling $181. The outstanding standby letters of credit under these facilities at the end of 2017 totaled $103 and expire within one year. The bank credit facilities have various expiration dates, all within one year, and we generally intend to renew these facilities prior to their expiration. 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. 30 50 Contractual Obligations At September 3, 2017, our commitments to make future payments under contractual obligations were as follows: Payments Due by Fiscal Year 2018 2019 to 2020 2021 to 2022 2023 and thereafter Total Contractual obligations Purchase obligations (merchandise) $ 8,029 $ Net cash used in investing activities totaled $2,366 in 2017, compared to $2,345 in 2016. Cash flow used in investing activities is primarily related to funding warehouse expansion and remodeling. Net cash flows from investing activities also includes purchases and maturities of short-term investments. Inventory cost, where appropriate, is reduced by estimates of vendor rebates when earned or as we progress toward earning those rebates, provided they are probable and reasonably estimable. Other consideration received from vendors is generally recorded as a reduction of merchandise costs upon completion of contractual milestones, terms of agreement, or using other systematic approaches. 2013 We evaluate our long-lived assets for impairment on an annual basis, when relocating or closing a facility, or when events or changes in circumstances occur that may indicate the carrying amount may not be fully recoverable. Our judgments are based on existing market and operational conditions. Future events could cause us to conclude that impairment factors exist, requiring a downward adjustment of these assets to their then-current fair value. Executive Vice President, Chief Financial Officer and Director Richard A. Galanti Ruaud President, Chief Executive Officer and Director W. Craig Jelinek Cray Jeline Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Under the supervision and with the participation of our management, we assessed the effectiveness of our internal control over financial reporting as of September 3, 2017, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on its assessment, management has concluded that our internal control over financial reporting was effective as of September 3, 2017. The attestation of KPMG LLP, our independent registered public accounting firm, on the effectiveness of our internal control over financial reporting is included with the consolidated financial statements in this Report. Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of our assets; (2) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with appropriate authorizations; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Management's Annual Report on Internal Control over Financial Reporting There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our fiscal quarter ended September 3, 2017, that has materially affected or is reasonably likely to materially affect our internal control over financial reporting. As of the end of the period covered by this Annual Report on Form 10-K, we performed an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities and Exchange Act of 1934 (the Exchange Act)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures are effective. 36 The consolidated financial statements have been audited by KPMG LLP, an independent registered public accounting firm, who conducted their audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). The independent registered public accounting firm's responsibility is to express an opinion as to the fairness with which such consolidated financial statements present our financial position, results of operations and cash flows in accordance with U.S. GAAP. Disclosure Controls and Procedures Management's Report on the Consolidated Financial Statements MANAGEMENT'S REPORTS 35 55 Information related to our Executive Compensation and Director Compensation is incorporated herein by reference to Costco's Proxy Statement filed with the Securities and Exchange Commission. Executive Compensation We have adopted a code of ethics for senior financial officers pursuant to Section 406 of the Sarbanes- Oxley Act. Copies of the code are available free of charge, by writing to Secretary, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, WA 98027. If the Company makes any amendments to this code (other than technical, administrative, or non-substantive amendments) or grants any waivers, including implicit waivers, from this code to the CEO, chief financial officer or principal accounting officer and controller, we will disclose (on our website or in a Form 8-K report filed with the SEC) the nature of the amendment or waiver, its effective date, and to whom it applies. Executive Vice President, Chief Operating Officer, 1993 68 Southwest Division and Mexico. 52 2016 65 Costco's management is responsible for the preparation, integrity and objectivity of the accompanying consolidated financial statements and the related financial information. The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP) and necessarily include certain amounts that are based on estimates and informed judgments. The Company's management is also responsible for the preparation of the related financial information included in this Annual Report on Form 10-K and its accuracy and consistency with the consolidated financial statements. 65 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Costco Wholesale Corporation: Purchase obligations 38 October 17, 2017 Seattle, Washington KPMG LLP We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of September 3, 2017 and August 28, 2016, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the 53-week period ended September 3, 2017, and the 52-week periods ended August 28, 2016 and August 30, 2015, and our report dated October 17, 2017 expressed an unqualified opinion on those consolidated financial statements. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 3, 2017, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. We have audited Costco Wholesale Corporation's (the Company) internal control over financial reporting as of September 3, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting included in Item 9A. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. The Board of Directors and Stockholders Costco Wholesale Corporation: REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 37 37 KPMG LLP October 17, 2017 Seattle, Washington We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Costco Wholesale Corporation's internal control over financial reporting as of September 3, 2017, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated October 17, 2017 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. - In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Costco Wholesale Corporation and subsidiaries as of September 3, 2017 and August 28, 2016, and the results of their operations and their cash flows for the 53-week period ended September 3, 2017, and the 52-week periods ended August 28, 2016 and August 30, 2015, in conformity with U.S. generally accepted accounting principles. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. We have audited the accompanying consolidated balance sheets of Costco Wholesale Corporation as of September 3, 2017 and August 28, 2016, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the 53-week period ended September 3, 2017 and the 52-week periods ended August 28, 2016 and August 30, 2015. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The Board of Directors and Stockholders Impairment of Long-Lived Assets 1994 Executive Vice President, Ancillary Businesses, Manufacturing, and Business Centers. Mr. Rose was Senior Vice President, Merchandising, Food and Sundries and Private Label from 1995 to December 2012. Name The executive officers of Costco, their position, and ages are listed below. All executive officers have 25 or more years of service with the Company. EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE == 34 We are exposed to fluctuations in prices for energy that we consume, particularly electricity and natural gas, which we seek to partially mitigate through fixed-price contracts for certain of our warehouses and other facilities, predominantly in the U.S. and Canada. We also enter into variable-priced contracts for some purchases of electricity and natural gas, in addition to fuel for our gas stations, on an index basis. These contracts meet the characteristics of derivative instruments, but generally qualify for the "normal purchases or normal sales” exception under authoritative guidance and require no mark-to-market adjustment. Commodity Price Risk We seek to manage counterparty risk associated with these contracts by limiting transactions to counterparties with which we have established banking relationships. There can be no assurance that this practice is effective. These contracts are limited to less than one year. See Note 1 and Note 3 to the consolidated financial statements included in this Report for additional information on the fair value of unsettled forward foreign-exchange contracts at the end of 2017 and 2016. A hypothetical 10% strengthening of the functional currency compared to the non-functional currency exchange rates at September 3, 2017 would have decreased the fair value of the contracts by $69 and resulted in an unrealized loss in the consolidated statements of income for the same amount. Our foreign subsidiaries conduct certain transactions in their non-functional currencies, which exposes us to fluctuations in exchange rates. We manage these fluctuations, in part, through the use of forward foreign- exchange contracts, seeking to economically hedge the impact of these fluctuations on known future expenditures denominated in a non-functional foreign-currency. The contracts are intended primarily to economically hedge exposure to U.S. dollar merchandise inventory expenditures made by our international subsidiaries whose functional currency is other than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. We seek to mitigate risk with the use of these contracts and do not intend to engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features. Foreign Currency-Exchange Risk The nature and amount of our long-term debt may vary as a result of business requirements, market conditions, and other factors. As of the end of 2017, the majority of our long-term debt has fixed interest rates and is carried at $6,632. Fluctuations in interest rates may affect the fair value of the fixed-rate debt. See Note 4 to the consolidated financial statements included in this Report for more information on our long- term debt. W. Craig Jelinek A 100 basis-point change in interest rates as of the end of 2017 would have an incremental change in fair market value of $20. For those investments that are classified as available-for-sale, the unrealized gains or losses related to fluctuations in market volatility and interest rates are reflected within stockholders' equity in accumulated other comprehensive income. 33 Our exposure to market risk for changes in interest rates relates primarily to our investment holdings that are diversified among various instruments considered to be cash equivalents as defined in Note 1 to the consolidated financial statements included in this Report, as well as short-term investments in government and agency securities, and asset and mortgage-backed securities with effective maturities of generally three months to five years at the date of purchase. The primary objective of our investment activities is to preserve principal and secondarily to generate yields. The majority of our short-term investments are in fixed interest rate securities. These securities are subject to changes in fair value due to interest rate fluctuations. Our policy limits investments in the U.S. to direct U.S. government and government agency obligations, repurchase agreements collateralized by U.S. government and government agency obligations, and U.S. government and government agency money market funds. Our wholly-owned captive insurance subsidiary invests in U.S. government and government agency obligations and U.S. government and government agency money market funds. Our Canadian and Other International subsidiaries' investments are primarily in money market funds, bankers' acceptances, and bank certificates of deposit, generally denominated in local currencies. Interest Rate Risk QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (amounts in millions) Our exposure to financial market risk results from fluctuations in interest rates and foreign currency exchange rates. We do not engage in speculative or leveraged transactions or hold or issue financial instruments for trading purposes. See Note 1 to the consolidated financial statements included in this Report for a detailed description of recent accounting pronouncements. Recent Accounting Pronouncements The determination of our provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment also is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits associated with uncertain tax positions are recorded only after determining a more-likely-than- not probability that the positions will withstand challenge from tax authorities. When facts and circumstances change, we reassess these positions and record any changes in the consolidated financial statements as appropriate. Our cumulative foreign undistributed earnings, except the additional portion of earnings in Canada, were considered indefinitely reinvested as of September 3, 2017. These earnings would be subject to U.S. income tax if we changed our position and could result in a U.S. deferred tax liability. Although we have historically asserted that certain non-U.S. undistributed earnings will be permanently reinvested, we may repatriate such earnings to the extent we can do so without an adverse tax consequence. We are predominantly self-insured, with insurance coverage for certain catastrophic risks, for employee health care benefits, workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability, and inventory loss. We use different mechanisms including a wholly-owned captive insurance subsidiary and participate in a reinsurance program. Liabilities associated with the risks that we retain are not discounted and are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends. Income Taxes Insurance/Self-Insurance Liabilities 32 32 333 Executive Vice President, Chief Operating Officer, Merchandising. Mr. Vachris was Senior Vice President, Real Estate Development, from August 2015 to June 2016, and Senior Vice President, General Manager, Northwest Region from 2010 to July 2015. Position Executive Officer Executive Vice President, Chief Operating Officer, Eastern and Canadian Divisions. Mr. Portera has held these positions since 1994, and has been the Chief Diversity Officer since 2010. Dennis R. Zook. Ron M. Vachris Timothy L. Rose Joseph P. Portera. 64 2011 66 2001 Executive Vice President, Chief Information Officer. Mr. Moulton was Executive Vice President, Real Estate Development from 2001 until March 2010. Executive Vice President, Chief Operating Officer, International. Mr. Murphy was Senior Vice President, International, from 2004 to October 2010. James P. Murphy. . . . . President and Chief Executive Officer. Mr. Jelinek has been President and Chief Executive Officer since January 2012 and a director since February 2010. He was President and Chief Operating Officer from February 2010 to December 2011. Prior to that he was Executive Vice President, Chief Operating Officer, Merchandising since 2004. Paul G. Moulton 2010 Executive Vice President, Chief Operating Officer, Northern Division. Mr. McKay was Senior Vice President, General Manager, Northwest Region from 2000 to March 2010. John D. McKay. 61 1993 Executive Vice President and Chief Financial Officer. Mr. Galanti has been a director since January 1995. Executive Vice President, Administration. Mr. Lazarus 2012 70 was Senior Vice President, Administration-Global Operations from 2006 to September 2012. Franz E. Lazarus. Richard A. Galanti.. 65 1995 Age Since 60 (equipment, services 1,243 1,195 CONSOLIDATED BALANCE SHEETS 518 518 (165) - (165) 2,673 notes.... 5 Repurchases of common stock.. (2,998) - ( (41) 98 Cash dividends declared and other... (2) — (432) (3,945) (473) — (473) (3,945) (3,945) BALANCE AT SEPTEMBER 3, 2017 437,204 $ 2 4 $ 13 55 (146) (41) (436) (477) (477) (746) (749) 437,524 2 5,490 85 (1,099) 12,079 253 12,332 --- - 2,679 2,679 35 2,714 85 518 (165) 7,686 (146) 5,800 $ 10,778 $ Other non-cash operating activities, net.. Deferred income taxes. . 514 459 394 (38) (74) (86) 24 17 Excess tax benefits on stock-based awards (5) 269 (101) Changes in operating assets and liabilities: Merchandise inventories.. (894) (25) (890) Accounts payable 2,258 (1,532) (29) (1,014) $ 5,988 $ Stock-based compensation 1,255 301 $11,079 The accompanying notes are an integral part of these consolidated financial statements. 42 COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in millions) 53 Weeks Ended September 3, 2017 52 Weeks Ended August 28, 2016 52 Weeks Ended August 30, 2015 1,127 CASH FLOWS FROM OPERATING ACTIVITIES $ 2,714 $ 2,376 $ 2,409 Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities: Depreciation and amortization 1,370 Net income including noncontrolling interests 880 Conversion of convertible Stock-based compensation 2,377 2,377 32 2,409 Interest income and other, net (1,045) (1,045) (18) (1,063) 394 - 394 69 69 989 69 69 Release of vested restricted stock units (RSUs), including tax effects 2,736 (122) 394 (3.456) --- Foreign-currency translation adjustment and other, net. Additional Shares Paid-in Accumulated Other Comprehensive (000's) Amount Capital Income (Loss) Retained Earnings Total Costco Stockholders' Stock options exercised, including tax effects Equity Total Equity BALANCE AT AUGUST 31, 2014 437,683 $ 2 $ 4,919 $ (76) $ 7,458 $ 12,303 $ 212 $12,515 Net income Noncontrolling Interests Release of vested RSUs, including tax effects (42) Cash dividends declared 4 26 459 437,952 2 ཙཽ། - - 459 - - 459 4 ☐ | 22 (146) Release of vested RSUs, including tax effects 2,749 Conversion of convertible notes.. Repurchases of common stock... (3,184) Cash dividends declared and other.. BALANCE AT AUGUST 28, 2016 Net income Foreign-currency translation adjustment and other, net. 3 ---- Repurchases of common stock.. 22 26 and other. . . BALANCE AT AUGUST 30, 2015 Net income Foreign-currency translation adjustment and other, net. Stock-based compensation Stock options exercised, including tax effects (122) (122) (452) 2,376 (494) (2,865) (2,865) (2,865) 5,218 ---- 2,350 (1,121) 6,518 10,617 226 10,843 2,350 (494) Other operating assets and liabilities, net.. 807 547 Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. Level 3: Significant unobservable inputs that are not corroborated by market data. The Company's valuation techniques used to measure the fair value of money market mutual funds are based on quoted market prices, such as quoted net asset values published by the fund as supported in an active market. Valuation methodologies used to measure the fair value of all other non-derivative financial instruments are based on independent external valuation information. The pricing process uses data from a variety of independent external valuation information providers, including trades, bid price or spread, two- sided markets, quotes, benchmark curves including but not limited to treasury benchmarks and Libor and swap curves, discount rates, and market data feeds. All are observable in the market or can be derived principally from or corroborated by observable market data. The Company reports transfers in and out of Levels 1, 2, and 3, as applicable, using the fair value of the individual securities as of the beginning of the reporting period in which the transfer(s) occurred. Current financial liabilities have fair values that approximate their carrying values. Long-term financial liabilities include the Company's long-term debt, which are recorded on the balance sheet at issuance price and adjusted for unamortized discounts or premiums and debt issuance costs, which are being amortized to interest expense over the term of the loan. The estimated fair value of the Company's long-term debt is based primarily on reported market values, recently completed market transactions, and estimates based upon interest rates, maturities, and credit. Receivables, Net Receivables consist primarily of vendor, reinsurance, credit card incentive, third-party pharmacy and other receivables. Vendor receivables include coupons, volume rebates or other purchase discounts. Balances are generally presented on a gross basis, separate from any related payable due. In certain circumstances, these receivables may be settled against the related payable to that vendor, in which case the receivables 45 COSTCO WHOLESALE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying a fair value hierarchy, which requires maximizing the use of observable inputs when measuring fair value. The three levels of inputs are: (amounts in millions, except share, per share, and warehouse count data) (Continued) are presented on a net basis. Reinsurance receivables are held by the Company's wholly-owned captive insurance subsidiary and primarily represent amounts ceded through reinsurance arrangements gross of the amounts assumed under reinsurance, which are presented within other current liabilities in the consolidated balance sheets. Credit card incentive receivables primarily represent amounts earned under the co-branded credit card arrangement in the U.S. Third-party pharmacy receivables generally relate to amounts due from members' insurance companies. Other receivables primarily consist of amounts due from governmental entities, mostly tax-related items. Receivables are recorded net of an allowance for doubtful accounts. The allowance is based on historical experience and application of the specific identification method. Write-offs of receivables were immaterial for fiscal years 2017, 2016, and 2015. Merchandise Inventories Merchandise inventories consist of the following at the end of 2017 and 2016: United States Canada Other International Merchandise inventories. 2017 2016 Note 1-Summary of Significant Accounting Policies (Continued) $ 7,091 $6,422 The Company accounts for certain assets and liabilities at fair value. The carrying value of the Company's financial instruments, including cash and cash equivalents, receivables and accounts payable, approximate fair value due to their short-term nature or variable interest rates. See Notes 2, 3, and 4 for the carrying value and fair value of the Company's investments, derivative instruments, and fixed-rate debt, respectively. The Company periodically evaluates unrealized losses in its investment securities for other-than-temporary impairment, using both qualitative and quantitative criteria. In the event a security is deemed to be other- than-temporarily impaired, the Company recognizes the loss in interest income and other, net in the consolidated statements of income. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions, except share, per share, and warehouse count data) Note 1-Summary of Significant Accounting Policies Description of Business Costco Wholesale Corporation (Costco or the Company), a Washington corporation, and its subsidiaries operate membership warehouses based on the concept that offering members low prices on a limited selection of nationally-branded and private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. At September 3, 2017, Costco operated 741 warehouses worldwide: 514 United States (U.S.) locations (in 44 U.S. states, Washington, D.C., and Puerto Rico), 97 Canada locations, 37 Mexico locations, 28 United Kingdom (U.K.) locations, 26 Japan locations, 13 Korea locations, 13 Taiwan locations, nine Australia locations, two Spain locations, one Iceland location, and one France location. The Company operates its e-commerce websites in all countries except Japan, Australia, Spain, Iceland, and France. Basis of Presentation The consolidated financial statements include the accounts of Costco Wholesale Corporation, its wholly- owned subsidiaries, and subsidiaries in which it has a controlling interest. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company's equity. All material inter-company transactions between and among the Company and its consolidated subsidiaries have been eliminated in consolidation. The Company's net income excludes income attributable to noncontrolling interests in its operations in Taiwan and Korea. Unless otherwise noted, references to net income relate to net income attributable to Costco. Fiscal Year End The Company operates on a 52/53 week fiscal year basis with the fiscal year ending on the Sunday closest to August 31. References to 2017 relate to the 53-week fiscal year ended September 3, 2017. References to 2016 and 2015 relate to the 52-week fiscal years ended August 28, 2016, and August 30, 2015, respectively. Use of Estimates Fair Value of Financial Instruments The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. The Company considers as cash and cash equivalents all cash on deposit, highly liquid investments with a maturity of three months or less at the date of purchase, and proceeds due from credit and debit card transactions with settlement terms of up to four days. Credit and debit card receivables were $1,255 and $1,071 at the end of 2017 and 2016, respectively. The Company provides for the daily replenishment of major bank accounts as checks are presented. Included in accounts payable at the end of 2017 and 2016 are $383 and $619, respectively, representing the excess of outstanding checks over cash on deposit at the banks on which the checks were drawn. The Company accelerated vendor payments of approximately $1,700 in the last week of fiscal 2016 in advance of implementing its modernized accounting system in fiscal 2017. Short-Term Investments In general, short-term investments have a maturity at the date of purchase of three months to five years. Investments with maturities beyond five years may be classified, based on the Company's determination, as short-term based on their highly liquid nature and because they represent the investment of cash that is 44 COSTCO WHOLESALE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions, except share, per share, and warehouse count data) (Continued) Note 1-Summary of Significant Accounting Policies (Continued) available for current operations. Short-term investments classified as available-for-sale are recorded at fair value using the specific identification method with the unrealized gains and losses reflected in accumulated other comprehensive income (loss) until realized. Realized gains and losses from the sale of available-for- sale securities, if any, are determined on a specific identification basis and are recorded in interest income and other, net in the consolidated statements of income. Short-term investments classified as held-to-maturity are financial instruments that the Company has the intent and ability to hold to maturity and are reported net of any related amortization and are not remeasured to fair value on a recurring basis. Cash and Cash Equivalents COSTCO WHOLESALE CORPORATION 1,040 1,015 1,703 1,532 $ 9,834 $8,969 As of September 3, 2017, U.S. merchandise inventories valued at LIFO approximated FIFO after considering the lower of cost or market principle. Due to net deflation, a benefit of $64 and $27 was recorded to merchandise costs in 2016, and 2015, respectively. At the end of 2017 and 2016, the cumulative impact of the LIFO valuation on merchandise inventories was zero and immaterial, respectively. The Company recognizes foreign-currency transaction gains and losses related to revaluing or settling monetary assets and liabilities denominated in currencies other than the functional currency in interest income and other, net in the accompanying consolidated statements of income. Generally, these include the U.S. dollar cash and cash equivalents and the U.S. dollar payables of consolidated subsidiaries revalued to their functional currency. Also included are realized foreign-currency gains or losses from settlements of forward foreign-exchange contracts. These items were immaterial for 2017 and resulted in net gains of $38, and $35 for 2016 and 2015, respectively. Revenue Recognition The Company generally recognizes sales, which include gross shipping fees where applicable, net of returns, at the time the member takes possession of merchandise or receives services. When the Company collects payments from members prior to the transfer of ownership of merchandise or the performance of services, the amounts received are generally recorded as deferred sales, included in other current liabilities in the consolidated balance sheets, until the sale or service is completed. The Company reserves for estimated sales returns based on historical trends in merchandise returns and reduces sales and merchandise costs accordingly. The sales returns reserve is based on an estimate of the net realizable value of merchandise 48 1,325 3,604 3,619 4,039 Provision for income taxes INCOME BEFORE INCOME TAXES. The functional currencies of the Company's international subsidiaries are the local currency of the country in which the subsidiary is located. Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Translation adjustments are recorded in accumulated other comprehensive loss. Revenues and expenses of the Company's consolidated foreign operations are translated at average exchange rates prevailing during the year. 104 62 (124) (133) (134) 3,624 3,672 4,111 65 78 82 80 Merchandise inventories are stated at the lower of cost or market. U.S. merchandise inventories are valued by the cost method of accounting, using the last-in, first-out (LIFO) basis. The Company believes the LIFO method more fairly presents the results of operations by more closely matching current costs with current revenues. The Company records an adjustment each quarter, if necessary, for the projected annual effect of inflation or deflation, and these estimates are adjusted to actual results determined at year-end, after actual inflation or deflation rates and inventory levels for the year have been determined. Canadian and Other International merchandise inventories are predominantly valued using the cost and retail inventory methods, respectively, using the first-in, first-out (FIFO) basis. Foreign Currency COSTCO WHOLESALE CORPORATION The Company provides for estimated inventory losses between physical inventory counts as a percentage of net sales, using estimates based on the Company's experience. The provision is adjusted periodically to reflect actual physical inventory counts, which generally occur in the second and fourth fiscal quarters. Inventory cost, where appropriate, is reduced by estimates of vendor rebates when earned or as the Company progresses towards earning those rebates, provided that they are probable and reasonably estimable. Property and Equipment Property and equipment are stated at cost. In general, new building additions are classified into components, each with its own estimated useful life, generally five to fifty years for buildings and improvements and three to twenty years for equipment and fixtures. Depreciation and amortization expense is computed using the straight-line method over estimated useful lives or the lease term, if shorter. Leasehold improvements made after the beginning of the initial lease term are depreciated over the shorter of the estimated useful life of the asset or the remaining term of the initial lease plus any renewals that are reasonably assured at the date the leasehold improvements are made. 46 46 COSTCO WHOLESALE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions, except share, per share, and warehouse count data) (Continued) Note 1-Summary of Significant Accounting Policies (Continued) The Company capitalizes certain computer software and software development costs incurred in developing or obtaining computer software for internal use. These costs are included in equipment and fixtures and amortized on a straight-line basis over the estimated useful lives of the software, generally three to seven years. Repair and maintenance costs are expensed when incurred. Expenditures for remodels, refurbishments and improvements that add to or change the way an asset functions or that extend the useful life are capitalized. Assets that were removed during the remodel, refurbishment or improvement are retired. Assets classified as held-for-sale at the end of 2017 and 2016 were immaterial. The Company is exposed to fluctuations in prices for the energy it consumes, particularly electricity and natural gas, which it seeks to partially mitigate through the use of fixed-price contracts for certain of its warehouses and other facilities, primarily in the U.S. and Canada. The Company also enters into variable- priced contracts for some purchases of natural gas, in addition to fuel for its gas stations, on an index basis. These contracts meet the characteristics of derivative instruments, but generally qualify for the "normal purchases or normal sales" exception under authoritative guidance and require no mark-to-market adjustment. The Company evaluates long-lived assets for impairment on an annual basis, when relocating or closing a facility, or when events or changes in circumstances may indicate the carrying amount of the asset group, generally an individual warehouse, may not be fully recoverable. For asset groups held and used, including warehouses to be relocated, the carrying value of the asset group is considered recoverable when the estimated future undiscounted cash flows generated from the use and eventual disposition of the asset group exceed the respective carrying value. In the event that the carrying value is not considered recoverable, an impairment loss would be recognized for the asset group to be held and used equal to the excess of the carrying value above the estimated fair value of the asset group. For asset groups classified as held-for- sale (disposal group), the carrying value is compared to the disposal group's fair value less costs to sell. The Company estimates fair value by obtaining market appraisals from third party brokers or using other valuation techniques. There were no impairment charges recognized in 2017 and 2016, and charges were immaterial in 2015 and included in selling, general and administrative expenses in the consolidated statements of income. The Company is predominantly self-insured, with insurance coverage for certain catastrophic risks, for employee health care benefits, workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability, and inventory loss. We use different mechanisms including a wholly-owned captive insurance subsidiary (the captive) and participate in a reinsurance program. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated, in part, by considering historical claims experience, demographic factors, severity factors, and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends. At the end of 2017 and 2016, these insurance liabilities were $1,059 and $1,021 in the aggregate, respectively, and were included in accrued salaries and benefits and other current liabilities in the consolidated balance sheets, classified based on their nature. The captive receives direct premiums, which are netted against the Company's premium costs in selling, general and administrative expenses, in the consolidated statements of income. The captive participates in a reinsurance program that includes other third-party participants. The reinsurance agreement is one year in duration, and new agreements are entered into by each participant at their discretion at the commencement of the next calendar year. The participant agreements and practices of the reinsurance program limit a participating members' individual risk. Income statement adjustments related to the reinsurance program and related impacts to the consolidated balance sheets are recognized as information becomes known. In the event the Company leaves the reinsurance program, the Company is not relieved of its primary obligation to the policyholders for activity prior to the termination of the annual agreement. 47 COSTCO WHOLESALE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions, except share, per share, and warehouse count data) (Continued) Note 1-Summary of Significant Accounting Policies (Continued) Derivatives The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of business. It manages these fluctuations, in part, through the use of forward foreign-exchange contracts, seeking to economically hedge the impact of fluctuations of foreign exchange on known future expenditures denominated in a non-functional foreign-currency. The contracts relate primarily to U.S. dollar merchandise inventory expenditures made by the Company's international subsidiaries with functional currencies other than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. The Company seeks to mitigate risk with the use of these contracts and does not intend to engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features. The aggregate notional amounts of open, unsettled forward foreign-exchange contracts were $637 and $572 at the end of 2017 and 2016, respectively. The Company seeks to manage counterparty risk associated with these contracts by limiting transactions to counterparties with which the Company has an established banking relationship. There can be no assurance that this practice is effective. The contracts are limited to less than one year in duration. See Note 3 for information on the fair value of unsettled forward foreign-exchange contracts at the end of 2017 and 2016. The unrealized gains or losses recognized in interest income and other, net in the accompanying consolidated statements of income relating to the net changes in the fair value of unsettled forward foreign-exchange contracts were immaterial in 2017, 2016, and 2015. Insurance/Self-Insurance Liabilities 43 The accompanying notes are an integral part of these consolidated financial statements. 109 0 (106) (51) Proceeds from short-term borrowings 0 106 51 Proceeds from issuance of long-term debt. 3,782 185 Repayments of short-term borrowings. 1,125 (2,200) Minimum tax withholdings on stock-based awards (202) (1,288) (220) Excess tax benefits on stock-based awards 38 Repurchases of common stock (469) (486) 74 Repayments of long-term debt... (1) (178) (45) (236) 557 Net cash provided by operating activities 6,726 3,292 4,285 Additions to property and equipment. CASH FLOWS FROM INVESTING ACTIVITIES Purchases of short-term investments. . Maturities and sales of short-term investments 1,385 (2,502) (1,279) (1,432) 81 (1,501) Other investing activities, net. 30 27 Net cash used in investing activities (2,366) (2,345) 1,434 (2,393) (20) (2,480) CASH FLOWS FROM FINANCING ACTIVITIES Change in bank checks outstanding 1,709 (2,649) (481) 86 Cash dividend payments 3,379 $ 4,801 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest (reduced by $16, $19, and $14, interest capitalized in 2017, 2016, and 2015, respectively). . $ 131 $ Income taxes, net. . $ $ $ 123 $ 953 $ 117 1,186 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Property acquired under build-to-suit and capital leases. $ 17 $ 15 $ 1,185 4,546 $ CASH AND CASH EQUIVALENTS END OF YEAR (3,904) (746) (2,865) Other financing activities, net. (27) (19) 35 Net cash used in financing activities (3,218) (2,419) (2,324) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS. 25 50 (418) Net change in cash and cash equivalents 1,167 (1,422) (937) CASH AND CASH EQUIVALENTS BEGINNING OF YEAR. 3,379 4,801 5,738 Common Stock (amounts in millions) Stock-based compensation . 6.51 Selling, general and administrative 12,950 12,068 11,445 Preopening expenses Operating income OTHER INCOME (EXPENSE) Interest expense 2,714 2,376 Net income attributable to noncontrolling interests. (35) (26) (32) NET INCOME ATTRIBUTABLE TO COSTCO $ 2,679 $ 2,350 $ 2,377 NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO: Basic $ 6.11 $ 101,065 102,901 111,882 Merchandise costs 36,347 $ 33,163 The accompanying notes are an integral part of these consolidated financial statements. 39 REVENUE Net sales Membership fees Total revenue. OPERATING EXPENSES COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (amounts in millions, except per share data) 5.36 $ 53 Weeks Ended 52 Weeks Ended 52 Weeks Ended 126,172 $ 2,853 129,025 August 28, 2016 August 30, 2015 116,073 $ 113,666 2,646 2,533 118,719 116,199 September 3, 2017 $ 5.41 $ August 28, 2016 August 30, 2015 $ 2,714 $ 2,376 2,409 98 26 (1,063) 2,812 2,402 1,346 48 30 14 2,764 $ 2,372 $ 1,332 The accompanying notes are an integral part of these consolidated financial statements. 41 COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF EQUITY September 3, 2017 52 Weeks Ended 52 Weeks Ended 53 Weeks Ended 6.08 $ 5.33 $ 5.37 Shares used in calculation (000's) Basic Diluted 438,437 440,937 438,585 441,263 439,455 442,716 CASH DIVIDENDS DECLARED PER COMMON SHARE $ Diluted 8.90 1.70 The accompanying notes are an integral part of these consolidated financial statements. 40 COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (amounts in millions) NET INCOME INCLUDING NONCONTROLLING INTERESTS Foreign-currency translation adjustment and other, net Comprehensive income Less: Comprehensive income attributable to noncontrolling interests COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO $ 12,332 2,409 301 11,079 268 17,317 15,218 5,690 5,395 15,127 13,994 6,681 6,077 843 28,341 272 701 26,167 (9,124) 18,161 17,043 869 902 TOTAL ASSETS $ 36,347 Net income including noncontrolling interests.. $ 33,163 (10,180) LIABILITIES AND EQUITY 8,969 1,252 (amounts in millions, except par value and share data) ASSETS September 3, 2017 August 28, 2016 CURRENT ASSETS Cash and cash equivalents Short-term investments Receivables, net Merchandise inventories Other current assets Total current assets 9,834 PROPERTY AND EQUIPMENT Buildings and improvements Equipment and fixtures 253 Less accumulated depreciation and amortization Net property and equipment. OTHER ASSETS 4,546 $ 3,379 1,233 1,350 1,432 Land CURRENT LIABILITIES Construction in progress Current portion of long-term debt 961 869 1,498 1,362 2,639 2,003 17,495 15,575 6,573 4,061 1,200 2,629 1,195 20,831 0 4 5,490 (1,014) (1,099) 5,988 7,686 10,778 12,079 Accounts payable 25,268 2,703 5,800 86 Accrued salaries and benefits 1,100 Accrued member rewards Deferred membership fees Other current liabilities Total current liabilities. OTHER LIABILITIES Total liabilities. COMMITMENTS AND CONTINGENCIES EQUITY Preferred stock $.01 par value; 100,000,000 shares authorized; no shares issued and outstanding Common stock $.01 par value; 900,000,000 shares authorized; LONG-TERM DEBT, excluding current portion 437,204,000 and 437,524,000 shares issued and outstanding 9,608 TOTAL LIABILITIES AND EQUITY Noncontrolling interests. . 7,612 Total Costco stockholders' equity Total equity. Accumulated other comprehensive loss Additional paid-in capital Retained earnings $ Note 2-Investments In March 2016, the FASB issued new guidance on stock compensation, intended to simplify accounting for share-based payment transactions. The guidance makes several modifications related to the accounting for income taxes, forfeitures, and minimum statutory tax withholding requirements. The new standard is effective for fiscal years and interim periods within those years beginning after December 15, 2016, with early adoption permitted. The Company plans to adopt this guidance at the beginning of its first quarter of fiscal year 2018. Adoption of this guidance will likely be material to the provision for income taxes and earnings per share amounts on the Company's consolidated income statements for the change in the recognition of excess tax benefits or deficiencies. Due to the Company's annual vesting and release of shares in its first fiscal quarter, this may create increased volatility in these amounts during that quarter of each fiscal year. Previously these amounts were reflected in equity. Additionally, these amounts will be reflected as cash flows from operations instead of cash flows from financing activities in the consolidated statements of cash flows. Adoption of this guidance is not expected to have a material impact on the consolidated balance sheets, consolidated statements of cash flows, or related disclosures. The Company's investments at the end of 2017 and 2016 were as follows: (amounts in millions, except share, per share, and warehouse count data) (Continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COSTCO WHOLESALE CORPORATION 62 52 Note 1-Summary of Significant Accounting Policies (Continued) In May 2014, the Financial Accounting Standards Board (FASB) issued new guidance on the recognition of revenue from contracts with customers. The guidance converges the requirements for reporting revenue and requires disclosures of the nature, amount, timing, and uncertainty of revenue and cash flows arising from these contracts. Transition is permitted either retrospectively or as a cumulative effect adjustment as of the date of adoption. The new standard is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The Company plans to adopt this guidance at the beginning of its first quarter of fiscal year 2019. Recent Accounting Pronouncements Not Yet Adopted 51 (amounts in millions, except share, per share, and warehouse count data) (Continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2017: COSTCO WHOLESALE CORPORATION Repurchased shares of common stock are retired, in accordance with the Washington Business Corporation Act. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is deducted by allocation to additional paid-in capital and retained earnings. The amount allocated to additional paid-in capital is the current value of additional paid-in capital per share outstanding and is applied to the number of shares repurchased. Any remaining amount is allocated to retained earnings. See Note 6 for additional information. The Company continues to review current accounting policies, business processes, systems and controls to evaluate the impacts of applying the new standard. Based on its preliminary assessment, the Company believes the new guidance will change recognition timing and classification of cash card breakage income to reflect the historical pattern of gift card redemption rather than the current methodology of recognizing income when redemption is considered remote. The Company will also present estimated sales returns on a gross basis rather than net of the sales return reserve on the consolidated balance sheets. The Company continues to evaluate various areas such as gross versus net revenue presentation for certain contracts, identification and treatment of performance obligations associated with membership offers, and accounting for warranty arrangements on qualified purchases. Management continues to evaluate potential impacts on the contracts associated with the co-branded credit card arrangement as well as its adoption methodology. In February 2016, the FASB issued new guidance on leases, which will require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms greater than twelve months. The standard is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. The Company plans to adopt this guidance at the beginning of its first quarter of fiscal year 2020. While the Company continues to evaluate this standard and the effect on related disclosures, the primary effect of adoption will be to require recording right-of-use assets and corresponding lease obligations for current operating leases. The adoption is expected to have a material impact on the Company's consolidated balance sheets, but not on the consolidated statements of income or consolidated statements of cash flows. Available-for-sale: Bankers' acceptances Asset and mortgage-backed securities Total available-for-sale... 947 1 The computation of basic net income per share uses the weighted average number of shares that were outstanding during the period. The computation of diluted net income per share uses the weighted average number of shares in the basic net income per share calculation plus the number of common shares that would be issued assuming vesting of all potentially dilutive common shares outstanding using the treasury stock method for shares subject to RSUs and the "if converted" method for the convertible note securities. Stock Repurchase Programs 0 $ $ 947 $ Recorded Basis Unrealized Gains, Net Cost Basis Total held-to-maturity Certificates of deposit. Held-to-maturity: Government and agency securities Asset and mortgage-backed securities Total available-for-sale.. Available-for-sale: 2016: Total short-term investments Certificates of deposit. . Held-to-maturity: Government and agency securities Net Income per Common Share Attributable to Costco Retirement Plans The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credits and loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts that are more likely than not expected to be realized. 49 The Company's 401(k) Retirement Plan is available to all U.S. employees who have completed 90 days of employment. The plan allows pre-tax deferrals, a portion of which the Company matches. In addition, the Company provides each eligible participant an annual discretionary contribution. The Company also has a defined contribution plan for Canadian employees and contributes a percentage of each employee's salary. Certain subsidiaries in the Company's Other International operations have defined benefit and defined contribution plans that are not material. Amounts expensed under all plans were $543, $489, and $454 for 2017, 2016, and 2015, respectively, and are included in selling, general and administrative expenses and merchandise costs in the accompanying consolidated statements of income. Selling, general and administrative expenses consist primarily of salaries, benefits and workers' compensation costs for warehouse employees (other than fresh foods departments and certain ancillary businesses) as well as all regional and home office employees, including buying personnel. Selling, general and administrative expenses also include substantially all building and equipment depreciation, credit and debit card processing fees, utilities, and stock-based compensation expense, as well as other operating costs incurred to support warehouse operations. Selling, General and Administrative Expenses The Company has agreements to receive funds from vendors for coupons and a variety of other programs. These programs are evidenced by signed agreements that are reflected in the carrying value of the inventory when earned or as the Company progresses towards earning the rebate or discount, and as a component of merchandise costs as the merchandise is sold. Other vendor consideration is generally recorded as a reduction of merchandise costs upon completion of contractual milestones, terms of the related agreement, or by another systematic approach. Vendor Consideration Merchandise costs consist of the purchase price of inventory sold, inbound and outbound shipping charges and all costs related to the Company's depot operations, including freight from depots to selling warehouses, and are reduced by vendor consideration. Merchandise costs also include salaries, benefits, depreciation, and utilities in fresh foods and certain ancillary departments. Merchandise Costs The Company accounts for membership fee revenue, net of refunds, on a deferred basis, ratably over the one-year membership period. The Company's Executive members qualify for a 2% reward on qualified purchases (up to a maximum reward of approximately $1,000 per year), which can be redeemed only at Costco warehouses. The Company accounts for this reward as a reduction in sales. The sales reduction and corresponding liability (classified as accrued member rewards in the consolidated balance sheets) are computed after giving effect to the estimated impact of non-redemptions, based on historical data. The net reduction in sales was $1,281, $1,172, and $1,128 in 2017, 2016, and 2015, respectively. Generally, when Costco is the primary obligor, is subject to inventory risk, has latitude in establishing prices and selecting suppliers, can influence product or service specifications, or has several but not all of these indicators, revenue is recorded on a gross basis. If the Company is not the primary obligor and does not possess other indicators of gross reporting as noted above, it records the net amounts earned, which is reflected in net sales. inventories expected to be returned. Amounts collected from members for sales or value added taxes are recorded on a net basis. Note 1-Summary of Significant Accounting Policies (Continued) (amounts in millions, except share, per share, and warehouse count data) (Continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COSTCO WHOLESALE CORPORATION Carrying Value 0 COSTCO WHOLESALE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions, except share, per share, and warehouse count data) (Continued) Note 1-Summary of Significant Accounting Policies (Continued) Income Taxes Preopening expenses related to new warehouses, new regional offices and other startup operations are expensed as incurred. Preopening Expenses The Company's asset retirement obligations (ARO) primarily relate to leasehold improvements that at the end of a lease must be removed. These obligations are recorded as a liability with an offsetting asset at the inception of the lease term based upon the estimated fair value of the costs to remove the leasehold improvements. These liabilities are accreted over time to the projected future value of the obligation using the Company's incremental borrowing rate. The ARO assets are depreciated using the same depreciation method as the leasehold improvement assets and are included with buildings and improvements. Estimated ARO liabilities associated with these leases were immaterial at the end of 2017 and 2016, respectively, and are included in other liabilities in the accompanying consolidated balance sheets. Note 1-Summary of Significant Accounting Policies (Continued) (amounts in millions, except share, per share, and warehouse count data) (Continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COSTCO WHOLESALE CORPORATION The determination of the Company's provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits of uncertain tax positions are recorded in the Company's consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from tax authorities. When facts and circumstances change, the Company reassesses these probabilities and records any changes as appropriate. Certain of the Company's cumulative foreign undistributed earnings were considered by the Company to be indefinitely reinvested as of September 3, 2017. These earnings would be subject to U.S. income tax if the Company changed its position and could result in a U.S. tax liability. Although the Company has historically asserted that certain non-U.S. undistributed earnings will be permanently reinvested, it may repatriate such earnings to the extent it can do so without an adverse tax consequence. See Note 8 for additional information. 50 The Company records an asset and related financing obligation for the estimated construction costs under build-to-suit lease arrangements where it is considered the owner for accounting purposes, to the extent the Company is involved in the construction of the building or structural improvements or has construction risk prior to commencement of a lease. Upon occupancy, the Company assesses whether these arrangements qualify for sales recognition under the sale-leaseback accounting guidance. If the Company continues to be the deemed owner, it accounts for the arrangement as a financing lease. The Company has capital leases for certain warehouse locations, expiring at various dates through 2054. Capital lease assets are included in land and buildings and improvements in the accompanying consolidated balance sheets. Amortization expense on capital lease assets is recorded as depreciation expense and is included in selling, general and administrative expenses. Capital lease liabilities are recorded at the lesser of the estimated fair market value of the leased property or the net present value of the aggregate future minimum lease payments and are included in other current liabilities and other liabilities in the accompanying consolidated balance sheets. Interest on these obligations is included in interest expense in the consolidated statements of income. The Company accounts for its lease expense with free rent periods and step-rent provisions on a straight- line basis over the original term of the lease and any extension options that the Company more likely than not expects to exercise, from the date the Company has control of the property. Certain leases provide for periodic rental increases based on price indices, or the greater of minimum guaranteed amounts or sales volume. The Company leases land and/or buildings at warehouses and certain other office and distribution facilities, primarily under operating leases. Operating leases expire at various dates through 2064, with the exception of one lease in the Company's U.K. subsidiary, which expires in 2151. These leases generally contain one or more of the following options, which the Company can exercise at the end of the initial lease term: (a) renewal of the lease for a defined number of years at the then-fair market rental rate or rate stipulated in the lease agreement; (b) purchase of the property at the then-fair market value; or (c) right of first refusal in the event of a third-party purchase offer. Leases Stock-based compensation expense is predominantly included in selling, general and administrative expenses in the consolidated statements of income. Certain stock-based compensation costs are capitalized or included in the cost of merchandise. See Note 7 for additional information on the Company's stock-based compensation plans. Restricted stock units (RSUs) granted to employees generally vest over five years and allow for quarterly vesting of the pro-rata number of stock-based awards that would vest on the next anniversary of the grant date in the event of retirement or voluntary termination. The Company does not reduce stock-based compensation for an estimate of forfeitures, which are inconsequential in light of historical experience and considering the awards vest on a quarterly basis. Actual forfeitures are recognized as they occur. Compensation expense for all stock-based awards granted is predominantly recognized using the straight- line method over the requisite service period for the entire award. Awards for employees and non-employee directors provide for accelerated vesting of a portion of outstanding shares based on cumulative years of service with the Company. Compensation expense for the accelerated shares is recognized upon achievement of the long-service term. The cumulative amount of compensation cost recognized at any point in time equals at least the portion of the grant-date fair value of the award that is vested at that date. The fair value of RSUs is calculated as the market value of the common stock on the measurement date less the present value of the expected dividends forgone during the vesting period. Stock-Based Compensation 50 1 Fair 948 Leases (1) 216 $ 32 223 32 206 Capital 33 33 168 33 2,123 582 $ 3,113 177 99 56 (2) Included in other current liabilities in the accompanying consolidated balance sheets. (3) Included in other liabilities in the accompanying consolidated balance sheets. Gross assets recorded under capital and build-to-suit leases were $404 and $392 at the end of 2017 and 2016, respectively. These assets are recorded net of accumulated amortization of $78 and $63 at the end of 2017 and 2016, respectively. At the end of 2017, future minimum payments, net of sub-lease income of $112 for all years combined, under non-cancelable operating leases with terms of at least one year and capital leases were as follows: Operating Leases 2018 2019 2020 2021 2022 Thereafter Total Less amount representing interest Net present value of minimum lease payments. Less current installments (2) Long-term capital lease obligations less current installments (3) (1) Includes build-to-suit lease obligations. 745 (365) 380 (7) 473 3,184 149.90 477 3,456 142.87 494 These amounts may differ from the stock repurchase balances in the accompanying consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of each fiscal year. Note 7-Stock-Based Compensation Plans The Company grants stock-based compensation primarily to employees and non-employee directors. Since 2009, RSU grants to all executive officers have been performance-based. Through a series of shareholder approvals, there have been amended and restated plans and new provisions implemented by the Company. RSUs held by employees and non-employee directors are subject to quarterly vesting upon retirement or voluntary termination. Employees who attain certain years of service with the Company receive shares under accelerated vesting provisions on the annual vesting date rather than upon retirement. The Seventh Restated 2002 Stock Incentive Plan (Seventh Plan), amended in the second quarter of fiscal 2015, is the Company's only stock-based compensation plan with shares available for grant at the end of 2017. Each share issued in respect of stock awards is counted as 1.75 shares toward the limit of shares made available under the Seventh Plan. The Seventh Plan authorized the issuance of 23,500,000 shares (13,429,000 RSUs) of common stock for future grants in addition to the shares authorized under the previous plan. The Company issues new shares of common stock upon vesting of RSUs. Shares for vested RSUs are generally delivered to participants annually, net of shares equal to the minimum statutory withholding taxes. As required by the Company's Seventh Plan, in conjunction with the 2017 special cash dividend, the number of shares subject to outstanding RSUs was increased on the dividend record date to preserve their value. The outstanding RSUs were adjusted by multiplying the number of outstanding shares by a factor of 1.032, representing the ratio of the NASDAQ closing price of $180.20 on May 5, 2017, which was the last trading day immediately prior to the ex-dividend date, to the NASDAQ opening price of $174.66 on the ex-dividend date, May 8, 2017. The outstanding RSUs increased by approximately 247,000 and this adjustment did not result in additional stock-based compensation expense, as the fair value of the awards did not change. As further required by the Seventh Plan, the maximum number of shares issuable under the Seventh Plan was proportionally adjusted, which resulted in an additional 364,000 RSU shares available to be granted. 57 COSTCO WHOLESALE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions, except share, per share, and warehouse count data) (Continued) 157.87 $ Capital and Build-to-Suit Leases 2,998 $ Average Price per Share $ 373 COSTCO WHOLESALE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions, except share, per share, and warehouse count data) (Continued) Note 6-Stockholders' Equity Dividends The Company's current quarterly dividend rate is $0.50 per share. In May 2017 and February 2015, the Company paid special cash dividends of $7.00 and $5.00 per share, respectively. The aggregate payment was approximately $3,100 and $2,201, respectively. Stock Repurchase Programs The Company's stock repurchase program is conducted under a $4,000 authorization by the Board of Directors, approved on April 17, 2015, which expires April 17, 2019. This authorization revoked previously authorized but unused amounts, totaling $2,528. As of the end of 2017, the remaining amount available for stock repurchases under the approved plan was $2,749. The following table summarizes the Company's stock repurchase activity: 2017 2016 2015 Shares Repurchased (000's) Total Cost The aggregate rental expense for 2017, 2016, and 2015 was $258, $250, and $252, respectively. Sub-lease income and contingent rent was not material in 2017, 2016, or 2015. Operating Leases Note 5-Leases 994 1,007 0 497 504 497 512 793 805 0 991 948 0 3.00% Senior Notes due May 2027 986 508 1,009 498 498 Value 5.5% Senior Notes due March 2017 $ 0 $ 0 $1,100 $1,129 1.125% Senior Notes due December 2017. 1.7% Senior Notes due December 2019. 1.75% Senior Notes due February 2020 2.15% Senior Notes due May 2021. 2.25% Senior Notes due February 2022 2.30% Senior Notes due May 2022. 2.75% Senior Notes due May 2024 0 0 1,099 1,103 1,198 1,201 1,196 1,219 501 Note 7-Stock-Based Compensation Plans (Continued) 0 Other long-term debt Maturities of long-term debt during the next five fiscal years and thereafter are as follows: 2018 2019 2020 2021 2022 Thereafter Total $ 86 91 1,700 1,091 1,300 2,436 $ 6,704 Note 4-Debt (Continued) 0 (amounts in millions, except share, per share, and warehouse count data) (Continued) COSTCO WHOLESALE CORPORATION 702 716 771 803 Total long-term debt. 6,659 $ 6,753 5,161 $5,274 Less current portion. . 86 1,100 Long-term debt, excluding current portion. $ 6,573 $ 4,061 55 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Summary of Restricted Stock Unit Activity 1,010 The following awards were outstanding at the end of 2017: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COSTCO WHOLESALE CORPORATION 285 948 $ 948 $ 0 42 42 721 721 285 $ 185 185 $ Held-To-Maturity (amounts in millions, except share, per share, and warehouse count data) (Continued) Fair Value Note 3-Fair Value Measurement The tables below present information at the end of 2017 and 2016, respectively, regarding the Company's financial assets and financial liabilities that are measured at fair value on a recurring basis and indicate the level within the fair value hierarchy reflecting the valuation techniques utilized to determine such fair value. 0 0 $ 7 Level 2 Level 1 Total Investment in government and agency securities Investment in asset and mortgage-backed securities Forward foreign-exchange contracts, in asset position (2) Forward foreign-exchange contracts, in (liability) position (2) Money market mutual funds (1) Total (2) Investment in government and agency securities Investment in asset and mortgage-backed securities Forward foreign-exchange contracts, in asset position (2 Forward foreign-exchange contracts, in (liability) position(²) 2016: Money market mutual funds (1) 2017: Assets and Liabilities Measured at Fair Value on a Recurring Basis 947 Cost Basis 55 0 1 1,034 6 $ $ 1,028 $ Recorded Basis Unrealized Gains, Net Cost Basis 1,233 $ 0 $ 1,233 $ 285 285 RSUs granted to employees and to non-employee directors generally vest over five years and three years, respectively. Additionally, the terms of the RSUs, including performance-based awards, provide for accelerated vesting for employees and non-employee directors who have attained 25 or more years and five or more years of service with the Company, respectively, and provide for vesting upon retirement or voluntary termination. Recipients are not entitled to vote or receive dividends on non-vested and undelivered shares. At the end of 2017, 11,780,000 shares were available to be granted as RSUs under the Seventh Plan. 1 Available-For-Sale 6 306 53 Total. Due after one year through five years Due after five years Due in one year or less The maturities of available-for-sale and held-to-maturity securities at the end of 2017 were as follows: The proceeds from sales of available-for-sale securities were $202, $291, and $246 during 2017, 2016, and 2015, respectively. Gross realized gains or losses from sales of available-for-sale securities were not material in 2017, 2016, and 2015. Gross unrealized gains and losses on available-for-sale securities were not material in 2017, 2016, and 2015. At the end of 2017 and 2015, the Company's available-for-sale securities that were in a continuous unrealized-loss position were not material. The Company had no available-for-sale securities in a continuous unrealized-loss position in 2016. There were no gross unrealized gains and losses on cash equivalents at the end of 2017, 2016, or 2015. Total short-term investments $ 1,350 6 315 315 $ 1,344 $ 9 9 306 1,035 1 1,029 0 247 N/A 8,199 $ 128.15 The weighted-average grant date fair value of RSUs granted was $144.12, $153.46, and $125.68 in 2017, 2016, and 2015, respectively. The remaining unrecognized compensation cost related to non-vested RSUs at the end of 2017 was $694 and the weighted-average period of time over which this cost will be recognized is 1.6 years. Included in the outstanding balance at the end of 2017 were approximately 2,782,000 RSUs vested but not yet delivered. Summary of Stock-Based Compensation The following table summarizes stock-based compensation expense and the related tax benefits under the Company's plans: Stock-based compensation expense before income taxes Less recognized income tax benefit Stock-based compensation expense, net of income taxes 2017 2016 2015 $ 514 $ 459 $ 394 (167) (150) (131) $ 347 $ 309 $ 263 129.87 58 (204) (4,026) • 2 • 7,798,000 time-based RSUs that vest upon continued employment over specified periods of time; 401,000 performance-based RSUs, of which 259,000 were granted to executive officers subject to the certification of the attainment of specified performance targets for 2017. This certification occurred in October 2017, at which time a portion vested as a result of the long service of all executive officers. The remaining awards vest upon continued employment over specified periods of time. The following table summarizes RSU transactions during 2017: Outstanding at the end of 2016 Granted Vested and delivered. Forfeited Outstanding at the end of 2017 Weighted-Average Grant Date Fair Value Number of Units (in 000's) 8,326 $ 120.56 3,856 144.12 119.46 Fair Value Special cash dividend 2016 222 $ 1,033 (13) 0 11 1 1,034 (1) Included in cash and cash equivalents in the accompanying consolidated balance sheets. (2) The asset and the liability values are included in other current assets and other current liabilities, respectively, in the accompanying consolidated balance sheets. See Note 1 for additional information on derivative instruments. 0 Level 2 Level 1 7 $ 942 (8) Carrying Value $ 222 During and at the end of both 2017 and 2016, the Company did not hold any Level 3 financial assets or liabilities that were measured at fair value on a recurring basis. There were no transfers in or out of Level 1 or 2 during 2017 and 2016. $ Financial assets measured at fair value on a nonrecurring basis include held-to-maturity investments that are carried at amortized cost and are not remeasured to fair value on a recurring basis. There were no fair value adjustments to these financial assets during 2017 and 2016. See Note 4 for the fair value of long-term debt. In June 2017, the Company paid the outstanding $1,100 principal balance and accrued interest on the 1.125% Senior Notes through proceeds from the Senior Notes issued in May 2017 and existing sources of cash and cash equivalents and short-term investments. In March 2017, the Company paid the outstanding $1,100 principal balance and interest on the 5.5% Senior Notes with existing sources of cash and cash equivalents and short-term investments. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis The Company's long-term debt consists primarily of Senior Notes that have various principal balances, interest rates, and maturity dates as described below. In May 2017, the Company issued $3,800 in aggregate principal amount of Senior Notes, with maturity dates between May 2021 and May 2027. In February 2015 and December 2012, the Company issued $1,000 and $3,500 in aggregate principal amount of Senior Notes, respectively. Long-Term Debt (amounts in millions, except share, per share, and warehouse count data) (Continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COSTCO WHOLESALE CORPORATION 2017 Note 4-Debt (Continued) In 2017, short term borrowings were immaterial. In 2016, the average and maximum short term borrowings in Japan were $99 and $110, respectively, and had a weighted average interest rate of 0.52% during the year. All other short term borrowings during the year were immaterial. Nonfinancial assets measured at fair value on a nonrecurring basis include items such as long-lived assets that are measured at fair value resulting from an impairment, if deemed necessary. There were no fair value adjustments to nonfinancial assets during 2017 and 2016. 54 Note 4-Debt Short-Term Borrowings The Company, at its option, may redeem the Senior Notes at any time, in whole or in part, at a redemption price plus accrued interest. The redemption price is equal to the greater of 100% of the principal amount or the sum of the present value of the remaining scheduled payments of principal and interest to maturity. Additionally, upon certain events, as defined by the terms of the Senior Notes, the holder has the right to require the Company to purchase this security at a price of 101% of the principal amount plus accrued and unpaid interest to the date of the event. Interest on all outstanding long-term debt is payable semi-annually. The estimated fair value of Senior Notes is valued using Level 2 inputs. Other long-term debt consists primarily of promissory notes and term loans issued by the Company's Japanese subsidiary and are valued primarily using Level 3 inputs. The carrying value and estimated fair value of long-term debt at the end of 2017 and 2016 consisted of the following: The Company enters into various short-term bank credit facilities, which increased to $833 in 2017 from $429 in 2016 due to the addition of a $400 revolving line of credit in the U.S. which expires June 2018. At the end of 2017 and 2016, there were no outstanding borrowings under these credit facilities. Mike Cho Operations - Texas Region Country Manager - Korea Jeffrey M. Cole GMM-Foods - San Diego Region Gasoline, Car Wash & Mini-labs Deborah Calhoun Operations - Texas Region Julie L. Cruz Information Systems Kimberly F. Brown Timothy Bowersock Operations - Northwest Region Michael G. Casebier Global Ecommerce Financial Accounting Controller Bryan Blank Canadian Division Tiffany Barbre GMM - Business Centre - Marc-André Bally Kathleen Ardourel Canada Region GMM - Foods & Sundries - Western James J. Andruski Operations - Southeast Region Information Systems Michael Anderson GMM - Corporate Non-Foods Operations - - San Diego Region Christopher Bolves Wendy Davis GMM - Corporate Non-Foods Christopher E. Fleming Russ Decaire Joseph Grachek III Internal Audit Claudine Adamo - Marketing Canadian Division Lorelle S. Gilpin Real Estate Development - West Jack S. Frank GMM - Bakery & Food Court Thomas J. Fox Operations - Northeast Region Anthony Fontana GMM - Non-Foods - Canadian Division Operations - Western Canada Region Murray T. Fleming Timothy K. Farmer Operations - Los Angeles Region Frank Farcone International Ecommerce Liz Elsner GMM-Softlines - Canadian Division Debbie Ells Treasury Operations - Western Canada Region Jeff Elliott Heather Downie Operations - Eastern Canada Region Gino Dorico GMM - Foods & Sundries - Northwest Region Operations - Midwest Region 67 Executive Vice President, COO - Northern Division David Messner Senior Vice President, General Manager - San Diego Region Dennis R. Zook Senior Vice President, General Manager - Western Canada Region Senior Vice President, Real Estate Development Russ D. Miller Senior Vice President, Merchandising – Fresh Foods John D. McKay - Jeffrey B. Lyons Senior Vice President, General Manager - Northeast Region Jeffrey R. Long Executive Vice President, Administration Franz E. Lazarus Services & Publishing Senior Vice President, Membership, Marketing, Paul W. Latham Ali Moayeri Senior Vice President, Merchandising - Non-Foods & Ecommerce President and Chief Executive Officer W. Craig Jelinek Senior Vice President, Corporate Controller Senior Vice President, Merchandising - Foods & Sundries Daniel M. Hines Senior Vice President, General Manager - Mexico William Hanson Jaime Gonzalez Executive Vice President, Chief Financial Officer Senior Vice President, General Manager - Midwest Region Richard A. Galanti John B. Gaherty Senior Vice President, General Manager - Los Angeles Region Darby Greek Caton Frates James Klauer Senior Vice President, Construction Paul G. Moulton Executive Vice President, Chief Information Officer Richard Wilcox Senior Vice President, General Manager - Texas Region Richard L. Webb Executive Vice President, COO - Merchandising Ron M. Vachris Senior Vice President, Depots & Traffic John D. Thelan Corporate Secretary Senior Vice President, General Counsel & John Sullivan Senior Vice President, Information Systems James W. Rutherford Senior Vice President, General Manager - Southeast Region Yoram B. Rubanenko Manufacturing & Business Centers Executive Vice President, Ancillary Businesses, Timothy L. Rose Senior Vice President, General Manager - Eastern Canada Region Pierre Riel Executive Vice President, COO - Eastern & Canadian Divisions and Chief Diversity Officer Joseph P. Portera Senior Vice President, Accounting David S. Petterson Senior Vice President, General Manager - Europe Senior Vice President, General Manager - Northwest Region Stephen M. Pappas Executive Vice President, COO - International Division Mario Omoss James P. Murphy Executive Vice President, COO - Southwest Division & Mexico Nancy Griese David L. Skinner GMM - Corporate Foods Yves Thomas Operations - Midwest Region Country Manager - Japan Brian Thomas Chief Financial Officer - Mexico Ken J. Theriault Country Manager - France Mauricio Talayero Operations Ecommerce Gary Swindells - GMM - International Steve Supkoff Kimberley L. Suchomel Operations - Pharmacy Richard Stephens Operations - San Diego Region GMM-Optical, Optical Labs, Mini-labs & Gasoline - Canadian Division Keith H. Thompson Joseph Stanovcak Corporate Tax and Customs Compliance James Stafford Human Resources - Canadian Division Monica Smith General Manager - Taiwan Louie Silveira GMM-Corporate Non-Foods Geoff Shavey GMM - Fresh Foods Operations - Northeast Region Janet Shanks Operations - United Kingdom Adam Self Operations - Los Angeles Region Scott Schruber Debbie Sarter U.S. Optical GMM-Foods - Northeast Region Operations - Bay Area Region Art Salas Construction Todd Thull Adrian Thummler Senior Vice President, Merchandising - Non-Foods & Ecommerce 68 GMM - Fresh Foods - Asia/Australia Earl Wiramanaden Operations - San Diego Region Jill Whittaker Operations Fresh Meat, Produce & Service Deli Food Safety & Quality Assurance Charlie A. Winters Craig Wilson Information Systems Terry Williams GMM-Corporate Non-Foods Construction Jack Weisbly Sarah Wehling - Canadian Division Sr. GMM-Non-Foods & Ecommerce Azmina K. Virani Operations Japan Howard Tulk Country Manager - Spain GMM - Fresh Foods - Canadian Division Diane Tucci Tony Tran Corporate Marketing & Publishing Sandy Torrey Operations - Mexico GMM - Food & Sundries - Los Angeles Region Drew Sakuma Information Systems Chris Rylance Operations - Australia Robert Leuck Operations - Midwest Region Robert Leiss Merchandise Accounting Controller William Koza Real Estate - Eastern Division Kathy Kearney Finance, Information Systems & Administration - Canadian Division Jeff Ishida Ross A. Hunt GMM - Imports Mitzi Hu Payroll & Benefit Accounting Scott Howe GMM-Ecommerce - Canadian Division Graham E. Hillier Operations - Northeast Region Judith Logan Information Systems Operations - Northwest Region David Harruff Transportation Jim Harrison Warehouse Operations & Facilities GMM - Foods - Southeast Region Eric Harris Doris Harley VICE PRESIDENTS Costco Travel Peter Gruening GMM - Non-Foods - Canadian Division Martin Groleau Timothy Haser GMM - Non-Foods Steve Mantanona GMM - Merchandising - Mexico Mark Maushund Operations - Los Angeles Region Susan McConnaha Operations - Southeast Region Aldyn J. Royes GMM - Non-Foods - Canadian Division Giro Rizzuti Operations - Northeast Region Operations - Southeast Region Paul Pulver Steven D. Powers Ecommerce Michael Parrott - Los Angeles Region Operations Operations - Business Centers Shawn Parks Robert Parker Operations - Eastern Canada Region Operations - Northwest Region Daniel Parent Thomas Padilla GMM-Corporate Produce & Fresh Meat Country Manager - Australia Frank Padilla Patrick J. Noone - Canadian Division GMM - Foods & Sundries, Quality Assurance, Food Safety Pietro Nenci Treasury, Financial Planning & Investor Relations GMM - Foods - Texas Region Robert E. Nelson GMM - Foods - Bay Area Region Robert Murvin Operations - Midwest Region Tim Murphy Operations - Bakery & Food Court Daniel McMurray Operations Bay Area Region Richard Delie 965 Victor A. Curtis Additions to property and equipment Depreciation and amortization Operating income Total revenue 2016 Total assets Net property and equipment. . Net property and equipment. Additions to property and equipment Operating income Total revenue 2017 The Company and its subsidiaries are principally engaged in the operation of membership warehouses in the U.S., Canada, Mexico, U.K., Japan, Australia, Spain, Iceland, and France and through majority-owned subsidiaries in Taiwan and Korea. The Company's reportable segments are largely based on management's organization of the operating segments for operational decisions and assessments of financial performance, which considers geographic locations. The material accounting policies of the segments are as described in Note 1. All material inter-segment net sales and expenses have been eliminated in computing total revenue and operating income. Certain operating expenses, predominantly stock-based compensation, incurred on behalf of the Company's Canadian and Other International operations, but are included in the U.S. operations because those costs are not allocated internally and generally come under the responsibility of U.S. management. Note 11-Segment Reporting The Company does not believe that any pending claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company's financial position; however, it is possible that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be material to the results of an individual fiscal quarter. Note 10-Commitments and Contingencies (Continued) Depreciation and amortization Total assets 2015 Total revenue 1,370 202 124 1,044 4,111 626 841 2,644 $ 93,889 $ 18,775 $ 16,361 $ 129,025 Total Other International Operations Canadian Operations United States Operations Net property and equipment. Additions to property and equipment Depreciation and amortization Operating income (amounts in millions, except share, per share, and warehouse count data) (Continued) 1,714 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 63 Legal Proceedings Note 10—Commitments and Contingencies Weighted average number of common shares and dilutive potential of common stock used in diluted net income per share.. Conversion of convertible notes RSUs.... Weighted average number of common shares used in basic net income per common share.. Net income available to common stockholders after assumed conversions of dilutive securities $ 2,679 $ 2,350 $ 2,377 2015 2017 The following table shows the amounts used in computing net income per share and the effect on net income and the weighted average number of shares of potentially dilutive common shares outstanding (shares in 000's): Note 9-Net Income per Common and Common Equivalent Share (amounts in millions, except share, per share, and warehouse count data) (Continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COSTCO WHOLESALE CORPORATION 61 2016 438,437 2,493 7 438,585 439,455 In November 2016 and September 2017, the Company received notices of violation from the Connecticut Department of Energy and Environmental Protection regarding hazardous waste practices at its Connecticut warehouses, primarily concerning unsalable pharmaceuticals. The Company is seeking to cooperate concerning the resolution of these notices. On November 23, 2016, the Company's Canadian subsidiary received from the Ontario Ministry of Health and Long Term Care a request for an inspection and information concerning compliance with the anti-rebate provisions in the Ontario Drug Benefit Act and the Drug Interchangeability and Dispensing Fee Act. The Company is seeking to cooperate with the request. The Company received from the Drug Enforcement Administration subpoenas and administrative inspection warrants concerning the Company's fulfillment of prescriptions related to controlled substances and related practices. As previously disclosed, the Company entered into a settlement agreement in January 2017 under which it paid $12 to the Department of Justice, an amount for which a previous accrual was made. The Company received notices from most states stating that they have appointed an agent to conduct an examination of the books and records of the Company to determine whether it has complied with state unclaimed property laws. In addition to seeking the turnover of unclaimed property subject to escheat laws, the states may seek interest, penalties, costs of examinations, and other relief. The agent appears to have concluded its examination, without seeking payments from the Company. Certain states have separately also made requests for payment by the Company concerning a specific type of property, some of which have been paid in immaterial amounts. A class action alleging violation of California Wage Order 7-2001 by failing to provide seating to member service assistants who act as greeters and exit attendants in the Company's California warehouses. Canela v. Costco Wholesale Corp., et al. (Case No. 5:13-cv-03598, N.D. Cal. filed July 1, 2013). The complaint seeks relief under the California Labor Code, including civil penalties and attorneys' fees. The Company has filed an answer denying the material allegations of the complaint. (N.D. Cal.); J.C. Wash, et al., v. Chevron USA, Inc., et al.; Case No. 4:07cv37 (E.D. Mo.); Jonathan Charles Conlin, et al., v. Chevron USA, Inc., et al.; Case No. 07 0317 (M.D. Tenn.); William Barker, et al. v. Chevron USA, Inc., et al.; Case No. 07-cv-00293 (D.N.M.); Melissa J. Couch, et al. v. BP Products North America, Inc., et al., Case No. 07cv291 (E.D. Tex.); S. Garrett Cook, Jr., et al., v. Hess Corporation, et al., Case No. 07cv750 (M.D. Ala.); Jeff Jenkins, et al. v. Amoco Oil Company, et al., Case No. 07-cv-00661 (D. Utah); and Mark Wyatt, et al., v. B. P. America Corp., et al., Case No. 07-1754 (S.D. Cal.). On June 18, 2007, the Judicial Panel on Multidistrict Litigation assigned the action, entitled In re Motor Fuel Temperature Sales Practices Litigation, MDL Docket No 1840, to Judge Kathryn Vratil in the United States District Court for the District of Kansas. On April 12, 2009, the Company agreed to settle the actions in which it is named as a defendant. Under the settlement, the Company agreed, to the extent allowed by law and subject to other terms and conditions in the agreement, to install over five years from the effective date of the settlement temperature-correcting dispensers in the States of Alabama, Arizona, California, Florida, Georgia, Kentucky, Nevada, New Mexico, North Carolina, South Carolina, Tennessee, Texas, Utah, and Virginia. Other than payments to class representatives, the settlement did not provide for cash payments to class members. On September 22, 2011, the court preliminarily approved a revised settlement, which did not materially alter the terms. On April 24, 2012, the court granted final approval of the revised settlement. Plaintiffs moved for an award of $10 in attorneys' fees, as well as an award of costs and payments to class representatives. A report and recommendation was issued in favor of a fee award of $4. On August 24, 2016, the district court affirmed the report and recommendation. On March 20, 2014, the Company filed a notice invoking a "most favored nation" provision under the settlement, under which it sought to adopt provisions in later settlements with certain other defendants. The motion was denied on January 23, 2015. Final judgment was entered on September 22, 2015, which was affirmed by the court of appeals in August 2017. Note 10-Commitments and Contingencies (Continued) (amounts in millions, except share, per share, and warehouse count data) (Continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COSTCO WHOLESALE CORPORATION Numerous putative class actions have been brought around the United States against motor fuel retailers, including the Company, alleging that they have been overcharging consumers by selling gasoline or diesel that is warmer than 60 degrees without adjusting the volume sold to compensate for heat-related expansion or disclosing the effect of such expansion on the energy equivalent received by the consumer. The Company is named in the following actions: Raphael Sagalyn, et al., v. Chevron USA, Inc., et al., Case No. 07-430 (D. Md.); Phyllis Lerner, et al., v. Costco Wholesale Corporation, et al., Case No. 07-1216 (C.D. Cal.); Linda A. Williams, et al., v. BP Corporation North America, Inc., et al., Case No. 07-179 (M.D. Ala.); James Graham, et al. v. Chevron USA, Inc., et al., Civil Action No. 07-193 (E.D. Va.); Betty A. Delgado, et al., v. Allsups, Convenience Stores, Inc., et al., Case No. 07-202 (D.N.M.); Gary Kohut, et al. v. Chevron USA, Inc., et al., Case No. 07-285 (D. Nev.); Mark Rushing, et al., v. Alon USA, Inc., et al., Case No. 06-7621 (N.D. Cal.); James Vanderbilt, et al., v. BP Corporation North America, Inc., et al., Case No. 06-1052 (W.D. Mo.); Zachary Wilson, et al., v. Ampride, Inc., et al., Case No. 06-2582 (D. Kan.); Diane Foster, et al., v. BP North America Petroleum, Inc., et al., Case No. 07-02059 (W.D. Tenn.); Mara Redstone, et al., v. Chevron USA, Inc., et al., Case No. 07-20751 (S.D. Fla.); Fred Aguirre, et al. v. BP West Coast Products LLC, et al., Case No. 07-1534 62 The Company is a defendant in the following matters, among others: The Company is involved in a number of claims, proceedings and litigation arising from its business and property ownership. In accordance with applicable accounting guidance, the Company establishes an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. There may be exposure to loss in excess of any amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss (taking into account where applicable indemnification arrangements concerning suppliers and insurers) and the accrued amount, if any, thereof, and adjusts the amount as appropriate. As of the date of this Report, the Company has recorded an immaterial accrual with respect to one matter described below, in addition to other immaterial accruals for matters not described below. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. In each case, there is a reasonable possibility that a loss may be incurred, including a loss in excess of the applicable accrual. For matters where no accrual has been recorded, the possible loss or range of loss (including any loss in excess of the accrual) cannot, in the Company's view, be reasonably estimated because, among other things: (i) the remedies or penalties sought are indeterminate or unspecified; (ii) the legal and/or factual theories are not well developed; and/or (iii) the matters involve complex or novel legal theories or a large number of parties. 441,263 442,716 440,937 3,249 12 2,668 10 COSTCO WHOLESALE CORPORATION The Company files income tax returns in the United States, various state and local jurisdictions, in Canada and in several other foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local examination for years before fiscal 2014. The Company is currently subject to examination in Canada for fiscal years 2013 to present and in California for fiscal years 2007 to present. No other examinations are believed to be material. 277 2,502 Sundries Foods The following table summarizes the percentage of net sales by merchandise category: Total assets 33,017 6,421 3,608 Hardlines 22,988 3,205 1,381 10,815 2,393 Senior Vice President, Pharmacy 148 1,574 15,401 Fresh Foods Softlines Ancillary Second Quarter (12 Weeks) First Quarter (12 Weeks) 53 Weeks Ended September 3, 2017 The two tables that follow reflect the unaudited quarterly results of operations for 2017 and 2016. Note 12-Quarterly Financial Data (Unaudited) (amounts in millions, except share, per share, and warehouse count data) (Continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COSTCO WHOLESALE CORPORATION 17% 15% 16% 12% 12% 11% 14% 14% 14% 16% 16% 16% 20% 21% 21% 21% 22% 22% 2017 2016 2015 49 64 1,127 511 160 848 109 946 3,672 568 778 2,326 15,112 $ 118,719 200 86,579 $ 17,028 $ 7,808 4,471 24,068 18,161 4,002 1,820 12,339 36,347 1,255 1,823 299 3,624 545 771 2,308 14,507 $ 116,199 17,341 $ $ 84,351 $ 33,163 7,172 3,480 22,511 17,043 3,670 1,628 11,745 2,649 527 119 Third Quarter (12 Weeks) The Company is currently under audit by several taxing jurisdictions in the United States and in several foreign countries. Some audits may conclude in the next 12 months and the unrecognized tax benefits recorded in relation to the audits may differ from actual settlement amounts. It is not practical to estimate the effect, if any, of any amount of such change during the next 12 months to previously recorded uncertain tax positions in connection with the audits. The Company does not anticipate that there will be a material increase or decrease in the total amount of unrecognized tax benefits in the next 12 months. The gross unrecognized tax benefit includes tax positions for which the ultimate deductibility is highly certain but there is uncertainty about the timing of such deductibility. At the end of 2017 and 2016, these amounts were immaterial. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of these tax positions would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority. The total amount of such unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods is $29 and $46 at the end of 2017 and 2016, respectively. Tax benefits associated with the release of employee RSUs were allocated to equity attributable to Costco in the amount of $37, $74, and $86, in 2017, 2016, and 2015, respectively. $1,325 $1,243 $1,195 309 413 347 (90) 15 The reconciliation between the statutory tax rate and the effective rate for 2017, 2016, and 2015 is as follows: (42) 398 389 Total provision for income taxes. Total foreign Deferred Current Foreign: 399 2017 2016 2015 (0.6) (21) (1.6) (64) Foreign taxes, net. 2.3 85 2.5 91 2.9 116 State taxes, net. . 35.0% 35.0% $1,262 35.0% $1,267 $ 1,414 Federal taxes at statutory rate 132 (125) 129 21 $4,039 $3,619 $ 3,604 997 1,030 $2,574 $2,622 $2,988 1,051 2015 2016 Federal: 2017 Total. Domestic Foreign Income before income taxes is comprised of the following: Note 8―Income Taxes (amounts in millions, except share, per share, and warehouse count data) (Continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COSTCO WHOLESALE CORPORATION The provisions for income taxes for 2017, 2016, and 2015 are as follows: Current Deferred Total federal 131 108 161 754 809 (12) 233 7 802 $ 468 $ 766 $ 2015 2016 2017 Total state Deferred Current State: 169 Accrued interest and penalties related to income tax matters are classified as a component of income tax expense. Interest and penalties recognized by the Company were not material in 2017 or 2016. Accrued interest and penalties were not material at the end of 2017 or 2016. (3.5) (104) Gross unrecognized tax benefit at beginning of year A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2017 and 2016 is as follows: Note 8―Income Taxes (Continued) (amounts in millions, except share, per share, and warehouse count data) (Continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COSTCO WHOLESALE CORPORATION 60 Gross increases-current year tax positions 60 The Company has not provided for U.S. deferred taxes on cumulative undistributed earnings of $3,176 and $3,280 at the end of 2017 and 2016, respectively, of certain non-U.S. consolidated subsidiaries because the earnings have not been repatriated, or subsidiaries have invested or will invest the undistributed earnings indefinitely, or the earnings, if repatriated would not result in an adverse tax consequence. Because of the availability of U.S. foreign tax credits and complexity of the computation, it is not practicable to determine at this time the U.S. federal income tax liability that would be associated with such earnings if such earnings were not deemed to be indefinitely reinvested. Deferred taxes are recorded for earnings of foreign operations when it is determined that such earnings are no longer indefinitely reinvested. During 2015, the Company repatriated a portion of the earnings in the Canadian operations that, in 2014, the Company determined were no longer considered indefinitely reinvested. In the fourth quarter of 2015, the Company changed its position regarding an additional portion of the undistributed earnings of the Canadian operations, which are no longer considered indefinitely reinvested. These earnings were distributed in 2016. Current exchange rates compared to historical rates when these earnings were generated resulted in an immaterial U.S. benefit, which was recorded at the end of 2015. During 2017, the Company changed its position regarding an additional portion of the undistributed earnings of its Canadian operations as they could be repatriated without adverse tax consequences. Accordingly, that portion is no longer considered to be indefinitely reinvested. Subsequent to the end of the fiscal year, the Company repatriated a portion of undistributed earnings in its Canadian operations without adverse tax consequences. (1) Includes foreign tax credits of $36 and $78 for 2017 and 2016, respectively, which will expire beginning in 2025. The deferred tax accounts at the end of 2017 and 2016 include non-current deferred income tax assets of $254 and $202, respectively, included in other assets; and non-current deferred income tax liabilities of $312 and $297, respectively, included in other liabilities. (58) $ (95) $ (256) (252) The Company believes that its U.S. current and projected asset position is sufficient to meet its U.S. liquidity requirements and has no current plans to repatriate for use in the U.S. the cash and cash equivalents and short-term investments held by these non-U.S. subsidiaries whose earnings are considered indefinitely reinvested. Gross increases-tax positions in prior years. Gross decreases-tax positions in prior years Settlements... 52 52 $ $ (37) (9) (25) (11) (47) 0 1 17 2 3 2016 52 $ 158 2017 Gross unrecognized tax benefit at end of year Lapse of statute of limitations (779) Employee stock ownership plan (ESOP) .. Other (747) 18 33.2% 34.3% $ 1,195 32.8% $1,243 $ 1,325 Total 1.2 39 The Company's provision for income taxes in 2017 and 2015 was favorably impacted by net tax benefits of $104 and $68, respectfully, primarily due to tax benefits recorded in connection with the May 2017 and February 2015 special cash dividends paid by the Company to employees through the Company's 401(k) Retirement Plan of $82 and $57, respectively. Dividends on these shares are deductible for U.S. income tax purposes. (2.1) (0.9) (37) (1.8) (66) (0.5) (17) (2.6) (77) 59 59 COSTCO WHOLESALE CORPORATION 601 647 177 167 $ 109 $ 99 2016 2017 Net deferred tax (liabilities)/assets Merchandise inventories Property and equipment Other (1) Accrued liabilities and reserves. Deferred income/membership fees Equity compensation. The components of the deferred tax assets (liabilities) are as follows: (amounts in millions, except share, per share, and warehouse count data) (Continued) Note 8―Income Taxes (Continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 63 Fourth Quarter (17 Weeks) 671 REVENUE 487 noncontrolling interests Net income including 1,243 396 286 286 555 275 3,619 1,181 835 841 762 TAXES. INCOME BEFORE INCOME Provision for income taxes 549 785 2,376 $ 779 $ 545 $ 546 $ 480 $ TO COSTCO . NET INCOME ATTRIBUTABLE (26) (6) (4) (7) noncontrolling interests Net income attributable to 80 2,350 29 16 12,068 3,696 2,731 2,835 2,806 administrative.. Selling, general and Preopening expenses 102,901 23,162 24,469 23,621 Merchandise costs OPERATING EXPENSES 118,719 36,560 31,649 26 10 18 28 Interest income and other, net. Total (53 Weeks) (39) (30) (31) (33) Interest expense. OTHER INCOME (EXPENSE) 3,672 1,191 858 856 767 Operating income 78 24 7 26,769 NET INCOME PER COMMON COSTCO: Chairman of Trilogy International Partners, Inc.; Chairman of Trilogy Equity Partners Co-Founder, former President and CEO, Costco John W. Stanton (b)* Founder and CEO of the Raikes Foundation; Former CEO of the Bill and Melinda Gates Foundation James D. Sinegal Vice Chairman of the Board of Berkshire Hathaway Inc.; Chairman of the Board of Daily Journal Corporation Jeffrey S. Raikes (c)* President of MCM, A Meisenbach Company Charles T. Munger(a)*(b) John W. Meisenbach The Price Company Maggie A. Wilderotter(c) A Founder, former Director and Executive Officer of Chairman of the Board, Costco; President and Chief Operating Officer, The Blackstone Group W. Craig Jelinek Hamilton E. James Executive Vice President and Chief Financial Officer, Costco Chairman, Daniel J. Evans Associates; Former U.S. Senator and Governor of the State of Washington Richard A. Galanti Daniel J. Evans (a)(c) Former President and Chief Executive Officer of Emotient, Inc. BOARD OF DIRECTORS President and Chief Executive Officer, Costco Richard M. Libenson Former Executive Chairman of Frontier Communications Board Committees (a) Audit Committee (b) Compensation Committee Business Development Senior Vice President, Costco Wholesale Industries & Richard C. Chavez Senior Vice President, General Manager - Asia Richard Chang Risk Management Senior Vice President, Human Resources and Senior Vice President, Ecommerce and Travel Patrick J. Callans Donald E. Burdick Canadian Division Senior Vice President, National Merchandising - Andree T. Brien Senior Vice President, General Manager - Bay Area Region EXECUTIVE AND SENIOR OFFICERS Jeffrey Abadir * 2017 Committee Chair (c) Nominating and Governance Committee DIRECTORS AND OFFICERS SHARE ATTRIBUTABLE TO Kenneth D. Denman Principal of Deck3 Ventures LLC; $ 1.24 $ $ 1.24 1.09 $ Diluted. 1.77 $ 5.36 $ 1.24 1.24 $ $ 1.10 $ Basic 1.78 $ 5.33 Shares used in calculation (000's) Susan L. Decker(a) 99 66 0.45 $ 0.45 $ 1.70 $ $ 0.40 $ 0.40 PER COMMON SHARE CASH DIVIDENDS DECLARED 441,263 438,585 437,809 440,868 438,815 441,066 439,648 441,559 441,386 Diluted 438,342 Basic.. Former President of Yahoo! Inc. 28,170 (133) Total revenue 62 22 18 (4) 26 Interest income and other, net. (134) INCOME BEFORE INCOME (53) (31) (29) Interest expense . . . 4,111 27,220 968 844 (21) TAXES. 846 809 Net income attributable to 2,714 932 706 521 555 noncontrolling interests Net income including 1,325 487 259 288 291 Provision for income taxes (1) 4,039 1,419 849 noncontrolling interests OTHER INCOME (EXPENSE) 82 28,860 29,766 28,099 Total revenue 2,853 943 644 42,300 636 Membership fees $ 126,172 $ 41,357 $ 28,216 $ 29,130 $ 27,469 Net sales. 630 129,025 OPERATING EXPENSES Merchandise costs 30 15 15 22 Preopening expenses 12,950 4,123 2,907 2,980 2,940 administrative. . . Selling, general and 111,882 36,697 24,970 25,927 24,288 Operating income (10) 1,450 (6) COSTCO WHOLESALE CORPORATION 99 65 (2) Includes the special cash dividend of $7.00 per share paid in May 2017. (1) Includes an $82 tax benefit recorded in the third quarter in connection with the special cash dividend paid to employees through the Company's 401(k) Retirement Plan. 8.90 0.50 $ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS $ $ $ 0.45 0.45 $ PER COMMON SHARE (2) CASH DIVIDENDS DECLARED 7.50 (amounts in millions, except share, per share, and warehouse count data) (Continued) Note 12-Quarterly Financial Data (Unaudited) (Continued) 52 Weeks Ended August 28, 2016 First Quarter (12 Weeks) 2,646 832 (6) 603 593 Membership fees $ 116,073 $ 35,728 $ 26,151 $ 27,567 $ 26,627 Net sales REVENUE Total (52 Weeks) Fourth Quarter (16 Weeks) Third Quarter (12 Weeks) Second Quarter (12 Weeks) 440,937 438,437 618 438,817 441,056 Basic COSTCO: SHARE ATTRIBUTABLE TO NET INCOME PER COMMON 2,679 919 $ $ 700 $ 515 545 $ $ TO COSTCO ....... NET INCOME ATTRIBUTABLE (35) (13) 437,987 441,036 $ 1.24 $ 701 $ 1.17 Diluted Basic.. Shares used in calculation (000's) 6.08 2.08 $ $ 1.59 438,007 440,525 $ 1.59 1.17 $ $ 2.10 $ 439,127 440,657 Diluted. $ 1.24 6.11 4649 Morena Blvd. San Diego, CA 92117 Texas Region 1701 Dallas Parkway, Suite 201 Plano, TX 75093 EASTERN DIVISION Northeast Region Canada Corporate Office 415 West Hunt Club Road Ottawa, ON K2E 1C5 (613) 221-2000 45940 Horseshoe Drive, Suite 150 Sterling, VA 20166 3980 Venture Drive NW, #W100 Duluth, GA 30096 CANADIAN DIVISION Eastern Region Western Region 4500 Still Creek Drive, Unit A Burnaby, BC V5C 0E5, Canada INTERNATIONAL DIVISION United Kingdom Region 213 Hartspring Lane Watford, England WD25 8JS France Region San Diego Region Southeast Region 31 Auriga Drive Ottawa, ON K2E 1C4, Canada (425) 313-8100 Los Angeles Region WHOLESALE ADDITIONAL INFORMATION A copy of Costco's annual report to the Securities and Exchange Commission on Form 10-K and quarterly reports on Form 10-Q will be provided to any shareholder upon written request directed to Investor Relations, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, Washington 98027. Internet users can access recent sales and earnings releases, the annual report and SEC filings, as well as our Costco Online web site, at http://www.costco.com. E-mail users can direct their investor relations questions to investor@costco.com. All of the Company's filings with the SEC may be obtained at the SEC's Public Reference Room at Room 1580, 100 F Street NE, Washington, DC 20549. For information regarding the operation of the SEC's Public Reference Room, please contact the SEC at 1-800-SEC-0330. Additionally, the SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. NORTHERN DIVISION Northwest Region 1045 Lake Drive Issaquah, WA 98027 Bay Area Region Corporate, Division and Region Offices U.S. Corporate Office 999 Lake Drive Issaquah, WA 98027 1 avenue de Bréhat 2820 Independence Drive Livermore, CA 94551 Midwest Region 1901 West 22nd Street, 2nd Floor Oak Brook, IL 60523 SOUTHWEST DIVISION 11000 Garden Grove Blvd., #201 Garden Grove, CA 92843 91140 Villebon sur Yvette, France 17-21 Parramatta Rd. Calle Agustín de Betancourt, 17 Polígono Empresarial Los Gavilanes 28906 Getafe, Madrid, Spain Transfer Agent Computershare Costco Shareholder Relations Correspondence should be mailed to: P.O. Box 505000 Louisville, KY 40233 Overnight correspondence should be sent to: 462 South 4th Street, Suite 1600 Louisville, KY 40202 Telephone: (800) 249-8982 TDD for Hearing Impaired: (800) 490-1493 Outside U.S.: (201) 680-6578 FSC www.fsc.org MIX Paper from responsible sources FSC® C132107 The NASDAQ Global Select Market Stock Symbol: COST Spain Region Stock Exchange Listing Bellevue, Washington 98004 Japan Region 3-1-4 Ikegami-Shincho Kawasaki-ku Kawasaki-shi Kanagawa, 210-0832, Japan Korea Region 40, Iljik-ro Gwangmyeong-si Gyeonggi-do, 14347, Korea Taiwan Region 255 Min Shan Street Neihu, Taipei 114, Taiwan Australia Region Lidcombe, NSW, 2141, Australia Mexico Region Boulevard Magnocentro #4 Col. San Fernando La Herradura 52760 Huixquilucan, Mexico Annual Meeting Tuesday, January 30, 2018 at 4:00 PM Meydenbauer Center 11100 NE 6th Street Independent Public Accountants KPMG LLP 1918 Eighth Avenue, Suite 2900 Seattle, WA 98101 COSTCO Website: https://www.computershare.com/investor Item 16. Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES □ NO ☑ Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES NO The NASDAQ Global Select Market Name of each exchange on which registered Common Stock, $.01 Par Value Title of each class Registrant's telephone number, including area code: (425) 313-8100 Securities registered pursuant to Section 12(b) of the Act: (Address of principal executive offices) (Zip Code) 999 Lake Drive, Issaquah, WA 98027 (I.R.S. Employer Identification No.) 91-1223280 incorporation or organization) (State or other jurisdiction of Costco Wholesale Corporation (Exact name of registrant as specified in its charter) Commission file number 0-20355 Washington TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 or 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 ☑ NO Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES > NO ☐ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer," "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer ☑ Non-accelerated filer ☐ Emerging growth company ☐ Item 3. Properties. Item 2. Unresolved Staff Comments . Item 1B. Risk Factors Item 1A. Business For the fiscal year ended September 2, 2018 Item 1. TABLE OF CONTENTS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 2, 2018 COSTCO WHOLESALE CORPORATION Portions of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on January 24, 2019, are incorporated by reference into Part III of this Form 10-K. The number of shares outstanding of the registrant's common stock as of October 18, 2018 was 438,208,376. DOCUMENTS INCORPORATED BY REFERENCE Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES □ NO ☑ The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 18, 2018 was $83,850,253,577. If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Accelerated filer ☐ Smaller reporting company ☐ PARTI ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FORM 10-K Washington, D.C. 20549 KANAGAWA - 3 ISHIKAWA-1 HYOGO – 2 IBARAKI – 2 SOUTH KOREA HOKKAIDO -1 HIROSHIMA-1 GUNMA – 1 GIFU-1 KYOTO-1 MIYAGI -1 OSAKA - 1 CHIBA - 2 FUKUOKA - 2 JAPAN WALES-1 SCOTLAND -3 ENGLAND - 24 COSTCO.CO.UK AUSTRALIA 10 Australia AICHI -1 Legal Proceedings SAITAMA-2 SHIZUOKA-1 COSTCO.CO.KR SECURITIES AND EXCHANGE COMMISSION UNITED STATES COR000075C 0618 FRANCE ICELAND SPAIN CHIAYI CITY-1 HSINCHU CITY-1 KAOHSIUNG CITY - 2 NEW TAIPEI CITY - 3 TAICHUNG CITY -1 TAINAN CITY-1 TAIPEI CITY-2 TAOYUAN CITY - 2 COSTCO.CO.TW TOKYO-1 TOYAMA-1 YAMAGATA-1 VICTORIA-4 NEW SOUTH WALES - 3 QUEENSLAND -1 AUSTRALIA CAPITAL TERRITORY-1 TAIWAN GYEONGGI-DO-4 INCHEON - 1 SEJONG-1 SEOUL - 3 ULSAN – 1 DAEJEON-1 DAEGU - 2 CHUNGCHEONGNAM-DO-1 BUSAN -1 SOUTH AUSTRALIA - 1 Item 4. Mine Safety Disclosures. Page We operate membership warehouses 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 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 generally sell inventory before we are required to pay for it, even while taking advantage of early payment discounts. General We report on a 52/53-week fiscal year, consisting of thirteen four-week periods and ending on the Sunday nearest the end of August. The first three quarters consist of three periods each, and the fourth quarter consists of four periods (five weeks in the thirteenth period in a 53-week year). The material seasonal impact in our operations is increased net sales and earnings during the winter holiday season. References to 2018 and 2016 relate to the 52-week fiscal years ended September 2, 2018, and August 28, 2016, respectively. References to 2017 relate to the 53-week fiscal year ended September 3, 2017. Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983, in Seattle, Washington. We are principally engaged in the operation of membership warehouses in the United States (U.S.) and Puerto Rico, Canada, United Kingdom (U.K.), Mexico, Japan, Korea, Australia, Spain, France, Iceland, and through a majority-owned subsidiary in Taiwan. Costco operated 762, 741, and 715 warehouses worldwide at September 2, 2018, September 3, 2017, and August 28, 2016, respectively. Our common stock trades on the NASDAQ Global Select Market, under the symbol "COST." Item 1-Business PART I 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, including, without limitation, the factors set forth in the section titled “Item 1A-Risk Factors", and other factors noted in the section titled “Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the consolidated financial statements and related notes in Item 8 of this Report. 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. INFORMATION RELATING TO FORWARD LOOKING STATEMENTS We buy most of our merchandise directly from manufacturers and route it to cross-docking consolidation points (depots) or directly to our warehouses. Our depots receive large shipments from manufacturers and quickly ship these goods to warehouses. This process creates freight volume and handling efficiencies, lowering costs associated with traditional multiple-step distribution channels. 2 67 65 780 Signatures Form 10-K Summary Exhibits, Financial Statement Schedules Item 15. PART IV 68 64 Our average warehouse space is approximately 145,000 square feet, with newer units being slightly larger. Floor plans are designed for economy and efficiency in the use of selling space, the handling of merchandise, and the control of inventory. Because shoppers are attracted principally by the quality of merchandise and low prices, our warehouses are not elaborate. By strictly controlling the entrances and exits and using a membership format, we believe our inventory losses (shrinkage) are well below those of typical retail operations. 4 Certain financial information for our segments and geographic areas is included in Note 11 to the consolidated financial statements included in Item 8 of this Report. Our e-commerce operations allow us to connect with our members online and provide additional products and services, many not found in our warehouses. We operate e-commerce websites in the U.S., Canada, Mexico, U.K., Korea, and Taiwan. Net sales for e-commerce represented approximately 4% of total net sales in 2018. Additionally, we offer business delivery, travel and various other services online in certain countries. We have direct buying relationships with many producers of national brand-name merchandise. We do not obtain a significant portion of merchandise from any one supplier. We generally have not experienced difficulty in obtaining sufficient quantities of merchandise and believe that if current sources of supply became unavailable, we would be able to obtain alternative sources without substantial disruption of our business. We also purchase and manufacture private-label merchandise, as long as quality and member demand are comparable and the value to our members is significant. Ancillary businesses within or next to our warehouses provide expanded products and services, encouraging members to shop more frequently. These businesses include gas stations, pharmacies, optical dispensing centers, food courts, and hearing-aid centers. The number of warehouses with gas stations vary significantly by country, and we do not operate our gasoline business in Korea or France. We operated 567 gas stations at the end of 2018. Ancillary (including gasoline and pharmacy businesses) • Softlines (including apparel and small appliances) • 3 Fresh Foods (including meat, produce, deli, and bakery) Hardlines (including major appliances, electronics, health and beauty aids, hardware, and garden and patio) Food and Sundries (including dry foods, packaged foods, groceries, snack foods, candy, alcoholic and nonalcoholic beverages, and cleaning supplies) • . We offer merchandise in the following categories: In keeping with our policy of member satisfaction, we generally accept returns of merchandise. On certain electronic items, we typically have a 90-day return policy and provide, free of charge, technical support services, as well as an extended warranty. Additional third-party warranty coverage is sold on certain electronic items. Our strategy is to provide our members with a broad range of high-quality merchandise at prices we believe are consistently lower than elsewhere. We seek to limit items to fast-selling models, sizes, and colors. We carry an average of approximately 3,700 active stock keeping units (SKUS) per warehouse in our core warehouse business, significantly less than other broadline retailers. Many consumable products are offered for sale in case, carton, or multiple-pack quantities only. Our warehouses on average operate on a seven-day, 70-hour week. Gasoline operations generally have extended hours. Because the hours of operation are shorter than other retailers, and due to other efficiencies inherent in a warehouse-type operation, labor costs are lower relative to the volume of sales. Merchandise is generally stored on racks above the sales floor and displayed on pallets containing large quantities, reducing labor required. In general, with variations by country, our warehouses accept certain credit, including the Costco co-branded card, and debit cards, cash, and checks. • ठ ठ ठ 64 64 Financial Statements and Supplementary Data. 31 Item 7A. Item 8. 21 Management's Discussion and Analysis of Financial Condition and Results of Operations 20 17 72 33 Selected Financial Data .... Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. PART II Item 5. 17 17 16 15 8 3 Item 6. Item 7. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Certain Relationships and Related Transactions, and Director Independence.. Principal Accounting Fees and Services Item 14. Item 13. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 12. 64 Executive Compensation ... Item 11. 64 Directors, Executive Officers and Corporate Governance Item 10. PART III 64 62 62 233 Other Information Item 9B. Controls and Procedures 13 Taiwan Quantitative and Qualitative Disclosures About Market Risk 26 2014 2015 2016 2017 2018 0 Totals 2009 & Before 10 13 21 22353 Fiscal Year 2010 20 15 2012 26 2013 30 14.8 30 2011 23 Average Sales Per Warehouse* (Sales In Millions) $121 *First year sales annualized. 762 $131 $139 $146 $155 $160 $164 $162 $159 $163 $176 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Fiscal Year $105 $103 120 $94 106 122 558 $131 140 149 158 166 173 173 172 177 190 130 139 152 115 124 128 130 136 139 139 148 163 135 144 148 151 155 168 137 116 124 $99 109 113 $116 140 112 94 85 $83 118 97 $87 142 $108 109 115 125 29 26 2222 3 KEY FINANCIAL METRICS Costco currently operates 768 warehouses, including 533 in the United States and Puerto Rico, 100 in Canada, 39 in Mexico, 28 in the United Kingdom, 26 in Japan, 15 in Korea, 13 in Taiwan, 10 in Australia, two in Spain, one in Iceland, and one in France. Costco also operates e-commerce sites in the U.S., Canada, the United Kingdom, Mexico, Korea, and Taiwan. Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983 in Seattle, Washington. In October 1993, Costco merged with The Price Company, which had pioneered the membership warehouse concept in 1976, to form Price/Costco, inc., a Delaware corporation. In January 1997, after the spin-off of most of its non-warehouse assets to Price Enterprises, Inc., the Company changed its name to Costco Companies, Inc. On August 30, 1999, the Company reincorporated from Delaware to Washington and changed its name to Costco Wholesale Corporation, which trades on the Nasdaq Global Select Market under the symbol "COST." THE COMPANY Millions WHOLESALE COSTCO A commitment to quality and value at 768 locations and on Costco.com Provided below is information related to our Membership and Sales per Warehouse which supplements additional key metrics found on page 20. FISCAL YEAR ENDED SEPTEMBER 2, 2018 Annual Report GOSTRO COSTCO COSTCO COSTCO WHOLESALE COSTCO Far East 2018 60 Paid Membership Executive 2014 16.1 2015 18.5 17.4 40 19.3 42.0 2016 44.6 47.6 2017 50 50 49.4 51.6 21 # of Whses 2018 Year Opened 2009 and 2010 exclude the results of our joint venture partnership in Mexico December 14, 2018 WHOLESALE When Costco was founded 35 years ago, we did not envision that we would become a $138 billion retailer, employ over 245,000 people, operate over 750 warehouses or serve more than 94 million members worldwide. Nor did we envision the breadth of products and services we now offer; or that what began as a "cash-and-carry" operation would extend to delivering products to our members' doorsteps. What we did know, and set out to do, was maintain a steadfast commitment to value and integrity. We honor this commitment in all aspects of our business, from providing quality merchandise at terrific prices; to treating members, employees, and vendors with courtesy and respect; and to working closely with suppliers to promote fairness, dignity, and safety throughout our supply chains. BAJA CALIFORNIA SUR-1 CHIHUAHUA - 2 COAHUILA - 1 AGUASCALIENTES - 1 BAJA CALIFORNIA - 4 COSTCO.COM.MX MEXICO SASKATCHEWAN - 3 ONTARIO - 36 QUÉBEC - 21 NEW BRUNSWICK - 3 NEWFOUNDLAND AND LABRADOR-1 NOVA SCOTIA - 2 BRITISH COLUMBIA - 14 MANITOBA -3 GUANAJUATO - 3 COSTCO.CA ALBERTA - 17 WASHINGTON - 32 WISCONSIN - 9 WASHINGTON, D.C. - 1 PUERTO RICO - 4 VIRGINIA-17 VERMONT-1 UTAH - 11 OREGON - 13 PENNSYLVANIA - 11 SOUTH CAROLINA - 6 SOUTH DAKOTA - 1 TENNESSEE - 5 TEXAS - 31 OKLAHOMA-1 OHIO - 12 NORTH CAROLINA - 8 NORTH DAKOTA - 1 CANADA JALISCO - 3 MÉXICO - 5 MÉXICO, D.F. - 4 MICHOACÁN -1 Dear Costco Shareholders: Japan Europe 15 South Korea 2 Spain 1 France 28 United Kingdom 1 Iceland YUCATÁN -1 VERACRUZ-2 TABASCO-1 SONORA - 1 PUEBLA -1 QUERÉTARO -1 QUINTANA ROO - 1 SAN LUIS POTOSÍ - 1 SINALOA - 1 MORELOS - 1 NUEVO LEÓN - 3 NEW YORK-19 NEW HAMPSHIRE - 1 NEW JERSEY - 19 NEW MEXICO - 3 UNITED KINGDOM MASSACHUSETTS - 6 UNITED STATES WHOLESALE COSTCO 768 locations as of December 31, 2018 President and Chief Executive Officer Craig Jelinek Cray Jelek Sincerely, Thank you for your continued trust in and support of Costco. May the year ahead bring you and your families good health, happiness, peace, and prosperity. Mexico In closing, I express my gratitude to the 245,000 employees and more than 94 million members worldwide who help make Costco the undeniable leader in membership warehouses, and one of the best retailers worldwide. We continue to be proud of creating a climate of inclusion, diversity and a positive work environment for employees globally. We recognize our consistently efficient and loyal employee base with competitive pay and benefits, and opportunities for growth and advancement. These sentiments were recently acknowledged in a survey by Indeed, identifying Costco as one of the top five Best Rated Workplaces in 2018 among Fortune 500 companies. Our relationship with our employees is fundamental to driving our business not only in the present, but over the long term. We remain committed to operating our business and sourcing our products using sustainable practices, being mindful of our global impact on people, communities and the environment. We believe sustainability is important to many of us who care deeply about how and where a product originates, the treatment of workers and animals, and environmental impacts. We strive to be good stewards and follow our code of conduct, requiring sustainable practices from suppliers, manufacturers, and farmers. This includes eliminating harmful chemicals, emphasizing recycled and compostable packaging materials, saving energy at our warehouses and depots, and donating more perishable items to food banks. We remain keenly aware that changing preferences of consumers, technological advancements and the ever-changing retail climate will continue to alter the ways in which members shop. "Hot buys,” ecommerce product showcases, online ordering capabilities and grocery delivery have all contributed to sales growth of over 30% in ecommerce for the fiscal year. Along with everyday merchandise, impressive sales were achieved in high-end items at outstanding values, such as Super Bowl tickets packages, diamonds, tablets and laptops, designer handbags and accessories, and once-in-a-lifetime vacation packages. Our new "hotel only" booking engine and expanded partnerships with new hotels provide greater value and convenience for our members. Such activities have positively impacted our business, both online and in-warehouse, and are helping our sales momentum, while also increasing our digital presence. Strong comparable sales and shopping frequency during fiscal 2018 reaffirm the demand and desire by our members to shop in our warehouses. In 2018, we tested technology that will allow merchandise to be moved faster through the registers and deployed self-checkout registers as well as self-ordering kiosks for the Food Court. Research and development is underway toward a fob that will allow members to pay for gas with a single swipe, eliminating the need to access their membership or credit cards. With respect to vertical integration, we continue to explore opportunities that will allow us to realize even greater member satisfaction, whether driven by price, quality or a combination. We enjoy continued success in our bakery commissary in Canada, various packaging operations, optical and pharmacy central-fill locations, and U.S. meat plants. Our chicken complex in Nebraska, which is currently under construction, should yield similar results. Costco remains strong and competitive in today's dynamic retail climate. We continue to open warehouses domestically and internationally, expand and improve our ecommerce business, and add products under our Kirkland Signature TM brand. The Kirkland Signature TM brand has become globally recognized as a "gold standard" of high quality and exceptional value. In 2018, Kirkland Signature sales exceeded $39 billion, compared to $35 billion in the prior year. We have broadened our selection in apparel, organic and fresh foods, household basics, sporting goods, and health and beauty products, including the introduction of a new razor. We have also intensified our focus on in-country sourcing, driving costs down, enhancing member value, and reducing the environmental impacts of transportation. In addition to investing $3 billion in capital expenditures during fiscal 2018 to expand our business in many ways, strong cash flows in fiscal 2018 allowed us to also declare dividends of $939 million and repurchase shares of $322 million. As well, income tax savings from the recent U.S. tax law changes provided funding to raise wages for most of our U.S. employees. MICHIGAN - 15 MINNESOTA-10 MISSOURI - 6 MONTANA -5 NEBRASKA-3 NEVADA - 8 We reached a key milestone as Costco co-founder Jim Sinegal stepped down in 2018, ending 35 years with the Company. Jim's extraordinary vision, passion and work ethic have impacted so many. While Jim still is frequently seen at the corporate headquarters and regularly visits warehouses, he is enjoying more time with family and actively participating in philanthropic and other pursuits. We remain resolute in carrying on the principal philosophy and values that Jim, along with Jeff Brotman, originally established for Costco in 1983. 39 In 2018, we reached a milestone with our 750th warehouse location. Fiscal 2018 expansion included the opening of 21 new warehouses around the globe, with our 100th location in Canada; and we continue to add gas stations and other ancillary services to locations in different countries. We are not only focused on new markets, but how we strategically infill and relocate within markets where we currently operate. In 2019, we expect to open 23 new warehouses and relocate up to 4 warehouses to more ideal locations. Especially anticipated is the planned opening in 2019 of our West Shanghai warehouse, our first in China. Our capital plans also extend to making improvements in our logistics that will drive value for our members. We are investing in new ecommerce fulfillment centers and improved transportation logistics. Membership renewal rates in the U.S. and Canada were 90 percent, and renewal rates worldwide saw an increase to 88 percent. We are seeing higher sign-up rates from younger generations and a more diverse membership base. This shift can be partially attributed to our buyers' increased focus on products that have an appeal that spans generations as well as sourcing products globally to expand cultural and ethnic offerings. 100 MARYLAND - 11 LOUISIANA -3 Canada KENTUCKY-4 KANSAS - 3 IOWA - 3 INDIANA - 6 ILLINOIS - 19 IDAHO - 5 These commitments, and our unwavering “do the right thing” philosophy, led us to another strong year in fiscal 2018. Net sales for the 52-week fiscal year totaled $138 billion, an increase of 9.7 percent, with a comparable sales increase of 9 percent. Net income for the 52-week fiscal year was $3.134 billion, or $7.09 per share, an increase of 17 percent. Revenue from membership fees increased 10.1 percent to $3.142 billion. GEORGIA - 12 HAWAII - 7 United States and COSTCO.COM ALABAMA -4 Puerto Rico 533 DELAWARE -1 FLORIDA - 26 ARIZONA - 18 CALIFORNIA - 128 COLORADO-14 CONNECTICUT -6 ALASKA - 4 2001 2013 66 1994 66 7 Executive Vice President, Chief Operating Officer, Merchandising. Mr. Vachris was Senior Vice President, Real Estate Development, from August 2015 to June 2016, and Senior Vice President, General Manager, Northwest Region, from 2010 to July 2015. Executive Vice President, Ancillary Businesses, Manufacturing, and Business Centers. Mr. Rose was Senior Vice President, Merchandising, Food and Sundries and Private Label, from 1995 to December 2012. Executive Vice President, Chief Information Officer. Mr. Moulton was Executive Vice President, Real Estate Development, from 2001 until March 2010. Executive Vice President, Chief Operating Officer, Eastern and Canadian Divisions. Mr. Portera has held these positions since 1994 and has been the Chief Diversity Officer since 2010. Ron M. Vachris 2016 Joseph P. Portera.. James P. Murphy. . . . . 65 61 2011 67 Executive Vice President, Chief Operating Officer, International. Mr. Murphy was Senior Vice President, International, from 2004 to October 2010. Timothy L. Rose The risks described below could materially and adversely affect our business, financial condition and results of operations. We could also be affected by additional risks that apply to all companies operating in the U.S. and globally, as well as other risks that are not presently known to us or that we currently consider to be immaterial. These Risk Factors should be carefully reviewed in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and our consolidated financial statements and related notes in Item 8 of this Report. Item 1A-Risk Factors 9 We are currently making, and will continue to make, investments to improve or advance critical information systems and processing capabilities. Failure to monitor and choose the right investments and implement them at the right pace would be harmful. The risk of system disruption is increased when significant system changes are undertaken, although we believe that our change management process will mitigate this risk. Excessive technological change could impact the effectiveness of adoption, and could make it more difficult Given the very high volume of transactions we process each year it is important that we maintain uninterrupted operation of our business-critical computer systems. Our systems, including our back-up systems, are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, internal or external security breaches, catastrophic events such as fires, earthquakes, tornadoes and hurricanes, and errors by our employees. If our systems are damaged or cease to function properly, we may have to make significant investments to fix or replace them, and we may suffer interruptions in our operations in the interim. Any material interruption in these systems could have a material adverse effect on our business and results of operations. 2018 for us to realize benefits. Targeting the wrong opportunities, failing to make the best investments, or making an investment commitment significantly above or below our needs could result in the loss of our competitive position and adversely impact our financial condition and results of operations. The potential problems and interruptions associated with implementing technology initiatives could disrupt or reduce the efficiency of our operations. These initiatives might not provide the anticipated benefits or may provide them on a delayed schedule or at a higher cost. We rely extensively on information technology to process transactions, compile results, and manage our businesses. Failure or disruption of our primary and back-up systems could adversely affect our businesses. A failure to adequately update our existing systems and implement new systems could harm our businesses and adversely affect our results of operations. We may not timely identify or effectively respond to consumer trends, which could negatively affect our relationship with our members, the demand for our products and services, and our market share. It is difficult to consistently and successfully predict the products and services that our members will desire. Our success depends, in part, on our ability to identify and respond to trends in demographics and consumer preferences. Failure to identify timely or effectively respond to changing consumer tastes, preferences (including those relating to sustainability of product sources and animal welfare) and spending patterns could negatively affect our relationship with our members, the demand for our products and services, and our market share. If we are not successful at predicting our sales trends and adjusting our purchases accordingly, we may have excess inventory, which could result in additional markdowns and reduce our operating performance. This could have an adverse effect on net sales, gross margin and operating income. We depend on the orderly operation of the merchandise receiving and distribution process, primarily through our depots. We also rely upon processing, packaging, manufacturing and other facilities to support our business, which includes the production of certain private-label items. Although we believe that our operations are efficient, disruptions due to fires, tornadoes, hurricanes, earthquakes or other catastrophic events, labor issues or other shipping problems may result in delays in the production and delivery of merchandise to our warehouses, which could adversely affect sales and the satisfaction of our members. 53 Disruptions in our merchandise distribution or processing, packaging, manufacturing, and other facilities could adversely affect sales and member satisfaction. Membership loyalty and growth are essential to our business. 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. Damage to our brands or reputation may negatively impact comparable sales, diminish member trust, and reduce member renewal rates and, accordingly, net sales and membership fee revenue, negatively impacting our results of operations. Our failure to maintain membership growth, loyalty and brand recognition could adversely affect our results of operations. 8 We seek to expand in existing markets to attain a greater overall market share. A new warehouse may draw members away from our existing warehouses and adversely affect their comparable sales performance, member traffic, and profitability. Our growth is dependent, in part, on our ability to acquire property and build or lease new warehouses and depots. We compete with other retailers and businesses for suitable locations. Local land use and other regulations restricting the construction and operation of our warehouses and depots, as well as local community actions opposed to the location of our warehouses or depots at specific sites and the adoption of local laws restricting our operations and environmental regulations, may impact our ability to find suitable locations and increase the cost of sites and of constructing, leasing and operating warehouses and depots. We also may have difficulty negotiating leases or purchase agreements on acceptable terms. In addition, certain jurisdictions have enacted or proposed laws and regulations that would prevent or restrict the operation or expansion plans of certain large retailers and warehouse clubs, including us. Failure to effectively manage these and other similar factors may affect our ability to timely build or lease and operate new warehouses and depots, which could have a material adverse effect on our future growth and profitability. We may be unsuccessful implementing our growth strategy, including expanding our business in existing markets and new markets, which could have an adverse impact on our business, financial condition and results of operations. We are highly dependent on the financial performance of our U.S. and Canadian operations. Our financial and operational performance is highly dependent on our U.S. and Canadian operations, which comprised 87% and 83% of net sales and operating income in 2018, respectively. Within the U.S., we are highly dependent on our California operations, which comprised 30% of U.S. net sales in 2018. Our California market, in general, has a larger percentage of higher volume warehouses as compared to our other domestic markets. Any substantial slowing or sustained decline in these operations could materially adversely affect our business and financial results. Declines in financial performance of our U.S. operations, particularly in California, and our Canadian operations could arise from, among other things: slow growth or declines in comparable warehouse sales (comparable sales); negative trends in operating expenses, including increased labor, healthcare and energy costs; failing to meet targets for warehouse openings; cannibalizing existing locations with new warehouses; shifts in sales mix toward lower gross margin products; changes or uncertainties in economic conditions in our markets, including higher levels of unemployment and depressed home values; and failing to consistently provide high quality and innovative new products. Business and Operating Risks We sell many products under our Kirkland Signature brand. Maintaining consistent product quality, competitive pricing, and availability of these products is essential to developing and maintaining member loyalty. These products also generally carry higher margins than national brand products carried in our warehouses and represent a growing portion of our overall sales. If the Kirkland Signature brand experiences a loss of member acceptance or confidence, our sales and gross margin results could be adversely affected. We intend to continue to open warehouses in new markets. Associated risks include difficulties in attracting members due to a lack of familiarity with us, attracting members of other wholesale club operators, our lack of familiarity with local member preferences, and seasonal differences in the market. Entry into new markets may bring us into competition with new competitors or with existing competitors with a large, established market presence. We cannot ensure that new warehouses and new websites will be profitable and, as a result, future profitability could be delayed or otherwise materially adversely affected. 6 2012 We believe that, to varying degrees, our trademarks, trade names, copyrights, proprietary processes, trade secrets, patents, trade dress, domain names and similar intellectual property add significant value to our business and are important to our success. We have invested significantly in the development and protection of our well-recognized brands, including the Costco Wholesale® trademarks and our private-label brand, Kirkland Signature®. We believe that Kirkland Signature products are high quality, offered to our members at prices that are generally lower than national brands, and that they help lower costs, differentiate our merchandise offerings, and generally earn higher margins. We expect to continue to increase the sales penetration of our private label items. Intellectual Property merchandise retail competitors. We also compete with warehouse club operations (primarily Walmart's Sam's Club and BJ's Wholesale Club), and nearly every major U.S. and Mexico metropolitan area has multiple club operations. 5 Our industry is highly competitive, based on factors such as price, merchandise quality and selection, location, convenience, distribution strategy, and customer service. We compete on a worldwide basis with global, national, and regional wholesalers and retailers, including supermarkets, supercenters, internet retailers, gasoline stations, hard discounters, department and specialty stores, and operators selling a single category or narrow range of merchandise. Walmart, Target, Kroger, and Amazon.com are among our significant general Competition Approximately 15,900 employees are union employees. We consider our employee relations to be very good. Total employees 143,000 133,000 126,000 102,000 98,000 92,000 245,000 231,000 218,000 2016 2017 2018 Part-time employees We identified a material weakness in our internal control related to ineffective information technology general controls which, if not remediated appropriately or timely, could result in loss of investor confidence and adversely impact our stock price. Full-time employees Paid cardholders (except Business affiliates) are eligible to upgrade to an Executive membership in the U.S. and Canada for an additional annual fee of $60. Executive memberships are also available in Mexico and the U.K., for which the additional annual fee varies. Executive members earn a 2% reward on qualified purchases (up to a maximum reward of $1,000 per year in U.S. and Canada and varies in Mexico and the U.K.), and can be redeemed only at Costco warehouses. This program also offers (except in Mexico), access to additional savings and benefits on various business and consumer services, such as auto and home insurance, the Costco auto purchase program, and check printing services. These services are generally provided by third parties and vary by state and country. Executive members, who represented 37% of paid members at the end of 2018, generally shop more frequently and spend more than other members. Labor Our employee count was as follows: We rely on trademark and copyright laws, trade-secret protection, and confidentiality, license and other agreements with our suppliers, employees and others to protect our intellectual property. The availability and duration of trademark registrations vary by country; however, trademarks are generally valid and may be renewed indefinitely as long as they are in use and registrations are properly maintained. Available Information Our U.S. website is www.costco.com. We make available through the Investor Relations section of that site, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and Forms 3, 4 and 5, and any amendments to those reports, as soon as reasonably practicable after filing such materials with or furnishing such documents to the Securities and Exchange Commission (SEC). The information found on our website is not part of this or any other report filed with or furnished to the SEC. The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a site that contains reports, proxy and information statements, and other information regarding issuers, such as the Company, that file electronically with the SEC at www.sec.gov. We have adopted a code of ethics for senior financial officers pursuant to Section 406 of the Sarbanes-Oxley Act. Copies of the code are available free of charge by writing to Secretary, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, WA 98027. If the Company makes any amendments to this code (other than technical, administrative, or non-substantive amendments) or grants any waivers, including implicit waivers, from this code to the CEO, chief financial officer or principal accounting officer and controller, we will disclose (on our website or in a Form 8-K report filed with the SEC) the nature of the amendment or waiver, its effective date, and to whom it applies. 56 2018 1993 62 Executive Officer Since Age 1995 66 Paul G. Moulton Executive Vice President, Administration. Mr. Lazarus was Senior Vice President, Administration-Global Operations, from 2006 to September 2012. Executive Vice President, Chief Operating Officer, Southern Division and Mexico. Mr. Miller was Senior Vice President, Western Canada Region, from 2001 to January 2018. Executive Vice President and Chief Financial Officer. Mr. Galanti has been a director since January 1995. Executive Vice President, Chief Operating Officer, Northern Division. Mr. Klauer was Senior Vice President, Non Foods and E-commerce merchandise, from 2013 to January 2018. President and Chief Executive Officer. Mr. Jelinek has been President and Chief Executive Officer since January 2012 and a director since February 2010. He was President and Chief Operating Officer from February 2010 to December 2011. Prior to that he was Executive Vice President, Chief Operating Officer, Merchandising since 2004. 71 Position Franz E. Lazarus. Jim C. Klauer. Richard A. Galanti.. W. Craig Jelinek Name The executive officers of Costco, their position, and ages are listed below. All executive officers have over 25 years of service with the Company. Executive Officers of the Registrant CO Russ D. Miller Internal controls related to the operation of technology systems are critical to maintaining adequate internal control over financial reporting. As disclosed in Part II, Item 9A, during the fourth quarter of fiscal 2018, management identified a material weakness in internal control related to ineffective information technology general controls (ITGCs) in the areas of user access and program change-management over certain information technology (IT) systems that support the Company's financial reporting processes. As a result, management concluded that our internal control over financial reporting was not effective as of September 2, 2018. We are implementing remedial measures and, while there can be no assurance that our efforts will be successful, we plan to remediate the material weakness prior to the end of fiscal 2019. These measures will result in additional technology and other expenses. If we are unable to remediate the material weakness, or are otherwise unable to maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to record, process and report financial information accurately, and to prepare financial statements within required time periods, could be adversely affected, which could subject us to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in our financial statements and adversely impact our stock price. 40,900 We receive, retain, and transmit personal information about our members and employees and entrust that information to third-party business associates, including cloud service-providers that perform activities for us. Our warehouse and online businesses depend upon the secure transmission of encrypted confidential information over public networks, including information permitting cashless payments. A compromise of our security systems or defects within our hardware or software, or those of our business associates, that results in our members' or employees' information being obtained by unauthorized persons, could adversely affect our reputation with our members and others, as well as our operations, results of operations, financial condition and liquidity, and could result in litigation, government actions, or the imposition of penalties. In addition, a breach could require that we expend significant additional resources related to the security of information systems and could disrupt our operations. We believe that the price of our stock currently reflects high market expectations for our future operating results. Any failure to meet or delay in meeting these expectations, including our warehouse and e-commerce comparable sales growth rates, membership renewal rates, new member sign-ups, gross margin, earnings, earnings per share, new warehouse openings, or dividend or stock repurchase policies could cause the market price of our stock to decline. Legal and Regulatory Risks Our international operations subject us to risks associated with the legislative, judicial, accounting, regulatory, political and economic factors specific to the countries or regions in which we operate, which could adversely affect our business, financial condition and results of operations. During 2018, we operated 235 warehouses outside of the U.S., and we plan to continue expanding our international operations. Future operating results internationally could be negatively affected by a variety of factors, many similar to those we face in the U.S., certain of which are beyond our control. These factors include political and economic conditions, regulatory constraints, currency regulations, policy changes such as the U.K.'s vote to withdraw from the European Union, commonly known as "Brexit", and other matters in any of the countries or regions in which we operate, now or in the future. Other factors that may impact international operations include foreign trade (including tariffs), monetary and fiscal policies and the laws and regulations of the U.S. and foreign governments, agencies and similar organizations, and risks associated with having major facilities in locations which have been historically less stable than the U.S. Risks inherent in international operations also include, among others, the costs and difficulties of managing international operations, adverse tax consequences, and difficulty in enforcing intellectual property rights. 14 94,300 39,100 If we do not maintain the privacy and security of personal and business information, we could damage our reputation with members and employees, incur substantial additional costs, and become subject to litigation. 47,600 49,400 51,600 10,800 10,800 10,900 Failure to meet financial market expectations could adversely affect the market price and volatility of our stock. 36,800 40,700 2016 2017 2018 Total cardholders Household cards. . Total paid members Business, including affiliates.. Gold Star Our membership was made up of the following (in thousands): Our member renewal rate was 90% in the U.S. and Canada and 88% on a worldwide basis at the end of 2018. The majority of members renew within six months following their renewal date. Therefore, our renewal rate is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date. Our members may utilize their memberships at our warehouses worldwide. Gold Star memberships are available to individuals; Business memberships are limited to businesses, including individuals with a business license, retail sales license or comparable evidence. Business members have the ability to add additional cardholders (affiliates), to which the same annual fee applies. Affiliates are not available for Gold Star members. Our annual fee for these memberships is $60 in our U.S. and Canadian operations and varies in other countries. All paid memberships include a free household card. Membership 86,700 38,600 We use natural gas, diesel fuel, gasoline, and electricity in our distribution and warehouse operations. U.S. and foreign government regulations limiting carbon dioxide and other greenhouse gas emissions may result in increased compliance and merchandise costs, and legislation or regulation affecting energy inputs that could materially affect our profitability. Climate change and extreme weather conditions, such as intense hurricanes, thunderstorms, tornadoes, and snow or ice storms, as well as rising sea levels could affect our ability to procure needed commodities at costs and in quantities we currently experience. We also sell a substantial amount of gasoline, the demand for which could be impacted by concerns about climate change and which could face increased regulation. 42,700 Natural disasters, such as hurricanes, typhoons or earthquakes, particularly in California or Washington state, where our centralized operating systems and administrative personnel are located, could negatively affect our operations and financial performance. Such events could result in physical damage to one or more of our properties, the temporary closure of one or more warehouses, depots, manufacturing or home office facilities, the temporary lack of an adequate work force in a market, the temporary or long-term disruption in the supply of products from some local or overseas suppliers, the temporary disruption in the transport of goods to or from overseas, delays in the delivery of goods to our warehouses or depots within the countries in which we operate, and the temporary reduction in the availability of products in our warehouses. Public health issues, whether occurring in the U.S. or abroad, could disrupt our operations, disrupt the operations of suppliers or members, or have an adverse impact on consumer spending and confidence levels. These events could also reduce demand for our products or make it difficult or impossible to procure products. We may be required to suspend operations in some or all of our locations, which could have a material adverse effect on our business, financial condition and results of operations. The use of data by our business and our business associates is regulated at the national and state or local level in all of our operating countries. Privacy and information-security laws and regulations change, and compliance with them may result in cost increases due to, among other things, systems changes and the development of new processes. If we or those with whom we share information fail to comply with these laws and regulations, our reputation could be damaged, possibly resulting in lost future business, and we could be subjected to additional legal risk as a result of non-compliance, including fines of up to 4% of our global revenue in the case of the General Data Protection Regulation (GDPR). We do not maintain cyber- insurance for these risks. We have security measures and controls to protect personal and business information and continue to make investments to secure access to our information technology network. These measures may be undermined, however, due to the actions of outside parties, employee error, internal or external malfeasance, or otherwise, and, as a result an unauthorized party may obtain access to our data systems and misappropriate business and personal information. Because the techniques used to obtain unauthorized access, disable or degrade 10 service, or sabotage systems change frequently and may not immediately produce signs of intrusion, we may be unable to anticipate these techniques, timely discover or counter them, or implement adequate preventative measures. Any such breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation, and potentially have an adverse effect on our business and results of operations. We are subject to payment-related risks. Factors associated with climate change could adversely affect our business. We might sell products that cause illness or injury to our members, harm to our reputation, and expose us to litigation. If our merchandise, such as food and prepared food products for human consumption, drugs, children's products, pet products and durable goods, do not meet or are perceived not to meet applicable safety standards or our members' expectations regarding safety, we could experience lost sales, increased costs, litigation or reputational harm. The sale of these items involves the risk of health-related illness or injury to our members. Such illnesses or injuries could result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, manufacturing, storage, handling and transportation phases, or faulty design. Our vendors are generally contractually required to comply with product safety laws, and we are dependent on them to ensure that the products we buy comply with all safety standards. While we are subject to governmental inspection and regulations and work to comply in all material respects with applicable laws and regulations, we cannot be sure that consumption or use of our products will not cause illness or injury in the future or that we will not be subject to claims, lawsuits, or government investigations relating to such matters resulting in costly product recalls and other liabilities that could adversely affect our business and results of operations. Even if a product liability claim is unsuccessful or is not fully pursued, negative publicity could adversely affect our reputation with existing and potential members and our corporate and brand image, and these effects could be long term. If we do not successfully develop and maintain a relevant omnichannel experience for our members, our results of operations could be adversely impacted. Omnichannel retailing is rapidly evolving, and we must keep pace with changing member expectations and new developments by our competitors. Our members are increasingly using mobile phones, tablets, computers, and other devices to shop and to interact with us through social media. We are making technology investments in our websites and mobile applications. If we are unable to make, improve, or develop relevant member-facing technology in a timely manner, our ability to compete and our results of operations could be adversely affected. 11 Inability to attract, train and retain highly qualified employees could adversely impact our business, financial condition and results of operations. Our success depends on the continued contributions of members of our senior management and other key operations, merchandising and administrative personnel. Failure to identify and implement a succession plan for key senior management could negatively impact the business. We must attract, train and retain a large and growing number of qualified employees, while controlling related labor costs and maintaining our core values. Our ability to control labor and benefit costs is subject to numerous internal and external factors, including regulatory changes, prevailing wage rates, and healthcare and other insurance costs. We compete with other retail and non-retail businesses for these employees and invest significant resources in training and motivating them. There is no assurance that we will be able to attract or retain highly qualified employees in the future, which could have a material adverse effect on our business, financial condition and results of operations. We may incur property, casualty or other losses not covered by our insurance. We accept payments using a variety of methods, including cash and checks, a select variety of credit and debit cards, and our proprietary cash card. As we offer new payment options to our members, we may be subject to additional rules, regulations, compliance requirements, and higher fraud losses. For certain payment methods, we pay interchange and other related card acceptance fees, along with additional transaction processing fees. We rely on third parties to provide payment transaction processing services, including the processing of credit and debit cards, and our proprietary cash card, and it could disrupt our business if these companies become unwilling or unable to provide these services to us. We are also subject to payment card association and network operating rules, including data security rules, certification requirements and rules governing electronic funds transfers, which could change over time. For example, we are subject to Payment Card Industry Data Security Standards ("PCI DSS"), which contain compliance guidelines and standards with regard to our security surrounding the physical and electronic storage, processing and transmission of individual cardholder data. In addition, if our internal systems are breached or compromised, we may be liable for card re-issuance costs, subject to fines and higher transaction fees and lose our ability to accept credit and/or debit card payments from our members, and our business and operating results could be adversely affected. We are primarily self-insured as it relates to property damage. Although we maintain specific coverages for catastrophic losses, we still bear the risk of losses incurred as a result of any physical damage to, or the destruction of, any warehouses, depots, manufacturing or home office facilities, loss or spoilage of inventory, and business interruption caused by any such events to the extent they are below catastrophic levels of coverage, as well as any losses to the extent they exceed our aggregate limits of applicable coverages. Such losses could materially impact our cash flow and results of operations. Natural disasters or other catastrophes could negatively affect our business, financial condition, and results of operations. The Company is predominantly self-insured for employee health care benefits, workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability, and inventory loss. Insurance coverage is maintained in certain instances to limit the exposure arising from catastrophic events. The types and amounts of insurance may vary from time to time based on our decisions with respect to risk retention and regulatory requirements. Significant claims or events, regulatory changes, a substantial rise in costs of health care or costs to maintain our insurance, or the failure to maintain adequate insurance coverage could have an adverse impact on our financial condition and results of operations. 13 A portion of the products we purchase for sale in our warehouses around the world is paid for in a currency other than the local currency of the country in which the goods are sold. Currency fluctuations may increase our cost of goods and may not be passed on to members. Consequently, fluctuations in currency exchange rates may adversely affect our results of operations. Our suppliers (and those they depend upon for materials and services) are subject to risks, including labor disputes, union organizing activities, financial liquidity, inclement weather, natural disasters, supply constraints, and general economic and political conditions that could limit their ability to timely provide us with acceptable merchandise. For these or other reasons, one or more of our suppliers might not adhere to our quality control, legal, regulatory, labor, environmental or animal welfare standards. These deficiencies may delay or preclude delivery of merchandise to us and might not be identified before we sell such merchandise to our members. This failure could lead to recalls and litigation and otherwise damage our reputation and our brands, increase our costs, and otherwise adversely impact our business. Fluctuations in foreign exchange rates may adversely affect our results of operations. During 2018, our international operations, including Canada, generated 28% and 38% of our net sales and operating income, respectively. Our international operations have accounted for an increasing portion of our warehouses, and we plan to continue international growth. To prepare our consolidated financial statements, we translate the financial statements of our international operations from local currencies into U.S. dollars using current exchange rates. Future fluctuations in exchange rates that are unfavorable to us may adversely affect the financial performance of our Canadian and Other International operations and have a corresponding adverse period-over-period effect on our results of operations. As we continue to expand internationally, our exposure to fluctuations in foreign exchange rates may increase. We buy from numerous domestic and foreign manufacturers and importers. Our inability to acquire suitable merchandise on acceptable terms or the loss of key vendors could negatively affect us. We may not be able to develop relationships with new vendors, and products from alternative sources, if any, may be of a lesser quality or more expensive than those from existing vendors. Because of our efforts to adhere to high quality standards for which available supply may be limited, particularly for certain food items, the large volume we demand may not be consistently available. We depend heavily on our ability to purchase quality merchandise in sufficient quantities at competitive prices. As the quantities we require continue to grow, we have no assurances of continued supply, appropriate pricing or access to new products, and any vendor has the ability to change the terms upon which they sell to us or discontinue selling to us. Member demands may lead to out-of-stock positions of our merchandise leading to loss of sales and profits. 90,300 policies including changes in tax rates, duties, tariffs, or other restrictions, sovereign debt crises, and other economic factors could adversely affect demand for our products and services, require a change in product mix, or impact the cost of or ability to purchase inventory. Prices of certain commodity products, including gasoline and other food products, are historically volatile and are subject to fluctuations arising from changes in domestic and international supply and demand, labor costs, competition, market speculation, government regulations, taxes and periodic delays in delivery. Rapid and significant changes in commodity prices and our ability and desire to pass them through to our members may affect our sales and profit margins. These factors could also increase our merchandise costs and selling, general and administrative expenses, and otherwise adversely affect our operations and financial results. General economic conditions can also be affected by significant events like the outbreak of war or acts of terrorism. 12 Higher energy and gasoline costs, inflation, levels of unemployment, healthcare costs, consumer debt levels, foreign-currency exchange rates, unsettled financial markets, weaknesses in housing and real estate markets, reduced consumer confidence, changes and uncertainties related to government fiscal and tax The retail business is highly competitive. We compete for members, employees, sites, products and services and in other important respects with a wide range of local, regional and national wholesalers and retailers, both in the United States and in foreign countries, including other warehouse-club operators, supermarkets, supercenters, internet retailers, gasoline stations, hard discounters, department and specialty stores and operators selling a single category or narrow range of merchandise. Such retailers and warehouse club operators compete in a variety of ways, including merchandise pricing, selection and availability, services, location, convenience, store hours, and the attractiveness and ease of use of websites and mobile applications. The evolution of retailing in online and mobile channels has improved the ability of customers to comparison shop with digital devices, which has enhanced competition. Some competitors may have greater financial resources and technology capabilities, better access to merchandise, and greater market penetration than we do. Our inability to respond effectively to competitive pressures, changes in the retail markets and member expectations could result in lost market share and negatively affect our financial results. General economic factors, domestically and internationally, may adversely affect our business, financial condition, and results of operations. Market and Other External Risks We face strong competition from other retailers and warehouse club operators, which could adversely affect our business, financial condition and results of operations. Vendors may be unable to timely supply us with quality merchandise at competitive prices or may fail to adhere to our high standards, resulting in adverse effects on our business, merchandise inventories, sales, and profit margins. (5)% 2% 11% 2% (3)% (3)% 3% 0 % 4% 1 % 4% Changes in Total Company comparable sales excluding the impact of foreign currency 7% 4% 4 % 9% and gasoline prices Warehouses in Operation. 6% 741 715 686 663 634 Opened. 25 28 Beginning of year 33 30 Closed due to relocation (4) (2) (4) (3) (1) (3)% 26 WAREHOUSE INFORMATION 12,303 10,617 BALANCE SHEET DATA Net property and equipment. . $ 19,681 Total assets 40,830 $ 18,161 36,347 Long-term debt, excluding current portion . . 6,487 6,573 $ 17,043 33,163 4,061 $ 15,401 $ 14,830 33,017 4,852 32,662 5,084 Costco stockholders' equity. 12,799 10,778 12,079 7 % 5% 7 5% Operating income.. 9.89% 10.07 % 10.40 % 10.26% 10.02% expenses as a percentage of net sales. . Selling, general and administrative 10.66% 11.09 % 11.35 % 11.33% 11.04% $ sales Gross margin (1) $110,212 2,428 $113,666 2,533 $116,073 2,646 2,853 3,142 Membership fees $ 126,172 $ 138,434 Net sales RESULTS OF OPERATIONS Aug. 31, 2014 (52 weeks) End of year.. as a percentage of net 4,480 $ 4,111 $ 3,672 $ 3,624 $ 3% 1 % 4% 9% Total Company Other International Canada United States Changes in comparable sales (2) 1.33 6.51 1.70 8.90 2.14 Cash dividends declared per common share 4.65 5.37 5.33 6.08 7.09 attributable to Costco Net income per diluted common share 2,058 2,377 2,350 2,679 3,134 Net income attributable to Costco 3,220 9% 762 Membership fees. 715 4% 2.28% 2018 vs. 2017 The increase in membership fees was primarily due to the annual fee increase and membership sign-ups at existing and new warehouses. These increases were partially offset by the impact of one additional week of membership fees in 2017. At the end of 2018, our member renewal rates were 90% in the U.S. and Canada and 88% worldwide. As reported in fiscal 2017, we increased our annual membership fees in the U.S. and Canada and in certain of our Other International operations. 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 of approximately $178 in fiscal 2018 and will positively impact fiscal 2019, primarily the first two quarters, by approximately $70. 2017 vs. 2016 The increase in membership fees was primarily due to membership sign-ups at existing and new warehouses, an extra week of membership fee revenue, the annual fee increase, and an increased number of upgrades to our higher-fee Executive Membership program. Fee increases had a positive impact on membership fee revenues during 2017 of approximately $23. 24 24 Canada.. 3 % 4% 7% 2,646 U.S. Total Company ... 0 % 4% 9% (3)% 2% 11% (3)% 5% 9% 1 % 4% 9% Increases in comparable sales excluding the impact of changes in foreign currency and gasoline prices: 2% 2,853 $ 8% 2.26% Membership fees as a percentage of net sales 8 % Other International 7% 4% 4 % Total Company 7% 4% 4 % 2018 vs. 2017 Net Sales Net sales increased $12,262 or 10% during 2018, primarily due to a 9% increase in comparable sales and sales at new warehouses opened in 2017 and 2018, partially offset by the impact of one additional week of sales in 2017. Changes in gasoline prices positively impacted net sales by approximately $2,267, or 180 basis points, due to a 19% increase in the average sales price per gallon. Changes in foreign currencies relative to the U.S. dollar positively impacted net sales by approximately $1,156, or 92 basis points, compared to 2017. The positive impact was driven by both our Canadian and Other International operations. 3,142 $ 10% 2.27% Comparable Sales 23 2017 vs. 2016 Net Sales Net sales increased $10,099 or 9% during 2017, primarily due to a 4% increase in comparable sales, new warehouses opened in 2016 and 2017, and the benefit of one additional week of sales in 2017. Changes in gasoline prices positively impacted net sales by approximately $785, or 68 basis points, due to an 8% increase in the average sales price per gallon. Changes in foreign currencies relative to the U.S. dollar negatively impacted net sales by approximately $295, or 25 basis points, compared to 2016. The negative impact was driven by Other International operations, partially offset by positive impacts attributable to our Canadian operations. Comparable Sales Comparable sales increased 4% during 2017 and were positively impacted by an increase in shopping frequency and, to a lesser extent, an increased average ticket. The average ticket and comparable sales results were positively impacted by an increase in gasoline prices, offset by decreases in foreign currencies relative to the U.S. dollar. Changes in comparable sales includes the negative impact of cannibalization. Membership Fees 2018 2017 2016 Aug. 30, 2015 (52 weeks) $ Membership fees increase. Comparable sales increased 9% during 2018 and were positively impacted by increases in both shopping frequency and the average ticket. The average ticket and comparable sales results were positively impacted by an increase in gasoline prices and exchange rates in foreign currencies relative to the U.S. dollar. Changes in comparable sales includes the negative impact of cannibalization (established warehouses losing sales to our newly opened locations). 9% 10% 4 % • • • • • Our fiscal year ends on the Sunday closest to August 31. Fiscal year 2018 and 2016 were 52-week fiscal years ending on September 2, 2018 and August 28, 2016, respectively, and 2017 was a 53-week fiscal year ending on September 3, 2017. 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. Highlights for fiscal year 2018 included: In discussions of our consolidated operating results, we refer to the impact of changes in foreign currencies relative to the U.S. dollar, which are references 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 operating model is generally the same across our U.S., Canada, and Other International operating segments (see Note 11 to the consolidated financial statements included in Item 8 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. 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 expenses relating to the compensation of our employees, our philosophy is not to seek to minimize their wages and benefits. Rather, we believe that achieving our longer-term objectives of 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. 21 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. 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 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, all 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 believe that the most important driver of our profitability is sales growth, particularly comparable warehouse sales (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); and changes in the cost of gasoline and associated competitive conditions. 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. 20 20 (2) Includes net sales from warehouses and websites operating for more than one year. For fiscal 2017, the prior year includes the comparable 53 weeks. (1) Net sales less merchandise costs. 42,000 44,600 47,600 49,400 51,600 Total paid members (000's) MEMBERSHIP INFORMATION 663 686 Item 7-Management's Discussion and Analysis of Financial Conditions and Results of Operations (amounts in millions, except per share, share, membership fee, and warehouse count data) Overview We opened 25 new warehouses, including 4 relocations, in 2018: 13 net new locations in the U.S., three in Canada, and five in our Other International segment, compared to 28 new warehouses, including 2 relocations in 2017; Net sales increased 10% to 138,434 driven by a 9% increase in comparable sales and sales at new warehouses opened in 2017 and 2018, partially offset by one additional week of sales in 2017; Membership fee revenue increased 10% to $3,142, primarily due to the annual fee increase in the U.S. and Canada in June 2017, and membership sign-ups at existing and new warehouses; Gross margin percentage decreased 29 basis points due to the impact of gasoline price inflation on net sales and a shift in sales penetration to certain lower margin warehouse ancillary businesses from our core merchandise categories; 8% 14% (2)% 10% 10% 3% 8% 9% $ 138,434 $ 126,172 $ 116,073 Other International Canada... U.S. Changes in comparable sales: Total Company .. Other International Canada. Changes in net sales: U.S. Net Sales 2016 2017 2018 Net Sales Results of operations 22 22 In April 2018, the Board of Directors approved an increase in the quarterly cash dividend from $0.50 to $0.57 per share. Net income increased 17% to $3,134, or $7.09 per diluted share compared to $2,679, or $6.08 per diluted share in 2017; and The effective tax rate in 2018 was 28.4% and was favorably impacted by the 2017 Tax Act and net tax benefits of $57. The effective tax rate in 2017 was 32.8% and was favorably impacted by net tax benefits of $104; Selling, general & administrative (SG&A) expenses as a percentage of net sales decreased 24 basis points, due to the impact of gasoline price inflation and leveraging increased sales; 741 Aug. 28, 2016 (52 weeks) 4% Sept. 3, 2017 Total Other International Canada m 21 12 468 100 533 Total... 6 Total Warehouses in Operation 2019 (expected through 12/31/2018). 2018 13 2017 2016. 2015. 2014 and prior United States The following schedule shows warehouse openings, net of closings and relocations, and expected openings through December 31, 2018: (1) 106 of the 157 leases are land-only leases, where Costco owns the building. (2) In fiscal 2018, Costco purchased the remaining equity interest and three formerly leased locations from its former joint-venture partner in Korea. 762 157 13 88 107 663 663 Item 3-Legal Proceedings 16 16 At the end of fiscal 2018, our warehouses contained approximately 110.7 million square feet of operating floor space: 77.5 million in the U.S.; 13.9 million in Canada; and 19.3 million in Other International. We operate 24 depots, with approximately 11.0 million square feet, for the consolidation and distribution of most merchandise shipments to the warehouses. Additionally, we operate various processing, packaging, manufacturing and other facilities to support our business, which includes the production of certain private- label items. Our executive offices are located in Issaquah, Washington, and we maintain 18 regional offices in the U.S., Canada and Other International locations. 769 136 769 7 1 762 21 5 3 741 26 4% 6 715 29 6 2 686 23 10 1 605 - 2 10 Iceland Spain Australia Taiwan Korea (2) Japan United Kingdom Mexico Canada . United States and Puerto Rico At September 2, 2018, we operated 762 membership warehouses: Warehouse Properties Item 2-Properties 15 None. Item 1B-Unresolved Staff Comments Our business requires compliance with many laws and regulations. Failure to achieve compliance could subject us to lawsuits and other proceedings, and lead to damage awards, fines, penalties, and remediation costs. We are, or may become involved, in a number of legal proceedings and audits including grand jury investigations, government and agency investigations, and consumer, employment, tort, unclaimed property laws, and other litigation. We cannot predict with certainty the outcomes of these proceedings and other contingencies, including environmental remediation and other proceedings commenced by governmental authorities. The outcome of some of these proceedings, audits, unclaimed property laws, and other contingencies could require us to take, or refrain from taking, actions which could negatively affect our operations or could require us to pay substantial amounts of money, adversely affecting our financial condition and results of operations. Additionally, defending against these lawsuits and proceedings may involve significant expense and diversion of management's attention and resources. We are involved in a number of legal proceedings and audits and some of these outcomes could adversely affect our business, financial condition and results of operations. We are subject to a wide variety of federal, state, regional, local and international laws and regulations relating to the use, storage, discharge and disposal of hazardous materials, hazardous and non-hazardous wastes and other environmental matters. Failure to comply with these laws could result in harm to our members, employees or others, significant costs to satisfy environmental compliance, remediation or compensatory requirements, or the imposition of severe penalties or restrictions on operations by governmental agencies or courts that could adversely affect our business, financial condition and results of operations. Significant changes in, or failure to comply with, federal, state, regional, local and international laws and regulations relating to the use, storage, discharge and disposal of hazardous materials, hazardous and non-hazardous wastes and other environmental matters could adversely impact our business, financial condition and results of operations. We compute our income tax provision based on enacted tax rates in the countries in which we operate. As tax rates vary among countries, a change in earnings attributable to the various jurisdictions in which we operate could result in an unfavorable change in our overall tax provision. Additionally, changes in the enacted tax rates, adverse outcomes in tax audits, including transfer pricing disputes, or any change in the pronouncements relating to accounting for income taxes could have a material adverse effect on our financial condition and results of operations. We could be subject to additional income tax liabilities. Accounting principles and related pronouncements, implementation guidelines, and interpretations we apply to a wide range of matters that are relevant to our business, including self-insurance liabilities and income taxes, are highly complex and involve subjective assumptions, estimates and judgments by our management. Changes in rules or interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance and have a material impact on our consolidated financial statements. Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial condition and results of operations. (53 weeks) France See discussion of Legal Proceedings in Note 10 to the consolidated financial statements included in Item 8 of this Report. Total Own Land and Building 3 7 13 13 - 15 4 26 14 12 28 6 22 39 1 38 100 14 86 527 101 426 Total Building and/or (1) Lease Land Item 4-Mine Safety Disclosures 11 PART II (1) The repurchase program is conducted under a $4,000 authorization approved by our Board of Directors in April 2015, which expires in April 2019. 419,000 211.35 419,000 $ Total fourth quarter.. 2,427 2,445 2,469 2,497 78,000 225.20 18 78,000 111,000 216.06 111,000 July 9-August 5, 2018.. 134,000 208.49 134,000 96,000 $ 198.61 96,000 $ that May Yet be Purchased under the Program August 6-September 2, 2018. Performance Graph The following graph compares the cumulative total shareholder return (stock price appreciation plus dividends) on our common stock for the last five years with the cumulative total return of the S&P 500 Index, the S&P 500 Retail Index, and a peer group previously selected by the Company. The S&P 500 Retail Index is intended to replace the previously selected peer group to allow for a more broad representation of industry performance. The transition to a larger retail index provides a better representation of total retail market performance. For the year ended September 2, 2018, the cumulative total return of the previous peer group is provided pursuant to SEC rules requiring presentation in the year of change, and consists of: Amazon.com Inc.; The Home Depot Inc.; Lowe's Companies; Best Buy Co., Inc.; Staples Inc.; Target Corporation; Kroger Company; and Walmart Stores, Inc. This group will not be presented in future periods. Sept. 2, 2018 (52 weeks) Not applicable. As of and for the year ended (dollars in millions, except per share data) SELECTED FINANCIAL DATA The following table sets forth information concerning our consolidated financial condition, operating results, and key operating metrics. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, included in Item 7 of this Report, and our consolidated financial statements and notes thereto, included in Item 8 of this Report. Item 6-Selected Financial Data 9/2/18 19 Peer Group S&P 500 S&P 500 Retail 9/3/17 8/28/16 8/30/15 8/31/14 Comparison of 5-Year Cumulative Total Returns Costco 9/1/13 0 100 200 300 400 Dollars Maximum Dollar Value of Shares Program(1) The information provided is from September 1, 2013, through September 2, 2018. The graph assumes the investment of $100 in Costco common stock, the S&P 500 Index, the S&P 500 Retail Index, and the previously selected peer group on September 1, 2013, and reinvestment of all dividends. Shares Purchased as Part of Publicly 172.61 198.91 0.570 180.84 197.16 $ 233.13 $ 195.48 $ 0.570 Cash Dividends Declared Low High Price Range Includes a special cash dividend of $7.00 per share. First Quarter. Second Quarter Third Quarter Fourth Quarter. 2017: First Quarter. Second Quarter Third Quarter Fourth Quarter 2018: Our common stock is traded on the NASDAQ Global Select Market under the symbol "COST." On October 18, 2018, we had 8,829 stockholders of record. The following table shows the quarterly high and low closing prices of our common stock as reported by NASDAQ for each quarter during the last two fiscal years and the quarterly cash dividend declared per share. Announced Market Information and Dividend Policy Item 5-Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 0.500 173.42 (1) 0.500 per Share Total Number of Purchased 154.61 Average Price Paid of Shares June 11-July 8, 2018 May 14-June 10, 2018. Total Number The following table sets forth information on our common stock repurchase program activity for the fourth quarter of fiscal 2018 (dollars in millions, except per share data): Issuer Purchases of Equity Securities 17 Payment of future dividends is subject to declaration by the Board of Directors. Factors considered in determining dividends include our profitability and expected capital needs. Subject to these qualifications, we presently expect to continue to pay dividends on a quarterly basis. Period 0.450 182.45 $ 182.20 $ 150.44 $ (1) 164.55 172.00 7.500 150.11 0.450 163.98 142.24 0.500 10.26% 12,950 $ earned under the co-branded credit card arrangement and non-recurring legal settlements and other matters as discussed above. These increases were partially offset by a decrease in core merchandise categories, predominantly food and sundries as a result of a decrease in sales penetration, and a LIFO benefit in 2016. The segment gross margin percentage in our Canadian operations increased, primarily due to increases in warehouse ancillary and other businesses, primarily our pharmacy business, partially offset by a decrease in our core merchandise categories, largely fresh foods. The segment gross margin percentage increased in our Other International operations due to increases across all core merchandise categories, except fresh foods. 12,068 2017 13,876 10.02% 2016 Selling, General and Administrative Expenses 2018 SG&A expenses. 10.40% $ SG&A expenses as a percentage of net sales. Preopening expenses SG&A expenses as a percentage of net sales decreased 24 basis points compared to 2017. Excluding the impact of gasoline price inflation on net sales, SG&A expenses as a percentage of adjusted net sales was 10.19%, a decrease of seven basis points. Operating costs related to warehouses, ancillary, and other businesses, which includes e-commerce and travel, were lower by six basis points, predominantly in our U.S. and Other International operations, due to leveraging increased sales. Charges related to certain non- recurring legal and other matters in 2017 positively impacted SG&A expense by two basis points. Stock compensation expense was also lower by one basis point. Central operating costs were higher by two basis points. Changes in foreign currencies relative to the U.S. dollar increased our SG&A expenses by approximately $98 in 2018. Effective in June 2018, a portion of the savings generated from the Tax Cuts and Jobs Act (the "2017 Tax Act") were used to increase wages for the majority of our U.S. hourly employees. The impact in fiscal 2018 was two basis points and the estimated annualized pre-tax cost of these increases is approximately $120. 2017 vs. 2016 SG&A expenses as a percentage of net sales decreased 14 basis points compared to 2016. Excluding the impact of gasoline price inflation on net sales, SG&A expenses as a percentage of adjusted net sales was 10.33%, a decrease of seven basis points. Operating costs related to warehouses, ancillary, and other businesses, were lower by nine basis points, primarily due to lower costs associated with the co-branded credit card arrangement in the U.S. of 18 basis points. The improvement in terms in our current co-brand agreement as compared to the prior co-brand arrangement led to substantial year over year benefits in fiscal 2017. This was partially offset by higher payroll and employee benefit expenses of 11 basis points, primarily in our U.S. operations. Central operating costs were higher by one basis point, primarily due to increased costs associated with our information systems modernization, including increased depreciation for projects placed in service, incurred by our U.S. operations. Stock compensation expense was also higher by one basis point. 26 26 Preopening 2018 2017 2016 Warehouse openings, including relocations United States. Other International. 25 Canada 2018 vs. 2017 45 138,434 $ Total gross margin percentage decreased two basis points compared to 2016. Excluding the impact of gasoline price inflation on net sales, gross margin as a percentage of adjusted net sales was 11.40%, an increase of five basis points. This increase was primarily due to amounts earned under the co-branded credit card arrangement in the U.S. of 15 basis points and a benefit of three basis points from non-recurring legal settlements and other matters. The improvement in terms in our current co-brand agreement as compared to the prior co-brand arrangement led to substantial year over year benefits in fiscal 2017. These increases were partially offset by a six basis point decrease in our core merchandise categories, primarily due to food and sundries as a result of a decrease in sales penetration. The gross margin percentage was also negatively impacted by five basis points due to a LIFO benefit in 2016 and one basis point in warehouse ancillary and other businesses. Changes in foreign currencies relative to the U.S. dollar had an immaterial impact on gross margin in 2017. Item 7A-Quantitative and Qualitative Disclosures About Market Risk (amounts in millions) Total warehouse openings, including relocations. . 2018 Our exposure to financial market risk results from fluctuations in interest rates and foreign currency exchange rates. We do not engage in speculative or leveraged transactions or hold or issue financial instruments for trading purposes. 2016 Net sales $ 126,172 $ 116,073 Less merchandise costs 123,152 111,882 102,901 Gross margin 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, increased in our U.S. operations, due to amounts $ $ 14,290 $ 13,172 Gross margin percentage 11.04 % 11.33% 11.35% 2018 vs. 2017 Gross Margin 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 one basis point primarily due to increases in food and sundries and hardlines partially offset by decreases in fresh foods 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 decreased 29 basis points compared to 2017. Excluding the impact of gasoline price inflation on net sales, gross margin as a percentage of adjusted net sales was 11.22%, a decrease of 11 basis points. This decrease was primarily due to a shift in sales penetration to certain lower margin warehouse ancillary and other businesses, which contributed to a 13 basis point decrease in our core merchandise categories, except hardlines which was flat. Gross margin percentage was also negatively impacted by 10 basis points due to a non-recurring legal settlement benefiting 2017 and costs related to our centralized return centers in the U.S. These decreases were partially offset by a 13 basis point increase in our warehouse ancillary and other businesses, predominantly our gasoline business. Changes in foreign currencies relative to the U.S. dollar positively impacted gross margin by approximately $124 in 2018. The segment gross margin percentage, 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), decreased in our U.S. operations, predominantly in our core merchandise categories, and as a result of the non-recurring legal settlement in 2017, and the costs related to our centralized return centers mentioned above. The segment gross margin percentage in our Canadian operations increased, due to warehouse ancillary and other businesses, primarily our gasoline business. The segment gross margin percentage in our Other International operations decreased, predominantly in food and sundries and softlines, partially offset by an increase in our gasoline business. 2017 vs. 2016 The gross margin of our core merchandise categories, when expressed as a percentage of core merchandise sales, increased eight basis points due to increases in these categories other than fresh foods. 15,282 $ 68 $ 82 $ 78 Costco Wholesale Corporation: 17 32 Item 8-Financial Statements and Supplementary Data REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors Costco Wholesale Corporation: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Costco Wholesale Corporation and subsidiaries (the Company) as of September 2, 2018 and September 3, 2017, the related consolidated statements of income, comprehensive income, equity, and cash flows for the 52-week period ended September 2, 2018, the 53-week period ended September 3, 2017 and the 52-week period ended August 28, 2016, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 2, 2018 and September 3, 2017, and the results of its operations and its cash flows for the 52-week period ended September 2, 2018, the 53-week period ended September 3, 2017 and the 52-week period ended August 28, 2016, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 2, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated October 25, 2018 expressed an adverse opinion on the effectiveness of the Company's internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ KPMG LLP We have served as the Company's auditor since 2002. Seattle, Washington 32 October 25, 2018 33 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors Opinion on Internal Control Over Financial Reporting We have audited Costco Wholesale Corporation and subsidiaries' (the Company) internal control over financial reporting as of September 2, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weakness, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of September 2, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of September 2, 2018 and September 3, 2017, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the 52-week period ended September 2, 2018, the 53-week period ended September 3, 2017 and the 52-week period ended August 28, 2016, and the related notes (collectively, the consolidated financial statements), and our report dated October 25, 2018 expressed an unqualified opinion on those consolidated financial statements. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's assessment: There were ineffective information technology general controls (ITGCs) in the areas of user access and program change-management over certain information technology (IT) systems that support the Company's financial reporting processes. As a result, business process automated and manual controls that were dependent on the affected ITGCs were ineffective because they could have been adversely impacted. These control deficiencies were a result of: IT control processes lacked sufficient documentation; insufficient knowledge and training of certain individuals with IT expertise; and risk- assessment processes inadequate to identify and assess changes in IT environments and personnel that could impact internal control over financial reporting. The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the fiscal year 2018 consolidated financial statements, and this report does not affect our report on those consolidated financial statements. Basis for Opinion The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting (Item 9A). Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal 34 See Note 1 to the consolidated financial statements included in Item 8 of this Report for a detailed description of recent accounting pronouncements. 33 56 We are exposed to fluctuations in prices for energy, particularly electricity and natural gas, which we seek to partially mitigate through fixed-price contracts for certain of our warehouses and other facilities, predominantly in the U.S. and Canada. We also enter into variable-priced contracts for some purchases of electricity and natural gas, in addition to fuel for our gas stations, on an index basis. These contracts meet the characteristics of derivative instruments, but generally qualify for the “normal purchases or normal sales" exception under authoritative guidance and require no mark-to-market adjustment. Our foreign subsidiaries conduct certain transactions in their non-functional currencies, which exposes us to fluctuations in exchange rates. We manage these fluctuations, in part, through the use of forward foreign- exchange contracts, seeking to economically hedge the impact of these fluctuations on known future expenditures denominated in a non-functional foreign-currency. The contracts are intended primarily to economically hedge exposure to U.S. dollar merchandise inventory expenditures made by our international subsidiaries whose functional currency is other than the U.S. dollar. We seek to mitigate risk with the use of these contracts and do not intend to engage in speculative transactions. For additional information related to the Company's forward foreign-exchange contracts, see Notes 1 and 3 to the consolidated financial statements included in Item 8 of this Report. A hypothetical 10% strengthening of the functional currency compared to the non-functional currency exchange rates at September 2, 2018, would have decreased the fair value of the contracts by $80 and resulted in an unrealized loss in the consolidated statements of income for the same amount. 15 3 5 25 28 25 2 6 33 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 opening relative to our year-end, whether the warehouse is owned or leased, and whether the opening is in an existing, new, or international market. In 2017, we entered into two new international markets, Iceland and France. Interest Expense 2018 2017 2016 Commodity Price Risk Interest expense Interest expense primarily relates to Senior Notes issued by the Company. In May 2017, we issued $3,800 in aggregate principal amount of Senior Notes. In March and June 2017, we repaid $2,200 in total outstanding principal of the 5.5% and 1.125% Senior Notes, respectively. Interest Income and Other, Net 2018 2017 2016 Interest income Foreign-currency transaction gains (losses), net. Interest Rate Risk Our exposure to market risk for changes in interest rates relates primarily to our investment holdings that are diversified among various instruments considered to be cash equivalents, as defined in Note 1 to the consolidated financial statements included in Item 8 of this Report, as well as short-term investments in government and agency securities with effective maturities of generally three months to five years at the date of purchase. The primary objective of our investment activities is to preserve principal and secondarily to generate yields. The majority of our short-term investments are in fixed interest-rate securities. These securities are subject to changes in fair value due to interest rate fluctuations. 31 Our policy limits investments in the U.S. to direct U.S. government and government agency obligations, repurchase agreements collateralized by U.S. government and government agency obligations, and U.S. government and government agency money market funds. Our wholly-owned captive insurance subsidiary invests in U.S. government and government agency obligations and U.S. government and government agency money market funds. Our Canadian and Other International subsidiaries' investments are primarily in money market funds, bankers' acceptances, and bank certificates of deposit, generally denominated in local currencies. A 100 basis-point change in interest rates as of the end of 2018 would have had an immaterial incremental change in fair market value. For those investments that are classified as available-for-sale, the unrealized gains or losses related to fluctuations in market volatility and interest rates are reflected within stockholders' equity in accumulated other comprehensive income in the consolidated balance sheets. The nature and amount of our long-term debt may vary as a result of business requirements, market conditions, and other factors. As of the end of 2018, long-term debt with fixed interest rates was $6,577. Fluctuations in interest rates may affect the fair value of the fixed-rate debt. See Note 4 to the consolidated financial statements included in Item 8 of this Report for more information on our long-term debt. Foreign Currency-Exchange Risk $ 159 $ 134 $ 133 Recent Accounting Pronouncements 1,325 $ Income Taxes 6,726 $ (2,366) 3,292 (2,345) Net cash used in financing activities (1,281) (3,218) (2,419) Our primary sources of liquidity are cash flows generated from warehouse operations, cash and cash equivalents, and short-term investments. Cash and cash equivalents and short-term investments were $7,259 and $5,779 at the end of 2018 and 2017, respectively. Of these balances, approximately $1,348 and $1,255 represented unsettled credit and debit card receivables, respectively. These receivables generally settle within four days. Cash and cash equivalents were negatively impacted by a change in exchange rates of $37 in 2018 and positively impacted by $25 and $50 in 2017 and 2016, respectively. Management believes that our cash position and operating cash flows will be sufficient to meet our liquidity and capital requirements for the foreseeable future. While we believe that our U.S. current and projected asset position is sufficient to meet our U.S. liquidity requirements, beginning in the second quarter of fiscal 2018, we no longer consider current fiscal year and future earnings of our non-U.S. consolidated subsidiaries to be permanently reinvested. We recorded the estimated incremental foreign withholding (net of available foreign tax credits) and state income taxes payable on current fiscal year earnings assuming a hypothetical repatriation to the U.S. We continue to consider undistributed earnings of certain non-U.S. consolidated subsidiaries prior to fiscal 2018 to be indefinitely reinvested and have not provided for withholding or state taxes. In fiscal 2018, we recorded a one-time charge of $142 for the estimated tax on deemed repatriation of unremitted earnings under the 2017 Tax Act. The 2017 Tax Act provides for the payment of the federal tax over an eight-year period. Because of the availability of foreign tax credits, the amount payable is $97, of which $89 is classified as long-term and included in other liabilities on our consolidated balance sheet. Cash Flows from Operating Activities Net cash provided by operating activities totaled $5,774 in 2018, compared to $6,726 in 2017. Our cash flow provided by operations is primarily derived from net sales and membership fees. Cash flow used in operations 28 generally consists of payments to our merchandise vendors, warehouse operating costs including payroll and employee benefits, utilities, and credit and debit card processing fees. Cash used in operations also includes payments for income taxes. The decrease in net cash provided by operating activities for 2018 when compared to 2017 was primarily due to accelerated vendor payments of approximately $1,700 made in the last week of fiscal 2016, which positively impacted cash flows in 2017. Cash Flows from Investing Activities Net cash used in investing activities totaled $2,947 in 2018, compared to $2,366 in 2017, and primarily related to capital expenditures. Net cash flows from investing activities also includes maturities and purchases of short-term investments. Capital Expenditures We opened 21 net new warehouses and relocated 4 warehouses in 2018 and plan to open approximately 20 net new warehouses and relocate up to 4 warehouses in 2019. Our primary requirement 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 2018, we spent $2,969 on capital expenditures, and it is our current intention to spend approximately $2,800 to $3,100 during fiscal 2019. These expenditures are expected to be financed with cash from operations, existing cash and cash equivalents, and short-term investments. 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 $1,281 in 2018, compared to $3,218 in 2017. The primary uses of cash in 2018 were related to dividend payments and repurchases of common stock. Net cash used in financing activities in 2017 primarily related to dividend payments, predominantly the special dividend paid in May 2017, and the repayments of debt totaling $2,200 representing the aggregate principal balances of the 5.5% and 1.125% Senior Notes. In May 2017, we issued $3,800 in aggregate principal amount of Senior Notes. The proceeds received were net of a discount and used to pay the special dividend and a portion of the redemption of the 1.125% Senior Notes. Stock Repurchase Programs During 2018 and 2017, we repurchased 1,756,000 and 2,998,000 shares of common stock, at average prices of $183.13 and $157.87, totaling approximately $322 and $473, respectively. The remaining amount available to be purchased under our approved plan was $2,427 at the end of 2018. These amounts may differ from the stock repurchase balances in the accompanying consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of each fiscal year. 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 Cash dividends declared in 2018 totaled $2.14 per share, as compared to $8.90 per share in 2017, which included a special cash dividend of $7.00 per share. In April 2018, our Board of Directors increased our quarterly cash dividend from $0.50 to $0.57 per share. Subsequent to the end of 2018, our Board of Directors declared a quarterly cash dividend in the amount of $0.57 per share, which is payable on November 23, 2018. 29 29 Bank Credit Facilities and Commercial Paper Programs We maintain bank credit facilities for working capital and general corporate purposes. At September 2, 2018, we had borrowing capacity under these facilities of $857, including a $400 revolving line of credit renewed by the U.S., which expires in June 2019. The Company currently has no plans to draw upon this facility. Our international operations maintain $344 of the total borrowing capacity under bank credit facilities, of which $163 is guaranteed by the Company. There were no outstanding short-term borrowings under the bank credit facilities at the end of 2018 and 2017. The Company has letter of credit facilities, for commercial and standby letters of credit, totaling $220. The outstanding standby letters of credit under these facilities at the end of 2018 totaled $149 and expire within one year. The bank credit facilities and commercial paper programs have various expiration dates, all within one year, 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 5,774 $ (2,947) $ Net cash provided by operating activities. . Net cash used in investing activities 2016 Other, net... Interest income and other, net. $ 75 $ 50 $ 41 23 23 (5) 17 _41 28 11 $ 121 $ 62 $ 80 2018 vs. 2017 The increase in interest income in 2018 as compared to 2017 was primarily due to higher interest rates earned on higher average cash and investment balances. Foreign-currency transaction gains (losses), net include the revaluation or settlement of monetary assets and liabilities and mark-to-market adjustments for forward foreign-exchange contracts by our Canadian and Other International operations. In 2018, the increase was primarily due to a strengthening U.S. dollar relative to certain foreign currencies on forward foreign-exchange contracts. See Derivatives and Foreign Currency sections in Item 8, Note 1 of this Report. 2017 vs. 2016 Foreign-currency transaction gains (losses), net include the revaluation or settlement of monetary assets and liabilities and mark-to-market adjustments for forward foreign-exchange contracts by our Canadian and Other International operations. 27 22 Provision for Income Taxes Provision for income taxes At September 2, 2018, our commitments to make future payments under contractual obligations were as follows: Effective tax rate 2017 2016 $ 1,263 $ 1,243 28.4% 32.8% 34.3% Our effective tax rate for 2018 was favorably impacted by the 2017 Tax Act, which included a reduction in the U.S. federal corporate rate from 35% to 21%. Due to the timing of our fiscal year relative to the effective date of the rate change, our U.S. corporate rate for 2018 resulted in a blended rate of 25.6%. Other impacts from the 2017 Tax Act consisted of tax expense of $142 for the estimated tax on deemed repatriation of unremitted earnings and $43 for the reduction in foreign tax credits and other immaterial items, largely offset by a tax benefit of $166 for the provisional remeasurement of certain deferred tax liabilities. In 2018, we also recognized net tax benefits of $76, which was largely driven by the adoption of an accounting standard related to stock-based compensation and other immaterial net benefits. In 2017, our provision was favorably impacted by net tax benefits of $104, primarily due to a tax benefit recorded in connection with the May 2017 special dividend paid to employees through our 401(k) retirement plan of $82. This dividend was deductible for U.S. income tax purposes. LIQUIDITY AND CAPITAL RESOURCES The following table summarizes our significant sources and uses of cash and cash equivalents: 2018 2017 2018 Payments Due by Fiscal Year 2019 2020 to 2021 and other) 611 186 67 3 867 Other (6) 19 38 36 141 234 Total $ (equipment services 10,862 $ 2,070 $ 5,502 $ 22,179 (1) Includes only open merchandise purchase orders. (2) Includes contractual interest payments and excludes deferred issuance costs. (3) Excludes common area maintenance, taxes, and insurance and have been reduced by $105 related to sub-lease income. (4) Includes build-to-suit lease obligations and contractual interest payments. (5) Excludes certain services negotiated at the individual warehouse or regional level that are not significant and generally contain clauses allowing for cancellation without significant penalty. (6) Includes asset retirement obligations, deferred compensation obligations and current liabilities for unrecognized tax contingencies. The total amount excludes $36 of non-current unrecognized tax contingencies and $30 of other obligations due to uncertainty regarding the timing of future cash payments. Off-Balance Sheet Arrangements In the opinion of management, we have no off-balance sheet arrangements that have had, or are reasonably likely to have, a material current or future effect on our financial condition or financial statements other than operating leases, included in the table above and discussed in Note 1 and Note 5 to the consolidated financial statements included in Item 8 of this Report. 30 50 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 assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on assumptions that we believe to be reasonable, and we continue to review and evaluate these estimates. For further information on significant accounting policies, see discussion in Note 1 to the consolidated financial statements included in Item 8 of this Report. Insurance/Self-Insurance Liabilities The Company is predominantly self-insured for employee health-care benefits, workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability, and inventory loss. Insurance coverage is maintained in certain instances to limit the exposure arising from catastrophic events. We use different mechanisms, including a wholly-owned captive insurance subsidiary and participate in a reinsurance program. Liabilities associated with the risks that we retain are not discounted and are estimated by using historical claims experience, demographic factors, severity factors and other actuarial assumptions. The costs of claims are highly unpredictable and can fluctuate as a result of inflation rates, regulatory or legal changes, and unforeseen developments in claims of an extended nature. While we believe our estimates are reasonable and provide for a certain degree of coverage to account for these variables, actual claims and costs could differ significantly from recorded liabilities. Historically, adjustments to our estimates have not been material. 3,745 $ The determination of our provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment also is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits associated with uncertain tax positions are recorded only after determining a more-likely-than- not probability that the positions will withstand challenge from tax authorities. When facts and circumstances change, we reassess these positions and record any changes in the consolidated financial statements as appropriate. In December 2017, the 2017 Tax Act was signed into law and our effective tax rate for fiscal 2018 reflects the provisional impact (see Note 8 to our Consolidated Financial Statements). Purchase obligations 647 2022 to 2023 2024 and thereafter Total Contractual obligations Purchase obligations (merchandise)(1) $ 9,029 $ Long-term debt (2) 232 Operating leases (3) 227 2 $ 3,029 407 $ 824 $ 1,537 358 2,496 2,215 7,294 3,207 Construction and land obligations.. 710 12 Capital lease obligations (4) 34 71 IN 722 72 9,031 2017 (220) 44 440,937 438,437 438,515 441,834 Diluted Basic Shares used in calculation (000's) 5.33 6.08 $ $ 7.09 $ Diluted 5.36 6.11 $ $ 438,585 441,263 CASH DIVIDENDS DECLARED PER COMMON SHARE 2.14 $ 8.90 $ August 28, 2016 September 3, 2017 September 2, 2018 52 Weeks Ended 53 Weeks Ended 52 Weeks Ended COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO 7.15 Less: Comprehensive income attributable to noncontrolling interests Foreign-currency translation adjustment and other, net. NET INCOME INCLUDING NONCONTROLLING INTERESTS (amounts in millions) COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 37 The accompanying notes are an integral part of these consolidated financial statements. 1.70 Comprehensive income 3,179 $ ATTRIBUTABLE TO COSTCO: 4,039 4,442 INCOME BEFORE INCOME TAXES. 80 62 121 (133) (134) (159) Interest income and other, net Interest expense OTHER INCOME (EXPENSE) 3,672 4,111 4,480 3,619 Provision for income taxes 1,263 1,325 NET INCOME PER COMMON SHARE 2,350 2,679 $ 3,134 $ $ NET INCOME ATTRIBUTABLE TO COSTCO (26) Basic (35) interests.... Net income attributable to noncontrolling 2,376 2,714 3,179 Net income including noncontrolling interests. . 1,243 (45) Operating income $ $ 4 22 22 21 2,376 26 $10,843 226 $ 10,617 (1,121) $ 6,518 $ Equity Interests Total Noncontrolling 26 ---- 2,350 2,350 - - 459 - - 459 - 459 4------ 2,749 --- - (746) Net income BALANCE AT AUGUST 28, Cash dividends declared and other.. 2016 (477) (477) Total Costco Stockholders' Equity (436) (3,184) Repurchases of common stock.. (146) | 3 ------ (146) (146) - - (41) 2,714 Retained Earnings Conversion of convertible 26 2,376 2,372 $ 2,764 $ 2,949 $ 30 48 38 2,812 98 2,987 (192) 2,402 The accompanying notes are an integral part of these consolidated financial statements. 38 COSTCO WHOLESALE CORPORATION Release of vested restricted stock units (RSUs), including tax effects Stock-based compensation . Stock options exercised, including tax effects Foreign-currency translation adjustment and other, net. Net income 5,218 $ 2 $ 437,952 $ notes.... BALANCE AT AUGUST 30, 2015 Accumulated Other Comprehensive Paid-in Shares Additional Common Stock (amounts in millions) CONSOLIDATED STATEMENTS OF EQUITY (000's) Amount Capital Income (Loss) (746) 78 68 18,161 19,681 (10,180) (11,033) 28,341 30,714 843 1,140 6,681 7,274 15,127 16,107 5,690 6,193 17,317 860 869 TOTAL ASSETS $ Deferred membership fees 961 1,057 Accrued member rewards 2,703 2,994 Accrued salaries and benefits 20,289 9,608 $ Accounts payable CURRENT LIABILITIES LIABILITIES AND EQUITY 36,347 $ 40,830 11,237 $ Other current liabilities 272 9,834 Short-term investments Cash and cash equivalents CURRENT ASSETS September 2, September 3, 2018 2017 ASSETS (amounts in millions, except par value and share data) CONSOLIDATED BALANCE SHEETS COSTCO WHOLESALE CORPORATION 35 Seattle, Washington October 25, 2018 /s/ KPMG LLP Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Definition and Limitations of Internal Control Over Financial Reporting control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Receivables, net Merchandise inventories Other current assets Total current assets 11,040 1,432 1,669 1,233 1,204 4,546 6,055 $ 321 $ Net property and equipment. Less accumulated depreciation and amortization Construction in progress Equipment and fixtures Buildings and improvements Land PROPERTY AND EQUIPMENT OTHER ASSETS 82 Total current liabilities 1,624 52 Weeks Ended 52 Weeks Ended 53 Weeks Ended September 2, 2018 COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (amounts in millions, except per share data) OPERATING EXPENSES Total revenue. Membership fees Net sales. REVENUE 36 36,347 $ 40,830 $ 11,079 13,103 September 3, 2017 August 28, 2016 138,434 $ 3,142 Preopening expenses. 12,068 12,950 13,876 Selling, general and administrative. 102,901 111,882 TOTAL LIABILITIES AND EQUITY 123,152 118,719 129,025 2,646 2,853 116,073 126,172 $ 141,576 Merchandise costs LONG-TERM DEBT, excluding current portion Total equity 304 EQUITY COMMITMENTS AND CONTINGENCIES Total liabilities OTHER LIABILITIES 25,268 27,727 1,200 1,314 6,573 6,487 17,495 19,926 2,725 3,014 1,498 Preferred stock $0.01 par value; 100,000,000 shares authorized; no shares issued and outstanding 0 0 Common stock $0.01 par value; 900,000,000 shares authorized; 10,778 12,799 5,988 7,887 (1,014) (1,199) Noncontrolling interests. . 301 Total Costco stockholders' equity. Accumulated other comprehensive loss 5,800 6,107 Additional paid-in capital 4 4 438,189,000 and 437,204,000 shares issued and outstanding Retained earnings (749) The accompanying notes are an integral part of these consolidated financial statements. 2 Net change in cash and cash equivalents EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS. . . (2,419) (3,218) (1,281) 55 11 (41) (746) (3,904) (689) (486) (469) (328) (202) (37) 25 50 1,509 143 $ $ Interest (reduced by $19, $16, and $19, interest capitalized in 2018, 2017, and 2016, respectively).. Cash paid during the year for: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: 3,379 4,546 $ (217) 6,055 $ CASH AND CASH EQUIVALENTS END OF YEAR 4,801 3,379 4,546 CASH AND CASH EQUIVALENTS BEGINNING OF YEAR (1,422) 1,167 $ 131 (1,288) (86) (2,366) (2,947) 30 4 (2,649) 1,709 1,385 (2,502) 1,078 (2,969) (1,432) (1,279) (1,060) Net cash used in investing activities Additions to property and equipment. Maturities and sales of short-term investments CASH FLOWS FROM INVESTING ACTIVITIES Purchases of short-term investments. 27 (2,345) CASH FLOWS FROM FINANCING ACTIVITIES Change in bank checks outstanding Repayments of short-term borrowings. 185 3,782 106 (106) 81 The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of business. It manages these fluctuations, in part, through the use of forward foreign-exchange contracts, seeking to economically hedge the impact of fluctuations of foreign exchange on known future expenditures denominated in a non-functional foreign-currency. The contracts relate primarily to U.S. dollar merchandise inventory expenditures made by the Company's international subsidiaries with functional currencies other (236) (2,200) 80 Other financing activities, net. Cash dividend payments Repurchases of common stock Tax withholdings on stock-based awards.. Repayments of long-term debt... Proceeds from issuance of long-term debt. Proceeds from short-term borrowings Net cash used in financing activities Other investing activities, net. . Income taxes, net. 1,204 $ $ 8,081 $ 7,091 2017 2018 Other International Canada United States Merchandise inventories consist of the following: Merchandise Inventories Receivables are recorded net of an allowance for doubtful accounts. The allowance is based on historical experience and application of the specific identification method. Write-offs of receivables were immaterial for fiscal years 2018, 2017, and 2016. Receivables consist primarily of vendor, reinsurance, credit card incentive, third-party pharmacy and other receivables. Vendor receivables include coupons, volume rebates or other purchase discounts. Balances are generally presented on a gross basis, separate from any related payable due. In certain circumstances, these receivables may be settled against the related payable to that vendor, in which case the receivables are presented on a net basis. Reinsurance receivables are held by the Company's wholly-owned captive insurance subsidiary and primarily represent amounts ceded through reinsurance arrangements gross of the amounts assumed under reinsurance, which are presented within other current liabilities in the consolidated balance sheets. Credit card incentive receivables primarily represent amounts earned under the co-branded credit card arrangement in the U.S. Third-party pharmacy receivables generally relate to amounts due from members' insurers. Other receivables primarily consist of amounts due from governmental entities, mostly tax-related items. Receivables, Net 42 22 Current financial liabilities have fair values that approximate their carrying values. Long-term financial liabilities include the Company's long-term debt, which are recorded on the balance sheet at issuance price and adjusted for unamortized discounts or premiums and debt issuance costs, and are being amortized to interest expense over the term of the loan. The estimated fair value of the Company's long-term debt is based primarily on reported market values, recently completed market transactions, and estimates based upon interest rates, maturities, and credit. The Company's valuation techniques used to measure the fair value of money market mutual funds are based on quoted market prices, such as quoted net asset values published by the fund as supported in an active market. Valuation methodologies used to measure the fair value of all other non-derivative financial instruments are based on independent external valuation information. The pricing process uses data from a variety of independent external valuation information providers, including trades, bid price or spread, two- sided markets, quotes, benchmark curves including but not limited to treasury benchmarks and Libor and swap curves, discount rates, and market data feeds. All are observable in the market or can be derived principally from or corroborated by observable market data. The Company reports transfers in and out of Levels 1, 2, and 3, as applicable, using the fair value of the individual securities as of the beginning of the reporting period in which the transfer(s) occurred. 1,189 1,770 1,040 1,703 Merchandise inventories 437,524 Derivatives The captive receives direct premiums, which are netted against the Company's premium costs in selling, general and administrative expenses, in the consolidated statements of income. The captive participates in a reinsurance program that includes other third-party participants. The reinsurance agreement is one year in duration, and new agreements are entered into by each participant at their discretion at the commencement of the next calendar year. The participant agreements and practices of the reinsurance program limit a participating members' individual risk. Income statement adjustments related to the reinsurance program and related impacts to the consolidated balance sheets are recognized as information becomes known. In the event the Company leaves the reinsurance program, the Company retains its primary obligation to the policyholders for prior activity. The Company is predominantly self-insured for employee health care benefits, workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability, and inventory loss. Insurance coverage is maintained in certain instances to limit the exposure arising from catastrophic events. It uses different mechanisms including a wholly-owned captive insurance subsidiary (the captive) and participates in a reinsurance program. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated, in part, by considering historical claims experience, demographic factors, severity factors, and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends. At the end of 2018 and 2017, these insurance liabilities were $1,148 and $1,059 in the aggregate, respectively, and were included in accrued salaries and benefits and other current liabilities in the consolidated balance sheets, classified based on their nature. Insurance/Self-Insurance Liabilities The Company evaluates long-lived assets for impairment on an annual basis, when relocating or closing a facility, or when events or changes in circumstances may indicate the carrying amount of the asset group, generally an individual warehouse, may not be fully recoverable. For asset groups held and used, including warehouses to be relocated, the carrying value of the asset group is considered recoverable when the estimated future undiscounted cash flows generated from the use and eventual disposition of the asset group exceed the respective carrying value. In the event that the carrying value is not considered recoverable, an impairment loss is recognized for the asset group to be held and used equal to the excess of the carrying value above the estimated fair value of the asset group. For asset groups classified as held-for-sale (disposal group), the carrying value is compared to the disposal group's fair value less costs to sell. The Company estimates fair value by obtaining market appraisals from third party brokers or using other valuation techniques. There were no impairment charges recognized in 2018, 2017 or 2016. Repair and maintenance costs are expensed when incurred. Expenditures for remodels, refurbishments and improvements that add to or change the way an asset functions or that extend the useful life are capitalized. Assets that were removed during the remodel, refurbishment or improvement are retired. Assets classified as held-for-sale at the end of 2018 and 2017 were immaterial. Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. Level 3: Significant unobservable inputs that are not corroborated by market data. The Company capitalizes certain computer software and software development costs incurred in developing or obtaining computer software for internal use. These costs are included in equipment and fixtures and amortized on a straight-line basis over the estimated useful lives of the software, generally three to seven years. 43 Property and equipment are stated at cost. In general, new building additions are classified into components, each with an estimated useful life, generally five to fifty years for buildings and improvements and three to twenty years for equipment and fixtures. Depreciation and amortization expense is computed using the straight-line method over estimated useful lives or the lease term, if shorter. Leasehold improvements made after the beginning of the initial lease term are depreciated over the shorter of the estimated useful life of Property and Equipment The Company provides for estimated inventory losses between physical inventory counts as a percentage of net sales, using estimates based on the Company's experience. The provision is adjusted periodically to reflect physical inventory counts, which generally occur in the second and fourth fiscal quarters. Inventory cost, where appropriate, is reduced by estimates of vendor rebates when earned or as the Company progresses towards earning those rebates, provided that they are probable and reasonably estimable. As of September 2, 2018 and September 3, 2017, U.S. merchandise inventories valued at LIFO approximated FIFO after considering the lower of cost or market principle. Due to net deflation, a benefit of $64 was recorded to merchandise costs in 2016. Merchandise inventories are stated at the lower of cost or market. U.S. merchandise inventories are valued by the cost method of accounting, using the last-in, first-out (LIFO) basis. The Company believes the LIFO method more fairly presents the results of operations by more closely matching current costs with current revenues. The Company records an adjustment each quarter, if necessary, for the projected annual effect of inflation or deflation, and these estimates are adjusted to actual results determined at year-end, after actual inflation or deflation rates and inventory levels for the year have been determined. Canadian and Other International merchandise inventories are predominantly valued using the cost and retail inventory methods, respectively, using the first-in, first-out (FIFO) basis. $ 11,040 $ 9,834 the asset or the remaining term of the initial lease plus any renewals that are reasonably assured at the date the leasehold improvements are made. $ Level 1: Quoted market prices in active markets for identical assets or liabilities. The Company accounts for certain assets and liabilities at fair value. The carrying value of the Company's financial instruments, including cash and cash equivalents, receivables and accounts payable, approximate fair value due to their short-term nature or variable interest rates. See Notes 2, 3, and 4 for the carrying value and fair value of the Company's investments, derivative instruments, and fixed-rate debt, respectively. 40 The accompanying notes are an integral part of these consolidated financial statements. 250 $ Cash dividend declared, but not yet paid. . $ $ 113 $ Property and equipment acquired, but not yet paid SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: 953 123 $ $ 1,185 COSTCO WHOLESALE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions, except share, per share, and warehouse count data) Note 1-Summary of Significant Accounting Policies Fair Value of Financial Instruments The Company periodically evaluates unrealized losses in its investment securities for other-than-temporary impairment, using both qualitative and quantitative criteria. In the event a security is deemed to be other- than-temporarily impaired, the Company recognizes the loss in interest income and other, net in the consolidated statements of income. In general, short-term investments have a maturity at the date of purchase of three months to five years. Investments with maturities beyond five years may be classified, based on the Company's determination, as short-term based on their highly liquid nature and because they represent the investment of cash that is available for current operations. Short-term investments classified as available-for-sale are recorded at fair value using the specific identification method with the unrealized gains and losses reflected in accumulated other comprehensive income (loss) until realized. Realized gains and losses from the sale of available-for- sale securities, if any, are determined on a specific identification basis and are recorded in interest income and other, net in the consolidated statements of income. Short-term investments classified as held-to-maturity are financial instruments that the Company has the intent and ability to hold to maturity and are reported net of any related amortization and are not remeasured to fair value on a recurring basis. Short-Term Investments 41 The Company provides for the daily replenishment of major bank accounts as checks are presented. Included in accounts payable at the end of 2018 and 2017 are $463 and $383, respectively, representing the excess of outstanding checks over cash on deposit at the banks on which the checks were drawn. The Company considers as cash and cash equivalents all cash on deposit, highly liquid investments with a maturity of three months or less at the date of purchase, and proceeds due from credit and debit card transactions with settlement terms of up to four days. Credit and debit card receivables were $1,348 and $1,255 at the end of 2018 and 2017, respectively. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying a fair value hierarchy, which requires maximizing the use of observable inputs when measuring fair value. The three levels of inputs are: Cash and Cash Equivalents Use of Estimates The Company operates on a 52/53 week fiscal year basis with the fiscal year ending on the Sunday closest to August 31. References to 2018 and 2016 relate to the 52-week fiscal years ended September 2, 2018, and August 28, 2016, respectively. References to 2017 relate to the 53-week fiscal year ended September 3, 2017. Fiscal Year End The consolidated financial statements include the accounts of Costco Wholesale Corporation, its wholly- owned subsidiaries, and subsidiaries in which it has a controlling interest. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company's equity. All material inter-company transactions between and among the Company and its consolidated subsidiaries have been eliminated in consolidation. The Company's net income excludes income attributable to the noncontrolling interest in Taiwan. During the first quarter of 2018, Costco purchased its former joint- venture partner's remaining equity interest in its Korean operations. Unless otherwise noted, references to net income relate to net income attributable to Costco. Basis of Presentation Costco Wholesale Corporation (Costco or the Company), a Washington corporation, and its subsidiaries operate membership warehouses based on the concept that offering members low prices on a limited selection of nationally-branded and private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. At September 2, 2018, Costco operated 762 warehouses worldwide: 527 United States (U.S.) locations (in 44 U.S. states, Washington, D.C., and Puerto Rico), 100 Canada locations, 39 Mexico locations, 28 United Kingdom (U.K.) locations, 26 Japan locations, 15 Korea locations, 13 Taiwan locations, 10 Australia locations, two Spain locations, one Iceland location, and one France location. The Company operates e-commerce websites in the U.S., Canada, Mexico, U.K., Korea, and Taiwan. Description of Business The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. 3,292 EA GA 5,774 (3,945) (3,945) - (473) (473) (432) (1,014) 5,800 4 437,204 ( (2) 2 - (41) (4 - (3,945) 5,988 10,778 301 (217) (217) 2,741 547 (185) 547 547 (2,998) (192) (185) 3,179 45 3,134 3,134 - 11,079 (7) (217) 5 Stock-based compensation 85 | 2,673 Release of vested RSUs, including tax effects Stock-based compensation . Foreign-currency translation adjustment and other, net. 2,714 35 2,679 12,332 253 12,079 (1,099) 7,686 --- - 2,679 6,726 5,490 55 85 13 98 Foreign-currency translation adjustment and other, net. Net income 2017... BALANCE AT SEPTEMBER 3, and other. Cash dividends declared stock... Release of vested RSUs, including tax effects Repurchases of common Conversion of convertible (165) (165) -- 518 518 518 notes.. Repurchases of common (165) (1,756) - Deferred income taxes. Other non-cash operating activities, net.. 459 514 544 1,255 1,370 1,437 Stock-based compensation Depreciation and amortization to net cash provided by operating activities: Adjustments to reconcile net income including noncontrolling interests 2,376 $ 2,714 (14) (57) (49) (29) Net cash provided by operating activities 547 stock.... 807 421 Other operating assets and liabilities, net. (1,532) $ 2,258 Accounts payable. (25) (894) (1,313) Merchandise inventories.. Changes in operating assets and liabilities: 269 1,561 3,179 (6) (971) $ 4 $ $ 438,189 BALANCE AT SEPTEMBER 2, 2018... (35) (936) (1,199) $ (939) and other. Cash dividends declared (322) (322) $ (26) (296) 3 7,887 6,107 $ Net income including noncontrolling interests CASH FLOWS FROM OPERATING ACTIVITIES August 28, 2016 September 3, 2017 Ended 52 Weeks 52 Weeks Ended September 2, 2018 (amounts in millions) 53 Weeks Ended 39 The accompanying notes are an integral part of these consolidated financial statements. $13,103 304 $ 12,799 COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Thereafter Total 2023 2022 2021 2020 2019 At the end of 2018, future minimum payments, net of sub-lease income of $105 for all years combined, under non-cancelable operating leases with terms of at least one year and capital leases were as follows: 175 Capital and Build-to-Suit Leases The aggregate rental expense for 2018, 2017, and 2016 was $265, $258, and $250, respectively. Sub-lease income and contingent rent were not material in 2018, 2017, or 2016. Operating Leases Note 5-Leases Total Thereafter Less amount representing interest $ 6,614 Gross assets recorded under capital and build-to-suit leases were $427 and $404 at the end of 2018 and 2017, respectively. These assets are recorded net of accumulated amortization of $94 and $78 at the end of 2018 and 2017, respectively. Net present value of minimum lease payments. 36 Long-term capital lease obligations less current installments (3) 2,343 36 183 36 193 35 214 34 227 $ $ Leases (1) Capital Operating Leases 62 52 (2) Included in other current liabilities in the accompanying consolidated balance sheets. (3) Included in other liabilities in the accompanying consolidated balance sheets. (1) Includes build-to-suit lease obligations. Less current installments (2) 90 5557 1,300 793 794 497 498 994 995 498 499 1,198 1,199 $ 2017 2018 51 (1) Included in other current liabilities in the consolidated balance sheets. Long-term debt, excluding current portion. 2,215 Less current portion (1) 992 2023 991 986 2022 1,091 2021 1,700 2020 90 $ 2019 Maturities of long-term debt during the next five fiscal years and thereafter are as follows: 6,573 6,487 $ 86 90 6,659 6,577 702 613 987 647 ... 824 (1) Stock-based compensation expense before income taxes Less income tax benefit The following table summarizes stock-based compensation expense and the related tax benefits under the Company's plans: Summary of Stock-Based Compensation The weighted-average grant date fair value of RSUs granted was $156.19, $144.12, and $153.46 in 2018, 2017, and 2016, respectively. The remaining unrecognized compensation cost related to non-vested RSUs at the end of 2018 was $693 and the weighted-average period of time over which this cost will be recognized is 1.6 years. Included in the outstanding balance at the end of 2018 were approximately 2,658,000 RSUs vested but not yet delivered. 140.85 7,578 $ 138.57 (255) 129.49 (4,088) 156.19 3,722 128.15 8,199 $ Weighted-Average Grant Date Fair Value Number of Units (in 000's) Stock-based compensation expense, net of income taxes Outstanding at the end of 2018 2018 2016 Total long-term debt. $ 4,442 $4,039 $3,619 997 $3,182 $2,988 $2,622 1,260 1,051 2016 2017 2018 54 Total Domestic Foreign. Income before income taxes is comprised of the following: (1) In 2018, the income tax benefit reflects the reduction in the U.S. federal statutory income tax rate from 35% to 21%. Note 8—Income Taxes $ 428 $ 347 $ 309 (150) (116) (167) $ 459 $ 544 $ 514 2017 $ 3,207 Forfeited Granted 1,756 $ Total Cost Average Price per Share (000's) Shares Repurchased 2016. 2018 2017 The Company's stock repurchase program is conducted under a $4,000 authorization by the Board of Directors, which expires April 17, 2019. As of the end of 2018, the remaining amount available for stock repurchases under the approved plan was $2,427. The following table summarizes the Company's stock repurchase activity: Stock Repurchase Programs The Company's current quarterly dividend rate is $0.57 per share. In May 2017, the Company paid a special cash dividend of $7.00 per share. The aggregate payment was approximately $3,100. Subsequent to the end of 2018, the Board of Directors declared a quarterly cash dividend in the amount of $0.57 per share, which is payable on November 23, 2018. Dividends Note 6-Stockholders' Equity 390 $ (7) 397 (427) 183.13 $ Vested and delivered 322 157.87 Outstanding at the end of 2017 The following table summarizes RSU transactions during 2018: 7,246,000 time-based RSUs that vest upon continued employment over specified periods of time; 332,000 performance-based RSUs, of which 205,000 were granted to executive officers subject to the certification of the attainment of specified performance targets for 2018. This certification occurred in October 2018, at which time a portion vested as a result of the long service of all executive officers. The remaining awards vest upon continued employment over specified periods of time. • • The following awards were outstanding at the end of 2018: 53 53 RSUS granted to employees and to non-employee directors generally vest over five and three years, respectively. Additionally, the terms of the RSUs, including performance-based awards, provide for accelerated vesting for employees and non-employee directors who have attained 25 or more and five or more years of service with the Company, respectively. Recipients are not entitled to vote or receive dividends on non-vested and undelivered shares. At the end of 2018, 8,313,000 shares were available to be granted as RSUs under the Seventh Plan. Summary of Restricted Stock Unit Activity The Company grants stock-based compensation primarily to employees and non-employee directors. RSU grants to all executive officers are performance-based. Through a series of shareholder approvals, there have been amended and restated plans and new provisions implemented by the Company. RSUs are subject to quarterly vesting upon retirement or voluntary termination. Employees who attain certain years of service with the Company receive shares under accelerated vesting provisions on the annual vesting date rather than upon retirement. The Seventh Restated 2002 Stock Incentive Plan (Seventh Plan) is the Company's only stock-based compensation plan with shares available for grant at the end of 2018. Each share issued in respect of stock awards is counted as 1.75 shares toward the limit of shares made available under the Seventh Plan. The Seventh Plan authorized the issuance of 23,500,000 shares (13,429,000 RSUs) of common stock for future grants in addition to the shares authorized under the previous plan. The Company issues new shares of common stock upon vesting of RSUs. Shares for vested RSUs are generally delivered to participants annually, net of statutory withholding taxes. Note 7-Stock-Based Compensation Plans These amounts may differ from the stock repurchase balances in the accompanying consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of each fiscal year. 477 149.90 3,184 473 2,998 Other long-term debt. The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial 2.75% Senior Notes due May 2024 (14) $ $ 912 $ Recorded Basis Unrealized Losses, Net Cost Basis Total short-term investments. Certificates of deposit Held-to-maturity: Government and agency securities. . Available-for-sale: 2018: The Company's investments were as follows: Note 2-Investments In February 2016, the FASB issued ASU 2016-02 which will require recognition on the balance sheet for the rights and obligations created by leases with terms greater than twelve months. The new standard is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. The Company plans to adopt this guidance at the beginning of its first quarter of fiscal 2020 and plans to utilize the transition option which does not require application of the guidance to comparative periods in the year of adoption. While the Company continues to evaluate this standard and the effect on related disclosures, the primary effect of adoption will be recording right-of-use assets and corresponding lease obligations for current operating leases. The adoption is expected to have a material impact on the Company's consolidated balance sheets, but not on the consolidated statements of income or cash flows. Additionally, the Company is in the process of reviewing current accounting policies, changes to business processes, systems and controls to support adoption of the new standard, which includes implementing a new lease accounting system. 48 In May 2014, the FASB issued ASU 2014-09 providing for changes in the recognition of revenue from contracts with customers. The guidance converges the requirements for reporting revenue and requires disclosures sufficient to describe the nature, amount, timing, and uncertainty of revenue and cash flows arising from these contracts. The new standard is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The Company plans to adopt this guidance at the beginning of its first quarter of fiscal 2019, using the modified retrospective approach through a cumulative effect adjustment to retained earnings. The Company has substantially completed its assessment of the new standard and it does not believe the impacts to be material to the Company's consolidated financial statements. The Company continues to evaluate the disclosure requirements related to the new standard. Recent Accounting Pronouncements Not Yet Adopted 898 In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09 related to the accounting for share-based payment transactions. The guidance relates to income taxes, forfeitures, and minimum statutory tax withholding requirements. The new standard was effective for fiscal years and interim periods within those years beginning after December 15, 2016, with early adoption permitted. The Company adopted this guidance at the beginning of its first quarter of fiscal year 2018. As a result, the Company recognized a net tax benefit in fiscal 2018 of $33 as part of its income tax provision in the accompanying consolidated statements of income, which includes the impact of the lower tax rate from the 2017 Tax Act. Previously, tax benefits associated with the release of employee RSUs were reflected in equity. These amounts are now reflected as cash flows from operations instead of cash flows from financing activities in the consolidated statements of cash flows on a prospective basis. Adoption of this guidance did not have a material impact on the consolidated balance sheets, consolidated statements of cash flows, or related disclosures. 306 $ 1,218 (14) $ 948 Total available-for-sale 1 0 1 Mortgage-backed securities 947 0 $ 947 $ $ Government and agency securities. Available-for-sale: Recorded Basis Unrealized Gains, Net Cost Basis 2017: 1,204 3.00% Senior Notes due May 2027 0 Recent Accounting Pronouncements Adopted Stock Repurchase Programs Selling, General and Administrative Expenses The Company has agreements to receive funds from vendors for coupons and a variety of other programs. These programs are evidenced by signed agreements that are reflected in the carrying value of the inventory when earned or as the Company progresses towards earning the rebate or discount, and as a component of merchandise costs as the merchandise is sold. Other vendor consideration is generally recorded as a reduction of merchandise costs upon completion of contractual milestones, terms of the related agreement, or by another systematic approach. Vendor Consideration Merchandise costs consist of the purchase price or manufacturing costs of inventory sold, inbound and outbound shipping charges and all costs related to the Company's depot operations, including freight from depots to selling warehouses, and are reduced by vendor consideration. Merchandise costs also include salaries, benefits, depreciation, and utilities in fresh foods and certain ancillary departments. Merchandise Costs (up to a maximum reward of approximately $1,000 per year), which can be redeemed only at Costco warehouses. The Company accounts for this reward as a reduction in sales. The sales reduction and corresponding liability (classified as accrued member rewards in the consolidated balance sheets) are computed after giving effect to the estimated impact of non-redemptions, based on historical data. The net reduction in sales was $1,394, $1,281, and $1,172 in 2018, 2017, and 2016, respectively. 45 The Company accounts for membership fee revenue, net of refunds, on a deferred basis, ratably over the one-year membership. The Company's Executive members qualify for a 2% reward on qualified purchases Generally, when Costco is the primary obligor, is subject to inventory risk, has latitude in establishing prices and selecting suppliers, can influence product or service specifications, or has several but not all of these indicators, revenue is recorded on a gross basis. It otherwise records the net amounts earned, which is reflected in net sales. The Company generally recognizes sales, which include gross shipping fees where applicable, net of returns, at the time the member takes possession of merchandise or receives services. When the Company collects payments from members prior to the transfer of ownership of merchandise or the performance of services, the amounts received are generally recorded as deferred sales, included in other current liabilities in the consolidated balance sheets, until the sale or service is completed. The Company reserves for estimated sales returns based on historical trends in merchandise returns and reduces sales and merchandise costs accordingly. The sales returns reserve is based on an estimate of the net realizable value of merchandise inventories expected to be returned. Amounts collected from members for sales or value added taxes are recorded on a net basis. Revenue Recognition The Company recognizes foreign-currency transaction gains and losses related to revaluing or settling monetary assets and liabilities denominated in currencies other than the functional currency in interest income and other, net in the accompanying consolidated statements of income. Generally, these include the U.S. dollar cash and cash equivalents and the U.S. dollar payables of consolidated subsidiaries revalued to their functional currency. Also included are realized foreign-currency gains or losses from settlements of forward foreign-exchange contracts. These items were immaterial for 2018 and 2017 and resulted in net gains of $38 for 2016. The functional currencies of the Company's international subsidiaries are the local currency of the country in which the subsidiary is located. Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Translation adjustments are recorded in accumulated other comprehensive loss. Revenues and expenses of the Company's consolidated foreign operations are translated at average exchange rates prevailing during the year. Foreign Currency The Company is exposed to fluctuations in prices for energy, particularly electricity and natural gas, which it seeks to partially mitigate through the use of fixed-price contracts for certain of its warehouses and other facilities, primarily in the U.S. and Canada. The Company also enters into variable-priced contracts for some purchases of natural gas, in addition to fuel for its gas stations, on an index basis. These contracts meet the characteristics of derivative instruments, but generally qualify for the "normal purchases or normal sales" exception under authoritative guidance and require no mark-to-market adjustment. The unrealized gains or losses recognized in interest income and other, net in the accompanying consolidated statements of income relating to the net changes in the fair value of unsettled forward foreign-exchange contracts were immaterial in 2018, 2017, and 2016. than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. The Company seeks to mitigate risk with the use of these contracts and does not intend to engage in speculative transactions. Some of these contracts contain credit-risk-related contingent features that require settlement of outstanding contracts upon certain triggering events. At the end of 2018 and 2017, the aggregate fair value amounts of derivative instruments in a net liability position and the amount needed to settle the instruments immediately if the credit-risk-related contingent features were triggered were immaterial. The aggregate notional amounts of open, unsettled forward foreign-exchange contracts were $717 and $637 at the end of 2018 and 2017, respectively. See Note 3 for information on the fair value of unsettled forward foreign-exchange contracts at the end of 2018 and 2017. Selling, general and administrative expenses consist primarily of salaries, benefits and workers' compensation costs for warehouse employees (other than fresh foods departments and certain ancillary businesses) as well as all regional and home office employees, including buying personnel. Selling, general and administrative expenses also include substantially all building and equipment depreciation, stock compensation expense, utilities, credit and debit card processing fees, as well as other operating costs incurred to support warehouse operations. Repurchased shares of common stock are retired, in accordance with the Washington Business Corporation Act. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is deducted by allocation to additional paid-in capital and retained earnings. The amount allocated to additional paid-in capital is the current value of additional paid-in capital per share outstanding and is applied to the number of shares repurchased. Any remaining amount is allocated to retained earnings. See Note 6 for additional information. Retirement Plans Stock-Based Compensation The computation of basic net income per share uses the weighted average number of shares that were outstanding during the period. The computation of diluted net income per share uses the weighted average number of shares in the basic net income per share calculation plus the number of common shares that would be issued assuming vesting of all potentially dilutive common shares outstanding using the treasury stock method for shares subject to RSUs. Net Income per Common Share Attributable to Costco The timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions requires significant judgment. The benefits of uncertain tax positions are recorded in the Company's consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge from tax authorities. When facts and circumstances change, the Company reassesses these probabilities and records any changes as appropriate. statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credits and loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Avaluation allowance is established when necessary to reduce deferred tax assets to amounts that are more likely than not expected to be realized. 47 Income Taxes 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 and are expensed as incurred. Preopening Expenses The Company's asset retirement obligations (ARO) primarily relate to leasehold improvements that at the end of a lease must be removed. These obligations are recorded as a liability with an offsetting asset at the inception of the lease term based upon the estimated fair value of the costs to remove the leasehold improvements. These liabilities are accreted over time to the projected future value of the obligation using the Company's incremental borrowing rate. The ARO assets are depreciated using the same depreciation method as the leasehold improvement assets and are included with buildings and improvements. Estimated ARO liabilities associated with these leases were immaterial at the end of 2018 and 2017, respectively, and are included in other liabilities in the accompanying consolidated balance sheets. The Company records an asset and related financing obligation for the estimated construction costs under build-to-suit lease arrangements where it is considered the owner for accounting purposes, to the extent the Company is involved in the construction of the building or structural improvements or has construction risk prior to commencement of a lease. Upon occupancy, the Company assesses whether these arrangements qualify for sales recognition under the sale-leaseback accounting guidance. If the Company continues to be the deemed owner, it accounts for the arrangement as a financing lease. The Company has capital leases for certain warehouse locations, expiring at various dates through 2059. Capital lease assets are included in land and buildings and improvements in the accompanying consolidated balance sheets. Amortization expense on capital lease assets is recorded as depreciation expense and is included in selling, general and administrative expenses. Capital lease liabilities are recorded at the lesser of the estimated fair market value of the leased property or the net present value of the aggregate future minimum lease payments and are included in other current liabilities and other liabilities in the accompanying consolidated balance sheets. Interest on these obligations is included in interest expense in the consolidated statements of income. The Company accounts for its lease expense with free rent periods and step-rent provisions on a straight- line basis over the original term of the lease and any extension options that the Company more likely than not expects to exercise, from the date the Company has control of the property. Certain leases provide for periodic rental increases based on price indices, or the greater of minimum guaranteed amounts or sales volume. The Company leases land and/or buildings at warehouses and certain other office and distribution facilities, primarily under operating leases. Operating leases expire at various dates through 2064, with the exception of one lease in the U.K., which expires in 2151. These leases generally contain one or more of the following options, which the Company can exercise at the end of the initial lease term: (a) renewal of the lease for a defined number of years at the then-fair market rental rate or rate stipulated in the lease agreement; (b) purchase of the property at the then-fair market value; or (c) right of first refusal in the event of a third- party purchase offer. Leases Stock-based compensation expense is predominantly included in selling, general and administrative expenses in the consolidated statements of income. Certain stock-based compensation costs are capitalized or included in the cost of merchandise. See Note 7 for additional information on the Company's stock-based compensation plans. 46 Restricted stock units (RSUs) granted to employees generally vest over five years and allow for quarterly vesting of the pro-rata number of stock-based awards that would vest on the next anniversary of the grant date in the event of retirement or voluntary termination. Actual forfeitures are recognized as they occur. Compensation expense for stock-based awards is predominantly recognized using the straight-line method over the requisite service period for the entire award. Awards for employees and non-employee directors provide for accelerated vesting of a portion of outstanding shares based on cumulative years of service with the Company. Compensation expense for the accelerated shares is recognized upon achievement of the long-service term. The cumulative amount of compensation cost recognized at any point in time equals at least the portion of the grant-date fair value of the award that is vested at that date. The fair value of RSUs is calculated as the market value of the common stock on the measurement date less the present value of the expected dividends forgone during the vesting period. The Company's 401(k) retirement plan is available to all U.S. employees who have completed 90 days of employment. The plan allows participants to make wage deferral contributions, a portion of which the Company matches. In addition, the Company provides each eligible participant an annual discretionary contribution. The Company also has a defined contribution plan for Canadian employees and contributes a percentage of each employee's wages. Certain subsidiaries in the Company's Other International operations have defined benefit and defined contribution plans that are not material. Amounts expensed under all plans were $578, $543, and $489 for 2018, 2017, and 2016, respectively, and are predominantly included in selling, general and administrative expenses in the accompanying consolidated statements of income. 948 306 Certificates of deposit 0 $ 7 Level 2 Level 1 917 9 $ $ (2) 0 16 903 0 $ 9 Level 2 Level 1 0 Total Held-to-maturity: 2 1.70% Senior Notes due December 2019. 1.75% Senior Notes due February 2020 2.15% Senior Notes due May 2021. 2.25% Senior Notes due February 2022 2.30% Senior Notes due May 2022. The Company at its option may redeem the Senior Notes at any time, in whole or in part, at a redemption price plus accrued interest. The redemption price is equal to the greater of 100% of the principal amount or the sum of the present value of the remaining scheduled payments of principal and interest to maturity. Additionally, upon certain events, as defined by the terms of the Senior Notes, the holder has the right to require the Company to purchase this security at a price of 101% of the principal amount plus accrued and unpaid interest to the date of the event. Interest on all outstanding long-term debt is payable semi-annually. The estimated fair value of Senior Notes is valued using Level 2 inputs. Other long-term debt consists of Guaranteed Senior Notes issued by the Company's Japanese subsidiary and are valued using Level 3 inputs. At the end of 2018 and 2017, the fair value of the Company's long-term debt, including the current portion, was approximately $6,492 and $6,753, respectively. The carrying value of long-term debt consisted of the following: The Company's long-term debt consists primarily of Senior Notes, which have various principal balances, interest rates, and maturity dates as described below. In May 2017, the Company issued $3,800 in aggregate principal amount of Senior Notes, with maturity dates between May 2021 and May 2027. Additionally, in 2017 the Company repaid long-term debt totaling $2,200. Long-Term Debt The Company maintains various short-term bank credit facilities with a borrowing capacity of $857 and $833, in 2018 and 2017, respectively. Borrowings on these short-term facilities were immaterial during 2018 and 2017, and there were no outstanding borrowings at the end of 2018 and 2017. Short-Term Borrowings Note 4-Debt 50 Assets and liabilities recognized and disclosed at fair value on a nonrecurring basis include items such as financial assets measured at amortized cost and long-lived nonfinancial assets. These assets are measured at fair value if determined to be impaired. There were no fair value adjustments to these items during 2018 and 2017. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis During and at the end of both 2018 and 2017, the Company did not hold any Level 3 financial assets or liabilities that were measured at fair value on a recurring basis. There were no transfers in or out of Level 1 or 2 during 2018 and 2017. (3) The asset and the liability values are included in other current assets and other current liabilities, respectively, in the accompanying consolidated balance sheets. See Note 1 for additional information on derivative instruments. condensed consolidated balance sheets. At September 3, 2017, there were no securities included in cash and cash equivalents and $947 included in short-term investments in the accompanying condensed consolidated balance sheets. (1) Included in cash and cash equivalents in the accompanying consolidated balance sheets. (2) At September 2, 2018, immaterial cash and cash equivalents and $898 short-term investments are included in the accompanying 7 $ 942 0 (8) 1 Forward foreign-exchange contracts, in (liability) position (3) 947 Investment in mortgage-backed securities Cost Basis Available-For-Sale Note 3-Fair Value Measurement Total.... Due after five years Due after one year through five years Due in one year or less 49 49 The proceeds from sales of available-for-sale securities were $39, $202, and $291 during 2018, 2017, and 2016, respectively. Gross realized gains or losses from sales of available-for-sale securities were not material in 2018, 2017, and 2016. Gross unrealized gains and losses on available-for-sale securities were not material in 2018, 2017, and 2016. At the end of 2018 and 2017, the Company's available-for-sale securities that were in a continuous unrealized-loss position were not material. The Company had no available-for-sale securities in a continuous unrealized-loss position in 2016. Gross unrealized gains and losses on cash equivalents were not material at the end of 2018, and there were no gross unrealized gains and losses on cash equivalents at the end of 2017 or 2016. Total short-term investments. 0 $ 1,233 $1,233 $ 285 285 Forward foreign-exchange contracts, in asset position(³) 307 $ Fair Value 305 The maturities of available-for-sale and held-to-maturity securities at the end of 2018 were as follows: 306 Investment in government and agency securities (2) Held-To-Maturity Money market mutual funds (1) Total Forward foreign-exchange contracts, in asset position (3) Forward foreign-exchange contracts, in (liability) position (3 Investment in government and agency securities (2) 2017: 2018: The tables below present information regarding the Company's financial assets and financial liabilities that are measured at fair value on a recurring basis and indicate the level within the hierarchy reflecting the valuation techniques utilized to determine such fair value. Money market mutual funds (1) 21 306 912 $ 898 $ $ 0 0 572 21 Assets and Liabilities Measured at Fair Value on a Recurring Basis 584 129 169 212 108 8 22 Current 21 Deferred 450 Total provision for income taxes 487 389 398 (37) (42) 15 161 Total foreign 190 Federal: 809 The provisions for income taxes are as follows: Current Deferred State: Total federal Current Deferred Total state 701 Foreign: 2017 2016 $ 636 $ 802 $ 468 (35) 7 347 601 2018 413 233 In December 2017, the 2017 Tax Act was signed into law. Except for certain provisions, the 2017 Tax Act is effective for tax years beginning on or after January 1, 2018. The Company is a fiscal-year taxpayer, so most provisions will become effective for fiscal 2019, including limitations on the Company's ability to claim foreign tax credits, repeal of the domestic manufacturing deduction, and limitations on certain business deductions. Provisions with significant impacts that were effective starting in the second quarter of fiscal 2018 and throughout the remainder of fiscal 2018 included: a decrease in the U.S. federal income tax rate, remeasurement of certain net deferred tax liabilities, and a transition tax on deemed repatriation of certain foreign earnings. The decrease in the U.S. federal statutory income tax rate to 21.0% resulted in a blended rate for the Company of 25.6% for fiscal 2018. $ 41,357 $ 28,216 $ 29,130 636 630 Membership fees.. $ 27,469 Net sales REVENUE Total (53 Weeks) Fourth Quarter (17 Weeks) 53 Weeks Ended September 3, 2017 Third Quarter (12 Weeks) Second Quarter (12 Weeks) First Quarter (12 Weeks) $ 126,172 60 0.50 $ 0.50 $ 0.57 $ 0.57 $ 2.14 $ PER COMMON SHARE CASH DIVIDENDS DECLARED 441,834 438,515 438,379 442,427 438,740 441,715 439,022 441,568 437,965 440,851 Diluted Basic Shares used in calculation (000's) 7.09 60 644 943 2,853 1,450 968 844 849 Operating income 82 30 15 15 22 Preopening expenses 12,950 4,123 2,907 2,980 2,940 administrative . . . Total revenue. 28,099 29,766 28,860 42,300 129,025 $ 2.36 $ OPERATING EXPENSES 24,288 25,927 24,970 36,697 111,882 Selling, general and Merchandise costs. 7.15 2.38 $ $ noncontrolling interests. Net income including 1,263 396 309 273 285 Provision for income taxes 4,442 1,449 1,071 986 936 TAXES.. INCOME BEFORE INCOME 121 51 1,067 1,446 4,480 OTHER INCOME (EXPENSE) Interest expense. (37) 651 (37) (48) (159) Interest income and other, net 22 7 41 (37) 4,111 713 1,053 1.71 1.60 $ 1.59 $ 1.70 $ 1.45 $ Diluted $ 1.46 $ Basic COSTCO: SHARE ATTRIBUTABLE TO NET INCOME PER COMMON 3,134 1,043 $ $ 750 3,179 Net income attributable to noncontrolling interests. (11) (12) (12) 762 (10) NET INCOME ATTRIBUTABLE TO COSTCO. $ 640 $ 701 $ (45) OTHER INCOME (EXPENSE) Interest expense (29) Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness for future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of our assets; (2) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with appropriate authorizations; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Management's Annual Report on Internal Control Over Financial Reporting 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 September 2, 2018 and, based on their evaluation, have concluded that the disclosure controls and procedures were not effective as of such date due to a material weakness in internal control over financial reporting, described below. Evaluation of Disclosure Controls and Procedures Item 9A-Controls and Procedures Item 9-Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 61 (2) Includes the special cash dividend of $7.00 per share paid in May 2017. (1) Includes an $82 tax benefit recorded in the third quarter in connection with the special cash dividend paid to employees through the Company's 401(k) Retirement Plan. 8.90 $ 0.50 $ $ 7.50 0.45 $ (2) 0.45 2.08 $ 6.08 Shares used in calculation Basic 438,007 439,127 Under the supervision of and with the participation of our management, we assessed the effectiveness of our internal control over financial reporting as of September 2, 2018, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control- Integrated Framework (2013). Amaterial weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Diluted. 440,657 438,817 441,056 437,987 441,036 438,437 440,937 CASH DIVIDENDS DECLARED PER COMMON SHARE.. 440,525 $ We identified a material weakness in internal control related to ineffective information technology general controls (ITGCs) in the areas of user access and program change-management over certain information technology (IT) systems that support the Company's financial reporting processes. Our business process controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted. We believe that these control deficiencies were a result of: IT control processes lacking sufficient documentation such that the successful operation of ITGCs was overly dependent upon knowledge and actions of certain individuals with IT expertise, which led to failures resulting from changes in IT personnel; insufficient training of IT personnel on the importance of ITGCs; and risk-assessment processes inadequate to identify and assess changes in IT environments that could impact internal control over financial reporting. The material weakness did not result in any identified misstatements 62 $1,263 $1,325 $1,243 . 64 The information required by this Item is incorporated herein by reference to the sections entitled “Independent Public Accountants" in Costco's Proxy Statement. The information required by this Item is incorporated herein by reference to the sections entitled "Proposal 1: Election of Directors," "Directors," "Committees of the Board," "Shareholder Communications to the Board," "Meeting Attendance," "Report of the Compensation Committee of the Board of Directors,” “Certain Relationships and Transactions" and "Report of the Audit Committee” in Costco's Proxy Statement. Item 14-Principal Accounting Fees and Services Item 13-Certain Relationships and Related Transactions, and Director Independence The information required by this Item is incorporated herein by reference to the section entitled "Principal Shareholders" and "Equity Compensation Plan Information" in Costco's Proxy Statement. Item 12-Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The information required by this Item is incorporated herein by reference to the sections entitled "Compensation of Directors,” “Executive Compensation," and "Compensation Discussion and Analysis" in Costco's Proxy Statement. Item 11-Executive Compensation Information relating to the availability of our code of ethics for senior financial officers and a list of our executive officers appear in Part I, Item 1 of this Report. The information required by this Item concerning our directors and nominees for director is incorporated herein by reference to the sections entitled "Proposal 1: Election of Directors," "Directors,” “Committees of the Board" and "Section 16(a) Beneficial Ownership Reporting Compliance" in Costco's Proxy Statement for its 2019 annual meeting of stockholders, which will be filed with the SEC within 120 days of the end of our fiscal year ("Proxy Statement”). Item 10-Directors, Executive Officers and Corporate Governance PART III None. Item 9B-Other Information 63 80 to the financial statements, and there were no changes to previously released financial results. Based on this material weakness, the Company's management concluded that at September 2, 2018, the Company's internal control over financial reporting was not effective. The Company's independent registered public accounting firm, KPMG LLP has issued an adverse audit report on the effectiveness of the Company's internal control over financial reporting as of September 2, 2018, which appears in Item 8 of this Form 10-K. Following identification of the material weakness and prior to filing this Annual Report on Form 10-K, we completed substantive procedures for the year ended September 2, 2018. Based on these procedures, management believes that our consolidated financial statements included in this Form 10-K have been prepared in accordance with U.S. GAAP. Our CEO and CFO have certified that, based on their knowledge, the financial statements, and other financial information included in this Form 10-K, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Form 10-K. KPMG LLP has issued an unqualified opinion on our financial statements, which is included in Item 8 of this Form 10-K. Remediation Management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions include: (i) creating and filling an IT Compliance Oversight function; (ii) developing a training program addressing ITGCs and policies, including educating control owners concerning the principles and requirements of each control, with a focus on those related to user access and change-management over IT systems impacting financial reporting; (iii) developing and maintaining documentation underlying ITGCs to promote knowledge transfer upon personnel and function changes; (iv) developing enhanced risk assessment procedures and controls related to changes in IT systems; (v) implementing an IT management review and testing plan to monitor ITGCs with a specific focus on systems supporting our financial reporting processes; and (vi) enhanced quarterly reporting on the remediation measures to the Audit Committee of the Board of Directors. We believe that these actions will remediate the material weakness. The weakness will not be considered remediated, however, 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. 62 Changes in Internal Control Over Financial Reporting /s/ W. CRAIG JELINEK W. Craig Jelinek President, Chief Executive Officer and Director /s/ RICHARD A. GALANTI Richard A. Galanti Executive Vice President, Chief Financial Officer and Director Except for the material weakness identified during the quarter, as of September 2, 2018, there have been no other 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 fourth quarter of fiscal 2018 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 1,016 1.59 1.17 2,714 932 706 521 555 noncontrolling interests Net income including 1,325 487 259 288 291 Provision for income taxes (1) 4,039 1,419 965 (31) (21) (53) (134) Interest income and other, net.. 26 Net income attributable to (4) 22 62 INCOME BEFORE INCOME TAXES 846 809 18 $ noncontrolling interests (6) $ 1.24 $ Diluted 6.11 2.10 $ $ 1.59 $ 1.17 $ 1.24 $ Basic . COSTCO: SHARE ATTRIBUTABLE TO NET INCOME PER COMMON (6) (13) (35) NET INCOME ATTRIBUTABLE TO COSTCO $ (10) 545 515 $ 700 $ 919 $ 2,679 $ 951 (000's) 68 441,263 The Company is a defendant in a class action alleging violation of California Wage Order 7-2001 for failing to provide seating to member service assistants who act as greeters and exit attendants in the Company's California warehouses. Canela v. Costco Wholesale Corp., et al. (Case No. 5:13-cv-03598, N.D. Cal. filed July 1, 2013). The complaint seeks relief under the California Labor Code, including civil penalties and attorneys' fees. The Company filed an answer denying the material allegations of the complaint. The plaintiff has since indicated that exit attendants are no longer a subject of the litigation. The action in the district court 57 58 50 has been stayed pending review by the Ninth Circuit of the order certifying a class. On September 6, 2018, counsel claiming to represent an employee notified the California Labor and Workforce Development agency of an intention to bring similar claims concerning Costco employees engaged at member services counters. On November 23, 2016, the Company's Canadian subsidiary received from the Ontario Ministry of Health and Long Term Care a request for an inspection and information concerning compliance with the anti-rebate provisions in the Ontario Drug Benefit Act and the Drug Interchangeability and Dispensing Fee Act. The Company is seeking to cooperate with the request. The Ministry has indicated it has reason to believe the Company received payments in violation of these laws and is seeking disgorgement of these sums. In December 2017, the United States Judicial Panel on Multidistrict Litigation consolidated numerous cases filed against various defendants by counties, cities, hospitals, Native American tribes and third-party payors concerning the impacts of opioid abuse. In re National Prescription Opiate Litigation (MDL No. 2804) (N.D. Ohio). Included are federal court cases that name the Company, including actions filed by a number of counties and cities in Michigan, New Jersey and Ohio, and a third-party payor in Ohio. Similar cases that name the Company have been filed in state courts in New Jersey and Oklahoma. The Company is defending these matters. In November 2016 and September 2017, the Company received notices of violation from the Connecticut Department of Energy and Environmental Protection regarding hazardous waste practices at its Connecticut warehouses, primarily concerning unsalable pharmaceuticals. The Company is seeking to cooperate concerning the resolution of these notices. 440,937 The Company does not believe that any pending claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company's financial position, results of operations or cash flows; however, it is possible that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be material to the results of an individual fiscal quarter. The Company and its subsidiaries are principally engaged in the operation of membership warehouses in the U.S., Canada, Mexico, U.K., Japan, Korea, Australia, Spain, Iceland, and France and through a majority- owned subsidiary in Taiwan. Reportable segments are largely based on management's organization of the operating segments for operational decisions and assessments of financial performance, which considers geographic locations. The material accounting policies of the segments are as described in Note 1. Inter- segment net sales and expenses have been eliminated in computing total revenue and operating income. Certain operating expenses, predominantly stock-based compensation, incurred on behalf of the Company's Canadian and Other International operations, are included in the U.S. operations because those costs generally come under the responsibility of U.S. management. United States Operations Canadian Operations Other International Operations Total 2018 Total revenue Operating income Note 11-Segment Reporting 441,834 2,678 438,585 The gross unrecognized tax benefit includes tax positions for which the ultimate deductibility is highly certain but there is uncertainty about the timing of such deductibility. At the end of 2018 and 2017, these amounts were immaterial. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of these tax positions would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority. The total amount of such unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods is $32 and $29 at the end of 2018 and 2017, respectively. Accrued interest and penalties related to income tax matters are classified as a component of income tax expense. Interest and penalties recognized during 2018 and 2017 and accrued at the end of each respective period were not material. 56 The Company is currently under audit by several jurisdictions in the United States and in several foreign countries. Some audits may conclude in the next 12 months and the unrecognized tax benefits recorded in relation to the audits may differ from actual settlement amounts. It is not practical to estimate the effect, if any, of any amount of such change during the next 12 months to previously recorded uncertain tax positions in connection with the audits. The Company does not anticipate that there will be a material increase or decrease in the total amount of unrecognized tax benefits in the next 12 months. The Company files income tax returns in the United States, various state and local jurisdictions, in Canada, and in several other foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local examination for years before fiscal 2014. The Company is currently subject to examination in California for fiscal years 2007 to present. No other examinations are believed to be material. Note 9-Net Income per Common and Common Equivalent Share The following table shows the amounts used in computing net income per share and the weighted average number of shares of potentially dilutive common shares outstanding (shares in 000's): Net income attributable to Costco Weighted average number of common shares used in basic net income per common share.. RSUS and other Weighted average number of common shares and dilutive potential of common stock used in diluted net income per share. Note 10-Commitments and Contingencies Legal Proceedings 2018 2017 2016 $ 3,134 $ 2,679 $ 2,350 438,515 3,319 438,437 2,500 Depreciation and amortization (10) 36 $ 52 Additions to property and equipment 2,787 93,889 $ 18,775 $ 16,361 $ 129,025 Operating income 2,644 841 626 4,111 Depreciation and amortization Total revenue 1,044 202 1,370 Additions to property and equipment 1,714 277 511 2,502 Net property and equipment. 124 2017 40,830 8,320 939 754 4,480 1,078 135 224 1,437 2,046 268 655 2,969 Net property and equipment. . . 13,353 1,900 4,428 19,681 Total assets 28,207 4,303 $ 102,286 $ 20,689 $ 18,601 $ 141,576 (11) (1) 0 (0.6) Employee stock ownership plan (ESOP). 2017 Tax Act. (14) (0.3) (104) (2.6) (17) (0.5) (21) 19 Other (64) (1.4) (37) (0.9) (77) (2.1) Total. $ 1,263 0.4 (1.6) (64) 0.7 Operating income.. The reconciliation between the statutory tax rate and the effective rate is as follows: 2018 2017 2016 Federal taxes at statutory rate $ 1,136 25.6% $1,414 35.0% $1,267 35.0% State taxes, net. 154 3.4 116 2.9 91 2.5 Foreign taxes, net. 32 28.4% $1,325 32.8% $1,243 34.3% During fiscal 2018, the Company recognized a net tax expense of $19 related to the 2017 Tax Act. This expense included $142 for the estimated tax on deemed repatriation of foreign earnings, and $43 for the reduction in foreign tax credits and other immaterial items, largely offset by a tax benefit of $166 for the provisional remeasurement of certain deferred tax liabilities. These items were predominantly recorded in the second quarter as provisional amounts and reflect the Company's current interpretations and estimates that it believes are reasonable. As the Company continues to evaluate the 2017 Tax Act and available data, it anticipates that adjustments may be made in future periods up to and including the second quarter of fiscal 2019 in accordance with Staff Accounting Bulletin 118. (40) 18 $ (1) $ (58) The deferred tax accounts at the end of fiscal 2018 and 2017 include deferred income tax assets of $316 and $254, respectively, included in other assets; and deferred income tax liabilities of $317 and $312, respectively, included in other liabilities. The Company no longer considers current fiscal 2018 and future earnings of our non-U.S. consolidated subsidiaries to be permanently reinvested and has recorded the estimated incremental foreign withholding (net of available foreign tax credits) on current fiscal year earnings and state income taxes payable assuming a hypothetical repatriation to the U.S. The Company continues to consider undistributed earnings of certain non-U.S. consolidated subsidiaries prior to fiscal 2018, which totaled $3,071, to be indefinitely reinvested and has not provided for withholding or state taxes. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2018 and 2017 is as follows: Gross unrecognized tax benefit at beginning of year Gross increases-current year tax positions Gross increases-tax positions in prior years. Gross decreases-tax positions in prior years Settlements. . . Lapse of statute of limitations Gross unrecognized tax benefit at end of year 2018 2017 52 $ 52 6 3 6 17 (17) (252) 12,339 (175) (478) In fiscal 2018, we also recognized net tax benefits of $76, which was largely driven by the adoption of an accounting standard related to stock-based compensation and other immaterial net benefits. In fiscal 2017, the Company's provision for income taxes was favorably impacted by a net tax benefit of $104, primarily 55 due to tax benefits recorded in connection with the May 2017 special cash dividends paid by the Company to employees through the Company's 401(k) retirement plan of $82. Dividends on these shares are deductible for U.S. income tax purposes. There was no similar special cash dividend in 2018 or 2016. The components of the deferred tax assets (liabilities) are as follows: Equity compensation. Deferred income/membership fees Accrued liabilities and reserves. Property and equipment Merchandise inventories Other (1) ... Net deferred tax (liabilities)/assets (1) Includes foreign tax credits of $36 for 2017. There were no foreign tax credits in 2018. 2018 2017 $ 72 $ 109 136 167 484 647 (747) 1,820 The Company is involved in a number of claims, proceedings and litigation arising from its business and property ownership. In accordance with applicable accounting guidance, the Company establishes an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. There may be exposure to loss in excess of any amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss (taking into account where applicable indemnification arrangements concerning suppliers and insurers) and the accrued amount, if any, thereof, and adjusts the amount as appropriate. As of the date of this Report, the Company has recorded an immaterial accrual with respect to one matter described below, in addition to other immaterial accruals for matters not described below. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. In each case, there is a reasonable possibility that a loss may be incurred, including a loss in excess of the applicable accrual. For matters where no accrual has been recorded, the possible loss or range of loss (including any loss in excess of the accrual) cannot, in the Company's view, be reasonably estimated because, among other things: (i) the remedies or penalties sought are indeterminate or unspecified; (ii) the legal and/or factual theories are not well developed; and/or (iii) the matters involve complex or novel legal theories or a large number of parties. Total revenue. 527 2,649 Net property and equipment. . 11,745 1,628 3,670 17,043 Total assets 22,511 299 3,480 33,163 The following table summarizes the percentage of net sales by merchandise category: Food and Sundries. Hardlines Fresh Foods Softlines Ancillary 59 2018 2017 2016 7,172 1,823 Additions to property and equipment 1,255 4,002 18,161 Total assets 24,068 4,471 7,808 36,347 2016 Total revenue $ 86,579 $ 17,028 $ 15,112 $ 118,719 Operating income 2,326 568 3,672 Depreciation and amortization 946 109 200 41% 41% 43% 16% 16% 16% 778 11% 12% 12% 44,411 141,576 OPERATING EXPENSES Merchandise costs 27,617 28,733 28,131 38,671 123,152 Selling, general and administrative 3,224 3,155 4,263 13,876 Preopening expenses. 17 12 8 31 14% 14% 14% 3,142 997 3,234 32,995 18% 17% 15% 737 32,361 Note 12-Quarterly Financial Data (Unaudited) The two tables that follow reflect the unaudited quarterly results of operations for 2018 and 2017. 52 Weeks Ended September 2, 2018 First Quarter (12 Weeks) Third Quarter (12 Weeks) Fourth Quarter (16 Weeks) Total (52 Weeks) REVENUE Net sales Second Quarter (12 Weeks) $ 32,279 $ 31,624 $ 43,414 31,809 $ 138,434 Membership fees 692 716 $ 31,117 2017, between W. Craig Jelinek and Costco Wholesale Corporation Agreement, effective January 1, 11/20/2016 12/16/2016 10-Q Executive Employment 10.3.1* Seventh Restated 2002 Stock Incentive Plan Letter Agreement for 2016 Performance-Based Restricted Stock Units-Executive 11/22/2015 12/17/2015 10-Q 10.2.7* 10.3.2* 10-Q 11/22/2015 12/17/2015 Seventh Restated 2002 Stock Incentive Plan Restricted Stock Unit Award Agreement-Non- Executive Director Letter Dated December 18, 2017, Regarding an Extension of the 14A 11/26/2017 12/21/2017 10.6.1** 10-K 10.2.6* Deferred Compensation Plan 10.5* Agreement 10-Q 12/13/1999 10.4* Wholesale Corporation Craig Jelinek and Costco January 1, 2017, between W. Employment Agreement, effective Term of the Executive Form of Indemnification 12/17/2015 10.2.3* 10-Q Fifth Restated 2002 Stock Citibank, N.A. Co-Branded Credit Incentive Plan 10.2.2* Sixth Restated 2002 Stock 8-K 10-Q 2/14/2010 3/17/2010 1/31/2012 Incentive Plan Seventh Restated 2002 Stock Incentive Plan DEF 14A 12/19/2014 10.2.4* Seventh Restated 2002 Stock Incentive Plan Restricted Stock Unit Award Agreement-U.S. Employee 10-Q Filing Date Period Ending Form Herewith Filed Incorporated by Reference 11/22/2015 Seventh Restated 2002 Stock Incentive Plan Restricted Stock Unit Award Agreement-Non-U.S. Employee 10.2.5* Exhibit Number 99 65 12/17/2015 11/22/2015 Exhibit Description 10-Q/A Exhibit Description XBRL Instance Document 9/1/2013 10/16/2013 8/31/2015 Registered Public Accounting Firm 31.1 Rule 13a 14(a) Certifications 32.1 Section 1350 Certifications X 99 66 Exhibit Number 101.INS 10.2.1* Filed Herewith Form X 101.SCH XBRL Taxonomy Extension Schema Document X 101.CAL ** Portions of this exhibit have been omitted under a confidential treatment order issued by the Securities and Exchange Commission. * Management contract, compensatory plan or arrangement. Filing Date Period Ending Incorporated by Reference Presentation Linkbase Document X X X XBRL Taxonomy Extension Label Linkbase Document 101.LAB 101.DEF XBRL Taxonomy Extension Definition Linkbase Document XBRL Taxonomy Extension Calculation Linkbase Document X 101.PRE XBRL Taxonomy Extension 5/10/2015 Consent of Independent X Card Agreement 10.6.2** First Amendment to Citi, N.A. Co- Branded Credit Card Agreement 10-Q 11/22/2015 12/17/2015 10.6.3** Second Amendment to Citi, N.A. 10-Q 2/14/2016 3/9/2016 Co-Branded Credit Card Agreement 10.6.4** Third Amendment to Citi, N.A. Co- 10-K 8/28/2016 10/12/2016 Subsidiaries of the Company 21.1 10/31/2017 8-K Fiscal 2018 Executive Bonus Plan 10.7* 23.1 Agreement 3/15/2018 2/18/2018 10-Q Fourth Amendment to Citi, N.A. 10.6.5** Branded Credit Card Agreement Co-Branded Credit Card Health Plan 2. 9/2/2012 Gyeonggi-do, 14347, Korea Gwangmyeong-si Korea Region 40, Iljik-ro Japan Region 3-1-4 Ikegami-Shincho Kawasaki-ku Kawasaki-shi Kanagawa, 210-0832, Japan Calle Agustín de Betancourt, 17 Polígono Empresarial Los Gavilanes 28906 Getafe, Madrid, Spain Spain Region 91140 Villebon sur Yvette, France 1 avenue de Bréhat France Region INTERNATIONAL DIVISION United Kingdom Region 213 Hartspring Lane Watford, England WD25 8JS 4500 Still Creek Drive, Unit A Burnaby, BC V5C 0E5, Canada Western Region Ottawa, ON K2E 1C4, Canada 31 Auriga Drive CANADIAN DIVISION Eastern Region 3980 Venture Drive NW, #W100 Duluth, GA 30096 Southeast Region San Diego, CA 92117 Texas Region 1701 Dallas Parkway, Suite 201 Plano, TX 75093 Annual Meeting Thursday, January 24, 2019 at 4:00 PM Meydenbauer Center Taiwan Region 11100 NE 6th Street Independent Public Accountants KPMG LLP 1918 Eighth Avenue, Suite 2900 Seattle, WA 98101 Stock Exchange Listing The Nasdaq Global Select Market Stock Symbol: COST EASTERN DIVISION Northeast Region 45940 Horseshoe Drive, Suite 150 Sterling, VA 20166 Bellevue, Washington 98004 4649 Morena Blvd. 255 Min Shan Street Neihu, Taipei 114, Taiwan 17-21 Parramatta Rd. Operations COR000075B_0618 WHOLESALE COSTCO FSC® C132107 Paper from responsible sources MIX FSC www.fsc.org WHOLESALE GOSTOO COSTCO COSTCO WHOLESALE COSTCO Состоя Website: https://www.computershare.com/investor Lidcombe, NSW, 2141, Australia Mexico Region Boulevard Magnocentro #4 Col. San Fernando La Herradura 52765 Huixquilucan, Mexico Transfer Agent Australia Region Computershare Correspondence should be mailed to: P.O. Box 505000 Louisville, KY 40233 Overnight correspondence should be sent to: 462 South 4th Street, Suite 1600 Louisville, KY 40202 Telephone: (800) 249-8982 TDD for Hearing Impaired: (800) 490-1493 Outside U.S.: (201) 680-6578 Costco Shareholder Relations 10/19/2012 San Diego Region SOUTHWEST DIVISION Los Angeles Region Filing Date 10-Q 2/15/2015 3/11/2015 amended of Costco Wholesale Corporation 3.2 Bylaws as amended of Costco 8-K 11/2/2017 Wholesale Corporation 4.1 Form of 2.150% Senior Notes due 8-K 5/16/2017 May 18, 2021 4.2 10-K Costco Wholesale Executive 10.1* 5/16/2017 8-K Form of 3.000% Senior Notes due May 18, 2027 Period Ending 4.4 8-K Form of 2.750% Senior Notes due May 18, 2024 4.3 5/16/2017 8-K Form of 2.300% Senior Notes due May 18, 2022 5/16/2017 11000 Garden Grove Blvd., #201 Garden Grove, CA 92843 Form Incorporated by Reference 1901 West 22nd Street, 2nd Floor Oak Brook, IL 60523 Midwest Region 2820 Independence Drive Livermore, CA 94551 Bay Area Region Issaquah, WA 98027 1045 Lake Drive NORTHERN DIVISION Northwest Region Canada Corporate Office 415 West Hunt Club Road Ottawa, ON K2E 1C5 (613) 221-2000 999 Lake Drive Issaquah, WA 98027 (425) 313-8100 U.S. Corporate Office Corporate, Division and Region Offices A copy of Costco's annual report to the Securities and Exchange Commission on Form 10-K and quarterly reports on Form 10-Q will be provided to any shareholder upon written request directed to Investor Relations, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, Washington 98027. Internet users can access recent sales and earnings releases, the annual report and SEC filings, as well as our Costco Online web site, at http://www.costco.com. E-mail users can direct their investor relations questions to investor@costco.com. All of the Company's filings with the SEC may be obtained at the SEC's Public Reference Room at Room 1580, 100 F Street NE, Washington, DC 20549. For information regarding the operation of the SEC's Public Reference Room, please contact the SEC at 1-800-SEC-0330. Additionally, the SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. ADDITIONAL INFORMATION - Northeast Region PART IV Item 15-Exhibits, Financial Statement Schedules (a) Articles of Incorporation as Exhibit Description 3.1 Exhibit Number Exhibits: The required exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference. All schedules have been omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements, including the notes thereto. Filed Herewith Financial Statement Schedules: See the listing of Financial Statements included as a part of this Form 10-K in Item 8 of Part Financial Statements: (c) 1. Documents filed as part of this report are as follows: (b) II. Financial Statement Schedules―None. Warehouse Operations & Facilities None. Yoon Kim GMM - Food & Sundries - Midwest Region Jim Kenyon Merchandise Accounting Controller Kathy Kearney Depot Operations Teresa Jones Real Estate - Eastern Division Jeff Ishida - Canadian Division Finance, Information Systems & Administration Ross A. Hunt GMM - Imports Mitzi Hu Payroll & Benefit Accounting Scott Howe - Canadian Division GMM - Non-Foods Graham E. Hillier GMM-Corporate Non-Foods Information Systems William Koza Robert Leiss Patrick J. Noone Quality Assurance, Food Safety - Canadian Division GMM-Corporate Foods, Foods & Sundries, Pietro Nenci GMM Corporate Non-Foods Jim Nelson GMM - Foods - Texas Region GMM - Foods - Bay Area Region Robert Murvin Tim Murphy - Midwest Region Operations Operations Bakery & Food Court Daniel McMurray Operations - Los Angeles Region Susan McConnaha GMM - Merchandising - Mexico Mark Maushund GMM - Non-Foods Steve Mantanona Judith Logan Operations - Northeast Region Robert Leuck Operations - Australia Operations - Midwest Region Timothy Haser Operations - Northwest Region David Harruff Ecommerce Liz Elsner - Canadian Division GMM-Softlines Debbie Ells Treasury Jeff Elliott Operations - Western Canada Region Heather Downie Operations - Eastern Canada Region Gino Dorico - Southeast Region Operations Guy Delmonte GMM - Foods & Sundries - Northwest Region Russ Decaire Operations - Midwest Region Wendy Davis Marketing Canadian Division Frank Farcone Operations - Los Angeles Region Timothy K. Farmer GMM-Corporate Non-Foods Christopher E. Fleming Transportation Jim Harrison GMM - Foods - Southeast Region Eric Harris Doris Harley Costco Travel Peter Gruening GMM - Non-Foods - Canadian Division Martin Groleau GMM-Corporate Foods Country Manager - Australia Nancy Griese Joseph Grachek III Real Estate Development - West Jack S. Frank GMM-Bakery & Food Court Thomas J. Fox Operations - Northeast Region Anthony Fontana - Western Canada Region Operations Internal Audit Frank Padilla GMM-Corporate Produce & Fresh Meat Thomas Padilla Country Manager - Spain Diane Tucci GMM - Fresh Foods - Canadian Division Tony Tran Publishing Corporate Marketing & Sandy Torrey Operations - Mexico Adrian Thummler Construction Todd Thull Construction H. Keith Thompson GMM-Optical, Optical Labs, Mini-labs, Pharmacy & Gasoline - Canadian Division Yves Thomas Operations - Midwest Region Brian Thomas Country Manager - Japan Ken J. Theriault Howard Tulk Operations - Azmina K. Virani Sr. GMM - Non-Foods & Ecommerce Item 16-Form 10-K Summary Karim Zeffouini GMM - Fresh Foods - Asia/Australia Earl Wiramanaden Operations Fresh Meat, Produce & Service Deli Charlie A. Winters Food Safety & Quality Assurance Craig Wilson Information Systems Chief Financial Officer - Mexico Terry Williams Janet Wiebke - Operations San Diego Region Jill Whittaker GMM-Corporate Non-Foods Jack Weisbly GMM - Food & Sundries - Los Angeles Region Sarah Wehling - Canadian Division GMM-Corporate Non-Foods Ron Damiani Country Manager - France Mauricio Talayero Kimberley L. Suchomel GMM - International Steve Supkoff Drew Sakuma Information Systems Chris Rylance Operations - Southeast Region Aldyn J. Royes GMM - Non-Foods - Canadian Division Giro Rizzuti Operations - Northeast Region Operations - Southeast Region Paul Pulver Operations - Eastern Canada Region Steven D. Powers Larry Pifer Operations - Los Angeles Region Shawn Parks Operations Business Centers Robert Parker - Eastern Canada Region Operations Daniel Parent Operations - Northwest Region Operations - Bay Area Region Art Salas U.S. Optical Debbie Sarter Operations - Los Angeles Region Scott Schruber Operations - Pharmacy Richard Stephens Operations - San Diego Region Joseph Stanovcak GMM - Foods - Northeast Region James Stafford Operations - Midwest Region Corporate Tax and Customs Compliance Dick Snyder Monica Smith Operations Ecommerce Gary Swindells General Manager - Taiwan - Corporate Non-Foods GMM Geoff Shavey Legal - Canada Stuart Shamis Operations - Northeast Region Adam Self - United Kingdom Operations Louie Silveira Operations - Southeast Region Japan Gasoline, Car Wash & Mini-labs John W. Meisenbach President and Chief Executive Officer, Costco W. Craig Jelinek Executive Vice Chair, The Blackstone Group Chairman of the Board, Costco; Hamilton E. James Chief Financial Officer, Costco Executive Vice President and Richard A. Galanti Former President and Chief Executive Officer of Emotient, Inc. BOARD OF DIRECTORS DIRECTORS AND OFFICERS Venture Partner at Sway Ventures; Kenneth D. Denman(a)(c) Former President of Yahoo! Inc. CEO and co-founder of Raftr; Susan L. Decker(a) John W. Stanton Director /s/ JOHN W. STANTON Former President of MCM, A Meisenbach Company Richard M. Libenson Director Emeritus Charles T. Munger(a)*(b) Senior Vice President, Ecommerce and Travel Senior Vice President, National Merchandising - Canada Division Donald E. Burdick Senior Vice President, Merchandising - Non-Foods & Ecommerce Andree T. Brien Senior Vice President, General Manager - Bay Area Claudine Adamo Jeffrey Abadir EXECUTIVE AND SENIOR OFFICERS (c) Nominating and Governance Committee *2018 Committee Chair (b) Compensation Committee (a) Audit Committee /s/ CHARLES T. MUNGER Charles T. Munger Director Board Committees CEO and Chairman of Grand Reserve Inn; Maggie A. Wilderotter(b)(c) Trilogy International Partners, Inc. and Trilogy Equity Partners Chairman of First Avenue Entertainment LLLP, John W. Stanton(b)* Former CEO of the Bill and Melinda Gates Foundation Founder and CEO of the Raikes Foundation; Jeffrey S. Raikes(c)* Vice Chairman of the Board of Berkshire Hathaway Inc.; Chairman of the Board of Daily Journal Corporation Former Executive Chairman of Frontier Communications Patrick J. Callans Kenneth D. Denman Director (Principal Accounting Officer) Officer and Director Executive Vice President, Chief Financial Richard A. Galanti /s/ RICHARD A. GALANTI Director President, Chief Executive Officer and By By By Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. October 25, 2018 and Director Executive Vice President, Chief Financial Officer /s/ RICHARD A. GALANTI Richard A. Galanti By COSTCO WHOLESALE CORPORATION (Registrant) Pursuant to the requirements of Section 13 or 15(d) 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. October 25, 2018 Julie L. Cruz SIGNATURES 67 (Principal Financial Officer) /s/ SUSAN L. DECKER Susan L. Decker Director By Controller Senior Vice President and Corporate Daniel M. Hines /s/ DANIEL M. HINES /s/ HAMILTON E. JAMES Hamilton E. James Chairman of the Board 88 68 Director /s/ MARY (MAGGIE) A. WILDEROTTER Mary (Maggie) A. Wilderotter /s/ KENNETH D. DENMAN By By /s/ JEFFREY S. RAIKES By John W. Meisenbach Director By /s/ JOHN W. MEISENBACH By By By Jeffrey S. Raikes Director Senior Vice President, Human Resources and Risk Management Richard Chang /s/ W. CRAIG JELINEK W. Craig Jelinek Richard C. Chavez Kathleen Ardourel Foods & Sundries - Western Canada Region James J. Andruski Information Systems Michael Anderson VICE PRESIDENTS Senior Vice President, General Manager - San Diego Region W. Richard Wilcox Executive Vice President, COO - Merchandising Ron M. Vachris Senior Vice President, Depots & Traffic John D. Thelan Senior Vice President, General Counsel & Corporate Secretary Senior Vice President, General Manager - Western Canadian Region John Sullivan David Skinner Senior Vice President, Information Systems Senior Vice President, General Manager - Southeast Region James W. Rutherford Yoram B. Rubanenko Executive Vice President, Ancillary Businesses, Manufacturing & Business Centers Global Ecommerce Marc-André Bally Business Centre and Bakery Commissary - Canadian Division Mike Cho Operations - Texas Region Senior Vice President, General Manager - Asia Michael G. Casebier Operations - Bay Area Region Paul Cano GMM - Foods - San Diego Region Deborah Calhoun Kimberly F. Brown Senior Vice President, General Manager - Eastern Canada Region Timothy L. Rose Information Systems Operations Northwest Region Christopher Bolves - San Diego Region Operations Bryan Blank Information Systems Patty Bauer Financial Accounting Controller Tiffany Barbre Timothy Bowersock Pierre Riel Operations - Texas Region Joseph P. Portera President and Chief Executive Officer W. Craig Jelinek Senior Vice President, Corporate Controller Senior Vice President, Merchandising - Foods & Sundries Daniel M. Hines Senior Vice President, General Manager - Texas Region William Hanson Darby Greek - Mexico Senior Vice President, General Manager Jaime Gonzalez James Klauer Executive Vice President, Chief Financial Officer - Midwest Region Senior Vice President, Costco Wholesale Industries & Business Development Senior Vice President, General Manager Senior Vice President, Pharmacy Senior Vice President, General Manager - Los Angeles Region Senior Vice President, Merchandising - Non-Foods & Ecommerce Caton Frates Victor A. Curtis Executive Vice President, COO - Eastern & Canadian Divisions and Chief Diversity Officer Richard Delie Richard A. Galanti Country Manager - Korea Jeffrey M. Cole John B. Gaherty Senior Vice President, General Manager - Northwest Region Stephen M. Pappas Senior Vice President, Ecommerce Executive Vice President, COO - Northern Division Senior Vice President, General Manager - Europe Mario Omoss Senior Vice President, Treasury, Financial Planning & Investor Relations Robert E. Nelson Executive Vice President, COO - International Division Executive Vice President, Chief Information Officer James P. Murphy Paul G. Moulton Senior Vice President, Construction Mike Parrott Senior Vice President, Real Estate Development Russ Miller Senior Vice President, Merchandising - Fresh Foods David Messner Jeffrey B. Lyons Senior Vice President, General Manager - Northeast Region Jeffrey R. Long Paul Latham Executive Vice President, Administration Executive Vice President, COO - Southwest Division & Mexico Ali Moayeri Senior Vice President, Membership, Marketing, Services & Franz E. Lazarus 40 Year Opened # of Whses 51.6 50 49.4 47.6 20 50 44.6 2018 21 20.8 53.9 19.3 2019 AWN THE COMPANY Average Sales Per Warehouse* (Sales In Millions) Cosice KIRKLAND TER TO RICH PRICK Costco JIMMY 60 COSTCO Millions Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983 in Seattle, Washington. In October 1993, Costco merged with The Price Company, which had pioneered the membership warehouse concept in 1976, to form Price/Costco, Inc., a Delaware corporation. In January 1997, after the spin-off of most of its non-warehouse assets to Price Enterprises, Inc., the Company changed its name to Costco Companies, Inc. On August 30, 1999, the Company reincorporated from Delaware to Washington and changed its name to Costco Wholesale Corporation, which trades on the Nasdaq Global Select Market under the symbol "COST." Costco currently operates 785 warehouses, including 546 in the United States and Puerto Rico, 100 in Canada, 39 in Mexico, 29 in the United Kingdom, 26 in Japan, 16 in Korea, 13 in Taiwan, 11 in Australia, two in Spain, one in Iceland, one in France, and one in China. Costco also operates e-commerce sites in the U.S., Canada, the United Kingdom, Mexico, Korea, Taiwan, and Japan. KEY FINANCIAL METRICS Provided below is information related to our Membership and Sales per Warehouse which supplements additional key metrics found on page 19. Paid Membership Executive WHOLESALE 2017 119 40 131 23 $ 83 85 94 112 122 $ 108 109 115 125 140 144 26 $ 99 109 113 116 124 137 144 15 DAW $ 105 115 124 118 97 $ 87 142 158 18.5 17.4 16.1 2016 29 30 30 2015 26 2014 20 20 2013 2012 22222225 $ 129 $ 116 $ 121 30 KIRKLAND Item 9. FISCAL YEAR ENDED SEPTEMBER 1, 2019 Directors, Executive Officers and Corporate Governance Executive Compensation Item 11. Item 10. PART III 64 63 63 1%80 Other Information Item 9B. 30 28 8 N N Controls and Procedures Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Financial Statements and Supplementary Data. Quantitative and Qualitative Disclosures About Market Risk 64 Management's Discussion and Analysis of Financial Condition and Results of Operations 64 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 67 65 2 10 Signatures Form 10-K Summary Item 16. Item 15. Exhibits, Financial Statement Schedules PART IV 65 65 64 J 10 10 Certain Relationships and Related Transactions, and Director Independence.. Principal Accounting Fees and Services Item 14. Item 13. Item 12. KIRKLAND Item 9A. Item 7A. Item 1B. Risk Factors Item 1A. Business Item 1. PART I TABLE OF CONTENTS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 1, 2019 COSTCO WHOLESALE CORPORATION Portions of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on January 22, 2020, are incorporated by reference into Part III of this Form 10-K. The number of shares outstanding of the registrant's common stock as of October 3, 2019 was 439,656,950. DOCUMENTS INCORPORATED BY REFERENCE Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐ NO ☑ The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 17, 2019 was 95,005,703,244. ND WATS COSTCO 2019 ANNUAL REPORT Unresolved Staff Comments . Item 8. Item 2. Item 3. 19 17 715 Selected Financial Data .... Item 6. Item 7. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. PART II Item 5. 17 17 16 16 8 3 Page Mine Safety Disclosures. Item 4. Legal Proceedings Properties. 2011 ICELAND $ 103 120 130 HIROSHIMA-1 HOKKAIDO-1 FUKUOKA - 2 GIFU-1 ISHIKAWA-1 KANAGAWA - 3 KYOTO-1 GUNMA – 1 MIYAGI -1 SAITAMA - 2 SHIZUOKA-1 TOKYO-1 TOYAMA-1 YAMAGATA-1 KOREA COSTCO.CO.KR BUSAN - 1 CHUNGCHEONGNAM-DO-1 DAEGU - 2 DAEJEON-1 OSAKA - 1 AICHI -1 COSTCO.CO.JP JAPAN Spain 2 FRANCE VILLEBON-SUR-YVETTE -1 KAUPTÚN -1 CHINA MINHANG (W SHANGHAI)-1 SPAIN HYOGO – 2 IBARAKI – 2 CHIBA - 2 GETAFE-1 SEVILLE-1 UNITED KINGDOM COSTCO.CO.UK ENGLAND -25 SCOTLAND - 3 WALES-1 GYEONGGI-DO-5 INCHEON - 1 SEJONG-1 SEOUL - 3 ULSAN – 1 TAIWAN COSTCO.COM.TW (I.R.S. Employer Identification No.) 999 Lake Drive, Issaquah, WA 98027 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (425) 313-8100 Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, $.01 Par Value Trading Symbol COST Name of each exchange on which registered The NASDAQ Global Select Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES NO □ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES NO ☑ 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 ☑ NO ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES > NO □ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act. 68 Large accelerated filer ☑ Non-accelerated filer Emerging growth company ☐ 91-1223280 11 incorporation or organization) Costco Wholesale Corporation (Exact name of registrant as specified in its charter) CHIAYI CITY-1 HSINCHU CITY -1 KAOHSIUNG CITY - 2 NEW TAIPEI CITY - 3 TAICHUNG CITY -1 TAINAN CITY-1 TAIPEI CITY -2 TAOYUAN CITY - 2 AUSTRALIA AUSTRALIA CAPITAL TERRITORY -1 NEW SOUTH WALES - 3 QUEENSLAND - 2 SOUTH AUSTRALIA - 1 VICTORIA - 4 COR000296 1019 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 1, 2019 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Washington Commission file number 0-20355 (State or other jurisdiction of Australia China 13 Sincerely, Cray Jelek Craig Jelinek President and Chief Executive Officer COSTCO 785 locations as of December 31, 2019 Mexico 39 1 Canada 100 United States and Puerto Rico 546 UNITED STATES COSTCO.COM ALABAMA -4 ALASKA - 4 ARIZONA - 18 CALIFORNIA - 128 COLORADO-14 CONNECTICUT -7 May the year ahead bring you and your families good health, happiness, peace, and prosperity. DELAWARE-1 FLORIDA-28 GEORGIA-13 We continue to improve our members' experiences, the successes of which have been validated by solid comparable sales results, shopping frequency, and membership renewals. Our expansion of self-checkout in the U.S. and Canada has benefited our warehouse operations and members by providing a more rapid and autonomous option for completing purchases, and we will continue expanding this program. Pickup lockers, which allow members to purchase certain merchandise online to be picked up at the warehouse, have been introduced at various locations and will also be expanded. We remain focused on the continued growth of our Kirkland Signature brand through the development of new items, while also seeking to establish new relationships with premium brands. In fiscal 2019, this included the addition and/or expansion of quality offerings from Apple, Columbia Sportswear, Sony and Weber (among others). To complement and support our core warehouse business, we continue to improve our e-commerce activities. New merchandise selections have driven traffic to the site, and new technology has improved delivery times. Same-day grocery delivery is now available to members within a 20-minute drive of 99% of our U.S. locations. We continue to improve the Costco App for easier functionality, including new features such as the Digital Membership Card in the U.S. and Canada, Costco Pharmacy order placement and pick-up notifications, and an option to navigate directly to member savings events. Costco Travel introduced the option of bundling hotel accommodations with airfare, which provides added value and flexibility. In fiscal 2020, we are launching e-commerce operations in Australia and Japan. Our employees are fundamental to all of our achievements. We acknowledge their importance by providing great wages and health benefits, emphasizing inclusion and diversity, providing resources to enrich and inspire, supporting leadership training, and promoting from within. From entry-level employees to senior executives, we all have a responsibility for our success. I again extend my sincere thanks to all members and employees who help make Costco one of the world's most highly regarded companies. Since we opened our doors in 1983, the world and the retail landscape have changed. The same might be said of our business, which as of the end of fiscal 2019 had grown to 782 locations, extending across multiple international borders, 254,000 employees, and 99 million Costco cardholders. With the many successes we have realized over these past 36 years, one thing has remained constant. We have remained true to our core values of doing the right thing, operating efficiently, and providing great, quality goods and services at very low prices. Our commitment to these tenets resulted in another strong year. In fiscal 2019, net sales for the 52-week year totaled $149 billion, an increase of 8%, with a comparable sales increase of 6%. Net income was $3.66 billion, or $8.26 per share, an increase of 17%. Revenue from membership fees increased 7% to $3.35 billion. In the United States and Canada, our membership renewal rate reached a record high of 91%, while worldwide our renewal rate was 88%. 2010 & Before 0 2015 2016 2017 2018 2019 Fiscal Year Totals 130 139 152 158 139 148 163 170 571 $ 139 148 157 166 177 190 197 782 $139 $ 146 $155 $ 160 $ 164 $ 162 $ 159 $ 163 $ 176 $ 182 128 136 139 172 172 172 2010 2011 2012 2013 2014 2015 2016 Fiscal Year 2017 2018 2019 *First year sales annualized. 2012 and 2017 were 53-week fiscal years December 10, 2019 Dear Shareholders: This year, we opened our first Costco in China (West Shanghai). With over 139,000 membership sign-ups by opening day, the reception was exceptional, and we look forward to future China openings. Additional warehouse openings in 2019 included 16 in the United States, one in the United Kingdom, one in Australia and one in Korea. We will continue to explore opportunities to grow worldwide. We also believe continued investment in logistics and vertical integration will reap benefits for our members, our business, and our shareholders. We expanded our depot operations and rolled out the first of several planned e-commerce fulfillment automation operations. Our poultry complex in Nebraska recently opened, and a joint partnership to develop a greenhouse will yield fresh organic lettuce out of California in fiscal 2020. 21 HAWAII - 7 IDAHO - 5 ILLINOIS-20 INDIANA - 7 IOWA - 3 KANSAS - 3 KENTUCKY -4 MARYLAND - 11 MICHOACÁN -1 MORELOS - 1 NUEVO LEÓN - 3 PUEBLA - 1 QUERÉTARO-1 QUINTANA ROO - 1 SAN LUIS POTOSÍ - 1 SINALOA - 1 SONORA - 1 TABASCO - 1 VERACRUZ-2 YUCATÁN - 1 Iceland 1 United 29 Kingdom France 1 Korea 16 Japan 26 Taiwan JALISCO - 3 MÉXICO - 5 LOUISIANA -3 COSTCO.COM.MX AGUASCALIENTES - 1 BAJA CALIFORNIA - 4 BAJA CALIFORNIA SUR-1 CHIHUAHUA -2 CIUDAD DE MÉXICO - 4 COAHUILA -1 GUANAJUATO - 3 SASKATCHEWAN - 3 MASSACHUSETTS - 6 MICHIGAN - 15 MINNESOTA - 12 MISSOURI - 6 MONTANA -5 NEBRASKA-3 NEVADA - 8 NEW HAMPSHIRE - 1 NEW JERSEY - 20 NEW MEXICO - 3 NEW YORK-19 NORTH CAROLINA - 9 NORTH DAKOTA - 1 OHIO - 12 OKLAHOMA - 2 OREGON - 13 PENNSYLVANIA - 11 SOUTH CAROLINA - 6 SOUTH DAKOTA-1 TENNESSEE - 5 TEXAS - 33 UTAH - 11 VERMONT -1 VIRGINIA - 17 WASHINGTON - 32 WISCONSIN - 9 WASHINGTON, D.C. -1 PUERTO RICO - 4 CANADA COSTCO.CA ALBERTA -17 BRITISH COLUMBIA - 14 MANITOBA - 3 NEW BRUNSWICK - 3 NEWFOUNDLAND AND LABRADOR-1 NOVA SCOTIA -2 ONTARIO - 36 QUÉBEC - 21 MEXICO 168 If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. □ Accelerated filer Smaller reporting company ☐ 63 We believe that, to varying degrees, our trademarks, trade names, copyrights, proprietary processes, trade secrets, trade dress, domain names and similar intellectual property add significant value to our business and are important to our success. We have invested significantly in the development and protection of our well-recognized brands, including the Costco Wholesale® trademarks and our private-label brand, Kirkland Signature. We believe that Kirkland Signature products are high quality, offered to our members at prices that are generally lower than national brands, and that they help lower costs, differentiate our merchandise offerings, and generally earn higher margins. We expect to continue to increase the sales penetration of our private-label items. We rely on trademark and copyright laws, trade-secret protection, and confidentiality, license and other agreements with our suppliers, employees and others to protect our intellectual property. The availability and duration of trademark registrations vary by country; however, trademarks are generally valid and may be renewed indefinitely as long as they are in use and registrations are maintained. Available Information Our U.S. website is www.costco.com. We make available through the Investor Relations section of that site, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and Forms 3, 4 and 5, and any amendments to those reports, as soon as reasonably practicable after filing such materials with or furnishing such documents to the Securities and Exchange Commission (SEC). The information found on our website is not part of this or any other report filed with or furnished to the SEC. The SEC maintains a site that contains reports, proxy and information statements, and other information regarding issuers, such as the Company, that file electronically with the SEC at www.sec.gov. We have adopted a code of ethics for senior financial officers pursuant to Section 406 of the Sarbanes-Oxley Act. Copies of the code are available free of charge by writing to Secretary, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, WA 98027. If the Company makes any amendments to this code (other than technical, administrative, or non-substantive amendments) or grants any waivers, including implicit waivers, to the CEO, chief financial officer or principal accounting officer and controller, we will disclose (on our website or in a Form 8-K report filed with the SEC) the nature of the amendment or waiver, its effective date, and to whom it applies. CO Information about our Executive Officers The executive officers of Costco, their position, and ages are listed below. All executive officers have over 25 years of service with the Company. Name W. Craig Jelinek Richard A. Galanti. . Jim C. Klauer.. Patrick J. Callans Russ D. Miller Position President and Chief Executive Officer. Mr. Jelinek has been President and Chief Executive Officer since January 2012 and a director since February 2010. He was President and Chief Operating Officer from February 2010 to December 2011. Prior to that he was Executive Vice President, Chief Operating Officer, Merchandising since 2004. Executive Vice President and Chief Financial Officer. Mr. Galanti has been a director since January 1995. Executive Vice President, Chief Operating Officer, Northern Division. Mr. Klauer was Senior Vice President, Non Foods and E-commerce merchandise, from 2013 to January 2018. Executive Vice President, Administration. Mr. Callans was Senior Vice President, Human Resources and Risk Management, from 2013 to December 2018. Executive Vice President, Chief Operating Officer, Southern Division and Mexico. Mr. Miller was Senior Vice President, Western Canada Region, from 2001 to January 2018. Executive Officer Since Age 1995 67 1993 2018 57 2019 57 2018 62 Intellectual Property Our industry is highly competitive, based on factors such as price, merchandise quality and selection, location, convenience, distribution strategy, and customer service. We compete on a worldwide basis with global, national, and regional wholesalers and retailers, including supermarkets, supercenters, internet retailers, gasoline stations, hard discounters, department and specialty stores, and operators selling a single category or narrow range of merchandise. Walmart, Target, Kroger, and Amazon.com are among our significant general merchandise retail competitors. We also compete with other warehouse clubs (primarily Walmart's Sam's Club and BJ's Wholesale Club), and many of the major metropolitan areas in the U.S. and certain of our Other International locations have multiple club operations. Competition 50 51,600 49,400 44,600 42,700 40,900 98,500 94,300 90,300 Paid cardholders (except affiliates) are eligible to upgrade to an Executive membership in the U.S. and Canada, for an additional annual fee of $60. Executive memberships are also available in Mexico, the U.K., and Korea, for which the additional annual fee varies. Executive members earn a 2% reward on qualified purchases (up to a maximum reward of $1,000 per year in the U.S. and Canada and varies in Mexico, the U.K. and Korea), which can be redeemed only at Costco warehouses. This program also offers (except in Mexico and Korea), access to additional savings and benefits on various business and consumer services, such as auto and home insurance, the Costco auto purchase program, and check printing. These services are generally provided by third parties and vary by state and country. Executive members, who represented 39% of paid members at the end of 2019, generally shop more frequently and spend more than other members. Labor Our employee count was as follows: Full-time employees Part-time employees Paul G. Moulton Total employees. 2018 2017 149,000 143,000 133,000 105,000 102,000 98,000 254,000 245,000 231,000 Approximately 16,000 employees are union employees. We consider our employee relations to be very good. 2019 Executive Vice President, Chief Information Officer. Mr. Moulton was Executive Vice President, Real Estate Development, from 2001 until March 2010. 2001 68 Given the very high volume of transactions we process it is important that we maintain uninterrupted operation of our business-critical systems. Our systems, including our back-up systems, are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, internal or external security breaches, catastrophic events such as fires, earthquakes, tornadoes and hurricanes, and errors or misfeasance by our employees. If our systems are damaged or cease to function properly, we may have to make significant investments to fix or replace them, and we may suffer interruptions in our operations. Any material interruption in these systems could have a material adverse effect on our business and results of operations. We are currently making and will continue to make investments to improve or advance critical information systems and processing capabilities. Failure to monitor and choose the right investments and implement them at the right pace could be harmful. The risk of system disruption is increased when significant system changes are undertaken, although we believe that our change management process should mitigate this risk. Excessive technological change could impact the effectiveness of adoption, and could make it more 9 difficult for us to realize benefits. Targeting the wrong opportunities, failing to make the best investments, or making an investment commitment significantly above or below our needs could result in the loss of our competitive position and adversely impact our financial condition and results of operations. The potential problems and interruptions associated with implementing technology initiatives could disrupt or reduce the efficiency of our operations. These initiatives might not provide the anticipated benefits or may provide them on a delayed schedule or at a higher cost. We previously identified a material weakness in our internal control related to ineffective information technology general controls and if we fail to maintain an effective system of internal control in the future, this could result in loss of investor confidence and adversely impact our stock price. Internal controls related to the operation of technology systems are critical to maintaining adequate internal control over financial reporting. We reported in our Annual Report on Form 10-K as of September 2, 2018, a material weakness in internal control related to ineffective information technology general controls (ITGCs) in the areas of user access and program change-management over certain information technology systems that support the Company's financial reporting processes. During 2019, we completed the remediation measures related to the material weakness and concluded that our internal control over financial reporting was effective as of September 1, 2019. Completion of remediation does not provide assurance that our remediation or other controls will continue to operate properly. If we are unable to maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to record, process and report financial information accurately, and to prepare financial statements within required time periods could be adversely affected, which could subject us to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in our financial statements and adversely impact our stock price. If we do not maintain the privacy and security of personal and business information, we could damage our reputation with members and employees, incur substantial additional costs, and become subject to litigation. We receive, retain, and transmit personal information about our members and employees and entrust that information to third-party business associates, including cloud service-providers that perform activities for us. Our warehouse and online businesses depend upon the secure transmission of confidential information over public networks, including information permitting cashless payments. A compromise of our security systems or defects within our hardware or software, or those of our business associates, that results in our members' or employees' information being obtained by unauthorized persons could adversely affect our reputation with our members and others, as well as our operations, results of operations, financial condition and liquidity, and could result in litigation, government actions, or the imposition of penalties. In addition, a breach could require expending significant additional resources related to the security of information systems and could disrupt our operations. The use of data by our business and our business associates is highly regulated in all of our operating countries. Privacy and information-security laws and regulations change, and compliance with them may result in cost increases due to, among other things, systems changes and the development of new processes. If we or those with whom we share information fail to comply with laws and regulations, such as the General Data Protection Regulation (GDPR) and California Consumer Privacy Act (CCPA), our reputation could be damaged, possibly resulting in lost business, and we could be subjected to additional legal risk or financial losses as a result of non-compliance. We have security measures and controls to protect personal and business information and continue to make investments to secure access to our information technology network. These measures may be undermined, however, due to the actions of outside parties, employee error, internal or external malfeasance, or otherwise, and, as a result an unauthorized party may obtain access to our data systems and misappropriate business and personal information. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may not immediately produce signs of intrusion, we may be unable to anticipate these techniques, timely discover or counter them, or implement adequate 10 preventative measures. Any such breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation, and potentially have an adverse effect on our business and results of operations. We are subject to payment-related risks. We accept payments using a variety of methods, including cash and checks, select credit and debit cards, and our shop card. As we offer new payment options to our members, we may be subject to additional rules, regulations, compliance requirements, and higher fraud losses. For certain payment methods, we pay interchange and other related acceptance fees, along with additional transaction processing fees. We rely on third parties to provide payment transaction processing services for credit and debit cards and our shop card. It could disrupt our business if these companies become unwilling or unable to provide these services to us. We are also subject to evolving payment card association and network operating rules, including data security rules, certification requirements and rules governing electronic funds transfers. For example, we are subject to Payment Card Industry Data Security Standards ("PCI DSS"), which contain compliance guidelines and standards with regard to our security surrounding the physical and electronic storage, processing and transmission of individual cardholder data. If our internal systems are breached or compromised, we may be liable for card re-issuance costs, subject to fines and higher transaction fees and lose our ability to accept card payments from our members, and our business and operating results could be adversely affected. We might sell products that cause illness or injury to our members, harm to our reputation, and expose us to litigation. If our merchandise, such as food and prepared food products for human consumption, drugs, children's products, pet products and durable goods, do not meet or are perceived not to meet applicable safety standards or our members' expectations regarding safety, we could experience lost sales, increased costs, litigation or reputational harm. The sale of these items involves the risk of health-related illness or injury to our members. Such illnesses or injuries could result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, manufacturing, storage, handling and transportation phases, or faulty design. Our suppliers are generally contractually required to comply with product safety laws, and we are dependent on them to ensure that the products we buy comply with safety and other standards. While we are subject to governmental inspection and regulations and work to comply in all material respects with applicable laws and regulations, we cannot be sure that consumption or use of our products will not cause illness or injury or that we will not be subject to claims, lawsuits, or government investigations relating to such matters, resulting in costly product recalls and other liabilities that could adversely affect our business and results of operations. Even if a product liability claim is unsuccessful or is not fully pursued, negative publicity could adversely affect our reputation with existing and potential members and our corporate and brand image, and these effects could be long term. If we do not successfully develop and maintain a relevant omnichannel experience for our members, our results of operations could be adversely impacted. Omnichannel retailing is rapidly evolving, and we must keep pace with changing member expectations and new developments by our competitors. Our members are increasingly using mobile phones, tablets, computers, and other devices to shop and to interact with us through social media. We are making investments in our websites and mobile applications. If we are unable to make, improve, or develop relevant member- facing technology in a timely manner, our ability to compete and our results of operations could be adversely affected. 11 Inability to attract, train and retain highly qualified employees could adversely impact our business, financial condition and results of operations. Our success depends on the continued contributions of members of our senior management and other key operations, merchandising and administrative personnel. Failure to identify and implement a succession plan for key senior management could negatively impact our business. We must attract, train and retain a large and growing number of qualified employees, while controlling related labor costs and maintaining our core values. Our ability to control labor and benefit costs is subject to numerous internal and external factors, including regulatory changes, prevailing wage rates, and healthcare and other insurance costs. We compete with other retail and non-retail businesses for these employees and invest significant resources in training and motivating them. There is no assurance that we will be able to attract or retain highly qualified employees in the future, which could have a material adverse effect on our business, financial condition and results of operations. We may incur property, casualty or other losses not covered by our insurance. The Company is predominantly self-insured for employee health care benefits, workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability, and inventory loss. Insurance coverage is maintained in certain instances to limit exposures arising from very large losses. The types and amounts of insurance may vary from time to time based on our decisions with respect to risk retention and regulatory requirements. Significant claims or events, regulatory changes, a substantial rise in costs of health care or costs to maintain our insurance or the failure to maintain adequate insurance coverage could have an adverse impact on our financial condition and results of operations. Although we maintain specific coverages for catastrophic property losses, we still bear the risk of losses incurred as a result of any physical damage to, or the destruction of, any warehouses, depots, manufacturing or home office facilities, loss or spoilage of inventory, and business interruption caused by any such events to the extent they are below catastrophic levels of coverage, as well as any losses to the extent they exceed our aggregate limits of applicable coverages. Such losses could materially impact our cash flows and results of operations. Market and Other External Risks We face strong competition from other retailers and warehouse club operators, which could adversely affect our business, financial condition and results of operations. The retail business is highly competitive. We compete for members, employees, sites, products and services and in other important respects with a wide range of local, regional and national wholesalers and retailers, both in the United States and in foreign countries, including other warehouse-club operators, supermarkets, supercenters, internet retailers, gasoline stations, hard discounters, department and specialty stores and operators selling a single category or narrow range of merchandise. Such retailers and warehouse club operators compete in a variety of ways, including pricing, selection and availability, services, location, convenience, store hours, and the attractiveness and ease of use of websites and mobile applications. The evolution of retailing in online and mobile channels has improved the ability of customers to comparison shop, which has enhanced competition. Some competitors may have greater financial resources and technology capabilities, better access to merchandise, and greater market penetration than we do. Our inability to respond effectively to competitive pressures, changes in the retail markets and member expectations could result in lost market share and negatively affect our financial results. General economic factors, domestically and internationally, may adversely affect our business, financial condition, and results of operations. Higher energy and gasoline costs, inflation, levels of unemployment, healthcare costs, consumer debt levels, foreign-currency exchange rates, unsettled financial markets, weaknesses in housing and real estate markets, reduced consumer confidence, changes and uncertainties related to government fiscal and tax policies including changes in tax rates, duties, tariffs, or other restrictions, sovereign debt crises, and other 12 We rely extensively on information technology to process transactions, compile results, and manage our business. Failure or disruption of our primary and back-up systems could adversely affect our business. A failure to adequately update our existing systems and implement new systems could harm our business and adversely affect our results of operations. We may not timely identify or effectively respond to consumer trends, which could negatively affect our relationship with our members, the demand for our products and services, and our market share. It is difficult to consistently and successfully predict the products and services that our members will desire. Our success depends, in part, on our ability to identify and respond to trends in demographics and consumer preferences. Failure to identify timely or effectively respond to changing consumer tastes, preferences (including those relating to sustainability of product sources and animal welfare) and spending patterns could negatively affect our relationship with our members, the demand for our products and services, and our market share. If we are not successful at predicting our sales trends and adjusting our purchases accordingly, we may have excess inventory, which could result in additional markdowns and reduce our operating performance. This could have an adverse effect on net sales, gross margin and operating income. We depend on the orderly operation of the merchandise receiving and distribution process, primarily through our depots. We also rely upon processing, packaging, manufacturing and other facilities to support our business, which includes the production of certain private-label items. Although we believe that our operations are efficient, disruptions due to fires, tornadoes, hurricanes, earthquakes or other catastrophic events, labor issues or other shipping problems may result in delays in the production and delivery of merchandise to our warehouses, which could adversely affect sales and the satisfaction of our members. Disruptions in our merchandise distribution or processing, packaging, manufacturing, and other facilities could adversely affect sales and member satisfaction. James P. Murphy. Executive Vice President, Chief Operating Officer, International. Mr. Murphy was Senior Vice President, International, from 2004 to October 2010. 2011 66 Joseph P. Portera 1994 67 Ron M. Vachris Executive Vice President, Chief Operating Officer, Eastern and Canadian Divisions. Mr. Portera has held these positions since 1994 and has been the Chief Diversity Officer since 2010. Executive Vice President, Ancillary Businesses, Manufacturing, and Business Centers. Mr. Rose was Senior Vice President, Merchandising, Food and Sundries and Private Label, from 1995 to December 2012. Executive Vice President, Chief Operating Officer, Merchandising. Mr. Vachris was Senior Vice President, Real Estate Development, from August 2015 to June 2016, and Senior Vice President, General Manager, Northwest Region, from 2010 to July 2015. 7 2013 53,900 67 ... 54 Item 1A-Risk Factors The risks described below could materially and adversely affect our business, financial condition and results of operations. We could also be affected by additional risks that apply to all companies operating in the U.S. and globally, as well as other risks that are not presently known to us or that we currently consider to be immaterial. These Risk Factors should be carefully reviewed in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and our consolidated financial statements and related notes in Item 8 of this Report. Business and Operating Risks We are highly dependent on the financial performance of our U.S. and Canadian operations. Our financial and operational performance is highly dependent on our U.S. and Canadian operations, which comprised 87% and 84% of net sales and operating income in 2019, respectively. Within the U.S., we are highly dependent on our California operations, which comprised 30% of U.S. net sales in 2019. Our California market, in general, has a larger percentage of higher volume warehouses as compared to our other domestic markets. Any substantial slowing or sustained decline in these operations could materially adversely affect our business and financial results. Declines in financial performance of our U.S. operations, particularly in California, and our Canadian operations could arise from, among other things: slow growth or declines in comparable warehouse sales (comparable sales); negative trends in operating expenses, including increased labor, healthcare and energy costs; failing to meet targets for warehouse openings; cannibalizing existing locations with new warehouses; shifts in sales mix toward lower gross margin products; changes or uncertainties in economic conditions in our markets, including higher levels of unemployment and depressed home values; and failing to consistently provide high quality and innovative new products. We may be unsuccessful implementing our growth strategy, including expanding our business in existing markets and new markets, which could have an adverse impact on our business, financial condition and results of operations. Our growth is dependent, in part, on our ability to acquire property and build or lease new warehouses and depots. We compete with other retailers and businesses for suitable locations. Local land use and other regulations restricting the construction and operation of our warehouses and depots, as well as local community actions opposed to the location of our warehouses or depots at specific sites and the adoption of local laws restricting our operations and environmental regulations, may impact our ability to find suitable locations and increase the cost of sites and of constructing, leasing and operating warehouses and depots. We also may have difficulty negotiating leases or purchase agreements on acceptable terms. In addition, certain jurisdictions have enacted or proposed laws and regulations that would prevent or restrict the operation or expansion plans of certain large retailers and warehouse clubs, including us. Failure to effectively manage these and other similar factors may affect our ability to timely build or lease and operate new warehouses and depots, which could have a material adverse effect on our future growth and profitability. We seek to expand in existing markets to attain a greater overall market share. A new warehouse may draw members away from our existing warehouses and adversely affect their comparable sales performance, member traffic, and profitability. We intend to continue to open warehouses in new markets, including China. Associated risks include difficulties in attracting members due to a lack of familiarity with us, attracting members of other wholesale club operators, our lesser familiarity with local member preferences, and seasonal differences in the market. Entry into new markets may bring us into competition with new competitors or with existing competitors with a large, established market presence. We cannot ensure that new warehouses and new e-commerce websites will be profitable and, as a result, future profitability could be delayed or otherwise materially adversely affected. Our failure to maintain membership growth, loyalty and brand recognition could adversely affect our results of operations. Membership loyalty and growth are essential to our business. The extent to which we achieve growth in our membership base, increase the penetration of Executive members, and sustain high renewal rates materially influences our profitability. Damage to our brands or reputation may negatively impact comparable sales, diminish member trust, and reduce renewal rates and, accordingly, net sales and membership fee revenue, negatively impacting our results of operations. We sell many products under our Kirkland Signature brand. Maintaining consistent product quality, competitive pricing, and availability of these products is essential to developing and maintaining member loyalty. These products also generally carry higher margins than national brand products carried in our warehouses and represent a growing portion of our overall sales. If the Kirkland Signature brand experiences a loss of member acceptance or confidence, our sales and gross margin results could be adversely affected. 2016 10,800 Timothy L. Rose 11,000 • Hardlines (including major appliances, electronics, health and beauty aids, hardware, and garden and patio) Food and Sundries (including dry foods, packaged foods, groceries, snack foods, candy, alcoholic and nonalcoholic beverages, and cleaning supplies) • . We offer merchandise in the following categories: In keeping with our policy of member satisfaction, we generally accept returns of merchandise. On certain electronic items, we typically have a 90-day return policy and provide, free of charge, technical support services, as well as an extended warranty. Additional third-party warranty coverage is sold on certain electronic items. Our strategy is to provide our members with a broad range of high-quality merchandise at prices we believe are consistently lower than elsewhere. We seek to limit items to fast-selling models, sizes, and colors. We carry an average of approximately 3,700 active stock keeping units (SKUs) per warehouse in our core warehouse business, significantly less than other broadline retailers. Many consumable products are offered for sale in case, carton, or multiple-pack quantities only. Our warehouses on average operate on a seven-day, 70-hour week. Gasoline operations generally have extended hours. Because the hours of operation are shorter than other retailers, and due to other efficiencies inherent in a warehouse-type operation, labor costs are lower relative to the volume of sales. Merchandise is generally stored on racks above the sales floor and displayed on pallets containing large quantities, reducing labor required. In general, with variations by country, our warehouses accept certain credit cards, including Costco co-branded cards, debit cards, cash, checks, and our proprietary stored-value card (shop card). Fresh Foods (including meat, produce, deli, and bakery) and the control of inventory. Because shoppers are attracted principally by the quality of merchandise and low prices, our warehouses are not elaborate. By strictly controlling the entrances and exits and using a membership format, we believe our inventory losses (shrinkage) are well below those of typical retail operations. We buy most of our merchandise directly from manufacturers and route it to cross-docking consolidation points (depots) or directly to our warehouses. Our depots receive large shipments from manufacturers and quickly ship these goods to warehouses. This process creates freight volume and handling efficiencies, lowering costs associated with traditional multiple-step distribution channels. We operate membership warehouses 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 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 generally sell inventory before we are required to pay for it, even while taking advantage of early payment discounts. General We report on a 52/53-week fiscal year, consisting of thirteen four-week periods and ending on the Sunday nearest the end of August. The first three quarters consist of three periods each, and the fourth quarter consists of four periods (five weeks in the thirteenth period in a 53-week year). The material seasonal impact in our operations is increased net sales and earnings during the winter holiday season. References to 2019 and 2018 relate to the 52-week fiscal years ended September 1, 2019, and September 2, 2018, respectively. References to 2017 relate to the 53-week fiscal year ended September 3, 2017. Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983, in Seattle, Washington. We are principally engaged in the operation of membership warehouses in the United States (U.S.) and Puerto Rico, Canada, United Kingdom (U.K.), Mexico, Japan, Korea, Australia, Spain, France, Iceland, China, and through a majority-owned subsidiary in Taiwan. Costco operated 782, 762, and 741 warehouses worldwide at September 1, 2019, September 2, 2018, and September 3, 2017, respectively. Our common stock trades on the NASDAQ Global Select Market, under the symbol "COST." Item 1-Business PART I 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, including, without limitation, the factors set forth in the section titled “Item 1A-Risk Factors", and other factors noted in the section titled “Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the consolidated financial statements and related notes in Item 8 of this Report. 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. 10,900 Our average warehouse space is approximately 146,000 square feet, with newer units being slightly larger. Floor plans are designed for economy and efficiency in the use of selling space, the handling of merchandise, 3 • INFORMATION RELATING TO FORWARD LOOKING STATEMENTS • 38,600 40,700 42,900 2017 2018 2019 Softlines (including apparel and small appliances) Household cards Total paid members Business, including affiliates Total cardholders. Our membership was made up of the following (in thousands): Gold Star Ancillary businesses within or next to our warehouses provide expanded products and services, encouraging members to shop more frequently. These businesses include gas stations, pharmacies, optical dispensing centers, food courts, and hearing-aid centers. The number of warehouses with gas stations varies significantly by country, and we do not currently operate our gasoline business in Korea, France or China. We operated 593 gas stations at the end of 2019. Net sales for our gasoline business represented approximately 11% of total net sales in 2019. Our e-commerce operations allow us to connect with our members online and provide additional products and services, many not found in our warehouses. At the end of 2019, we operated e-commerce websites in the U.S., Canada, Mexico, U.K., Korea, and Taiwan. Net sales for e-commerce represented approximately 4% of total net sales in 2019. Additionally, we offer business delivery, travel and various other services online in certain countries. We have direct buying relationships with many producers of national brand-name merchandise. We do not obtain a significant portion of merchandise from any one supplier. We generally have not experienced difficulty in obtaining sufficient quantities of merchandise and believe that if current sources of supply became unavailable, we would be able to obtain alternative sources without substantial disruption of our business. We also purchase and manufacture private-label merchandise, as long as quality and member demand are high and the value to our members is significant. Ancillary (including gasoline and pharmacy businesses) Certain financial information for our segments and geographic areas is included in Note 11 to the consolidated financial statements included in Item 8 of this Report. Membership Our members may utilize their memberships at our warehouses worldwide. Gold Star memberships are available to individuals; Business memberships are limited to businesses, including individuals with a business license, retail sales license or comparable document. Business members may add additional cardholders (affiliates), to which the same annual fee applies. Affiliates are not available for Gold Star members. Our annual fee for these memberships is $60 in our U.S. and Canadian operations and varies in other countries. All paid memberships include a free household card. Our member renewal rate was 91% in the U.S. and Canada and 88% on a worldwide basis at the end of 2019. The majority of members renew within six months following their renewal date. Our renewal rate is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date. 4 36,000 263.30 36,000 Maximum Dollar Value of Shares that May Yet be Purchased under the Program 39,000 $ Shares Purchased as Part of Publicly Announced Program(1) Total Number of 246.12 39,000 $ Period Purchased Average Price Paid of Shares Total Number Total fourth quarter. . . August 5-September 1, 2019. July 8-August 4, 2019. June 10-July 7, 2019 May 13-June 9, 2019 per Share 54,000 268.08 54,000 The following table sets forth information on our common stock repurchase activity for the fourth quarter of 2019 (dollars in millions, except per share data): 0 100 200 300 400 Dollars The following graph compares the cumulative total shareholder return (stock price appreciation and the reinvestment of dividends) on an investment of $100 in Costco common stock, S&P 500 Index, and the S&P 500 Retail Index over the five years from August 31, 2014, through September 1, 2019. Performance Graph 278.15 17 194,000 194,000 $ 3,943 3,961 3,976 3,985 65,000 275.37 65,000 (1) The repurchase program is conducted under a $4,000 authorization approved by our Board of Directors in April 2019, which expires in April 2023. This authorization revoked previously authorized but unused amounts, totaling $2,237. Issuer Purchases of Equity Securities 26 Our common stock is traded on the NASDAQ Global Select Market under the symbol "COST." On October 3, 2019, we had 9,115 stockholders of record. 100 546 Total.... 3 2020 (expected through 12/31/2019). 16 2019 3 13 117 686 2018 13 2017 2 21 2016.. 89 Canada United States 480 United States. 6 6 29 715 Market Information and Dividend Policy Item 5-Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities PART II Not applicable. Item 4-Mine Safety Disclosures See discussion of Legal Proceedings in Note 10 to the consolidated financial statements included in Item 8 of this Report. Item 3-Legal Proceedings 16 At the end of 2019, our warehouses contained approximately 113.9 million square feet of operating floor space: 79.9 million in the U.S.; 14.0 million in Canada; and 20.0 million in Other International. We operate 24 depots, with approximately 11.0 million square feet, for the distribution of most merchandise shipments to the warehouses. Additionally, we operate various fulfillment, processing, packaging, manufacturing and other facilities to support our business, which includes the production of certain private-label items. Our executive offices are located in Issaquah, Washington, and we maintain 19 regional offices in the U.S., Canada and Other International locations. 785 139 785 3 782 20 4 762 21 5 741 8/31/14 Payment of dividends is subject to declaration by the Board of Directors. Factors considered in determining dividends include our profitability and expected capital needs. Subject to these qualifications, we presently expect to continue to pay dividends on a quarterly basis. Costco 2% 8/30/15 10.02% 10.26% 10.40 % 10.07 % Operating income.. 4,737 $ 4,480 $ 4,111 $ 3,672 $ 3,624 10.04% Net income attributable to Costco. 3,134 2,679 2,350 2,377 Net income per diluted common share attributable to Costco 8.26 7.09 6.08 5.33 3,659 5.37 expenses as a percentage of net sales. . . 11.09 % Aug. 28, 2016 (52 weeks) Aug. 30, 2015 (52 weeks) RESULTS OF OPERATIONS Net sales $ 149,351 $ 138,434 $ 126,172 Membership fees Selling, general and administrative 6.51 3,142 2,853 $116,073 2,646 $113,666 2,533 Gross margin (1) as a percentage of net sales... 11.02% 11.04% 11.33% 11.35 % 3,352 Cash dividends declared per common share. 2.44 2.14 1 % 4% 9% 8% Canada Sept. 3, 2017 (53 weeks) Sept. 2, 2018 (52 weeks) (52 weeks) As of and for the year ended 3% Sept. 1, 2019 The following table sets forth information concerning our consolidated financial condition, operating results, and key operating metrics. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, included in Item 7 of this Report, and our consolidated financial statements and notes thereto, included in Item 8 of this Report. Item 6-Selected Financial Data S&P 500 Retail 9/1/19 9/2/18 9/3/17 18 S&P 500 8/28/16 SELECTED FINANCIAL DATA (dollars in millions, except per share data) 9% 5% (3)% 8.90 1.70 4 % 4% 7% 6% excluding the impact of changes in foreign currency and gasoline prices Changes in Total Company comparable sales 1% 0 % 4% 9% 6% Total Company (3)% (3)% 2% 11% 2% Other International. (5)% Comparison of 5-Year Cumulative Total Returns Changes in comparable sales (2) 1017 BALANCE SHEET DATA 22 686 Total Warehouses in Operation Total Other International The following schedule shows warehouse openings, net of closings and relocations, and expected openings through December 31, 2019: (1) 114 of the 162 leases are land-only leases, where Costco owns the building. 782 162 620 1 1 Comparable sales increased 6% during 2019 and were positively impacted by increases in both shopping frequency and average ticket. Comparable sales were negatively impacted by cannibalization (established warehouses losing sales to our newly opened locations). 1 11 3 13 13 16 4 12 26 13 13 29 6 1 Comparable Sales Changes in foreign currencies relative to the U.S. dollar negatively impacted net sales by approximately $1,463, or 106 basis points, compared to 2018, attributable to our Canadian and Other International Operations. The revenue recognition standard positively impacted net sales by $1,332, or 96 basis points. Changes in gasoline prices did not have a material impact on net sales. Net sales increased $10,917 or 8% during 2019, primarily due to a 6% increase in comparable sales and sales at new warehouses opened in 2018 and 2019. Other International 2% 11% 2% Total Company.. 6% 9% 4% Increases in comparable sales excluding the impact of changes in foreign currency and gasoline prices(1) 7 % Canada Other International. 6% 7% 4% 5% 4% 4% 6% 7% 4% Total Company. 6% 7% 4% (1) Excluding the impact of the revenue recognition standard for the year ended September 1, 2019. See Note 1 in Item 8. Net Sales 23 39 1 38 15 Our business requires compliance with many laws and regulations. Failure to achieve compliance could subject us to lawsuits and other proceedings, and lead to damage awards, fines, penalties, and remediation costs. We are or may become involved in a number of legal proceedings and audits, including grand jury investigations, government and agency investigations, and consumer, employment, tort, unclaimed property laws, and other litigation. We cannot predict with certainty the outcomes of these proceedings and other contingencies, including environmental remediation and other proceedings commenced by governmental authorities. The outcome of some of these proceedings, audits, unclaimed property laws, and other contingencies could require us to take, or refrain from taking, actions which could negatively affect our operations or could require us to pay substantial amounts of money, adversely affecting our financial condition and results of operations. Additionally, defending against these lawsuits and proceedings may involve significant expense and diversion of management's attention and resources. We are involved in a number of legal proceedings and audits and some of these outcomes could adversely affect our business, financial condition and results of operations. We are subject to a wide variety of federal, state, regional, local and international laws and regulations relating to the use, storage, discharge and disposal of hazardous materials, hazardous and non-hazardous wastes and other environmental matters. Failure to comply with these laws could result in harm to our members, employees or others, significant costs to satisfy environmental compliance, remediation or compensatory requirements, or the imposition of severe penalties or restrictions on operations by governmental agencies or courts that could adversely affect our business, financial condition and results of operations. Significant changes in or failure to comply with regulations relating to the use, storage, discharge and disposal of hazardous materials, hazardous and non-hazardous wastes and other environmental matters could adversely impact our business, financial condition and results of operations. We are subject to a variety of taxes and tax collection and remittance obligations in the U.S. and numerous foreign jurisdictions. Additionally, at any point in time, we may be under examination for value added, sales- based, payroll, product, import or other non-income taxes. We may recognize additional tax expense, be subject to additional tax liabilities, or incur losses and penalties, due to changes in laws, regulations, administrative practices, principles, assessments by authorities and interpretations related to tax, including tax rules in various jurisdictions. We compute our income tax provision based on enacted tax rates in the countries in which we operate. As tax rates vary among countries, a change in earnings attributable to the various jurisdictions in which we operate could result in an unfavorable change in our overall tax provision. Additionally, changes in the enacted tax rates or adverse outcomes in tax audits, including transfer pricing disputes, could have a material adverse effect on our financial condition and results of operations. We could be subject to additional tax liabilities. Accounting principles and related pronouncements, implementation guidelines, and interpretations we apply to a wide range of matters that are relevant to our business, including self-insurance liabilities and income taxes, are highly complex and involve subjective assumptions, estimates and judgments by our management. Changes in rules or interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance and have a material impact on our consolidated financial statements. Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial condition and results of operations. managing international operations, adverse tax consequences, and difficulty in enforcing intellectual property rights. At the end of 2019, we operated 239 warehouses outside of the U.S., and we plan to continue expanding our international operations. Future operating results internationally could be negatively affected by a variety of factors, many similar to those we face in the U.S., certain of which are beyond our control. These factors include political and economic conditions, regulatory constraints, currency regulations, policy changes such as the U.K.'s vote to withdraw from the European Union, commonly known as "Brexit", and other matters in any of the countries or regions in which we operate, now or in the future. Other factors that may impact international operations include foreign trade (including tariffs and trade sanctions), monetary and fiscal policies and the laws and regulations of the U.S. and foreign governments, agencies and similar organizations, and risks associated with having major facilities in locations which have been historically less stable than the U.S. Risks inherent in international operations also include, among others, the costs and difficulties of 14 Our international operations subject us to risks associated with the legislative, judicial, accounting, regulatory, political and economic factors specific to the countries or regions in which we operate, which could adversely affect our business, financial condition and results of operations. Legal and Regulatory Risks We believe that the price of our stock currently reflects high market expectations for our future operating results. Any failure to meet or delay in meeting these expectations, including our warehouse and e-commerce comparable sales growth rates, membership renewal rates, new member sign-ups, gross margin, earnings, earnings per share, new warehouse openings, or dividend or stock repurchase policies could cause the market price of our stock to decline. We use natural gas, diesel fuel, gasoline, and electricity in our distribution and warehouse operations. U.S. and foreign government regulations limiting carbon dioxide and other greenhouse gas emissions may increase compliance and merchandise costs, and other regulation affecting energy inputs could materially affect our profitability. Climate change and extreme weather conditions, such as hurricanes, thunderstorms, tornadoes, and snow or ice storms, as well as rising sea levels could affect our ability to procure commodities at costs and in quantities we currently experience. We also sell a substantial amount of gasoline, the demand for which could be impacted by concerns about climate change and which could face increased regulation. Failure to meet financial market expectations could adversely affect the market price and volatility of our stock. Natural disasters, such as hurricanes, typhoons or earthquakes, particularly in California or Washington state, where our centralized operating systems and administrative personnel are located, could negatively affect our operations and financial performance. Such events could result in physical damage to our properties, the temporary closure of warehouses, depots, manufacturing or home office facilities, the temporary lack of an adequate work force, the temporary or long-term disruption in the supply of products from some local or overseas suppliers, the temporary disruption in the transport of goods to or from overseas, delays in the delivery of goods to our warehouses or depots, and the temporary reduction in the availability of products in our warehouses. Public health issues, whether occurring in the U.S. or abroad, could disrupt our operations, disrupt the operations of suppliers or members, or have an adverse impact on consumer spending and confidence levels. These events could also reduce demand for our products or make it difficult or impossible to procure products. We may be required to suspend operations in some or all of our locations, which could have a material adverse effect on our business, financial condition and results of operations. Factors associated with climate change could adversely affect our business. Natural disasters or other catastrophes could negatively affect our business, financial condition, and results of operations. A portion of the products we purchase is paid for in a currency other than the local currency of the country in which the goods are sold. Currency fluctuations may increase our cost of goods and may not be passed on to members. Consequently, fluctuations in currency exchange rates may adversely affect our results of operations. 13 Fluctuations in foreign exchange rates may adversely affect our results of operations. During 2019, our international operations, including Canada, generated 27% and 35% of our net sales and operating income, respectively. Our international operations have accounted for an increasing portion of our warehouses, and we plan to continue international growth. To prepare our consolidated financial statements, we translate the financial statements of our international operations from local currencies into U.S. dollars using current exchange rates. Future fluctuations in exchange rates that are unfavorable to us may adversely affect the financial performance of our Canadian and Other International operations and have a corresponding adverse period-over-period effect on our results of operations. As we continue to expand internationally, our exposure to fluctuations in foreign exchange rates may increase. Our suppliers (and those they depend upon for materials and services) are subject to risks, including labor disputes, union organizing activities, financial liquidity, inclement weather, natural disasters, supply constraints, and general economic and political conditions that could limit their ability to timely provide us with acceptable merchandise. One or more of our suppliers might not adhere to our quality control, legal, regulatory, labor, environmental or animal welfare standards. These deficiencies may delay or preclude delivery of merchandise to us and might not be identified before we sell such merchandise to our members. This failure could lead to recalls and litigation and otherwise damage our reputation and our brands, increase costs, and otherwise adversely impact our business. We buy from numerous domestic and foreign manufacturers and importers. Our inability to acquire suitable merchandise on acceptable terms or the loss of key suppliers could negatively affect us. We may not be able to develop relationships with new suppliers, and products from alternative sources, if any, may be of a lesser quality or more expensive. Because of our efforts to adhere to high quality standards for which available supply may be limited, particularly for certain food items, the large volumes we demand may not be consistently available. We depend heavily on our ability to purchase quality merchandise in sufficient quantities at competitive prices. As the quantities we require continue to grow, we have no assurances of continued supply, appropriate pricing or access to new products, and any supplier has the ability to change the terms upon which they sell to us or discontinue selling to us. Member demands may lead to out-of-stock positions leading to loss of sales and profits. Suppliers may be unable to timely supply us with quality merchandise at competitive prices or may fail to adhere to our high standards, resulting in adverse effects on our business, merchandise inventories, sales, and profit margins. Prices of certain commodities, including gasoline and consumable goods used in manufacturing and our warehouse retail operations, are historically volatile and are subject to fluctuations arising from changes in domestic and international supply and demand, labor costs, competition, market speculation, government regulations, taxes and periodic delays in delivery. Rapid and significant changes in commodity prices and our ability and desire to pass them through to our members may affect our sales and profit margins. These factors could also increase our merchandise costs and selling, general and administrative expenses, and otherwise adversely affect our operations and financial results. General economic conditions can also be affected by events like the outbreak of war or acts of terrorism. economic factors could adversely affect demand for our products and services, require a change in product mix, or impact the cost of or ability to purchase inventory. Additionally, actions in various countries, particularly China and the United States, have created uncertainty with respect to tariff impacts on the costs of some of our merchandise. The degree of our exposure is dependent on (among other things) the type of goods, rates imposed, and timing of the tariffs. The impact to our business, including net sales and gross margin, will be influenced in part by merchandising and pricing strategies in response to potential cost increases by us and our competitors. While these potential impacts are uncertain, they could have an adverse impact on our financial results. 2015 and prior Item 1B-Unresolved Staff Comments 5% None. Warehouse Properties 100 14 86 543 106 437 Total Building and Building (1) and/or Own Land Lease Land Total China France Iceland Spain Australia Taiwan Korea Japan United Kingdom Mexico Canada United States and Puerto Rico At September 1, 2019, we operated 782 membership warehouses: Item 2-Properties 9% U.S. 4% 25 28 33 26 Closed due to relocation (5) (4) (2) (4) (3) End of year. . 782 762 741 715 686 MEMBERSHIP INFORMATION 2% 53,900 51,600 49,400 47,600 44,600 (1) Net sales less merchandise costs. (2) Includes net sales from warehouses and websites operating for more than one year. For 2017, the prior year includes the comparable 53 weeks. (3) Excluding the impact of the revenue recognition standard for the year ended September 1, 2019. See Note 1 in Item 8. 19 25 Item 7-Management's Discussion and Analysis of Financial Conditions and Results of Operations (amounts in millions, except per share, share, membership fee, and warehouse count data) Opened ... 686 Net property and equipment.. $ 20,890 Total assets 45,400 Long-term debt, excluding current portion . . 5,124 $ 19,681 40,830 6,487 $ 18,161 36,347 $ 17,043 $ 15,401 33,163 33,017 6,573 4,061 4,852 Costco stockholders' equity 15,243 12,799 10,778 12,079 10,617 WAREHOUSE INFORMATION Warehouses in Operation. Beginning of year 762 741 715 663 Overview Total paid members (000's) 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 may 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, all negatively impacting 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. Additionally, actions in various countries, particularly China and the United States, have created uncertainty with respect to how tariffs will affect the costs of some of our merchandise. The degree of our exposure is dependent on (among other things) the type of goods, rates imposed, and timing of the tariffs. The impact to our net sales and gross margin will be influenced in part by our merchandising and pricing strategies in response to cost increases. While these potential impacts are uncertain, they could have an adverse impact on our results. U.S. Canada Other International. Total Company... Changes in comparable sales: 2019 2018 2017 $ 149,351 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, and 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 online offerings. $126,172 9% 9% 8% 3% 10% 10% 5% 14% 8% 8% 10% 9% U.S. Canada 8% 9% Changes in net sales: Net Sales $ 138,434 Results of operations We also achieve sales growth by opening new warehouses. As our warehouse base grows, available and desirable 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. Net Sales 20 The 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 controlling 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 the compensation of our employees, our philosophy is not to seek to minimize their wages and benefits. Rather, we believe that achieving our longer-term objectives of 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 consolidated statements of income, 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 11 to the consolidated financial statements included in Item 8 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 are references 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 2019 and 2018 relate to the 52- week fiscal years ended September 1, 2019, and September 2, 2018, respectively. References to 2017 relate to the 53-week fiscal year ended September 3, 2017. 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. Highlights for 2019 included: • • • • 20 Net sales increased 8% to $149,351 driven by a 6% increase in comparable sales and sales at new warehouses opened in 2018 and 2019; to $0.65 per share and authorized a new share repurchase program in the amount of $4,000. In April 2019, the Board of Directors approved an increase in the quarterly cash dividend from $0.57 Net income increased 17% to $3,659, or $8.26 per diluted share compared to $3,134, or $7.09 per diluted share in 2018; and The effective tax rate in 2019 was 22.3% compared to 28.4% in 2018. Both years were favorably impacted by the Tax Cuts and Jobs Act (2017 Tax Act) and other net tax benefits; • Effective March 2019, starting and supervisor wages were increased and paid bonding leave was made available for hourly employees in the U.S. and Canada. The estimated annualized pre-tax cost of these increases is approximately $50-$60; • 21 Selling, general & administrative (SG&A) expenses as a percentage of net sales increased two basis points. Excluding the impact of the new revenue recognition standard on net sales, SG&A as a percentage of adjusted net sales increased 11 basis points, primarily related to a $123 charge for a product tax assessment; Gross margin percentage decreased two basis points. Excluding the impact of the new revenue recognition standard on net sales, gross margin as a percentage of adjusted net sales increased eight basis points; Membership fee revenue increased 7% to $3,352, primarily due to membership sign-ups at existing and new warehouses and the annual fee increase in the U.S. and Canada in June 2017. • We opened 25 new warehouses, including 5 relocations: 16 net new locations in the U.S. and 4 in our Other International segment, including our first warehouse in China, compared to 25 new warehouses, including 4 relocations in 2018; We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 1, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated October 10, 2019 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. Costco Wholesale Corporation: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Costco Wholesale Corporation and subsidiaries (the Company) as of September 1, 2019 and September 2, 2018, the related consolidated statements of income, comprehensive income, equity, and cash flows for the 52-week period ended September 1, 2019, the 52-week period ended September 2, 2018 and the 53-week period ended September 3, 2017, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 1, 2019 and September 2, 2018, and the results of its operations and its cash flows for the 52-week period ended September 1, 2019, the 52-week period ended September 2, 2018 and the 53-week period ended September 3, 2017, in conformity with U.S. generally accepted accounting principles. The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Evaluation of self-insurance liabilities These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters To the Stockholders and Board of Directors Basis for Opinion REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Foreign Currency Risk 29 29 We are exposed to fluctuations in prices for energy, particularly electricity and natural gas, and other commodities used in retail and manufacturing operations, which we seek to partially mitigate through fixed- price contracts for certain of our warehouses and other facilities, predominantly in the U.S. and Canada. We also enter into variable-priced contracts for some purchases of electricity and natural gas, in addition to fuel for our gas stations, on an index basis. These contracts meet the characteristics of derivative instruments, but generally qualify for the "normal purchases and normal sales" exception under authoritative guidance and require no mark-to-market adjustment. Commodity Price Risk Our foreign subsidiaries conduct certain transactions in non-functional currencies, which exposes us to fluctuations in exchange rates. We manage these fluctuations, in part, through the use of forward foreign- exchange contracts, seeking to economically hedge the impact of these fluctuations on known future expenditures denominated in a non-functional foreign-currency. The contracts are intended primarily to economically hedge exposure to U.S. dollar merchandise inventory expenditures made by our international subsidiaries whose functional currency is other than the U.S. dollar. We seek to mitigate risk with the use of these contracts and do not intend to engage in speculative transactions. For additional information related to the Company's forward foreign-exchange contracts, see Notes 1 and 3 to the consolidated financial statements included in Item 8 of this Report. A hypothetical 10% strengthening of the functional currency compared to the non-functional currency exchange rates at September 1, 2019, would have decreased the fair value of the contracts by $79 and resulted in an unrealized loss in the consolidated statements of income for the same amount. The nature and amount of our long-term debt may vary as a result of business requirements, market conditions, and other factors. As of the end of 2019, long-term debt with fixed interest rates was $6,852. Fluctuations in interest rates may affect the fair value of the fixed-rate debt. See Note 4 to the consolidated financial statements included in Item 8 of this Report for more information on our long-term debt. A 100 basis-point change in interest rates as of the end of 2019 would have had an immaterial incremental change in fair market value. For those investments that are classified as available-for-sale, the unrealized gains or losses related to fluctuations in market volatility and interest rates are reflected within stockholders' equity in accumulated other comprehensive income in the consolidated balance sheets. Our policy limits investments in the U.S. to direct U.S. government and government agency obligations, repurchase agreements collateralized by U.S. government and government agency obligations, U.S. government and government agency money market funds, and insured bank balances. Our wholly-owned captive insurance subsidiary invests in U.S. government and government agency obligations and U.S. government and government agency money market funds. Our Canadian and Other International subsidiaries' investments are primarily in money market funds, bankers' acceptances, and bank certificates of deposit, generally denominated in local currencies. Our exposure to market risk for changes in interest rates relates primarily to our investment holdings that are diversified among various instruments considered to be cash equivalents, as defined in Note 1 to the consolidated financial statements included in Item 8 of this Report, as well as short-term investments in government and agency securities with effective maturities of generally three months to five years at the date of purchase. The primary objective of our investment activities is to preserve principal and secondarily to generate yields. The majority of our short-term investments are in fixed interest-rate securities. These securities are subject to changes in fair value due to interest rate fluctuations. Interest Rate Risk Item 8-Financial Statements and Supplementary Data 28 538 Item 7A-Quantitative and Qualitative Disclosures About Market Risk (amounts in millions) 26 26 Bank Credit Facilities and Commercial Paper Programs We maintain bank credit facilities for working capital and general corporate purposes. At September 1, 2019, we had borrowing capacity under these facilities of $865, including a $400 revolving line of credit, which expires in June 2020. The Company currently has no plans to draw upon this facility. Our international operations maintain $355 of the total borrowing capacity under bank credit facilities, of which $150 is guaranteed by the Company. There were no outstanding short-term borrowings under the bank credit facilities at the end of 2019 and 2018. The Company has letter of credit facilities, for commercial and standby letters of credit, totaling $219. The outstanding commitments under these facilities at the end of 2019 totaled $145, most of which were standby letters of credit with expiration dates within one year. The bank credit facilities have various expiration dates, most of which are within one year, 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 outstanding. Contractual Obligations At September 1, 2019, our commitments to make future payments under contractual obligations were as follows: Payments Due by Fiscal Year Contractual obligations 2020 2021 to 2022 2023 to 2024 Cash dividends declared in 2019 totaled $2.44 per share, as compared to $2.14 per share in 2018. In April 2019, the Board of Directors increased our quarterly cash dividend from $0.57 to $0.65 per share. In August 2019, the Board of Directors declared a quarterly cash dividend in the amount of $0.65 per share, which was paid subsequent to the end of 2019. 2025 and thereafter Purchase obligations (merchandise)(1). $ 8,752 $ 4 $ - $ $ 8,756 Long-term debt (2) 1,828 Total 2,594 Dividends Net cash used in financing activities totaled $1,147 in 2019, compared to $1,281 in 2018. Cash flows used in financing activities primarily related to the payment of dividends, withholding taxes on stock-based awards, and repurchases of common stock. Dividends totaling $1,038 were paid during 2019, of which $250 related to the dividend declared in August 2018. In August 2019, approximately $200 and $100 of Guaranteed Senior Notes were issued by our Japanese subsidiary at fixed interest rates of 0.28% and 0.42%, respectively. Stock Repurchase Programs As discussed in Note 1 to the consolidated financial statements, the Company estimates its self-insurance liabilities by considering historical claims experience, demographic factors, severity factors, and other actuarial assumptions. The estimated self-insurance liabilities as of September 1, 2019 were $1,222 million. Net cash provided by operating activities. . The following table summarizes our significant sources and uses of cash and cash equivalents: Our effective tax rate for 2019 was favorably impacted by the reduction in the U.S. federal corporate tax rate in December 2017 from 35% to 21%, which was in effect for all of 2019, and compared to a higher blended rate effective for 2018. Net discrete tax benefits of $221 in 2019 included a benefit of $59 related to the stock-based compensation accounting standard adopted in the first quarter of 2018. This also included a tax benefit of $105 related to U.S. taxation of deemed foreign dividends, offset by losses of foreign tax credits, which impacted the effective tax rate. The tax rate for 2019 was 26.9%, excluding the net discrete tax benefits. LIQUIDITY AND CAPITAL RESOURCES 2019 $ 6,356 $ (2,865) (1,147) 2018 5,774 $ (2,947) 2017 6,726 (2,366) In April 2019, the Board of Directors authorized a new share repurchase program in the amount of $4,000, which expires in April 2023. This authorization revoked previously authorized but unused amounts, totaling $2,237. During 2019 and 2018, we repurchased 1,097,000 and 1,756,000 shares of common stock, at average prices of $225.16 and $183.13, respectively, totaling approximately $247 and $322, respectively. The remaining amount available to be purchased under our approved plan was $3,943 at the end of 2019. These amounts may differ from the stock repurchase balances in the accompanying consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of each fiscal year. 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. (1,281) Our primary sources of liquidity are cash flows generated from warehouse operations, cash and cash equivalents, and short-term investments. Cash and cash equivalents and short-term investments were $9,444 and $7,259 at the end of 2019 and 2018, respectively. Of these balances, unsettled credit and debit card receivables represented approximately $1,434 and $1,348 at the end of 2019 and 2018, respectively. These receivables generally settle within four days. Cash and cash equivalents were negatively impacted by a change in exchange rates of $15 and $37 in 2019 and 2018, respectively, and positively impacted by $25 in 2017. 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. We no longer consider earnings after 2017 of our non-U.S. consolidated subsidiaries to be indefinitely reinvested. 25 25 Cash Flows from Operating Activities Net cash provided by operating activities totaled $6,356 in 2019, compared to $5,774 in 2018. Our cash flow provided by operations is primarily derived from net sales and membership fees. Cash flow used in operations generally consists of payments to our merchandise suppliers, warehouse operating costs, including payroll and employee benefits, utilities, and credit and debit card processing fees. Cash used in operations also includes payments for income taxes. Changes in our net investment in merchandise inventories (the difference between merchandise inventories and accounts payable) is impacted by several factors, including how fast inventory is sold, payment terms with our suppliers, and the amount of payables paid early to obtain discounts from our suppliers. Cash Flows from Investing Activities Net cash used in investing activities totaled $2,865 in 2019, compared to $2,947 in 2018, and primarily related to capital expenditures. Net cash flows from investing activities also includes maturities and purchases of short-term investments. Capital Expenditures Our primary requirement 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 2019, we spent $2,998 on capital expenditures, and it is our current intention to spend approximately $3,000 to $3,200 during fiscal 2020. These expenditures are expected to be financed with cash from operations, existing cash and cash equivalents, and short-term investments. We opened 25 new warehouses, including five relocations, in 2019, and plan to open approximately 22 additional new warehouses, including three relocations, in 2020. 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 (3,218) 1,330 1,651 7,403 23 96 165 Total $ 12,032 $ 3,332 $ 1,838 $ 4,562 $ 21,764 (1) Includes only open merchandise purchase orders. (2) Includes contractual interest payments and excludes deferred issuance costs. 812 (3) Excludes common area maintenance, taxes, and insurance and have been reduced by $105 related to sub-lease income. (4) Includes build-to-suit lease obligations and contractual interest payments. (6) Includes asset retirement obligations and deferred compensation obligations. The amount excludes $27 of non-current unrecognized tax contingencies and $36 of other obligations due to uncertainty regarding the timing of future cash payments. Off-Balance Sheet Arrangements In the opinion of management, we have no off-balance sheet arrangements that have had or are reasonably likely to have a material current or future effect on our financial condition or financial statements, other than operating leases, included in the table above and discussed in Note 1 and Note 5 to the consolidated financial statements included in Item 8 of this Report. 27 22 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 assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on assumptions that we believe to be reasonable, and we continue to review and evaluate these estimates. For further information on significant accounting policies, see discussion in Note 1 to the consolidated financial statements included in Item 8 of this Report. Insurance/Self-insurance Liabilities The Company is predominantly self-insured for employee health-care benefits, workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability, and inventory loss. Insurance coverage is maintained in certain instances to seek to limit exposures arising from very large losses. We use different risk management mechanisms, including a wholly-owned captive insurance subsidiary, and participate in a reinsurance program. Liabilities associated with the risks that we retain are not discounted and are estimated by using historical claims experience, demographic factors, severity factors, and other actuarial assumptions. The costs of claims are highly unpredictable and can fluctuate as a result of inflation rates, regulatory or legal changes, and unforeseen developments in claims over time. While we believe our estimates are reasonable and provide for a certain degree of coverage to account for these variables, actual claims and costs could differ significantly from recorded liabilities. Historically, adjustments to our estimates have not been material. Income Taxes The determination of our provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment also is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits associated with uncertain tax positions are recorded only after determining a more-likely-than- not probability that the positions will withstand challenge from tax authorities. When facts and circumstances change, we reassess these positions and record any changes in the consolidated financial statements as appropriate. The 2017 Tax Act includes various provisions that significantly altered U.S. tax law, many of which impact our business (see Note 8 to the consolidated financial statements for further discussion). Recent Accounting Pronouncements See Note 1 to the consolidated financial statements included in Item 8 of this Report for a detailed description of recent accounting pronouncements. (5) Excludes certain services negotiated at the individual warehouse or regional level that are not significant and generally contain clauses allowing for cancellation without significant penalty. 65 33 32 Operating leases (3) 239 431 374 2,206 3,250 Construction and land obligations 606 8 | 614 Capital lease obligations (4) 51 91 78 544 764 Purchase obligations (equipment, services and other) 176 Other (6) 18 28 Our exposure to financial market risk results from fluctuations in interest rates and foreign currency exchange rates. We do not engage in speculative or leveraged transactions or hold or issue financial instruments for trading purposes. 30 Provision for Income Taxes We identified the evaluation of the Company's self-insurance liabilities as a critical audit matter because of the specialized skills necessary to evaluate the Company's actuarial models and the judgments required to assess the underlying assumptions made by the Company. Key assumptions underlying the Company's actuarial estimates include: reporting and payment patterns used in the projections of the ultimate loss; loss and exposure trends; the selected loss rates and initial expected losses used in the Paid and Incurred Bornhuetter-Ferguson methods; and the selection of the ultimate loss derived from the various methods. $ 2017 2018 2019 Interest expense. Interest Expense 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 and facility openings, the timing of the opening relative to our year-end, whether a warehouse is owned or leased, and whether openings are in an existing, new, or international market. In 2019, we opened our first warehouse in China. Subsequent to year end, operations commenced at our new poultry processing plant. 28 25 25 7 5 56 3 150 $ 15 18 Total warehouse openings, including relocations. Other International. Canada United States. Warehouse openings, including relocations 82 68 $ 86 $ $ Preopening expenses 2017 2018 2019 17 159 $ 134 1,061 $ 1,263 $ 1,325 22.3% 28.4% 32.8% 2017 2018 $ 2019 Provision for income taxes Effective tax rate Net cash used in investing activities. The increase in interest income in 2019 was primarily due to higher interest rates earned on higher average cash and investment balances. Foreign-currency transaction gains (losses), net include the revaluation and settlement of monetary assets and liabilities and mark-to-market adjustments for forward foreign-exchange contracts by our Canadian and Other International operations. See Derivatives and Foreign Currency sections in Item 8, Note 1 of this Report. 62 121 $ 178 $ $ 17 23 25 (5) 23 Interest expense primarily relates to Senior Notes issued by the Company. Interest expense decreased in 2019 largely due to an increase in capitalized interest associated with our new poultry processing plant. 24 Interest Income and Other, Net Interest income. Foreign-currency transaction gains (losses), net. Other, net. Interest income and other, net . Preopening 2019 2017 $ 126 $ 75 $ 50 27 2018 SG&A expenses as a percentage of net sales increased two basis points compared to 2018. Excluding the impact of the revenue recognition standard on net sales, SG&A expenses as a percentage of adjusted net sales were 10.13%, an increase of 11 basis points. This increase is largely due to a $123 charge, or eight basis points, recorded in the U.S. related to a product tax assessment. Central operating costs were higher by two basis points and stock compensation expense was higher by one basis point. Operating costs as a percent of adjusted net sales related to warehouses, ancillary, and other businesses, which includes e- commerce and travel, were flat despite the wage increases and bonding leave benefits for U.S. and Canadian hourly employees effective in March 2019. Changes in foreign currencies relative to the U.S. dollar positively impacted SG&A expenses by approximately $124 in 2019. 10.26% $ 12,950 2017 2018 2019 Membership fees as a percentage of net sales Membership fees increase. Membership fees Membership Fees October 10, 2019 Seattle, Washington We have served as the Company's auditor since 2002. /s/ KPMG LLP The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company's income tax process, including controls over the (a) identification and interpretation of the relevant provisions of the 2017 Tax Act and related Treasury Regulations and (b) calculation of the impact of the GILTI, FDII and FTC provisions. We involved tax professionals with specialized skills and knowledge who assisted in evaluating the Company's interpretation and application of the 2017 Tax Act. They developed an independent assessment of the impact of the GILTI, FDII and FTC provisions based on our understanding and interpretation, and compared it to the net tax benefits the Company recognized related to the 2017 Tax Act. We identified the evaluation of the Company's implementation of the provisions of the 2017 Tax Act as a critical audit matter. A high degree of judgment was required to interpret the impact of the new tax law on the Company, especially given the complexity of the 2017 Tax Act and related Treasury Regulations. Further, evaluating the Company's application of the GILTI, FDII and FTC provisions of the 2017 Tax Act required complex auditor judgment. As discussed in Note 8 to the consolidated financial statements, H.R. 1, the "Tax Cuts and Jobs Act" (2017 Tax Act) contains numerous provisions impacting the computation of the Company's U.S. federal and state corporate income tax provision, including the Global Intangible Low Tax Income (GILTI), Foreign Derived Intangibles Income (FDII) and Foreign Tax Credit (FTC) provisions. For the year ended September 1, 2019, the Company recognized net tax benefits of $123 million related to the 2017 Tax Act. Evaluation of the impact of the 2017 Tax Act 32 32 The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company's self-insurance process. Such controls included controls over the (a) evaluation of claims information sent to the actuary, (b) development and selection of the key assumptions used in the actuarial calculation, and (c) review of the actuarial report and evaluation of the external actuarial expert's qualifications, competency, and objectivity. We tested the claims data used in the actuarial calculation by selecting a sample and checking key attributes such as date of loss. We involved actuarial professionals with specialized skills and knowledge who assisted in: • • Assessing the actuarial models used by the Company for consistency with generally accepted actuarial standards; Evaluating the Company's ability to estimate self-insurance liabilities by comparing its historical estimates with actual loss payments; Evaluating the key assumptions underlying the Company's actuarial estimates by developing an independent expectation of the self-insurance liabilities and comparing them to the amounts recorded by the Company; and Evaluating the qualifications of the Company's actuaries by assessing their certifications, and determining whether they met the Qualification Standards of the American Academy of Actuaries to render the statements of actuarial opinion implicit in their analyses. Performance of incremental audit procedures over IT financial reporting processes $ 3,352 $ As of September 2, 2018, the Company identified a material weakness in internal control related to ineffective information technology general controls (ITGCs) in the areas of user access and program change-management over certain information technology (IT) systems that support the Company's financial reporting processes. Automated and manual business process controls that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted. While our report dated October 10, 2019 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of September 1, 2019, during a portion of the 52-week period ended September 1, 2019, the ITGCs were ineffective and the information or system generated reports produced by the affected financial reporting systems could not be relied upon without further testing. We identified the performance of the necessary incremental audit procedures over the financial information reliant on the impacted IT systems as a critical audit matter. Significant auditor judgment was required to design and execute the incremental audit procedures and to assess the sufficiency of the procedures performed and evidence obtained due to ineffective controls and the complexity of the Company's IT environment. • • Testing the underlying records of selected transaction data obtained from the impacted IT systems to support the use of the information in the conduct of the audit; and Involving forensic professionals with specialized skills and knowledge in data analysis to perform an evaluation of the journal entry data, including assessing that the entire population of automated and manual transactions has been identified. Forensic professionals also assisted with the identification of certain entries that required additional testing and for all such entries, we agreed the journal entry data to source documents. We evaluated the collective results of the incremental audit procedures performed to assess the sufficiency of audit evidence obtained related to the information produced by the impacted IT systems. 31 The primary procedures we performed to address this critical audit matter included the following. We involved IT professionals with specialized skills and knowledge to assist in the identification and design of the incremental procedures. We modified the types of procedures that were performed, which included: 50 3,142 $ 10% 2017 10.02% $ 13,876 2018 $ 14,994 10.04% 2019 SG&A expenses as a percentage of net sales. SG&A expenses. Selling, General and Administrative Expenses 23 23 The segment gross margin percentage, 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, predominantly in our warehouse ancillary and other businesses, primarily our gasoline business. This increase was partially offset by decreases in our core merchandise categories and the breakage adjustment noted above. The segment gross margin percentage in our Canadian operations decreased predominantly in hardlines and softlines and certain of our warehouse ancillary and other businesses, partially offset by an increase in fresh foods. The segment gross margin percentage in our Other International operations decreased primarily in our core merchandise categories and due to the introduction of the Executive Membership 2% reward program in Korea. This decrease was partially offset by an increase in our gasoline business. Total gross margin percentage decreased two basis points compared to 2018. Excluding the impact of the revenue recognition standard on net sales, gross margin as a percentage of adjusted net sales was 11.12%, an increase of eight basis points. This increase was primarily due to a 19 basis point increase in our warehouse ancillary and other businesses, predominantly our gasoline business. This increase was partially offset by decreases of four basis points in our core merchandise categories, four basis points due to an adjustment to our estimate of breakage on rewards earned under our co-branded credit card program and three basis points due to increased spending by members under the Executive Membership 2% reward program. Changes in foreign currencies relative to the U.S. dollar negatively impacted gross margin by approximately $155 in 2019. 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 seven basis points primarily due to increases in food and sundries and fresh foods partially offset by decreases in softlines and hardlines. This measure eliminates the impact of changes in sales penetration and gross margins from our warehouse ancillary and other businesses. $ 14,290 11.33% $126,172 111,882 $ 138,434 123,152 $ 15,282 11.04% 8% 7% 2.24% 2.27% 2.26% The increase in membership fees was primarily due to membership sign-ups at existing and new warehouses and the annual fee increase. Changes in foreign currencies relative to the U.S. dollar negatively impacted membership fees by approximately $30 in 2019. At the end of 2019, our member renewal rates were 91% in the U.S. and Canada and 88% worldwide. As reported in 2017, we increased our annual membership fees in the U.S. and Canada and in certain of our Other International operations. 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 of approximately $178 in 2018 and positively impacted 2019, primarily the first two quarters, by approximately $73. 2,853 Gross Margin Less merchandise costs. Gross margin Gross margin percentage. 2019 $ 149,351 132,886 2018 2017 $ 16,465 11.02% Net sales Net cash used in financing activities (1,313) Merchandise inventories. 3,176 2,994 Accrued member rewards 1,180 1,057 Deferred membership fees Accrued salaries and benefits 1,711 Current portion of long-term debt Other current liabilities Total current liabilities LONG-TERM DEBT, excluding current portion 1,699 90 1,624 11,237 11,679 $ $ 32,626 30,714 (11,736) (11,033) 20,890 19,681 1,025 860 TOTAL ASSETS $ 45,400 $ 40,830 LIABILITIES AND EQUITY CURRENT LIABILITIES Accounts payable 3,792 2,924 23,237 19,926 0 0 4 6,417 6,107 (1,436) (1,199) 10,258 7,887 15,243 12,799 341 304 15,584 13,103 TOTAL LIABILITIES AND EQUITY 1,140 Total equity. Total Costco stockholders' equity 5,124 6,487 OTHER LIABILITIES Total liabilities COMMITMENTS AND CONTINGENCIES EQUITY 1,455 1,314 29,816 27,727 Preferred stock $0.01 par value; 100,000,000 shares authorized; no shares issued and outstanding Common stock $0.01 par value; 900,000,000 shares authorized; 439,625,000 and 438,189,000 shares issued and outstanding Additional paid-in capital Accumulated other comprehensive loss Retained earnings. Noncontrolling interests $ 1,272 7,801 Costco Wholesale Corporation: Opinion on Internal Control Over Financial Reporting We have audited Costco Wholesale Corporation and subsidiaries' (the Company) internal control over financial reporting as of September 1, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 1, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of September 1, 2019 and September 2, 2018, the related consolidated statements of income, comprehensive income, equity, and cash flows for the 52-week period ended September 1, 2019, the 52-week period ended September 2, 2018 and the 53-week period ended September 3, 2017, and the related notes (collectively, the consolidated financial statements), and our report dated October 10, 2019 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting (Item 9A). Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. To the Stockholders and Board of Directors We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ KPMG LLP Seattle, Washington October 10, 2019 33 COSTCO WHOLESALE CORPORATION Definition and Limitations of Internal Control Over Financial Reporting REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Accounts payable. 322 Net cash used in investing activities Other investing activities, net. Additions to property and equipment. Maturities and sales of short-term investments CASH FLOWS FROM INVESTING ACTIVITIES Purchases of short-term investments. 6,726 5,774 6,356 Net cash provided by operating activities. 807 421 623 Other operating assets and liabilities, net. 2,258 1,561 CONSOLIDATED BALANCE SHEETS (amounts in millions, except par value and share data) September 1, 2019 September 2, 2018 OTHER ASSETS 1,060 1,204 1,535 1,669 11,395 11,040 1,111 321 23,485 20,289 6,417 6,193 17,136 16,107 Net property and equipment. 7,274 Less accumulated depreciation and amortization Equipment and fixtures ASSETS CURRENT ASSETS Cash and cash equivalents $ 8,384 $ 6,055 Short-term investments Receivables, net Merchandise inventories Other current assets Total current assets PROPERTY AND EQUIPMENT Land Buildings and improvements Construction in progress (1,094) 45,400 40,830 Comprehensive income Less: Comprehensive income attributable to noncontrolling interests COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO 52 Weeks Ended 52 Weeks Ended September 1, 2019 Foreign-currency translation adjustment and other, net. September 2, 2018 3,704 $ (245) 3,459 3,179 2,714 53 Weeks Ended September 3, 2017 NET INCOME INCLUDING NONCONTROLLING INTERESTS (amounts in millions) COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Diluted $ 8.26 $ 7.09 $ 6.08 Basic Diluted 439,755 438,515 442,923 441,834 438,437 440,937 The accompanying notes are an integral part of these consolidated financial statements. 35 (192) 2,987 98 2,812 37 Stock-based compensation Release of vested restricted stock units (RSUs), including tax effects. Conversion of convertible notes Repurchases of common stock Cash dividends declared and other... BALANCE AT SEPTEMBER 3, 2017... Net income. . Foreign-currency translation adjustment and other, net .. Stock-based compensation. Release of vested RSUs, including tax effects. Repurchases of common stock Cash dividends declared and other... BALANCE AT SEPTEMBER 2, (536) Net income.. Foreign-currency translation adjustment and other, net .. 6.11 BALANCE AT AUGUST 28, 2016 Shares 38 48 $ 3,422 $ 2,949 $ 2,764 The accompanying notes are an integral part of these consolidated financial statements. 36 COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF EQUITY (amounts in millions) Common Stock Additional Paid-in $ 7.15 $ $ 2,853 129,025 Merchandise costs 132,886 123,152 111,882 126,172 Selling, general and administrative. 13,876 12,950 Preopening expenses. 86 68 82 14,994 141,576 152,703 3,142 The accompanying notes are an integral part of these consolidated financial statements. 34 REVENUE Net sales. Membership fees Total revenue. OPERATING EXPENSES COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (amounts in millions, except per share data) September 1, 2019 52 Weeks Ended 52 Weeks Ended September 2, 2018 53 Weeks Ended September 3, 2017 149,351 $ 138,434 $ 3,352 Operating income 4,737 4,480 4,111 3,179 2,714 Net income attributable to noncontrolling interests.... (45) (45) (35) NET INCOME ATTRIBUTABLE TO COSTCO $ 3,659 $ 3,134 $ 2,679 NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO: Basic 3,704 8.32 $ Net income including noncontrolling interests.. 1,263 OTHER INCOME (EXPENSE) Interest expense Interest income and other, net INCOME BEFORE INCOME TAXES. (150) (159) (134) 178 121 62 4,765 4,442 4,039 Provision for income taxes 1,061 1,325 (1,060) Shares used in calculation (000's) 1,231 3,179 45 3,134 3,134 11,079 301 (185) 10,778 (1,014) — (3,945) (3,945) (3,945) (2) 2 5,988 (185) (7) (192) (936) (939) 3 (322) (322) (296) (26) (1,756) (217) (217) (217) 2,741 547 547 547 (473) (473) (432) (2,998) $ Total Equity Interests Noncontrolling Stockholders' Equity Retained Earnings Income (Loss) Comprehensive Total Costco Other Accumulated (1,097) 6,107 4 438,189 (1,099) - (35) $ 7,686 $ 253 $ 12,332 5 (165) (165) 2,673 518 518 98 13 85 518 85 5 2,714 35 35 2,679 2,679 12,079 $ 18 (971) 7,887 2,714 $ 3,179 $ 3,704 $ Adjustments to reconcile net income including noncontrolling interests Net income including noncontrolling interests September 3, 2017 September 2, 2018 Ended 53 Weeks 52 Weeks Ended 52 Weeks Ended September 1, 2019 CASH FLOWS FROM OPERATING ACTIVITIES to net cash provided by operating activities: Depreciation and amortization. 1,492 (1,279) (29) (49) 147 (14) (6) 9 514 544 595 Deferred income taxes. . Other non-cash operating activities, net. Stock-based compensation. 1,370 1,437 (amounts in millions) COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS 37 The accompanying notes are an integral part of these consolidated financial statements. 598 598 598 (245) (8) (237) (237) 3,704 Changes in operating assets and liabilities: 13,103 304 ཙྪཝཱ 3,659 3,659 12,799 2,533 - (2 (1,199) (272) (272) $ 15,584 341 15,243 $ $ (1,436) $ 10,258 6,417 $ 4 $ 439,625 $ (1,057) (1,057) Cash dividends declared and other. BALANCE AT SEPTEMBER 1, 2019.. (247) (247) (231) (16) (272) 5,800 45 - CASH AND CASH EQUIVALENTS BEGINNING OF YEAR. 1,167 1,509 2,329 Net change in cash and cash equivalents 25 6,055 (37) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS. (3,218) (1,281) (1,147) Net cash used in financing activities 11 (15) 4,546 3,379 CASH AND CASH EQUIVALENTS END OF YEAR. 131 143 $ 1,204 $ 141 $ 1,187 $ (894) $ Income taxes, net. $ Interest Cash paid during the year for: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: 4,546 $ 6,055 8,384 $ $ (41) (9) Other financing activities, net. 2018.. (236) 80 210 Change in bank payments outstanding CASH FLOWS FROM FINANCING ACTIVITIES (2,366) (2,947) (2,865) 30 4 (4) 1,385 (2,502) (2,969) (2,998) (41) Proceeds from issuance of long-term debt. . 1,185 298 Repayments of long-term debt. . . (3,904) 1,078 (1,038) Cash dividend payments (469) (328) (247) Repurchases of common stock (202) (217) (272) Tax withholdings on stock-based awards.. (2,200) (86) (89) 3,782 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: (689) $ Merchandise inventories are stated at the lower of cost or market. U.S. merchandise inventories are valued by the cost method of accounting, using the last-in, first-out (LIFO) basis. The Company believes the LIFO method more fairly presents the results of operations by more closely matching current costs with current revenues. The Company records an adjustment each quarter, if necessary, for the projected annual effect of inflation or deflation, and these estimates are adjusted to actual results determined at year-end, after actual inflation or deflation rates and inventory levels have been determined. As of September 1, 2019 and September 2, 2018, U.S. merchandise inventories valued at LIFO approximated first-in, first-out (FIFO) after considering the lower of cost or market principle. Canadian and Other International merchandise inventories are predominantly valued using the cost and retail inventory methods, respectively, using the FIFO basis. The Company provides for estimated inventory losses between physical inventory counts as a percentage of net sales, using estimates based on the Company's experience. The provision is adjusted periodically to reflect physical inventory counts, which generally occur in the second and fourth fiscal quarters. Inventory cost, where appropriate, is reduced by estimates of vendor rebates when earned or as the Company progresses towards earning those rebates, provided that they are probable and reasonably estimable. Property and Equipment $ 11,395 $11,040 Merchandise inventories 1,770 1,857 1,189 1,123 $ 8,415 $ 8,081 2018 2019 Other International Canada United States Merchandise inventories consist of the following: Merchandise Inventories Property and equipment are stated at cost. In general, new building additions are classified into components, each with an estimated useful life, generally five to fifty years for buildings and improvements and three to twenty years for equipment and fixtures. Depreciation and amortization expense is computed using the straight-line method over estimated useful lives or the lease term, if shorter. Leasehold improvements made after the beginning of the initial lease term are depreciated over the shorter of the estimated useful life of the asset or the remaining term of the initial lease plus any renewals that are reasonably assured at the date the leasehold improvements are made. Receivables are recorded net of an allowance for doubtful accounts. The allowance is based on historical experience and application of the specific identification method. Write-offs of receivables were immaterial in 2019, 2018, and 2017. 41 The Company evaluates long-lived assets for impairment on an annual basis, when relocating or closing a facility, or when events or changes in circumstances may indicate the carrying amount of the asset group, generally an individual warehouse, may not be fully recoverable. For asset groups held and used, including warehouses to be relocated, the carrying value of the asset group is considered recoverable when the estimated future undiscounted cash flows generated from the use and eventual disposition of the asset group exceed the respective carrying value. In the event that the carrying value is not considered recoverable, an impairment loss is recognized for the asset group to be held and used equal to the excess of the carrying value above the estimated fair value of the asset group. For asset groups classified as held-for-sale (disposal group), the carrying value is compared to the disposal group's fair value less costs to sell. The Company estimates fair value by obtaining market appraisals from third party brokers or using other valuation techniques. There were no impairment charges recognized in 2019, 2018 or 2017. (165) Cash dividend declared, but not yet paid. + 437,204 2 $ 5,490 --- (000's) Amount Capital 437,524 $ Stock-based compensation . . Release of vested RSUs, including tax effects.. Repurchases of common stock Foreign-currency translation adjustment and other, net . . Net income. 42 The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of business. It manages these fluctuations, in part, through the use of forward foreign-exchange contracts, seeking to economically hedge the impact of fluctuations of foreign exchange on known future expenditures denominated in a non-functional foreign-currency. The contracts relate primarily to U.S. dollar merchandise inventory expenditures made by the Company's international subsidiaries with functional currencies other than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. The Company Derivatives The captive receives direct premiums, which are netted against the Company's premium costs in selling, general and administrative expenses, in the consolidated statements of income. The captive participates in a reinsurance program that includes other third-party participants. The reinsurance agreement is one year in duration, and new agreements are entered into by each participant at their discretion at the commencement of the next calendar year. The participant agreements and practices of the reinsurance program limit a participating members' individual risk. Income statement adjustments related to the reinsurance program and related impacts to the consolidated balance sheets are recognized as information becomes known. In the event the Company leaves the reinsurance program, the Company retains its primary obligation to the policyholders for prior activity. The Company is predominantly self-insured for employee health care benefits, workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability, and inventory loss. Insurance coverage is maintained in certain instances to limit exposures arising from very large losses. It uses different risk management mechanisms, including a wholly-owned captive insurance subsidiary (the captive) and participates in a reinsurance program. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated, in part, by considering historical claims experience, demographic factors, severity factors, and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends. At the end of 2019 and 2018, these insurance liabilities were $1,222 and $1,148 in the aggregate, respectively, and were included in accrued salaries and benefits and other current liabilities in the consolidated balance sheets, classified based on their nature. Insurance/Self-insurance Liabilities Repair and maintenance costs are expensed when incurred. Expenditures for remodels, refurbishments and improvements that add to or change the way an asset functions or that extend the useful life are capitalized. Assets removed during the remodel, refurbishment or improvement are retired. Assets classified as held- for-sale at the end of 2019 and 2018 were immaterial. Receivables consist primarily of vendor, reinsurance, credit card incentive, third-party pharmacy and other receivables. Vendor receivables include volume rebates or other discounts. Balances are generally presented on a gross basis, separate from any related payable due. In certain circumstances, these receivables may be settled against the related payable to that vendor, in which case the receivables are presented on a net basis. Reinsurance receivables are held by the Company's wholly-owned captive insurance subsidiary and primarily represent amounts ceded through reinsurance arrangements gross of the amounts assumed under reinsurance, which are presented within other current liabilities in the consolidated balance sheets. Credit card incentive receivables primarily represent amounts earned under the co-branded credit card arrangement in the U.S. Third-party pharmacy receivables generally relate to amounts due from members' insurers. Other receivables primarily consist of amounts due from governmental entities, mostly tax-related items. The Company capitalizes certain computer software and software development costs incurred in developing or obtaining software for internal use. During development, these costs are included in construction in progress. When the assets are ready for their intended use, these costs are included in equipment and fixtures and amortized on a straight-line basis over the estimated useful lives of the software, generally three to seven years. 40 The consolidated financial statements include the accounts of Costco, its wholly-owned subsidiaries, and subsidiaries in which it has a controlling interest. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company's equity. All material inter- company transactions between and among the Company and its consolidated subsidiaries have been eliminated in consolidation. The Company's net income excludes income attributable to the noncontrolling interest in Taiwan. During the first quarter of 2018, the Company purchased its former joint-venture partner's remaining equity interest in its Korean operations. Unless otherwise noted, references to net income relate to net income attributable to Costco. Basis of Presentation Costco Wholesale Corporation (Costco or the Company), a Washington corporation, and its subsidiaries operate membership warehouses based on the concept that offering members low prices on a limited selection of nationally-branded and private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. At September 1, 2019, Costco operated 782 warehouses worldwide: 543 in the United States (U.S.) located in 44 states, Washington, D.C., and Puerto Rico, 100 in Canada, 39 in Mexico, 29 in the United Kingdom (U.K.), 26 in Japan, 16 in Korea, 13 in Taiwan, 11 in Australia, two in Spain, and one each in Iceland, France and China. The Company operates e-commerce websites in the U.S., Canada, Mexico, U.K., Korea, and Taiwan. Description of Business Note 1-Summary of Significant Accounting Policies NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal Year End COSTCO WHOLESALE CORPORATION The accompanying notes are an integral part of these consolidated financial statements. $ 250 Receivables, Net $ 286 38 The Company operates on a 52/53 week fiscal year basis with the year ending on the Sunday closest to August 31. References to 2019 and 2018 relate to the 52-week fiscal years ended September 1, 2019, and September 2, 2018, respectively. References to 2017 relate to the 53-week fiscal year ended September 3, 2017. (amounts in millions, except share, per share, and warehouse count data) The Company accounts for certain assets and liabilities at fair value. The carrying value of the Company's financial instruments, including cash and cash equivalents, receivables and accounts payable, approximate fair value due to their short-term nature or variable interest rates. See Notes 2, 3, and 4 for the carrying value and fair value of the Company's investments, derivative instruments, and fixed-rate debt, respectively. Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. Level 3: Significant unobservable inputs that are not corroborated by market data. Level 1: Quoted market prices in active markets for identical assets or liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying a fair value hierarchy, which requires maximizing the use of observable inputs when measuring fair value. The three levels of inputs are: 40 Fair Value of Financial Instruments Current financial liabilities have fair values that approximate their carrying values. Long-term financial liabilities include the Company's long-term debt, which are recorded on the balance sheet at issuance price and adjusted for unamortized discounts or premiums and debt issuance costs, and are being amortized to interest expense over the term of the loan. The estimated fair value of the Company's long-term debt is based primarily on reported market values, recently completed market transactions, and estimates based upon interest rates, maturities, and credit. Use of Estimates The Company periodically evaluates unrealized losses in its investment securities for other-than-temporary impairment, using both qualitative and quantitative criteria. In the event a security is deemed to be other- than-temporarily impaired, the Company recognizes the loss in interest income and other, net in the consolidated statements of income. In general, short-term investments have a maturity at the date of purchase of three months to five years. Investments with maturities beyond five years may be classified, based on the Company's determination, as short-term based on their highly liquid nature and because they represent the investment of cash that is available for current operations. Short-term investments classified as available-for-sale are recorded at fair value using the specific identification method with the unrealized gains and losses reflected in accumulated other comprehensive income (loss) until realized. Realized gains and losses from the sale of available-for- sale securities, if any, are determined on a specific identification basis and are recorded in interest income and other, net in the consolidated statements of income. Short-term investments classified as held-to-maturity are financial instruments that the Company has the intent and ability to hold to maturity and are reported net of any related amortization and are not remeasured to fair value on a recurring basis. Short-Term Investments 39 The Company provides for the daily replenishment of major bank accounts as payments are presented. Included in accounts payable at the end of 2019 and 2018 are $673 and $463, respectively, representing the excess of outstanding payments over cash on deposit at the banks on which the payments were drawn. The Company considers as cash and cash equivalents all cash on deposit, highly liquid investments with a maturity of three months or less at the date of purchase, and proceeds due from credit and debit card transactions with settlement terms of up to four days. Credit and debit card receivables were $1,434 and $1,348 at the end of 2019 and 2018, respectively. Cash and Cash Equivalents The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. The Company's valuation techniques used to measure the fair value of money market mutual funds are based on quoted market prices, such as quoted net asset values published by the fund as supported in an active market. Valuation methodologies used to measure the fair value of all other non-derivative financial instruments are based on independent external valuation information. The pricing process uses data from a variety of independent external valuation information providers, including trades, bid price or spread, two- sided markets, quotes, benchmark curves including but not limited to treasury benchmarks and Libor and swap curves, discount rates, and market data feeds. All are observable in the market or can be derived principally from or corroborated by observable market data. The Company reports transfers in and out of Levels 1, 2, and 3, as applicable, using the fair value of the individual securities as of the beginning of the reporting period in which the transfer(s) occurred. 500 500 At the end of 2019 and 2018, the fair value of the Company's long-term debt, including the current portion, was approximately $6,997 and $6,492, respectively. The carrying value of long-term debt consisted of the following: 800 2.75% Senior Notes due May 2024 1,000 800 1,000 1.70% Senior Notes due December 2019 1.75% Senior Notes due February 2020 2.15% Senior Notes due May 2021 2.25% Senior Notes due February 2022 500 500 1,200 1,200 $ 2.30% Senior Notes due May 2022 2018 2019 1,000 1,000 3.00% Senior Notes due May 2027 5,124 $ 1,000 Other long-term debt consists of Guaranteed Senior Notes issued by the Company's Japanese subsidiary and are valued using Level 3 inputs. In October 2018, the Company's Japanese subsidiary repaid a Guaranteed Senior Note and in August 2019, issued approximately $200 and $100 of Guaranteed Senior Notes at fixed interest rates of 0.28% and 0.42%, respectively. Interest is payable semi-annually, and principal is due in August 2029 and August 2034, respectively. 50 50 (1) Net of unamortized debt discounts and issuance costs. 6,487 Long-term debt, excluding current portion. 90 1,699 36 29 Less unamortized debt discounts and issuance costs. Less current portion (1) ………….. 6,613 6,852 Total long-term debt . . 613 852 Other long-term debt 1,000 The Company's long-term debt consists primarily of Senior Notes, which have various principal balances, interest rates, and maturity dates as described below. The Company at its option may redeem the Senior Notes at any time, in whole or in part, at a redemption price plus accrued interest. The redemption price is equal to the greater of 100% of the principal amount or the sum of the present value of the remaining scheduled payments of principal and interest to maturity. Additionally, upon certain events, as defined by the terms of the Senior Notes, the holder has the right to require the Company to purchase this security at a price of 101% of the principal amount plus accrued and unpaid interest to the date of the event. Interest on all outstanding long-term debt is payable semi-annually. The estimated fair value of Senior Notes is valued using Level 2 inputs. Total The Company maintains various short-term bank credit facilities, with a borrowing capacity of $865 and $857, in 2019 and 2018, respectively. Borrowings on these short-term facilities were immaterial during 2019 and 2018, and there were no outstanding borrowings at the end of 2019 and 2018. $ (4) 0 15 0 Level 2 $ 0 $ 766 Level 1 Total. Forward foreign-exchange contracts, in asset position (2) Forward foreign-exchange contracts, in (liability) position (2) Investment in government and agency securities (1) Money market mutual funds (³) 2018: Forward foreign-exchange contracts, in asset position (2) Forward foreign-exchange contracts, in (liability) position (2) Investment in government and agency securities (1) 2019: The tables below present information regarding the Company's financial assets and financial liabilities that are measured at fair value on a recurring basis and indicate the level within the hierarchy reflecting the valuation techniques utilized to determine such fair value. Assets and Liabilities Measured at Fair Value on a Recurring Basis 0 $ 777 Level 1 Level 2 9 Short-Term Borrowings Note 4-Debt 49 49 Assets and liabilities recognized and disclosed at fair value on a nonrecurring basis include items such as financial assets measured at amortized cost and long-lived nonfinancial assets. These assets are measured at fair value if determined to be impaired. There were no fair value adjustments to these items during 2019 and 2018. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis During and at the end of both 2019 and 2018, the Company did not hold any Level 3 financial assets or liabilities that were measured at fair value on a recurring basis. There were no transfers in or out of Level 1 or 2 during 2019 and 2018. (3) Included in cash and cash equivalents in the accompanying balance sheet. Long-Term Debt (2) The asset and the liability values are included in other current assets and other current liabilities, respectively, in the accompanying consolidated balance sheets. 9 $ 917 $ (2) 0 16 903 0 0 (1) At September 1, 2019, $44 cash and cash equivalents and $722 short-term investments are included in the accompanying consolidated balance sheets. At September 2, 2018, immaterial cash and cash equivalents and $898 short-term investments are included in the accompanying consolidated balance sheets. Maturities of long-term debt during the next five fiscal years and thereafter are as follows: 322 $ 1,700 The Company's current quarterly dividend rate is $0.65 per share. In August 2019, the Board of Directors declared a quarterly cash dividend in the amount of $0.65 per share, which was paid subsequent to the end of 2019. Dividends Note 6-Stockholders' Equity 395 $ (26) 421 (343) 764 $ 3,250 544 2,206 39 181 39 193 38 Stock Repurchase Programs In April 2019, the Board of Directors authorized a new share repurchase program in the amount of $4,000, which expires in April 2023. This authorization revoked previously authorized but unused amounts, totaling $2,237. As of the end of 2019, the remaining amount available for stock repurchases under the approved plan was $3,943. The following table summarizes the Company's stock repurchase activity: Shares Repurchased (000's) Note 3-Fair Value Measurement 52 52 RSUS granted to employees and to non-employee directors generally vest over five and three years, respectively. Additionally, the terms of the RSUs, including performance-based awards, provide for accelerated vesting for employees and non-employee directors who have attained 25 or more and five or more years of service with the Company, respectively. Recipients are not entitled to vote or receive dividends on non-vested and undelivered shares. At the end of 2019, 15,676,000 shares were available to be granted as RSUs under the 2019 Incentive Plan. Summary of Restricted Stock Unit Activity The Company grants stock-based compensation, primarily to employees and non-employee directors. Grants to all executive officers are performance-based. Through a series of shareholder approvals, there have been amended and restated plans and new provisions implemented by the Company. RSUs are subject to quarterly vesting upon retirement or voluntary termination. Employees who attain at least 25 years of service with the Company receive shares under accelerated vesting provisions on the annual vesting date. On January 24, 2019, shareholders approved the adoption of the 2019 Incentive Plan, which replaced the Seventh Restated 2002 Stock Incentive Plan (Seventh Plan). The 2019 Incentive Plan authorized the issuance of 17,500,000 shares (10,000,000 RSUs) of common stock for future grants, plus the remaining shares that were available for grant under the Seventh Plan on January 24, 2019 and future forfeited shares from grants under the Seventh Plan up to a maximum aggregate of 27,800,000 shares (15,885,000 RSUs). The Company issues new shares of common stock upon vesting of RSUs. Shares for vested RSUs are generally delivered to participants annually, net of shares withheld for taxes. These amounts may differ from repurchases of common stock in the accompanying consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of each fiscal year. Note 7-Stock-Based Compensation Plans 2,998 202 1,756 473 157.87 183.13 247 225.16 $ Total Cost Average Price per Share 1,097 $ 2019 2018 2017 2020 53 51 Gross assets recorded under capital and build-to-suit leases were $457 and $427 at the end of 2019 and 2018, respectively. These assets are recorded net of accumulated amortization of $106 and $94 at the end of 2019 and 2018, respectively. Capital and Build-to-Suit Leases The aggregate rental expense for 2019, 2018, and 2017 was $268, $265, and $258, respectively. Sub-lease income and contingent rent were not material in 2019, 2018, or 2017. Operating Leases Note 5-Leases Total Thereafter $ 6,852 1,551 1,113 2024 94 2023 1,300 2022 1,094 2021 At the end of 2019, future minimum payments, net of sub-lease income of $105 for all years combined, under non-cancelable operating leases with terms of at least one year and capital leases were as follows: 2020 2021 2022 $ 239 $ Leases (1) Leases Capital Operating 51 229 (2) Included in other current liabilities in the accompanying consolidated balance sheets. (3) Included in other liabilities in the accompanying consolidated balance sheets. Long-term capital lease obligations less current installments (3) Less current installments (2) Net present value of minimum lease payments. Less amount representing interest Total Thereafter 2024 2023 (1) Includes build-to-suit lease obligations. 48 52 Weeks Ended September 1, 2019 338 Income Taxes The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credits and loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Avaluation allowance is established when necessary to reduce deferred tax assets to amounts that are more likely than not expected to be realized. The timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions requires significant judgment. The benefits of uncertain tax positions are recorded in the Company's consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge from tax authorities. When facts and circumstances change, the Company reassesses these probabilities and records any changes as appropriate. Net Income per Common Share Attributable to Costco The computation of basic net income per share uses the weighted average number of shares that were outstanding during the period. The computation of diluted net income per share uses the weighted average number of shares in the basic net income per share calculation plus the number of common shares that would be issued assuming vesting of all potentially dilutive common shares outstanding using the treasury stock method for shares subject to RSUs. Stock Repurchase Programs Repurchased shares of common stock are retired, in accordance with the Washington Business Corporation Act. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is deducted by allocation to additional paid-in capital and retained earnings. The amount allocated to additional paid-in capital is the current value of additional paid-in capital per share outstanding and is applied to the number of shares repurchased. Any remaining amount is allocated to retained earnings. See Note 6 for additional information. 46 46 Recent Accounting Pronouncements Adopted In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, providing for changes in the recognition of revenue from contracts with customers. The guidance requires disclosures sufficient to describe the nature, amount, timing, and uncertainty of revenue and cash flows. The Company adopted the standard in the first quarter of 2019, using the modified retrospective approach, and recorded a cumulative effect adjustment of $16 as an increase to retained earnings, which is included in cash dividend declared and other in the consolidated statements of equity. The standard impacted the presentation and timing of certain revenue transactions. Specifically, the changes included gross presentation of the Company's estimate of merchandise returns reserve and the related recoverable assets, recognizing shop card breakage over the period of redemption, and accelerating the recognition of certain e-commerce and special-order sales. Additionally, the Company's evaluation under the standard of its status as a principal in certain revenue arrangements resulted in the recognition of additional sales on a gross basis. The effect of the standard on the Company's consolidated balance sheet was an increase to other current liabilities and other current assets of $649 and $698 at adoption and at the end of 2019, respectively, related to the estimate of merchandise returns reserve and the related recoverable assets. The effect of the adoption of this standard on the Company's consolidated statement of income is as follows: Excluding ASU 2014-09 Effect Net Sales... Merchandise Costs Gross Margin (1) (1) Net sales less merchandise costs. As Reported ASU 2014-09 Effect 149,351 $ 132,886 1,332 $ 1,324 148,019 131,562 16,465 16,457 For related disaggregated revenue disclosures, see Note 11. 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 and are expensed as incurred. Preopening Expenses The Company's asset retirement obligations (ARO) primarily relate to leasehold improvements that at the end of a lease must be removed. These obligations are generally recorded as a discounted liability with an offsetting asset at the inception of the lease term based upon the estimated fair value of the costs to remove the improvements. These liabilities are accreted over time to the projected future value of the obligation. The ARO assets are depreciated using the same depreciation method as the leasehold improvement assets and are included with buildings and improvements. Estimated ARO liabilities associated with these leases were immaterial at the end of 2019 and 2018, respectively, and are included in other liabilities in the accompanying consolidated balance sheets. The Company records an asset and related financing obligation for the estimated construction costs under build-to-suit lease arrangements where it is considered the owner for accounting purposes, to the extent the Company is involved in the construction of the building or structural improvements or has construction risk prior to commencement of a lease. Upon occupancy, the Company assesses whether these arrangements qualify for sales recognition under the sale-leaseback accounting guidance. If the Company continues to be the deemed owner, it accounts for the arrangement as a financing lease. 48 seeks to mitigate risk with the use of these contracts and does not intend to engage in speculative transactions. Some of these contracts contain credit-risk-related contingent features that require settlement of outstanding contracts upon certain triggering events. At the end of 2019 and 2018, the aggregate fair value amounts of derivative instruments in a net liability position and the amount needed to settle the instruments immediately if the credit-risk-related contingent features were triggered were immaterial. The aggregate notional amounts of open, unsettled forward foreign-exchange contracts were $704 and $717 at the end of 2019 and 2018, respectively. See Note 3 for information on the fair value of unsettled forward foreign-exchange contracts at the end of 2019 and 2018. The unrealized gains or losses recognized in interest income and other, net in the accompanying consolidated statements of income relating to the net changes in the fair value of unsettled forward foreign-exchange contracts were immaterial in 2019, 2018, and 2017. The Company is exposed to fluctuations in prices for energy, particularly electricity and natural gas, and other commodity products used in retail and manufacturing operations, which it seeks to partially mitigate through the use of fixed-price contracts for certain of its warehouses and other facilities, primarily in the U.S. and Canada. The Company also enters into variable-priced contracts for some purchases of natural gas, in addition to fuel for its gas stations, on an index basis. These contracts meet the characteristics of derivative instruments, but generally qualify for the "normal purchases or normal sales" exception under authoritative guidance and require no mark-to-market adjustment. Foreign Currency The functional currencies of the Company's international subsidiaries are the local currency of the country in which the subsidiary is located. Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Translation adjustments are recorded in accumulated other comprehensive loss. Revenues and expenses of the Company's consolidated foreign operations are translated at average exchange rates prevailing during the year. The Company recognizes foreign-currency transaction gains and losses related to revaluing or settling monetary assets and liabilities denominated in currencies other than the functional currency in interest income and other, net in the accompanying consolidated statements of income. Generally, these include the U.S. dollar cash and cash equivalents and the U.S. dollar payables of consolidated subsidiaries revalued to their functional currency. Also included are realized foreign-currency gains or losses from settlements of forward foreign-exchange contracts. These items were immaterial for 2019, 2018, and 2017. Revenue Recognition The Company recognizes sales for the amount of consideration collected from the member, which includes gross shipping fees where applicable, and is net of sales taxes collected and remitted to government agencies and returns. The Company reserves for estimated returns based on historical trends in merchandise returns and reduces sales and merchandise costs accordingly. The Company records, on a gross basis, a refund liability and an asset for recovery, which are included in other current liabilities and other current assets, respectively, in the consolidated balance sheets. Merchandise Sales - The Company offers merchandise in the following core merchandise categories: food and sundries, hardlines, softlines, and fresh foods. The Company also provides expanded products and services through warehouse ancillary and other businesses. The majority of revenue from merchandise sales is recognized at the point of sale. Revenue generated through e-commerce or special orders is recognized upon shipment to the member to the extent there is no installation provided as a part of the contract. For merchandise shipped directly to the member, shipping and handling costs are expensed as incurred as fulfillment costs and included in merchandise costs in the consolidated statements of income. In certain ancillary businesses, revenue is deferred until the member picks up merchandise at the warehouse. Deferred sales are included in other current liabilities in the consolidated balance sheets. 43 Principal Versus Agent - The Company is the principal for the majority of its transactions and recognizes revenue on a gross basis. The Company is the principal when it has control of the merchandise or service before it is transferred to the member, which generally is established when Costco is primarily responsible for merchandising decisions, maintains the relationship with the member, including assurance of member service and satisfaction, and has pricing discretion. Membership Fees - The Company accounts for membership fee revenue, net of refunds, on a deferred basis, ratably over the one-year membership period. Deferred membership fees at the end of 2019 and 2018 were $1,711 and $1,624, respectively. In certain countries, the Company's Executive members qualify for a 2% reward on qualified purchases (up to a maximum of approximately $1,000 per year), which does not expire and can be redeemed only at Costco warehouses. The Company accounts for this reward as a reduction in sales, net of the estimated impact of non-redemptions (breakage), with the corresponding liability classified as accrued member rewards in the consolidated balance sheets. Estimated breakage is computed based on redemption data. For 2019, 2018 and 2017, the net reduction in sales was $1,537, $1,394, and $1,281 respectively. Recent Accounting Pronouncements Not Yet Adopted Shop Cards - The Company sells and otherwise provides proprietary shop cards that do not expire and are redeemable at the warehouse or online for merchandise or membership. Revenue from shop cards is recognized upon redemption, and estimated breakage is recognized based on redemption data. The Company accounts for outstanding shop card balances as a shop card liability, net of estimated breakage. Previously, the shop cards were branded as cash cards. Merchandise Costs Merchandise costs consist of the purchase price or manufacturing costs of inventory sold, inbound and outbound shipping charges and all costs related to the Company's depot and fulfillment operations, including freight from depots to selling warehouses, and are reduced by vendor consideration. Merchandise costs also include salaries, benefits, depreciation, and utilities in fresh foods and certain ancillary departments. Vendor Consideration The Company has agreements to receive funds from vendors for discounts and a variety of other programs. These programs are evidenced by signed agreements that are reflected in the carrying value of the inventory when earned or as the Company progresses towards earning the rebate or discount, and as a component of merchandise costs as the merchandise is sold. Other vendor consideration is generally recorded as a reduction of merchandise costs upon completion of contractual milestones, terms of the related agreement, or by another systematic approach. Selling, General and Administrative Expenses Selling, general and administrative expenses consist primarily of salaries, benefits and workers' compensation costs for warehouse employees (other than fresh foods departments and certain ancillary businesses which are reflected in merchandise costs) as well as all regional and home office employees, including buying personnel. Selling, general and administrative expenses also include substantially all building and equipment depreciation, stock compensation expense, credit and debit card processing fees, utilities, as well as other operating costs incurred to support warehouse and e-commerce website operations. 44 Retirement Plans The Company's 401(k) retirement plan is available to all U.S. employees over the age of 18 who have completed 90 days of employment. The plan allows participants to make wage deferral contributions, a portion of which the Company matches. In addition, the Company provides each eligible participant an annual discretionary contribution. The Company also has a defined contribution plan for Canadian employees and contributes a percentage of each employee's wages. Certain subsidiaries in the Company's Other International operations have defined benefit and defined contribution plans that are not material. Amounts expensed under all plans were $614, $578, and $543 for 2019, 2018, and 2017, respectively, and are predominantly included in selling, general and administrative expenses in the accompanying consolidated statements of income. Stock-Based Compensation Restricted stock units (RSUs) granted to employees generally vest over five years and allow for quarterly vesting of the pro-rata number of stock-based awards that would vest on the next anniversary of the grant date in the event of retirement or voluntary termination. Actual forfeitures are recognized as they occur. Compensation expense for stock-based awards is predominantly recognized using the straight-line method over the requisite service period for the entire award. Awards for employees and non-employee directors provide for accelerated vesting of a portion of outstanding shares based on cumulative years of service with the Company. Compensation expense for the accelerated shares recognized upon achievement of the long-service term. The cumulative amount of compensation cost recognized at any point in time equals at least the portion of the grant-date fair value of the award that is vested at that date. The fair value of RSUs is calculated as the market value of the common stock on the measurement date less the present value of the expected dividends forgone during the vesting period. Leases The Company leases land and/or buildings at warehouses and certain other office and distribution facilities, primarily under operating leases. Operating leases expire at various dates through 2068, with the exception of one lease in the U.K., which expires in 2151. These leases generally contain one or more of the following options, which the Company can exercise at the end of the initial lease term: (a) renewal for a defined number of years at the then-fair market rental rate or rate stipulated in the lease agreement; (b) purchase of the property at the then-fair market value; or (c) right of first refusal in the event of a third-party purchase offer. The Company accounts for its lease expense with free rent periods and step-rent provisions on a straight- line basis over the original term of the lease and any extension options that the Company more likely than not expects to exercise, from the date the Company has control of the property. Certain leases provide for periodic rental increases based on price indices, or the greater of minimum guaranteed amounts or sales volume. The Company has capital leases for certain warehouse locations, expiring at various dates through 2059. Capital lease assets are included in land and buildings and improvements in the accompanying consolidated balance sheets. Amortization expense on capital lease assets is recorded as depreciation expense and is included in selling, general and administrative expenses. Capital lease liabilities are recorded at the lesser of the estimated fair market value of the leased property or the net present value of the aggregate future minimum lease payments and are included in other current liabilities and other liabilities in the accompanying consolidated balance sheets. Interest on these obligations is included in interest expense in the consolidated statements of income. 45 Co-Branded Credit Card Program - Citibank, N.A. ("Citi”) became the exclusive issuer of co-branded credit cards to U.S. members in June 2016. The Company receives various forms of consideration, including a royalty on purchases made on the card outside of Costco, a portion of which, after giving rise to estimated breakage, is used to fund the rebate that cardholders receive. The rebates are issued in February and expire on December 31. Breakage is estimated based on redemption data. In February 2016, the FASB issued ASU 2016-02, which requires recognition on the balance sheet of rights and obligations created by leases with terms greater than twelve months. The standard is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. The Company plans to adopt this guidance at the beginning of its first quarter of fiscal 2020 and utilize the transition option, which allows for a cumulative-effect adjustment in the period of adoption and does not require application of the guidance to comparative periods. The primary effect of adoption will be recording right-of-use assets and corresponding lease obligations for current operating leases. The Company has substantially completed its assessment of the new standard and estimates total assets and liabilities will increase by approximately $2,400 upon adoption. The adoption is not expected to have a material impact to the Company's consolidated statements of income or cash flows. The Company continues to evaluate the related disclosure requirements. Stock-based compensation expense is predominantly included in selling, general and administrative expenses in the consolidated statements of income. Certain stock-based compensation costs are capitalized or included in the cost of merchandise. See Note 7 for additional information on the Company's stock-based compensation plans. Note 2-Investments Certificates of deposit 306 Total short-term investments. $ 1,218 $ 306 (14) $ 1,204 Gross unrecognized holding gains and losses on available-for-sale securities were not material for the years ended September 1, 2019, and September 2, 2018. At the end of 2019 and 2018, the Company's available- for-sale securities that were in a continuous unrealized-loss position were not material. There were no sales of available-for-sale securities in 2019. Proceeds from sales of available-for-sale securities were $39 and $202 during 2018, and 2017, respectively. Gross realized gains or losses from sales of available-for-sale securities were not material in 2018 and 2017. The maturities of available-for-sale and held-to-maturity securities at the end of 2019 are as follows: Available-For-Sale Cost Basis Fair Value Held-to-maturity: Held-To-Maturity 297 $ Due after one year through five years. 402 297 $ 407 338 0 Due after five years 17 18 Total $ 716 $ 47 722 $ Due in one year or less 898 $ 912 $ The Company's investments were as follows: 2019: (14) $ Available-for-sale: Cost Basis Unrealized Recorded Gains, Net Basis $ 716 $ 6 $ 722 Held-to-maturity: Certificates of deposit Government and agency securities. . 338 Available-for-sale: Total short-term investments. Recorded Basis Unrealized Losses, Net Cost 2018: Basis 1,060 6 $ 1,054 $ $ 338 $ Government and agency securities. 30,233 152,703 OPERATING EXPENSES Merchandise costs... 30,623 30,720 47,498 3,475 132,886 Selling, general and administrative 3,464 3,371 14,994 3,352 4,684 (1) 41,310 1,050 REVENUE 35,396 Second Quarter (12 Weeks) Preopening expenses Third Quarter (12 Weeks) Fourth Quarter (16 Weeks) Total (52 Weeks) 916 Net sales $ 34,311 $ 34,628 $ 33,964 $ 46,448 $ 149,351 Membership fees 758 768 Total revenue. 35,069 776 34,740 22 158 14 INCOME BEFORE INCOME TAXES 935 1,215 1,123 1,492 4,765 Provision for income taxes. 314 207 382 1,061 Net income including noncontrolling interests. 777 901 First Quarter (12 Weeks) 178 9 74 46 41 86 Operating income 949 1,203 1,122 1,463 4,737 OTHER INCOME (EXPENSE) Interest expense (36) (34) (35) (45) (150) Interest income and other, net. 22 36 52 Weeks Ended September 1, 2019 13,353 Note 12-Quarterly Financial Data (Unaudited) 224 135 1,078 4,480 754 939 2,787 1,437 18,601 $ 141,576 $ 102,286 $ 45,400 8,869 4,369 32,162 202 1,370 20,689 $ 2,046 268 655 124 1,044 4,111 626 841 2,644 16,361 $ 129,025 18,775 $ $ 93,889 $ 40,830 8,320 4,303 28,207 19,681 4,428 1,900 2,969 1,714 277 511 2,502 56,073 $ 52,362 24,570 22,620 20,583 19,948 18,879 17,849 16,590 15,387 14,537 28,571 25,475 20,841 149,351 $ 138,434 $ 126,172 59,672 $ The two tables that follow reflect the unaudited quarterly results of operations for 2019 and 2018. 2017 2019 12,339 1,820 4,002 18,161 24,068 4,471 7,808 36,347 The following table summarizes net sales by merchandise category: Food and Sundries. Hardlines Fresh Foods. Softlines Ancillary Total Net Sales 60 60 2018 1,110 1.46 $ 1.45 $ Net income attributable to 936 986 1,071 1,449 4,442 Provision for income taxes 285 TAXES 273 396 1,263 Net income including noncontrolling interests.. 651 713 762 309 INCOME BEFORE INCOME 121 51 Operating income 951 1,016 1,067 1,446 4,480 OTHER INCOME (EXPENSE) Interest expense (37) (37) (37) (48) (159) Interest income and other, net 22 7 41 1,053 3,179 Net income attributable to noncontrolling interests. . (11) Shares used in calculation (000's) Basic Diluted 437,965 440,851 439,022 441,568 438,740 441,715 438,379 442,427 438,515 441,834 CASH DIVIDENDS DECLARED PER COMMON SHARE. $ 0.50 $ 0.50 $ 0.57 $ 0.57 2.14 62 62 1.60 $ 1.71 $ 2.38 $ 7.15 1.59 $ 1.70 $ 2.36 $ 7.09 68 20,890 Diluted (12) (12) (10) (45) NET INCOME ATTRIBUTABLE TO COSTCO.. $ 640 $ 701 $ 750 $ 1,043 $ 3,134 NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO: Basic $ $ 31 12 17 $ 1.75 $ 1.73 $ 2.02 $ 2.06 $ 2.49 $ 2.01 $ 2.05 $ 2.47 $ 8.32 8.26 Shares used in calculation (000's) Basic . Diluted 439,157 442,749 440,284 442,337 439,859 442,642 439,727 439,755 443,400 442,923 CASH DIVIDENDS DECLARED PER COMMON SHARE.. $ 0.57 Diluted $ 0.57 $ 0.65 $ 0.65 $ 2.44 $ COSTCO: noncontrolling interests. (10) (12) (10) (13) (45) NET INCOME ATTRIBUTABLE TO COSTCO.. $ 767 $ 889 $ 906 $ 1,097 $ 3,659 NET INCOME PER COMMON SHARE ATTRIBUTABLE TO Basic 3,704 (1) Includes a $123 charge for a product tax assessment. First Quarter (12 Weeks) 32,361 44,411 141,576 OPERATING EXPENSES Merchandise costs. 27,617 28,733 28,131 38,671 123,152 Selling, general and administrative 3,234 3,155 4,263 13,876 Preopening expenses 32,995 61 31,809 3,142 Second Quarter (12 Weeks) Third Quarter (12 Weeks) 52 Weeks Ended September 2, 2018 Fourth Quarter (16 Weeks) Total (52 Weeks) REVENUE Net sales $ 31,117 $ 32,279 $ 31,624 $ 43,414 $ 138,434 Membership fees 692 716 737 997 Total revenue. 4,479 3,224 14,367 (42) 307 450 347 $ 1,061 $ 1,263 $ (37) 1,325 The reconciliation between the statutory tax rate and the effective rate is as follows: 2019 2018 2017 Federal taxes at statutory rate $ 1,001 In December 2017, the 2017 Tax Act was signed into law. Except for certain provisions, the 2017 Tax Act is effective for tax years beginning on or after January 1, 2018. The Company is a fiscal-year taxpayer, so most provisions became effective for 2019, including limitations on the Company's ability to claim foreign tax credits, repeal of the domestic manufacturing deduction, and limitations on certain business deductions. Provisions with significant impacts that were effective starting in the second quarter of 2018 and throughout 2019 included: a decrease in the U.S. federal income tax rate, remeasurement of certain net deferred tax liabilities, and a transition tax on deemed repatriation of certain foreign earnings. The decrease in the U.S. federal statutory income tax rate to 21.0% was effective for all of 2019 and resulted in a blended rate for the Company of 25.6% for 2018. (98) 389 487 (35) 7 550 601 809 178 190 161 26 22 8 204 212 169 405 21.0% $ 1,136 25.6% 222 $1,414 State taxes, net. (2.6) (123) (2.6) 19 0.4 Other (104) 31 (64) (1.4) (37) (0.9) Total. $ 1,061 0.7 (0.3) (14) (0.4) 171 3.6 154 3.4 116 2.9 Foreign taxes, net. (1) 0.0 32 0.7 (64) (1.6) Employee stock ownership plan (ESOP). 2017 Tax Act. (18) 35.0% 802 636 328 $ (155) 164.75 6,496 $ 167.55 The weighted-average grant date fair value of RSUs granted was $224.00, $156.19, and $144.12 in 2019, 2018, and 2017, respectively. The remaining unrecognized compensation cost related to non-vested RSUs at the end of 2019 was $694 and the weighted-average period of time over which this cost will be recognized is 1.6 years. Included in the outstanding balance at the end of 2019 were approximately 2,194,000 RSUs vested but not yet delivered. Summary of Stock-Based Compensation 155.65 The following table summarizes stock-based compensation expense and the related tax benefits under the Company's plans: 2018 2017 Stock-based compensation expense before income taxes Less income tax benefit (1) 595 $ (128) 467 $ 544 $ (116) 428 $ 514 2019 (3,719) 224.00 2,792 2,044 The following awards were outstanding at the end of 2019: • • 6,268,000 time-based RSUs that vest upon continued employment over specified periods of time; 228,000 performance-based RSUs, of which 150,000 were granted to executive officers subject to the certification of the attainment of specified performance targets for 2019. This certification occurred in September 2019, at which time a portion vested as a result of the long service of all executive officers. The remaining awards vest upon continued employment over specified periods of time. The following table summarizes RSU transactions during 2019: Number of Units (in 000's) Weighted-Average Grant Date Fair Value Outstanding at the end of 2018 Granted Vested and delivered Forfeited... Outstanding at the end of 2019 7,578 $ 140.85 (167) 347 (1) In 2019 and 2018, the income tax benefit reflects the reduction in the U.S. federal statutory income tax rate from 35% to 21%. Note 8― Taxes Current. Deferred. Total federal. State: Current. Deferred. Total state Foreign: Current. Deferred. Total foreign.. Total provision for income taxes 2019 2018 2017 Federal: 22.3% $1,263 The provisions for income taxes are as follows: 4,442 $ Income Taxes Income before income taxes is comprised of the following: Domestic Foreign Total 53 2019 2018 2017 3,591 $ 1,174 3,182 $ 1,260 2,988 1,051 $ 4,765 $ 4,039 28.4% $ 1,325 Stock-based compensation expense, net of income taxes During 2019, the Company recognized net tax benefits of $123 related to the 2017 Tax Act. This benefit primarily included $105 related to U.S. taxation of deemed foreign dividends, partially offset by losses of current year foreign tax credits. During 2018, the Company recognized a net tax expense of $19 related to the 2017 Tax Act. This expense included $142 for the estimated tax on deemed repatriation of foreign earnings, and $43 for the reduction in foreign tax credits and other immaterial items, largely offset by a tax benefit of $166 for the remeasurement of certain deferred tax liabilities. The Company is a defendant in a class action alleging violation of California Wage Order 7-2001 for failing to provide seating to member service assistants who act as greeters in the Company's California warehouses. Canela v. Costco Wholesale Corp., et al. (Case No. 5:13-CV-03598, N.D. Cal. filed July 1, 2013). The complaint seeks relief under the California Labor Code, including civil penalties and attorneys' fees. The Company filed an answer denying the material allegations of the complaint. The action has been stayed pending review by the Ninth Circuit of the order certifying a class. In January 2019, an employee brought similar claims for relief concerning Costco employees engaged at member services counters in California. Rodriguez v. Costco Wholesale Corp. (Case No. RG19001310, Alameda Superior Court filed Jan. 4, 2019). The Company filed an answer denying the material allegations of the complaint. In December 2018, a depot employee raised similar claims, alleging that depot employees in California did not receive suitable seating or appropriate workplace temperature conditions. Lane v. Costco Wholesale Corp. (Dec. 6, 2018 Notice to California Labor and Workforce Development Agency). The Company filed an answer denying the material allegations of the complaint. 57 In January 2019, a former seasonal employee filed a class action, alleging failure to provide California seasonal employees meal and rest breaks, proper wage statements, and appropriate wages. Jadan v. Costco Wholesale Corp. (Case No. 19-CV-340438 Santa Clara Superior Court filed Jan. 3, 2019). The complaint seeks relief under the California Labor Code, including civil penalties and attorneys' fees. In March 2019, employees filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide meal periods and itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. Nevarez, et ano., v. Costco Wholesale Corp., et al. (Case No. 2:19-cv-03454 C.D. Cal. Filed Mar. 25, 2019). The Company filed an answer denying the material allegations of the complaint. In May 2019, employees filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Rough v. Costco Wholesale Corp. (Case No. 2:19-cv-01340 E.D. Cal. filed May 28, 2019). Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. In June 2019, employees filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide meal and rest periods, itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Martinez v. Costco Wholesale Corp., (Case No. 3:19- cv-05624 (N.D. Cal. filed June 11, 2019). The Company filed an answer denying the material allegations of the complaint. In August 2019, Rough filed a companion case in state court seeking penalties under the California Labor Code Private Attorneys General Act. Rough v. Costco (Case No. FCS053454, Sonoma County Superior Court, filed August 23, 2019). Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. In September 2019, an employee re-filed a class action against the Company alleging claims under California law for failure to pay wages, to provide meal and rest periods and itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Mosley v. Costco Wholesale Corp. (Case No. 2:19-cv-07935, C.D. Cal. filed Sept. 12, 2019). Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. In December 2017, the United States Judicial Panel on Multidistrict Litigation consolidated numerous cases filed against various defendants by counties, cities, hospitals, Native American tribes, and third-party payors concerning the impacts of opioid abuse. In re National Prescription Opiate Litigation (MDL No. 2804) (N.D. Ohio). Included are federal cases that name the Company, including actions filed by counties and cities in Michigan, New Jersey, Oregon, Virginia and South Carolina, a third-party payor in Ohio, and class actions filed in thirty-eight states on behalf of infants born with opioid-related medical conditions. In 2019 similar actions were commenced against the Company in state courts in Utah. Claims against the Company in state courts in New Jersey and Oklahoma have been dismissed. The Company is defending all of these matters. The Company and its CEO and CFO are defendants in putative class actions brought on behalf of shareholders who acquired Company stock between June 6 and October 25, 2018. Johnson v. Costco Wholesale Corp., et al. (W.D. Wash. filed Nov. 5, 2018); Chen v. Costco Wholesale Corp., et al. (W.D. Wash. filed Dec. 11, 2018). The complaints allege violations of the federal securities laws stemming from the Company's disclosures concerning internal control over financial reporting. They seek unspecified damages, equitable relief, interest, and costs and attorneys' fees. On January 30, 2019, an order was entered consolidating the actions and a consolidated amended complaint was filed on April 16, 2019. A motion to dismiss the complaint was filed on June 7. 58 The Company is involved in a number of claims, proceedings and litigation arising from its business and property ownership. In accordance with applicable accounting guidance, the Company establishes an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. There may be exposure to loss in excess of any amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss (taking into account where applicable indemnification arrangements concerning suppliers and insurers) and the accrued amount, if any, thereof, and adjusts the amount as appropriate. As of the date of this Report, the Company has recorded immaterial accruals with respect to certain matters described below, in addition to other immaterial accruals for matters not described below. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. In each case, there is a reasonable possibility that a loss may be incurred, including a loss in excess of the applicable accrual. For matters where no accrual has been recorded, the possible loss or range of loss (including any loss in excess of the accrual) cannot, in the Company's view, be reasonably estimated because, among other things: (i) the remedies or penalties sought are indeterminate or unspecified; (ii) the legal and/ or factual theories are not well developed; and/or (iii) the matters involve complex or novel legal theories or a large number of parties. Members of the Board of Directors, one other individual, and the Company are defendants in a shareholder derivative action related to the internal controls and related disclosures identified in the putative class actions, alleging that the individual defendants breached their fiduciary duties. Wedekind v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, Richard Libenson, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (W.D. Wash. filed Dec. 11, 2018). The complaint seeks unspecified damages, disgorgement of compensation, corporate governance changes, and costs and attorneys' fees. Because the complaint is derivative in nature, it does not seek monetary damages from the Company, which is a nominal defendant. By agreement among the parties the action has been stayed pending further proceedings in the class actions. Similar actions were filed in King County Superior Court on February 20, 2019, Elliott v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, Richard Libenson, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (Case No. 19-2-04824-7), and April 16, 2019, Brad Shuman, et ano. v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (Case No. 19-2-10460-1). These actions have also been stayed. The Company does not believe that any pending claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company's financial position, results of operations or cash flows; however, it is possible that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be material to the results of an individual fiscal quarter or year. 59 59 Note 11-Segment Reporting The Company and its subsidiaries are principally engaged in the operation of membership warehouses in the U.S., Canada, Mexico, U.K., Japan, Korea, Australia, Spain, Iceland, France, and China and through a majority-owned subsidiary in Taiwan. Reportable segments are largely based on management's organization of the operating segments for operational decisions and assessments of financial performance, which considers geographic locations. The material accounting policies of the segments are as described in Note 1. Inter-segment net sales and expenses have been eliminated in computing total revenue and operating income. Certain operating expenses, predominantly stock-based compensation, incurred on behalf of the Company's Canadian and Other International operations, are included in the U.S. operations because those costs generally come under the responsibility of U.S. management. 2019 In November 2016 and September 2017, the Company received notices of violation from the Connecticut Department of Energy and Environmental Protection regarding hazardous waste practices at its Connecticut warehouses, primarily concerning unsalable pharmaceuticals. The relief to be sought is not known at this time. The Company is seeking to cooperate concerning the resolution of these notices. On February 13, 2019, the Company's affiliate in Spain received notice from the General Directorate on Environment and Sustainability of the Regional Government of Madrid that the Directorate was investigating issues concerning rain, sewage and hydrocarbon drainage related to the Company's warehouse in Getafe. In August the Company was advised that no fines would be sought in this matter. 440,937 441,834 2,500 Net income attributable to Costco Weighted average basic shares RSUs and other Weighted average diluted shares. Note 10-Commitments and Contingencies Legal Proceedings 2019 2018 2017 $ 439,755 438,515 3,659 $ 3,134 $ 2,679 438,437 3,168 442,923 3,319 Total revenue Operating income Depreciation and amortization Additions to property and equipment Total $ 111,751 $ 21,366 $ 19,586 $ 152,703 3,063 924 750 4,737 1,126 143 223 1,492 2,186 303 509 2,998 32.8% Other International Operations The following table shows the amounts used in computing net income per share and the weighted average number of shares of basic and of potentially dilutive common shares outstanding (shares in 000's): United States Operations Total assets Net property and equipment. . . Total assets 2018 Total revenue Operating income Depreciation and amortization Additions to property and equipment Net property and equipment. Total assets 2017 Total revenue Operating income Depreciation and amortization Additions to property and equipment Net property and equipment. . Disaggregated Revenue Note 9-Net Income per Common and Common Equivalent Share Canadian Operations 56 $ 74 $ 72 180 136 65 566 Net deferred tax (liabilities)/assets 484 692 (76) 809 692 (677) (478) 885 Total deferred tax liabilities Foreign branch deferreds Other Merchandise inventories 54 66 In 2019 and 2018, the Company recognized total net tax benefits of $221 and $57, which included a benefit of $59 and $33, respectively, related to the stock-based compensation accounting standard adopted in 2018 in addition to the impacts of the 2017 Tax Act noted above. In 2017, the Company's provision for income taxes was favorably impacted by a net tax benefit of $104, primarily due to the $82 tax benefit recorded in connection with the May 2017 special cash dividends paid by the Company to employees through the Company's 401(k) retirement plan. Dividends on these shares are deductible for U.S. income tax purposes. There was no similar special cash dividend in 2019 or 2018. The components of the deferred tax assets (liabilities) are as follows: Deferred tax assets: 2019 2018 Equity compensation Deferred income/membership fees Foreign tax credit carry forward. Total deferred tax assets Valuation allowance. Total net deferred tax assets Deferred tax liabilities: Property and equipment (187) (175) Accrued liabilities and reserves. (21) 6 2 6 0 (17) (4) (1) (12) (10) The gross unrecognized tax benefit includes tax positions for which the ultimate deductibility is highly certain but there is uncertainty about the timing of such deductibility. At the end of 2019 and 2018, these amounts were immaterial. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of these tax positions would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority. The total amount of such unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods is $24 and $32 at the end of 2019 and 2018, respectively. Accrued interest and penalties related to income tax matters are classified as a component of income tax expense. Interest and penalties recognized during 2019 and 2018 and accrued at the end of each respective period were not material. The Company is currently under audit by several jurisdictions in the United States and in several foreign countries. Some audits may conclude in the next 12 months and the unrecognized tax benefits recorded in relation to the audits may differ from actual settlement amounts. It is not practical to estimate the effect, if any, of any amount of such change during the next 12 months to previously recorded uncertain tax positions in connection with the audits. The Company does not anticipate that there will be a material increase or decrease in the total amount of unrecognized tax benefits in the next 12 months. The Company files income tax returns in the United States, various state and local jurisdictions, in Canada, and in several other foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local examination for years before fiscal 2014. The Company is undergoing multiple examinations for value added, sales-based, payroll, product, import or other non-income taxes in various jurisdictions. In certain cases, the Company has received assessments from the authorities. Subsequent to the end of 2019, the Company received an assessment related to a product tax audit covering multiple years. The Company recorded a charge of $123 in 2019, but plans to protest the assessment. Other possible losses or range of possible losses associated with these matters are either immaterial or an estimate of the possible loss or range of loss cannot be made at this time. If certain matters or a group of matters were to be decided adversely to the Company, it could result in a charge that might be material to the results of an individual fiscal quarter or year. (69) Other Taxes 5 36 $ 52 $ 27 $ 36 2018 $ (145) $ (1) $ The deferred tax accounts at the end of 2019 and 2018 include deferred income tax assets of $398 and $316, respectively, included in other assets; and deferred income tax liabilities of $543 and $317, respectively, included in other liabilities. (40) $ (954) $ (693) The Company no longer considers fiscal year earnings of our non-U.S. consolidated subsidiaries after 2017 to be indefinitely reinvested and has recorded the estimated incremental foreign withholding (net of available foreign tax credits) on fiscal year earnings and state income taxes payable assuming a hypothetical repatriation to the U.S. The Company continues to consider undistributed earnings of certain non-U.S. consolidated subsidiaries prior to 2018, which totaled $2,924, to be indefinitely reinvested and has not provided for withholding or state taxes. 55 59 In 2019, the Company recorded a valuation allowance of $76 primarily related to foreign tax credits that we believe will not be realized due to limitations on the Company's ability to claim the credits during the carry forward period. The foreign tax credit carry forwards are set to expire beginning in fiscal 2027. Gross unrecognized tax benefit at beginning of year. Gross increases-current year tax positions. . Gross increases-tax positions in prior years Gross decreases-tax positions in prior years Settlements Lapse of statute of limitations Gross unrecognized tax benefit at end of year A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2019 and 2018 is as follows: 2019 Agreement 5/10/2015 12/13/1999 10-Q/A Citibank, N.A. Co-Branded Credit 9/1/2013 10/16/2013 10-K Deferred Compensation Plan 10.7* 10.8.1** 8/31/2015 12/17/2015 10.8.2** First Amendment to Citi, N.A. Co- Branded Credit Card Agreement 10-Q 11/22/2015 10.8.3** Second Amendment to Citi, N.A. 10-Q 2/14/2016 Agreement 14A 3/9/2016 Co-Branded Credit Card Card Agreement Form of Indemnification 10-Q Corporation 10-Q 11/22/2015 12/17/2015 10.8.4** 10.3.4 Seventh Restated 2002 Stock Incentive Plan Letter Agreement for 2016 Performance-Based Restricted Stock Units-Executive 10-Q 11/22/2015 12/17/2015 10.4* Fiscal 2019 Executive Bonus Plan 8-K 10/26/2018 10.5.1* 10.6 Executive Employment Agreement, effective January 1, 2017, between W. Craig Jelinek and Costco Wholesale Corporation 10.5.2* Extension of the Term of the 10-Q 11/25/2018 12/20/2018 Executive Employment Agreement, effective January 1, 2019, between W. Craig Jelinek and Costco Wholesale 11/20/2016 12/16/2016 Third Amendment to Citi, N.A. Co- Branded Credit Card Agreement 101.INS 8/28/2016 10/12/2016 32.1 Section 1350 Certifications X XBRL Instance Document X 101.SCH XBRL Taxonomy Extension Schema Document X 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document X 101.LAB XBRL Taxonomy Extension Label Linkbase Document X X X Presentation Linkbase Document * Management contract, compensatory plan or arrangement. ** Portions of this exhibit have been omitted under a confidential treatment order issued by the Securities and Exchange Commission. (၁) Financial Statement Schedules-None. Item 16-Form 10-K Summary None. 67 SIGNATURES Seventh Restated 2002 Stock Incentive Plan Restricted Stock Unit Award Agreement-Non- Executive Director Pursuant to the requirements of Section 13 or 15(d) 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. October 10, 2019 101.PRE XBRL Taxonomy Extension 10-K Rule 13a14(a) Certifications Registered Public Accounting Firm 10.8.5** Fourth Amendment to Citi, N.A. Co-Branded Credit Card Agreement 10-Q 2/18/2018 3/15/2018 66 99 Exhibit Number 10.8.6** 10.8.7** Exhibit Description 31.1 Fifth Amendment to Citi, N.A. Co- Branded Credit Card Agreement Subsidiaries of the Company Incorporated by Reference Filed Herewith Form Period Ended 10-Q 2/17/2019 Filing Date 3/13/2019 X 21.1 23.1 Consent of Independent Sixth Amendment to Citi, N.A. Co- Branded Credit Card Agreement 10.3.3* Financial Statements: 11/22/2015 The information required by this Item is incorporated herein by reference to the section entitled "Principal Shareholders" and "Equity Compensation Plan Information" in Costco's Proxy Statement. 64 64 Item 13-Certain Relationships and Related Transactions, and Director Independence The information required by this Item is incorporated herein by reference to the sections entitled "Proposal 1: Election of Directors," "Directors," "Committees of the Board," "Shareholder Communications to the Board," "Meeting Attendance," "Report of the Compensation Committee of the Board of Directors," "Certain Relationships and Transactions" and "Report of the Audit Committee” in Costco's Proxy Statement. Item 14-Principal Accounting Fees and Services The information required by this Item is incorporated herein by reference to the sections entitled "Independent Public Accountants” in Costco's Proxy Statement. PART IV Item 15-Exhibits, Financial Statement Schedules (a) (b) Documents filed as part of this report are as follows: 1. 2. See the listing of Financial Statements included as a part of this Form 10-K in Item 8 of Part II. Financial Statement Schedules: All schedules have been omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements, including the notes thereto. Exhibits: The required exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference. Exhibit Number 3.1 Exhibit Description Articles of Incorporation as Incorporated by Reference Filed Herewith Item 12-Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item is incorporated herein by reference to the sections entitled "Compensation of Directors,” “Executive Compensation," and "Compensation Discussion and Analysis" in Costco's Proxy Statement. Item 11-Executive Compensation Information relating to the availability of our code of ethics for senior financial officers and a list of our executive officers appear in Part I, Item 1 of this Report. The information required by this Item concerning our directors and nominees for director is incorporated herein by reference to the sections entitled "Proposal 1: Election of Directors," "Directors,” “Committees of the Board" and "Section 16(a) Beneficial Ownership Reporting Compliance" in Costco's Proxy Statement for its 2020 annual meeting of stockholders, which will be filed with the SEC within 120 days of the end of our fiscal year ("Proxy Statement"). COSTCO WHOLESALE CORPORATION (Registrant) Item 9-Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A-Controls and Procedures 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 September 1, 2019 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date. Management's Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of our assets; (2) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with appropriate authorizations; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness for future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision of and with the participation of our management, we assessed the effectiveness of our internal control over financial reporting as of September 1, 2019, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control- Integrated Framework (2013). As disclosed in Part II Item 9A Controls and Procedures in our Annual Report on Form 10-K for the fiscal year ended September 2, 2018, during the fourth quarter of fiscal 2018 we identified a material weakness in internal control related to ineffective information technology general controls (ITGCs) in the areas of user access and program change-management over certain information technology (IT) systems that support the Company's financial reporting processes. During 2019, management implemented our previously disclosed remediation plan that included: (i) creating and filling an IT Compliance Oversight function; (ii) developing a training program addressing ITGCs and policies, including educating control owners concerning the principles and requirements of each control, with a focus on those related to user access and change-management over IT systems impacting financial reporting; (iii) developing and maintaining documentation underlying ITGCs to promote knowledge transfer upon personnel and function changes; (iv) developing enhanced risk assessment procedures and controls related to changes in IT systems; (v) implementing an IT management review and testing plan to monitor 63 Form ITGCs with a specific focus on systems supporting our financial reporting processes; and (vi) enhanced quarterly reporting on the remediation measures to the Audit Committee of the Board of Directors. Changes in Internal Control Over Financial Reporting Except for the changes in connection with our implementation of the remediation plan discussed above, there have been no other 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 fourth quarter of 2019 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. /s/ W. CRAIG JELINEK W. Craig Jelinek President, Chief Executive Officer and Director /s/ RICHARD A. GALANTI Richard A. Galanti Executive Vice President, Chief Financial Officer and Director Item 9B-Other Information None. PART III Item 10-Directors, Executive Officers and Corporate Governance During the fourth quarter of 2019, we completed our testing of the operating effectiveness of the implemented controls and found them to be effective. As a result we have concluded the material weakness has been remediated as of September 1, 2019. Period Ended Filing Date 10-Q 10.2* 2019 Incentive Plan DEF 14 10-K 9/2/2012 10/19/2012 12/17/2019 65 99 Incorporated by Reference Exhibit Number Exhibit Description Health Plan Filed Herewith 10.3* Seventh Restated 2002 Stock Incentive Plan DEF 14A Filing Date 12/19/2014 10.3.1* Seventh Restated 2002 Stock Incentive Plan Restricted Stock Unit Award Agreement-U.S. Employee 10-Q 11/22/2015 12/17/2015 10.3.2* Seventh Restated 2002 Stock Incentive Plan Restricted Stock Unit Award Agreement-Non-U.S. Employee 10-Q Form 12/17/2015 Costco Wholesale Executive 5/16/2017 2/17/2019 3/13/2019 amended of Costco Wholesale Corporation 3.2 Bylaws as amended of Costco 8-K 4/30/2019 Wholesale Corporation 4.1 Form of 2.150% Senior Notes due 8-K 10.1* 5/16/2017 4.2 Form of 2.300% Senior Notes due 8-K 5/16/2017 May 18, 2022 4.3 Form of 2.750% Senior Notes due May 18, 2024 8-K 5/16/2017 4.4 Form of 3.000% Senior Notes due May 18, 2027 8-K May 18, 2021 By Period Ended Executive Vice President, Chief Financial Officer Marc-André Bally - Ancillary & Business Center, Canada Tiffany Barbre - Financial Accounting Controller Patty Bauer - Information Systems Christopher Bolves - Operations, Northwest Timothy Bowersock - Information Security Kimberly Brown - Operations, Texas Deborah Calhoun - GMM, Foods & Sundries Paul Cano-Operations, Bay Area Greg Carter GMM, Foods & Sundries Michael Casebier - Operations, Texas Mike Cho - Country Manager, Korea Jeffrey Cole - Gasoline, Car Wash & Photo Center Don Coleman - Information Systems Julie Cruz - Operations, Southeast Mike Cruz - Operations, Corporate Bakery & Food Court Ron Damiani - Marketing, Canada Wendy Davis - Operations, Midwest Russ Decaire - GMM, Foods & Sundries Guy Delmonte - Operations, Southeast Heather Downie - Operations, W. Canada Jeff Elliott - Treasury Debbie Ells - GMM, Non-Foods, Canada Liz Elsner - Ecommerce Frank Farcone - Operations, Los Angeles Timothy Farmer - GMM, Corporate Non-Foods Christopher Fleming - Operations, W. Canada Anthony Fontana - Operations, Northeast Thomas Fox - GMM, Corporate Bakery & Food Court Jack Frank - Real Estate, Western Division Joseph Grachek III - Internal Audit Kevin Green - Operations, Northwest Martin Groleau - GMM, Non-Foods, Canada Peter Gruening - Costco Travel Doris Harley - GMM, Foods & Sundries David Harruff - Operations, Northwest Timothy Haser - Enterprise Infrastructure Graham Hillier - GMM, Non-Foods, Canada Scott Howe - Payroll & Benefits Accounting Ross Hunt - Administration, Canada Jeff Ishida - Real Estate, Eastern Division Steven Jewer - GMM, Foods & Sundries, E. Canada Teresa Jones - Depot Operations Kathy Kearney - Merchandise Accounting Controller Jim Kenyon - GMM, Foods & Sundries Yoon Kim - GMM, Corporate Non-Foods Ken Kimble - GMM, Corporate Foods & Sundries William Koza - Operations, Midwest Robert Leiss - Operations, Australia Robert Leuck - Operations, Northeast Judith Logan - GMM, Corporate Non-Foods Steve Mantanona - GMM, Mexico Merchandising Randy Martel - Operations, E. Canada Tracy Mauldin-Avery - GMM, Foods & Sundries Mark Maushund - Operations, Los Angeles Susan McConnaha - Journeys, Diversity & Inclusion Daniel McMurray - Operations, Midwest Tim Murphy - GMM, Foods & Sundries Robert Murvin - GMM, Foods & Sundries Jim Nelson - GMM, Corporate Non-Foods Pietro Nenci - GMM, Foods & Business Centers, Canada Patrick Noone - Country Manager, Australia Scott O'Brien - GMM, Corporate Foods & Sundries Frank Padilla - GMM, Corporate Produce & Meat Thomas Padilla - Operations, Northwest Daniel Parent - Operations, E. Canada Robert Parker - Operations, Business Centers Shawn Parks - Operations, Los Angeles Larry Pifer - Operations, E. Canada Steven Pimental - GMM, Business Delivery Steven Powers - Operations, Southeast Paul Pulver - Operations, Northeast Giro Rizzuti - GMM, Non-Foods, Canada Aldyn Royes - Operations, Southeast Chris Rylance - Information Systems Drew Sakuma - Operations, Bay Area Art Salas - U.S. Optical Debbie Sarter - Operations, Los Angeles Scott Schruber - Operations, U.K. Adam Self - Operations, Northeast Stuart Shamis - Legal, Canada James Andruski - GMM, Foods & Sundries, W. Canada Kathleen Ardourel - Global Ecommerce Michael Anderson - Information Systems VICE PRESIDENTS Senior Vice President, General Manager - San Diego Region Senior Vice President, Treasury, Financial Planning and Investor Relations Mario Omoss Senior Vice President, General Manager - Northwest Region Stephen M. Pappas Senior Vice President, General Manager - Europe Mike Parrott Senior Vice President, Ecommerce Joseph P. Portera Executive Vice President, COO - Eastern & Canadian Divisions and Chief Diversity Officer Pierre Riel Senior Vice President, Country Manager - Canada Timothy L. Rose Geoff Shavey - GMM, Corporate Non-Foods Louie Silveira - Country Manager, U.K. & Iceland Monica Smith - Corporate Tax & Customs Compliance Dick Snyder - Operations, Midwest Executive Vice President, Ancillary Businesses, Manufacturing and Business Centers Senior Vice President, General Manager - Southeast Region James W. Rutherford Senior Vice President, Information Systems David Skinner Senior Vice President, General Manager - Western Canadian Region John Sullivan Senior Vice President, General Counsel & Corporate Secretary John D. Thelan Senior Vice President, Depots & Traffic Ron M. Vachris Executive Vice President, COO - Merchandising Azmina Virani Senior Vice President, Merchandising - Non Foods, Ecommerce, Membership & Marketing - Canadian Division W. Richard Wilcox Yoram B. Rubanenko James Stafford - GMM, Foods & Sundries Joseph Stanovcak - Operations, San Diego Richard Stephens - Pharmacy Steve Supkoff - Operations, Ecommerce Gary Swindells - Country Manager, France Mauricio Talayero - CFO, Mexico Ken Theriault - Country Manager, Japan Brian Thomas - Operations, Midwest Yves Thomas - GMM, Ancillary, Canada H. Keith Thompson - Construction Todd Thull - Construction Adrian Thummler - Operations, Mexico Chris Tingman - GMM, International Sandy Torrey - Corporate Marketing & Publishing Tony Tran-GMM, Fresh Foods, Canada Diane Tucci - Country Manager, Spain Howard Tulk - Operations, Japan Brenda Weber - Human Resources FSC® C132107 COSTCO ARTHUR COSTCO WHOLESALE Quality and value in 785 locations and on Costco.com COSTCO Otra Clear COSTCO KEITH G ELVIS LAND Paper from responsible sources 32 POCK 32 A SPARKLING WATER FIRKLAND SPARKLING WATER 32 PACK KIRKLAND SPRAKLING WATER 52 PACH KIRKLAN SPARKLING /s/ RICHARD A. GALANTI Richard A. Galanti COR000075B 1119 32 PACK Robert E. Nelson MIX FSC Sarah Wehling - GMM, Corporate Fresh Foods Jack Weisbly - GMM, Corporate Non-Foods Jill Whittaker - Operations, San Diego Janet Wiebke - GMM, Corporate Non-Foods Terry Williams - Information Systems Craig Wilson - Food Safety & Quality Assurance Charlie Winters - Operations, Corporate Fresh Foods Earl Wiramanaden - GMM, Fresh Foods, International Karim Zeffouini - Operations, Northeast ADDITIONAL INFORMATION Shareholder Information A copy of Costco's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q will be provided to any shareholder upon written request directed to Investor Relations, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, Washington 98027. Internet users can access recent sales and earnings releases, the annual report and SEC filings, as well as our Costco website, at http://www.costco.com. E-mail users can direct their investor relations questions to investor@costco.com. The SEC maintains a site that contains reports, proxy and information statements, and other information regarding issuers, such as the Company, that file electronically with the SEC at www.sec.gov. Annual Meeting Wednesday, January 22, 2020 at 4:00 PM Meydenbauer Center Bellevue, Washington 98004 Independent Public Accountants KPMG LLP www.fsc.org 1918 Eighth Avenue, Suite 2900 Seattle, WA 98101 The Nasdaq Global Select Market Stock Symbol: COST Transfer Agent Computershare Costco Shareholder Relations Correspondence should be mailed to: P.O. Box 505000 Louisville, KY 40233 Overnight correspondence should be sent to: 462 South 4th Street, Suite 1600 Louisville, KY 40202 Telephone: (800) 249-8982 TDD for Hearing Impaired: (800) 490-1493 Outside U.S.: (201) 680-6578 Website: https://www.computershare.com/investor Stock Exchange Listing Executive Vice President, COO - International Division 11100 NE 6th Street Paul G. Moulton 68 880 /s/ HAMILTON E. JAMES Hamilton E. James Chairman of the Board /s/ DANIEL M. HINES Daniel M. Hines Senior Vice President and Corporate Controller (Principal Accounting Officer) /s/ KENNETH D. DENMAN Kenneth D. Denman Director /s/ CHARLES T. MUNGER Charles T. Munger Director /s/ JOHN W. STANTON By John W. Stanton Director CEO and Founder of Raftr; Former President of Yahoo! Inc. Kenneth D. Denman(a)(c) Venture Partner at Sway Ventures; Former President and Chief Executive Officer of Emotient, Inc. Richard A. Galanti Executive Vice President and Chief Financial Officer, Costco Hamilton E. James Chairman of the Board, Costco; Executive Vice Chair, The Blackstone Group W. Craig Jelinek President and Chief Executive Officer, Costco Richard M. Libenson Director Emeritus Susan L. Decker(a) John W. Meisenbach Director /s/ MARY (MAGGIE) A. WILDEROTTER and Director Executive Vice President, Chief Information Officer James P. Murphy Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. October 10, 2019 By By By /s/ W. CRAIG JELINEK W. Craig Jelinek President, Chief Executive Officer and Director /s/ RICHARD A. GALANTI Richard A. Galanti Mary (Maggie) A. Wilderotter Executive Vice President, Chief Financial (Principal Financial Officer) /s/ SUSAN L. DECKER Susan L. Decker Director By By By By /s/ JOHN W. MEISENBACH By John W. Meisenbach Director By /s/ JEFFREY S. RAIKES Jeffrey S. Raikes Director Officer and Director Former President of MCM, A Meisenbach Company By BOARD OF DIRECTORS Richard Delie Senior Vice President, Merchandising - Non-Foods and Ecommerce Gino Dorico Senior Vice President, General Manager - Eastern Canadian Region Caton Frates Senior Vice President, General Manager - Los Angeles Region John B. Gaherty Senior Vice President, General Manager - Midwest Region Richard A. Galanti Executive Vice President and Chief Financial Officer Jaime Gonzalez Senior Vice President, Country Manager - Mexico Darby Greek Senior Vice President, General Manager - Texas Region Nancy Griese Senior Vice President, Merchandising - Foods & Sundries Daniel M. Hines Senior Vice President, Corporate Controller Senior Vice President, Pharmacy President and Chief Executive Officer Executive Vice President, COO - Northern Division Paul Latham Senior Vice President, Membership, Marketing, Services and Publishing Jeffrey R. Long Senior Vice President, General Manager - Northeast Region Jeffrey B. Lyons Senior Vice President, Merchandising - Fresh Foods David Messner Senior Vice President, Real Estate Development Russ Miller DIRECTORS AND OFFICERS Executive Vice President, COO - Southwest Division & Mexico Ali Moayeri Senior Vice President, Construction James Klauer Victor A. Curtis W. Craig Jelinek Senior Vice President, Costco Wholesale Industries and Vice Chairman of the Board of Berkshire Hathaway Inc.; Chairman of the Board of Daily Journal Corporation Jeffrey S. Raikes(c)* Business Development Founder and CEO of the Raikes Foundation; Former CEO of the Bill and Melinda Gates Foundation John W. Stanton(b)* Chairman of First Avenue Entertainment LLLP, Trilogy International Partners, Inc., and Trilogy Equity Partners Charles T. Munger(a)*(b) CEO and Chairman of Grand Reserve Inn; Former Executive Chairman and CEO of Frontier Communications Board Committees (a) Audit Committee Maggie A. Wilderotter(b)(c) Patrick J. Callans (b) Compensation Committee Richard C. Chavez Richard Chang Executive Vice President, Administration Senior Vice President, Global Ecommerce & Travel Senior Vice President, National Merchandising - Canadian Division Donald E. Burdick Senior Vice President, General Manager - Asia Senior Vice President, General Manager - Bay Area Region Claudine Adamo Jeffrey Abadir EXECUTIVE AND SENIOR OFFICERS (c) Nominating and Governance Committee *2019 Committee Chair Senior Vice President, Merchandising - Non-Foods & Ecommerce Andree T. Brien Properties Risk Factors Unresolved Staff Comments Item 2. Item 1B. Portions of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on January 21, 2021, are incorporated by reference into Part III of this Form 10-K. TABLE OF CONTENTS Business Item 1. The number of shares outstanding of the registrant's common stock as of September 29, 2020 was 441,228,027. DOCUMENTS INCORPORATED BY REFERENCE PART I ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED AUGUST 30, 2020 COSTCO WHOLESALE CORPORATION Item 1A. Item 3. PART II Item 5. Item 4. Management's Discussion and Analysis of Financial Condition and Results of Operations Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑ The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 16, 2020 was $140,245,657,604. 21 Selected Financial Data Item 6. Item 7. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Legal Proceedings 18 17 17 8 3 Page Mine Safety Disclosures 18 Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Smaller reporting company Emerging growth company incorporation or organization) (State or other jurisdiction of (Exact name of registrant as specified in its charter) Costco Wholesale Corporation Commission file number 0-20355 Washington 91-1223280 or ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FORM 10-K Washington, D.C. 20549 SECURITIES AND EXCHANGE COMMISSION Item 7A. UNITED STATES For the fiscal year ended August 30, 2020 If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ (I.R.S. Employer Identification No.) (Address of principal executive offices) (Zip Code) Accelerated filer Non-accelerated filer Large accelerated filer Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” "accelerated filer”, “smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act. 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 ☑ No □ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑ 999 Lake Drive, Issaquah, WA 98027 Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐ Name of each exchange on which registered COST Trading Symbol Common Stock, $.01 Par Value Title of each class Registrant's telephone number, including area code: (425) 313-8100 Securities registered pursuant to Section 12(b) of the Act: The NASDAQ Global Select Market Quantitative and Qualitative Disclosures About Market Risk • Financial Statements and Supplementary Data Our average warehouse space is approximately 146,000 square feet, with newer units being slightly larger. Floor plans are designed for economy and efficiency in the use of selling space, the handling of merchandise, and the control of inventory. Because shoppers are attracted principally by the quality of merchandise and low prices, our warehouses are not elaborate. By strictly controlling the entrances and exits and using a membership format, we believe our inventory losses (shrinkage) are well below those of typical retail operations. 3 We buy most of our merchandise directly from manufacturers and route it to cross-docking consolidation points (depots) or directly to our warehouses. Our depots receive large shipments from manufacturers and quickly ship these goods to warehouses. This process creates freight volume and handling efficiencies, lowering costs associated with traditional multiple-step distribution channels. We operate membership warehouses 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 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 generally sell inventory before we are required to pay for it, even while taking advantage of early payment discounts. General We report on a 52/53-week fiscal year, consisting of thirteen four-week periods and ending on the Sunday nearest the end of August. The first three quarters consist of three periods each, and the fourth quarter consists of four periods (five weeks in the thirteenth period in a 53-week year). The material seasonal impact in our operations is increased net sales and earnings during the winter holiday season. References to 2020, 2019, and 2018 relate to the 52-week fiscal years ended August 30, 2020, September 1, 2019, and September 2, 2018, respectively. Our warehouses on average operate on a seven-day, 70-hour week. Gasoline operations generally have extended hours. Because the hours of operation are shorter than other retailers, and due to other efficiencies inherent in a warehouse-type operation, labor costs are lower relative to the volume of sales. Merchandise is generally stored on racks above the sales floor and displayed on pallets containing large quantities, reducing labor required. In general, with variations by country, our warehouses accept certain credit cards, including Costco co-branded cards, debit cards, cash and checks, co-brand cardholder rebates, executive member 2% reward certificates and our proprietary stored-value card (shop card). Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983, in Seattle, Washington. We are principally engaged in the operation of membership warehouses in the United States (U.S.) and Puerto Rico, Canada, United Kingdom (U.K.), Mexico, Japan, Korea, Australia, Spain, France, Iceland, China, and through a majority-owned subsidiary in Taiwan. Costco operated 795, 782, and 762 warehouses worldwide at August 30, 2020, September 1, 2019, and September 2, 2018, respectively. The Company operates e-commerce websites in the U.S., Canada, Mexico, U.K., Korea, Taiwan, Japan, and Australia. Our common stock trades on the NASDAQ Global Select Market, under the symbol "COST." PART I 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," "likely," “may,” “might,” “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, including, without limitation, the factors set forth in the section titled "Item 1A-Risk Factors", and other factors noted in the section titled “Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the consolidated financial statements and related notes in Item 8 of this Report. 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. INFORMATION RELATING TO FORWARD LOOKING STATEMENTS 71 70 8p Item 1-Business 68 Our strategy is to provide our members with a broad range of high-quality merchandise at prices we believe are consistently lower than elsewhere. We seek to limit most items to fast-selling models, sizes, and colors. We carry an average of approximately 3,700 active stock keeping units (SKUs) per warehouse in our core warehouse business, significantly less than other broadline retailers. We average anywhere from 8,000 to 10,000 SKUs online, some of which are also available in our warehouses. Many consumable products are offered for sale in case, carton, or multiple-pack quantities only. We offer merchandise in the following categories: ☑ 4 We have direct buying relationships with many producers of national brand-name merchandise. We do not obtain a significant portion of merchandise from any one supplier. The COVID-19 pandemic created unprecedented supply constraints including disruptions and delays that have impacted and could continue to impact the flow and availability of certain products. When sources of supply become unavailable, we seek alternative sources. We also purchase and manufacture private-label merchandise, as long as quality and member demand are high and the value to our members is significant. Our e-commerce operations allow us to connect with our members online and provide additional products and services, many not found in our warehouses. Net sales for e-commerce represented approximately 6% of total net sales in 2020. This figure does not consider other services we offer online in certain countries such as business delivery, travel, same-day grocery, and various other services. Ancillary businesses within or next to our warehouses provide expanded products and services, encouraging members to shop more frequently. These businesses include gas stations, pharmacies, optical dispensing centers, food courts, and hearing-aid centers. The number of warehouses with gas stations varies significantly by country, and we do not currently operate our gasoline business in Korea or China. We operated 615 gas stations at the end of 2020. Net sales for our gasoline business represented approximately 9% of total net sales in 2020. Ancillary (including gasoline and pharmacy businesses) In keeping with our policy of member satisfaction, we generally accept returns of merchandise. On certain electronic items, we typically have a 90-day return policy and provide, free of charge, technical support services, as well as an extended warranty. Additional third-party warranty coverage is sold on certain electronic items. • • Fresh Foods (including meat, produce, deli, and bakery) • Hardlines (including major appliances, electronics, health and beauty aids, hardware, and garden and patio) Food and Sundries (including dry foods, packaged foods, groceries, snack foods, candy, alcoholic and nonalcoholic beverages, and cleaning supplies) . Softlines (including apparel and small appliances) 6 6 6 6 6 67 67 PART III 67 66 66 32 30 Item 10. 19 222 88 No∞o Other Information Controls and Procedures Item 9A. Item 9B. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9. 18 Item 11. Item 12. Item 13. 67 67 67 2 Signatures Form 10-K Summary Item 16. Exhibits, Financial Statement Schedules Item 15. PART IV Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Executive Compensation Directors, Executive Officers and Corporate Governance Item 14. Item 8. COR000296 0720 Spain SOUTH AUSTRALIA - 1 VICTORIA-4 MICHIGAN - 16 MINNESOTA - 12 MASSACHUSETTS - 6 MARYLAND - 11 LOUISIANA -3 HAWAII - 7 IDAHO - 7 ILLINOIS-22 INDIANA - 7 IOWA - 3 KANSAS - 3 KENTUCKY -4 DELAWARE-1 FLORIDA-28 GEORGIA - 13 MISSOURI - 6 ALABAMA -4 ALASKA - 4 ARIZONA - 18 CALIFORNIA - 131 COLORADO-14 CONNECTICUT -7 UNITED STATES 558 United States and Puerto Rico 102 Canada 39 COSTCO.COM Mexico MISSISSIPPI - 1 OHIO - 12 MEXICO SASKATCHEWAN - 3 COSTCO.CA ALBERTA -18 BRITISH COLUMBIA - 14 MANITOBA -3 NEW BRUNSWICK - 3 NEWFOUNDLAND AND LABRADOR-1 NOVA SCOTIA -2 ONTARIO - 36 QUÉBEC - 22 CANADA PUERTO RICO - 4 WASHINGTON, D.C.-- 1 MONTANA -5 NEBRASKA-3 NEVADA - 8 NEW HAMPSHIRE -1 NEW JERSEY - 21 NEW MEXICO - 3 NEW YORK-19 NORTH CAROLINA - 9 NORTH DAKOTA - 2 WISCONSIN-9 VIRGINIA - 17 VERMONT -1 UTAH - 12 TENNESSEE - 5 TEXAS - 33 SOUTH CAROLINA - 6 SOUTH DAKOTA - 1 OKLAHOMA - 2 OREGON - 13 PENNSYLVANIA - 11 WASHINGTON - 32 WHOLESALE COSTCO 803 locations as of December 31, 2020 Craig Jelinek TOWN Seese Towel Towel 14.99 FISCAL YEAR ENDED AUGUST 30, 2020 Tou ANNUAL REPORT WHOLESALE COSTCO TRABOH COSTC WESTERN AUSTRALIA -1 Mini Favon 2020 issue 425 KIRKLA Cray Jelek Sincerely, As we near the end of this extraordinary year, I extend my deepest gratitude to Costco employees, especially those on the front lines of our warehouses, whose exemplary service to members, dedication to the company, and support of one another has truly demonstrated excellence. Finally, I thank Costco members around the world for their loyal support and trust in our business. Together, we've made it through this trying year, and I am confident we will tackle whatever is ahead with strength and optimism. From the Costco family to yours, I wish you a happy, prosperous and healthy New Year. We continue to address sustainability in our supply chains. We support good land stewardship practices that include: avoiding deforestation and conversion of natural ecosystems; sourcing products from responsibly managed and certified forests; and focusing on preserving native grasslands. Through these efforts and others, we seek to protect valuable natural resources and reduce our environmental impact. Our Sustainability Commitment was updated in December 2020 to outline our progress this year and includes our new Climate Action Plan and Forest Conservation Commitment. In fiscal 2020, Costco donated an estimated 65 million pounds of food to those in need. Costco also made two important investments this year, the acquisition of Innovel (now known as Costco Wholesale Logistics or CWL) and a minority interest in Navitus. CWL is a logistics supplier, with infrastructure for efficient delivery and installation of big and bulky items, such as appliances, furniture, and exercise equipment. Navitus, a pharmacy benefit manager, will help us lower the health care spend for patients at our pharmacies, optical and hearing aid departments. Both acquisitions align with our philosophy of reducing costs and passing on the savings to our members. The Kirkland Signature TM brand saw another solid year, with global sales exceeding $52 billion. This growth of 7% was a result of several factors, including an emphasis on core items in categories such as grocery, health and beauty, home cleaning, and paper goods. Continuous improvements were a focus for key items, such as diapers, bar soap and frozen foods. We introduced new products in expanded categories, including the first Kirkland Signature putter, motor oil, copper exposed cookware, and apparel items. Our chicken complex in Nebraska became fully operational in fiscal 2020. While international trade issues and tariffs threatened increased prices on some goods, we worked diligently on both short- and long-term mitigation strategies. Buyers worked with suppliers to share in the absorption of tariffs, create new efficiencies in logistics and transportation, and move production origin. Buyers were committed to keeping us in stock, despite reduced workforces, factory closures, government restrictions and financial hardships. Costco.com played a vital role in meeting members' needs, especially those choosing or required to stay at home. Our ecommerce business saw a 50% increase in sales. Increases were particularly evident in same day and 2-day grocery deliveries, prescription medications, electronics, and office supplies. Additional strong sales were seen in apparel, appliances, health and beauty products, and home furnishings. Our depots responded to unprecedented volume by shifting certain operations to 24 hours a day, seven days a week. As circumstances allowed, expansion in fiscal 2020 continued, with the opening of 13 new warehouses. In fiscal 2021, we expect to open 20 new buildings. As the coronavirus pandemic swept the globe and crippled much of the world's economy, Costco was designated as an essential business, a responsibility we took seriously. In a time of uncertainty and panic purchasing by members, we went "all out" to try to maintain adequate supplies of necessities, including food, cleaning products, and personal care items. We targeted our efforts on these in-demand goods, installed protective barriers at the registers, increased our sanitation at high-touch areas, established social distancing protocols and face covering policies, created special operating hours for high-risk individuals and first responders, and donated surgical masks to healthcare workers. Certain of our ancillary businesses were temporarily closed, and our food courts continue to face significant restrictions. In addition, Costco Travel endured a tumultuous time, as tens of thousands of members canceled bookings and requested refunds. To reward our employees for exemplary service in difficult times, we temporarily increased compensation levels and otherwise increased spending for wages and benefits, including overtime pay. Net sales for fiscal 2020 totaled $163 billion, an increase of 9%, with a comparable sales increase of 8%. Net income was $4 billion, or $9.02 per diluted share, an increase of 9%. In addition, the Company surpassed 100 million members worldwide, contributing to membership revenue of $3.54 billion. When we started fiscal 2020, we expected to proceed with business as usual, focusing on providing Costco members with quality merchandise and exceptional value. Little did we know what lay ahead. Dear Costco Shareholders: December 10, 2020 42 30425 Bath Tisse COSTCO.COM.MX AGUASCALIENTES - 1 BAJA CALIFORNIA - 4 BAJA CALIFORNIA SUR-1 CHIHUAHUA - 2 CIUDAD DE MÉXICO - 4 COAHUILA -1 GUANAJUATO - 3 JALISCO - 3 MÉXICO - 5 President and Chief Executive Officer MORELOS-1 NUEVO LEÓN - 3 PUEBLA - 1 QUERÉTARO-1 QUINTANA ROO - 1 SAN LUIS POTOSÍ - 1 SINALOA - 1 COSTCO.CO.KR KOREA YAMAGATA-1 TOYAMA-1 SAITAMA - 2 SHIZUOKA-1 TOKYO-1 OSAKA - 1 CHUNGCHEONGNAM-DO-1 MIYAGI -1 KANAGAWA - 3 HYOGO - 2 IBARAKI – 2 ISHIKAWA-1 HOKKAIDO-1 HIROSHIMA-1 GIFU-1 GUNMA – 1 FUKUOKA - 2 KYOTO-1 CHIBA - 3 DAEGU - 2 DAEJEON-1 SEJONG-1 NEW SOUTH WALES - 3 QUEENSLAND - 2 MICHOACÁN -1 AUSTRALIAN CAPITAL TERRITORY-1 COSTCO.COM.AU AUSTRALIA TAIPEI CITY-2 TAOYUAN CITY - 2 GYEONGGI-DO-5 INCHEON - 1 TAINAN CITY-1 KAOHSIUNG CITY - 2 CHIAYI CITY-1 HSINCHU CITY-1 COSTCO.COM.TW TAIWAN ULSAN–1 SEOUL - 3 NEW TAIPEI CITY - 3 TAICHUNG CITY - 2 AICHI -1 BUSAN - 1 China United 1 1 Iceland 14 Taiwan 27 Japan 16 Korea YUCATÁN -1 VERACRUZ-2 COSTCO.CO.JP TABASCO - 1 SONORA - 1 France 1 29 Kingdom 3 JAPAN WALES-1 ENGLAND -25 SCOTLAND -3 COSTCO.CO.UK UNITED KINGDOM ANDALUCÍA -1 MADRID - 2 SHANGHAI -1 CHINA SPAIN ICELAND ÎLE-DE-FRANCE -1 FRANCE 12 Australia KAUPTÚN -1 8 We have made and may continue to make investments and acquisitions to improve the speed, accuracy and efficiency of our supply chains. The effectiveness of these investments can be less predictable than opening new locations and might not provide the anticipated benefits or desired rates of return. Our failure to maintain membership growth, loyalty and brand recognition could adversely affect our results of operations. Membership loyalty and growth are essential to our business. The extent to which we achieve growth in our membership base, increase the penetration of Executive members, and sustain high renewal rates materially influences our profitability. Damage to our brands or reputation may negatively impact comparable sales, diminish member trust, and reduce renewal rates and, accordingly, net sales and membership fee revenue, negatively impacting our results of operations. Disruptions in merchandise distribution or processing, packaging, manufacturing, and other facilities could adversely affect sales and member satisfaction. We sell many products under our Kirkland Signature brand. Maintaining consistent product quality, competitive pricing, and availability of these products is essential to developing and maintaining member loyalty. These products also generally carry higher margins than national brand products and represent a growing portion of our overall sales. If the Kirkland Signature brand experiences a loss of member acceptance or confidence, our sales and gross margin results could be adversely affected. We depend on the orderly operation of the merchandise receiving and distribution process, primarily through our depots. We also rely upon processing, packaging, manufacturing and other facilities to support our business, which includes the production of certain private-label items. Although we believe that our operations are efficient, disruptions due to fires, tornadoes, hurricanes, earthquakes, pandemics or other extreme weather conditions or catastrophic events, labor issues or other shipping problems may result in delays in the production and delivery of merchandise to our warehouses, which could adversely affect sales and the satisfaction of our members. Our e-commerce business depends heavily on third- party logistics providers and that business is negatively affected when these providers are unable to provide services in a timely fashion. 63 It is difficult to consistently and successfully predict the products and services that our members will desire. Our success depends, in part, on our ability to identify and respond to trends in demographics and consumer preferences. Failure to identify timely or effectively respond to changing consumer tastes, preferences (including those relating to sustainability of product sources and animal welfare) and spending patterns could negatively affect our relationship with our members, the demand for our products and services, and our market share. If we are not successful at predicting our sales trends and adjusting our purchases accordingly, we may have excess inventory, which could result in additional markdowns, or we may experience out-of-stock positions and delivery delays, which could result in higher costs, both of which would reduce our operating performance. This could have an adverse effect on net sales, gross margin and operating income. Availability and performance of our information technology (IT) systems are vital for our business to operate efficiently. Failure to execute complex IT projects, and have these IT systems available to our business will adversely impact our operations. IT systems play a crucial role in conducting our business on a daily basis. These systems are utilized to process a very high volume of transactions, conduct payment transactions, track and value our inventory and produce reports which are critical for making business decisions on a daily, weekly and periodic basis. Failure or disruption of these IT systems could have an adverse impact on our ability to buy products from our suppliers, produce goods in our manufacturing plants, move the products in an efficient manner to our warehouses and sell products to our members. We are undertaking large technology and IT transformation projects. The failure of these projects could adversely impact our business plans and 9 potentially impair our day to day business operations. Given the high volume of transactions we process, it is important that we build strong digital resiliency for our business-critical systems to prevent disruption from events such as power outages, computer and telecommunications failures, computer viruses, internal or external security breaches, errors by employees, and catastrophic events such as fires, earthquakes tornadoes and hurricanes. Any debilitating failure of our critical IT systems, data centers and backup systems would require significant investments in resources to restore IT services and may cause serious impairment in our business operations including loss of business services, increased cost of moving merchandise and failure to provide service to our members. We are currently making significant investments in enhancing our digital resiliency and failure or delay in execution of these projects could delay our ability to be resilient to disruptive events. Failure to deliver our IT transformation efforts efficiently and effectively could result in the loss of our competitive position and adversely impact our financial condition and results of operations. We intend to continue to open warehouses in new markets. Associated risks include difficulties in attracting members due to a lack of familiarity with us, attracting members of other wholesale club operators, our lesser familiarity with local member preferences, and seasonal differences in the market. Entry into new markets may bring us into competition with new competitors or with existing competitors with a large, established market presence. We cannot ensure that new warehouses and new e-commerce websites will be profitable and, as a result, future profitability could be delayed or otherwise materially adversely affected. We are required to maintain the privacy and security of personal and business information amidst evolving threat landscapes and in compliance with emerging privacy and data protection regulations globally. Failure to meet the requirements could damage our reputation with members, suppliers and employees, cause us to incur substantial additional costs, and become subject to litigation. We may not timely identify or effectively respond to consumer trends, which could negatively affect our relationship with our members, the demand for our products and services, and our market share. We seek to expand in existing markets to attain a greater overall market share. A new warehouse may draw members away from our existing warehouses and adversely affect their comparable sales performance, member traffic, and profitability. 69 We may be unsuccessful implementing our growth strategy, including expanding our business in existing markets and new markets, and integrating acquisitions, which could have an adverse impact on our business, financial condition and results of operations. Increased IT security threats and more sophisticated computer crime pose a risk to our systems, networks, products and services. We rely upon IT systems and networks, some of which are managed by third parties, in connection with a variety of business activities. Additionally, we collect, store and process sensitive information relating to our business, members, suppliers and employees. Operating these IT systems and networks, and processing and maintaining this data, in a secure manner, is critical to our business operations and strategy. The increased use of remote work infrastructure due to the COVID-19 pandemic has also increased the possible attack surfaces. Security threats designed to gain unauthorized access to our systems, networks and data, are increasing in frequency and sophistication. Cybersecurity attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer crimes and advanced persistent threats. These threats pose a risk to the security of our systems and networks and the confidentiality, integrity, and availability of our data. It is possible that our IT systems and networks, or those managed by third parties such as cloud providers, could have vulnerabilities, which could go unnoticed for a period of time. While our cybersecurity and compliance posture seeks to mitigate such risks, there can be no guarantee that the actions and controls we and our third-party service providers have implemented and are implementing, will be sufficient to protect our systems, information or other property. 2001 2011 67 1994 68 2013 68 2016 55 7 Item 1A-Risk Factors The risks described below could materially and adversely affect our business, financial condition and results of operations. We could also be affected by additional risks that apply to all companies operating in the U.S. and globally, as well as other risks that are not presently known to us or that we currently consider to be immaterial. These Risk Factors should be carefully reviewed in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and our consolidated financial statements and related notes in Item 8 of this Report. Business and Operating Risks We are highly dependent on the financial performance of our U.S. and Canadian operations. Our financial and operational performance is highly dependent on our U.S. and Canadian operations, which comprised 87% and 83% of net sales and operating income in 2020, respectively. Within the U.S., we are highly dependent on our California operations, which comprised 29% of U.S. net sales in 2020. Our California market, in general, has a larger percentage of higher volume warehouses as compared to our other domestic markets. Any substantial slowing or sustained decline in these operations could materially adversely affect our business and financial results. Declines in financial performance of our U.S. operations, particularly in California, and our Canadian operations could arise from, among other things: slow growth or declines in comparable warehouse sales (comparable sales); negative trends in operating expenses, including increased labor, healthcare and energy costs; failing to meet targets for warehouse openings; cannibalizing existing locations with new warehouses; shifts in sales mix toward lower gross margin products; changes or uncertainties in economic conditions in our markets, including higher levels of unemployment and depressed home values; and failing to consistently provide high quality and innovative new products. Our growth is dependent, in part, on our ability to acquire property and build or lease new warehouses and depots. We compete with other retailers and businesses for suitable locations. Local land use and other regulations restricting the construction and operation of our warehouses and depots, as well as local community actions opposed to the location of our warehouses or depots at specific sites and the adoption of local laws restricting our operations and environmental regulations, may impact our ability to find suitable locations and increase the cost of sites and of constructing, leasing and operating warehouses and depots. We also may have difficulty negotiating leases or purchase agreements on acceptable terms. In addition, certain jurisdictions have enacted or proposed laws and regulations that would prevent or restrict the operation or expansion plans of certain large retailers and warehouse clubs, including us. Failure to effectively manage these and other similar factors may affect our ability to timely build or lease and operate new warehouses and depots, which could have a material adverse effect on our future growth and profitability. The potential impacts of a future material cybersecurity attack includes reputational damage, litigation, government enforcement actions, penalties, disruption to systems, unauthorized release of confidential or otherwise protected information, corruption of data, diminution in the value of our investment in IT systems and increased cybersecurity protection and remediation costs. This could adversely affect our competitiveness, results of operations and financial condition and loss of member confidence. Further, the amount of insurance coverage we maintain may be inadequate to cover claims or liabilities relating to a cybersecurity attack. In addition, data we collect, store and process is subject to a variety of U.S. and international laws and regulations, such as the European Union's General Data Protection Regulation, California Consumer Privacy Act, Health Insurance Portability and Accountability Act, China cybersecurity law and other emerging privacy and cybersecurity laws across the various states and around the globe, which may carry significant potential penalties for noncompliance. The pandemic has significantly impacted the global supply chain, with restrictions and limitations on business activities causing disruption and delay. These disruptions and delays have strained certain domestic and international supply chains, which have affected and could continue to negatively affect the flow or availability of certain products. Member demand for certain products has also fluctuated as the pandemic has progressed and member behaviors have changed, which has challenged our ability to anticipate and/or adjust inventory levels to meet that demand. These factors have resulted in higher out- of-stock positions in certain products, as well as delays in delivering those products. Even if we are able to find alternate sources for certain products, they may cost more or require us to incur higher transportation costs, adversely impacting our profitability and financial condition. Similarly, increased demand for online purchases of products has impacted our fulfillment operations, resulting in delays in delivering products to members. We accept payments using a variety of methods, including select credit and debit cards, cash and checks, co-brand cardholder rebates, executive member 2% reward certificates, and our shop card. As we offer new payment options to our members, we may be subject to additional rules, regulations, compliance requirements, and higher fraud losses. For certain payment methods, we pay interchange and other related acceptance fees, along with additional transaction processing fees. We rely on third parties to Suppliers may be unable to timely supply us with quality merchandise at competitive prices or may fail to adhere to our high standards, resulting in adverse effects on our business, merchandise inventories, sales, and profit margins. We depend heavily on our ability to purchase quality merchandise in sufficient quantities at competitive prices. As the quantities we require continue to grow, we have no assurances of continued supply, appropriate pricing or access to new products, and any supplier has the ability to change the terms upon which they sell to us or discontinue selling to us. Member demands may lead to out-of-stock positions causing a loss of sales and profits. We buy from numerous domestic and foreign manufacturers and importers. Our inability to acquire suitable merchandise on acceptable terms or the loss of key suppliers could negatively affect us. We may not be able to develop relationships with new suppliers, and products from alternative sources, if any, may be of a lesser quality or more expensive. Because of our efforts to adhere to high quality standards for which available supply may be limited, particularly for certain food items, the large volumes we demand may not be consistently available. Our suppliers (and those they depend upon for materials and services) are subject to risks, including labor disputes, union organizing activities, financial liquidity, natural disasters, extreme weather conditions, public health emergencies, supply constraints and general economic and political conditions that could limit their ability to timely provide us with acceptable merchandise. One or more of our suppliers might not adhere to our quality control, legal, regulatory, labor, environmental or animal welfare standards. These deficiencies may delay or preclude delivery of merchandise to us and might not be identified before we sell such merchandise to our members. This failure could lead to recalls and litigation and otherwise damage our reputation and our brands, increase costs, and otherwise adversely impact our business. Fluctuations in foreign exchange rates may adversely affect our results of operations. During 2020, our international operations, including Canada, generated 27% and 33% of our net sales and operating income, respectively. Our international operations have accounted for an increasing portion of our warehouses, and we plan to continue international growth. To prepare our consolidated financial statements, we translate the financial statements of our international operations from local currencies into U.S. dollars using current exchange rates. Future fluctuations in exchange rates that are unfavorable to us may adversely affect the financial performance of our Canadian and Other International operations and have a corresponding adverse period-over-period effect on our results of operations. As we continue to expand internationally, our exposure to fluctuations in foreign exchange rates may increase. A portion of the products we purchase is paid for in a currency other than the local currency of the country in which the goods are sold. Currency fluctuations may increase our cost of goods and may not be passed on to members. Consequently, fluctuations in currency exchange rates may adversely affect our results of operations. Natural disasters, extreme weather conditions, public health emergencies or other catastrophic events could negatively affect our business, financial condition, and results of operations. Natural disasters and extreme weather conditions, such as hurricanes, typhoons, floods, earthquakes; acts of terrorism or violence, including active shooter situations; public health issues, including pandemics and quarantines, particularly in California or Washington state, where our centralized operating systems and administrative personnel are located, could negatively affect our operations and financial performance. Such events could result in physical damage to our properties, limitations on store operating hours, less frequent visits by members to physical locations, the temporary closure of warehouses, our ability and desire to pass them through to our members may affect our sales and profit margins. These factors could also increase our merchandise costs and selling, general and administrative expenses, and otherwise adversely affect our operations and financial results. General economic conditions can also be affected by events like the outbreak of war or acts of terrorism. 13 The COVID-19 pandemic is affecting our business, financial condition and results of operations in many respects. The continuing impacts of the COVID-19 pandemic are highly unpredictable and volatile, and are affecting certain business operations, demand for our products and services, in-stock positions, costs of doing business, availability of labor, access to inventory, supply chain operations, our ability to predict future performance, exposure to litigation, and our financial performance, among other things. The COVID-19 pandemic has resulted in widespread and continuing impacts on the global economy and on our employees, members, suppliers and other people and entities with which we do business. There is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders and business and government shutdowns. We are taking precautionary measures intended to help minimize the risk of the virus to our employees, including temporarily requiring some employees to work remotely. To reward our employees for exemplary service in difficult times we temporarily increased compensation levels and otherwise incurred increased spending for wages and benefits, including overtime pay. The pandemic and any preventative or protective actions that governments or we may take are likely to result in a period of business disruption, reduced member traffic and reduced sales in certain merchandise categories, and increased operating expenses. If we do not respond appropriately to the pandemic, or if our members do not participate in social distancing and other safety measures, the well-being of our employees and members could be at risk, and a failure to appropriately respond, or the perception of an inadequate response, could cause reputational harm to our brand and subject us to lost sales and claims from employees, members, suppliers, regulators or other parties. Additionally, a future outbreak of confirmed cases of COVID-19 in our facilities could result in temporary or sustained workforce shortages or facility closures, which would negatively impact our business and results of operations. Some jurisdictions have taken measures intended to expand the availability of workers compensation or to change the presumptions applicable to workers compensation measures. These actions may increase our exposure to claims and increase our costs. 14 14 2018 depots, manufacturing or home office facilities, the temporary lack of an adequate work force, disruptions to our IT systems, the temporary or long-term disruption in the supply of products from some local or overseas suppliers, the temporary disruption in the transport of goods to or from overseas, delays in the delivery of goods to our warehouses or depots, and the temporary reduction in the availability of products in our warehouses. Public health issues, whether occurring in the U.S. or abroad, could disrupt our operations, disrupt the operations of suppliers or members, or have an adverse impact on consumer spending and confidence levels. These events could also reduce demand for our products or make it difficult or impossible to procure products. We may be required to suspend operations in some or all of our locations, which could have a material adverse effect on our business, financial condition and results of operations. We are subject to payment-related risks. 12 Higher energy and gasoline costs, inflation, levels of unemployment, healthcare costs, consumer debt levels, foreign-currency exchange rates, unsettled financial markets, weaknesses in housing and real estate markets, reduced consumer confidence, changes and uncertainties related to government fiscal and tax policies including changes in tax rates, duties, tariffs, or other restrictions, sovereign debt crises, pandemics and other health crises, and other economic factors could adversely affect demand for our products and services, require a change in product mix, or impact the cost of or ability to purchase inventory. Additionally, actions in various countries, particularly China and the United States, have raised the cost of many items and created uncertainty with respect to tariff impacts on the costs of some of our merchandise. The degree of our exposure is dependent on (among other things) the type of goods, rates imposed, and timing of the tariffs. The impact to our business, including net sales and gross margin, will be influenced in part by merchandising and pricing strategies in response to potential cost increases by us and our competitors. While these potential impacts are uncertain, they could have an adverse impact on our financial results. 10 provide payment transaction processing services for credit and debit cards and our shop card. It could disrupt our business if these parties become unwilling or unable to provide these services to us. We are also subject to evolving payment card association and network operating rules, including data security rules, certification requirements and rules governing electronic funds transfers. For example, we are subject to Payment Card Industry Data Security Standards, which contain compliance guidelines and standards with regard to our security surrounding the physical and electronic storage, processing and transmission of individual cardholder data. If our internal systems are breached or compromised, we may be liable for card re-issuance costs, subject to fines and higher transaction fees and lose our ability to accept card payments from our members, and our business and operating results could be adversely affected. We might sell products that cause illness or injury to our members, harm to our reputation, and expose us to litigation. If our merchandise, including food and prepared food products for human consumption, drugs, children's products, pet products and durable goods, do not meet or are perceived not to meet applicable safety standards or our members' expectations regarding safety, we could experience lost sales, increased costs, litigation or reputational harm. The sale of these items involves the risk of illness or injury to our members. Such illnesses or injuries could result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, manufacturing, storage, handling and transportation phases, or faulty design. Our suppliers are generally contractually required to comply with product safety laws, and we are dependent on them to ensure that the products we buy comply with safety and other standards. While we are subject to governmental inspection and regulations and work to comply in all material respects with applicable laws and regulations, we cannot be sure that consumption or use of our products will not cause illness or injury or that we will not be subject to claims, lawsuits, or government investigations relating to such matters, resulting in costly product recalls and other liabilities that could adversely affect our business and results of operations. Even if a product liability claim is unsuccessful or is not fully pursued, negative publicity could adversely affect our reputation with existing and potential members and our corporate and brand image, and these effects could be long-term. If we do not successfully develop and maintain a relevant omnichannel experience for our members, our results of operations could be adversely impacted. Omnichannel retailing is rapidly evolving, and we must keep pace with changing member expectations and new developments by our competitors. Our members are increasingly using mobile phones, tablets, computers, and other devices to shop and to interact with us through social media, particularly in the wake of COVID-19. We are making investments in our websites and mobile applications. If we are unable to make, improve, or develop relevant member-facing technology in a timely manner, our ability to compete and our results of operations could be adversely affected. Inability to attract, train and retain highly qualified employees could adversely impact our business, financial condition and results of operations. Prices of certain commodities, including gasoline and consumable goods used in manufacturing and our warehouse retail operations, are historically volatile and are subject to fluctuations arising from changes in domestic and international supply and demand, labor costs, competition, market speculation, government regulations, taxes and periodic delays in delivery. Rapid and significant changes in commodity prices and Our success depends on the continued contributions of our employees, including members of our senior management and other key operations, IT, merchandising and administrative personnel. Failure to identify and implement a succession plan for senior management could negatively impact our business. We must attract, train and retain a large and growing number of qualified employees, while controlling related labor costs and maintaining our core values. Our ability to control labor and benefit costs is subject to numerous internal and external factors, including regulatory changes, prevailing wage rates, and healthcare and other insurance costs. We compete with other retail and non-retail businesses for these employees and invest significant resources in training and motivating them. There is no assurance that we will be able to attract or retain highly qualified employees in the future, which could have a material adverse effect on our business, financial condition and results of operations. We may incur property, casualty or other losses not covered by our insurance. Claims for employee health care benefits, workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability, inventory loss, and other exposures are funded predominantly through self-insurance. Insurance coverage is maintained in certain instances to limit exposures arising from very large losses. The types and amounts of insurance may vary from time to time based on our decisions with respect to risk retention and regulatory requirements. Significant claims or events, regulatory changes, a substantial rise in costs of health care or costs to maintain our insurance or the failure to maintain adequate insurance coverage could have an adverse impact on our financial condition and results of operations. Although we maintain specific coverages for catastrophic property losses, we still bear a significant portion of the risk of losses incurred as a result of any physical damage to, or the destruction of, any warehouses, depots, manufacturing or home office facilities, loss or spoilage of inventory, and business interruption. Such losses could materially impact our cash flows and results of operations. Market and Other External Risks We face strong competition from other retailers and warehouse club operators, which could adversely affect our business, financial condition and results of operations. The retail business is highly competitive. We compete for members, employees, sites, products and services and in other important respects with a wide range of local, regional and national wholesalers and retailers, both in the United States and in foreign countries, including other warehouse-club operators, supermarkets, supercenters, internet retailers, gasoline stations, hard discounters, department and specialty stores and operators selling a single category or narrow range of merchandise. Such retailers and warehouse club operators compete in a variety of ways, including pricing, selection and availability, services, location, convenience, store hours, and the attractiveness and ease of use of websites and mobile applications. The evolution of retailing in online and mobile channels has improved the ability of customers to comparison shop, which has enhanced competition. Some competitors may have greater financial resources and technology capabilities, better access to merchandise, and greater market penetration than we do. Our inability to respond effectively to competitive pressures, changes in the retail markets and customer expectations could result in lost market share and negatively affect our financial results. General economic factors, domestically and internationally, may adversely affect our business, financial condition, and results of operations. 11 2019 58 Executive Vice President, Chief Information Officer. Mr. Moulton was Executive Vice President, Real Estate Development, from 2001 until March 2010. Executive Vice President, Chief Operating Officer, International. Mr. Murphy was Senior Vice President, International, from 2004 to October 2010. 1993 64 53,900 51,600 47,400 44,600 42,700 105,500 98,500 58,100 94,300 Labor Our employee count was as follows: Full-time employees Part-time employees Total employees 2020 2019 Paid cardholders (except affiliates) are eligible to upgrade to an Executive membership in the U.S. and Canada, for an additional annual fee of $60. Executive memberships are also available in Mexico, the U.K., Japan, Korea, and Taiwan, for which the additional annual fee varies. Executive members earn a 2% reward on qualified purchases (generally up to a maximum reward of $1,000 per year), which can be redeemed only at Costco warehouses. This program also offers (except in Mexico, Japan, and Korea), access to additional savings and benefits on various business and consumer services, such as auto and home insurance, the Costco auto purchase program, and check printing. These services are generally provided by third parties and vary by state and country. Executive members, who totaled 22.6 million and represented 39% of paid members at the end of 2020, generally shop more frequently and spend more than other members. 2018 10,900 11,300 2018 58 Certain financial information for our segments and geographic areas is included in Note 12 to the consolidated financial statements included in Item 8 of this Report. Membership Our members may utilize their memberships at our warehouses worldwide. Gold Star memberships are available to individuals; Business memberships are limited to businesses, including individuals with a business license, retail sales license or comparable document. Business members may add additional cardholders (affiliates), to which the same annual fee applies. Affiliates are not available for Gold Star members. Our annual fee for these memberships is $60 in our U.S. and Canadian operations and varies in other countries. All paid memberships include a free household card. Our member renewal rate was 91% in the U.S. and Canada and 88% on a worldwide basis at the end of 2020. The majority of members renew within six months following their renewal date. Our renewal rate is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date. Our membership counts include active memberships as well as memberships that have not renewed within the 12 months prior to the reporting date. At the end of 2020, we standardized our membership count methodology globally to be consistent with the U.S. and Canada, which resulted in the addition to the count of approximately 2.0 million total cardholders for 2020, of which 1.3 million were paid members. The change did not impact 2019 or 2018. Membership fee income and the renewal rate calculations were not affected. Our membership was made up of the following (in thousands): Gold Star 11,000 Business, including affiliates Total cardholders 2020 2019 2018 46,800 42,900 40,700 Household cards 156,000 117,000 273,000 Total paid members 143,000 Patrick J. Callans Russ D. Miller Paul G. Moulton James P. Murphy Joseph P. Portera Timothy L. Rose Ron M. Vachris Jim C. Klauer Position Executive Vice President and Chief Financial Officer. Mr. Galanti has been a director since January 1995. Executive Vice President, Chief Operating Officer, Northern Division. Mr. Klauer was Senior Vice President, Non Foods and E-commerce Merchandise, from 2013 to January 2018. Executive Vice President, Administration. Mr. Callans was Senior Vice President, Human Resources and Risk Management, from 2013 to December 2018. Executive Vice President, Chief Operating Officer, Southern Division and Mexico. Mr. Miller was Senior Vice President, Western Canada Region, from 2001 to January 2018. Executive Vice President, Ancillary Businesses, Manufacturing, and Business Centers. Mr. Rose was Senior Vice President, Merchandising, Food and Sundries and Private Label, from 1995 to December 2012. Executive Vice President, Chief Operating Officer, Merchandising. Mr. Vachris was Senior Vice President, Real Estate Development, from August 2015 to June 2016, and Senior Vice President, General Manager, Northwest Region, from 2010 to July 2015. 149,000 Executive Officer Since Age 1995 68 President and Chief Executive Officer. Mr. Jelinek has been President and Chief Executive Officer since January 2012 and a director since February 2010. He was President and Chief Operating Officer from February 2010 to December 2011. Prior to that he was Executive Vice President, Chief Operating Officer, Merchandising since 2004. Richard A. Galanti Executive Vice President, Chief Operating Officer, Eastern and Canadian Divisions. Mr. Portera has held these positions since 1994 and has been the Chief Diversity Officer since 2010. Name 254,000 W. Craig Jelinek 105,000 102,000 Approximately 17,100 employees are union employees. We consider our employee relations to be very good. Competition Our industry is highly competitive, based on factors such as price, merchandise quality and selection, location, convenience, distribution strategy, and customer service. We compete on a worldwide basis with global, national, and regional wholesalers and retailers, including supermarkets, supercenters, internet retailers, gasoline stations, hard discounters, department and specialty stores, and operators selling a single category or narrow range of merchandise. Walmart, Target, Kroger, and Amazon are among our significant general merchandise retail competitors. We also compete with other warehouse clubs (primarily Walmart's Sam's Club and BJ's Wholesale Club), and many of the major metropolitan areas in the U.S. and certain of our Other International locations have multiple clubs. Intellectual Property 50 245,000 We rely on trademark and copyright laws, trade-secret protection, and confidentiality, license and other agreements with our suppliers, employees and others to protect our intellectual property. The availability and duration of trademark registrations vary by country; however, trademarks are generally valid and may be renewed indefinitely as long as they are in use and registrations are maintained. Available Information Our U.S. website is www.costco.com. We make available through the Investor Relations section of that site, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and Forms 3, 4 and 5, and any amendments to those reports, as soon as reasonably practicable after filing such materials with or furnishing such documents to the Securities and Exchange Commission (SEC). The information found on our website is not part of this or any other report filed with or furnished to the SEC. The SEC maintains a site that contains reports, proxy and information statements, and other information regarding issuers, such as the Company, that file electronically with the SEC at www.sec.gov. We have adopted a code of ethics for senior financial officers pursuant to Section 406 of the Sarbanes- Oxley Act. Copies of the code are available free of charge by writing to Secretary, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, WA 98027. If the Company makes any amendments to this code (other than technical, administrative, or non-substantive amendments) or grants any waivers, including implicit waivers, to the CEO, chief financial officer or principal accounting officer and controller, we will disclose (on our website or in a Form 8-K report filed with the SEC) the nature of the amendment or waiver, its effective date, and to whom it applies. The executive officers of Costco, their position, and ages are listed below. All executive officers have over 25 years of service with the Company. 6 We believe that, to varying degrees, our trademarks, trade names, copyrights, proprietary processes, trade secrets, trade dress, domain names and similar intellectual property add significant value to our business and are important to our success. We have invested significantly in the development and protection of our well-recognized brands, including the Costco Wholesale® trademarks and our private- label brand, Kirkland Signature®. We believe that Kirkland Signature products are high quality, offered at prices that are generally lower than national brands, and help lower costs, differentiate our merchandise offerings, and generally earn higher margins. We expect to continue to increase the sales penetration of our private-label items. Information about our Executive Officers $ 20,890 $ 19,681 $ 18,161 $ 17,043 Long-term debt, excluding current portion 55,556 40,830 36,347 $ 21,807 33,163 Total assets 45,400 9% BALANCE SHEET DATA 4 % 4 % 7 % 6% (3) currency and gasoline prices excluding the impact of changes in foreign Changes in Total Company comparable sales 0% 4 % 9% 7,514 6% Net property and equipment 5,124 686 6,573 8% End of year (4) (2) (4) 5 (3) Closed due to relocation 33 28 25 25 16 6,487 Opened 741 762 782 Beginning of year Warehouses in Operation WAREHOUSE INFORMATION 12,079 10,778 12,799 15,243 18,284 Costco stockholders' equity 4,061 715 (3)% Net income attributable to Costco 11 % 3,659 4,002 795 3,672 $ 4,111 $ 4,480 4,737 $ $ $ 5,435 Operating income 10.40 % 10.26 % 10.02 % 3,134 10.04 % expenses as a percentage of net sales Selling, general and administrative 11.35 % 11.33 % 11.04 % 11.02 % 11.20 % Gross margin (1) as a percentage of net sales 2,646 2,853 3,142 3,352 3,541 10.01 % 2% 2,679 Net income per diluted common share attributable to Costco 2% 9% (3)% 5 % 9% 2% 5 % 1% 4 % 9% 8% 8 % Total Company 2,350 Other International United States Changes in comparable sales (2) 1.70 8.90 2.14 2.44 2.70 Cash dividends declared per common share 5.33 6.08 7.09 8.26 9.02 Canada 782 For discussion related to the results of operations and changes in financial condition for 2019 compared to 2018 refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal year 2019 Form 10-K, which was filed with the United States Securities and Exchange Commission on October 11, 2019. 741 8% 8% 10 % 8 % 9% 14 % 5% 13 % 10 % 3 % 5 % 9% 9% 9% 9% 2018 $ 149,351 $ 163,220 2019 2020 Total Company Other International Canada U.S. Changes in comparable sales: Total Company Other International Canada $ 138,434 Changes in net sales: U.S. 5 % 9% Comparable sales increased 8% during 2020 and were positively impacted by increases in average ticket. While traffic increased slightly in 2020, it decreased in the second half of the year due to capacity restrictions and regulations related to COVID-19. There was an increase of 50% in e-commerce comparable sales in 2020, with an increase of 80% in the second half of the year. Comparable Sales Changes in gasoline prices negatively impacted net sales by $1,504, or 101 basis points, compared to 2019, due to a 10% decrease in the average price per gallon. The volume of gasoline sold decreased approximately 4%, negatively impacting net sales by $699, or 47 basis points. Changes in foreign currencies relative to the U.S. dollar negatively impacted net sales by approximately $663, or 44 basis points, compared to 2019, attributable to our Canadian and Other International Operations. Net sales increased $13,869 or 9% during 2020, primarily due to an 8% increase in comparable sales and sales at new warehouses opened in 2019 and 2020. During the second half of 2020, we experienced a significant sales shift from certain of our ancillary and other businesses to our core merchandise categories, primarily food and sundries and fresh foods, as a result of COVID-19. This shift was largely driven by price deflation and lower volume in our gasoline business; temporary closures of most of our optical, hearing aid and photo departments; limited service in our food courts; and minimal demand in our travel business. (1) Excluding the impact of the revenue recognition standard for the year ended September 1, 2019. Net Sales 7% 6% 9% Total Company 7% 6% 11 % 4 % 2% 5 % 7 % 6% 9% Other International Canada U.S. Increases in comparable sales excluding the impact of changes in foreign currency and gasoline prices (1): 9% 6% 8 % 11 % 2% 9% 7 % 762 Net Sales RESULTS OF OPERATIONS 24 21 We also achieve net sales growth by opening new warehouses. As our warehouse base grows, available and desirable 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 operating floor space square footage growth is generally higher in foreign markets, due to the smaller base in those markets, and we expect that to 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 may 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, all negatively impacting gross margin as a percentage of net sales (gross margin percentage). We believe our gasoline business draws members, but it generally has a lower gross margin percentage relative to our non-gasoline business. It also has lower SG&A expenses as a percent of net sales compared 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 SG&A expenses as a percentage of net sales. A decline in gasoline prices has the inverse effect. Additionally, actions in various countries, particularly China and the United States, have created uncertainty with respect to how tariffs will affect the costs of some of our merchandise. The degree of our exposure is dependent on (among other things) the type of goods, rates imposed, and timing of the tariffs. The impact to our net sales and gross margin will be influenced in part by our merchandising and pricing strategies in response to cost increases. While these potential impacts are uncertain, they could have an adverse impact on our results. We believe that the most important driver of our profitability is increasing net sales, particularly comparable sales growth. Net sales includes our core merchandise categories (food and sundries, hardlines, softlines, and fresh foods), warehouse ancillary and other businesses. We define comparable sales as net sales from warehouses open for more than one year, including remodels, relocations and expansions, and 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); and changes in the cost of gasoline and associated competitive conditions (primarily impacting our U.S. and Canadian operations). The higher our comparable sales exclusive of these items, the more we can leverage certain of our selling, general and administrative (SG&A) 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 net sales growth is the health of the economies in which we do business, including the effects of inflation or deflation, especially the United States. Net 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 merchandise mix, including increasing the penetration of our private-label items and through online offerings. Item 7-Management's Discussion and Analysis of Financial Conditions and Results of Operations (amounts in millions, except per share, share, membership fee, and warehouse count data) Overview 20 20 (5) Counts are included in total paid members (4) 2020 includes an additional 1.3 million due to standardizing our membership count methodology globally to be consistent with the U.S. and Canada. See Item 1. (3) Excluding the impact of the revenue recognition standard for the year ended September 1, 2019. (2) Includes net sales from warehouses and websites operating for more than one year. For 2017, the prior year includes the comparable 53 weeks. (1) Net sales less merchandise costs. continue. Our e-commerce business growth, domestically and internationally, has also increased our sales but it generally has a lower gross margin percentage relative to our warehouse business. 17,400 19,300 20,800 22,600 Total executive members (000's) (5) 47,600 49,400 51,600 53,900 58,100 (4) Total paid members (000's) MEMBERSHIP INFORMATION 715 18,500 Net Sales The 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 operating model is generally the same across our U.S., Canada, and Other International operating segments (see Note 12 to the consolidated financial statements included in Item 8 of this Report). Certain countries in the Other International segment have relatively higher rates of square footage growth, lower wage and benefit costs as a percentage of country sales, less or no direct membership warehouse competition, and may lack an e-commerce business. 223 23 On March 11, 2020, the World Health Organization announced that COVID-19 infections had become a pandemic, and shortly afterward the U.S. declared a National Emergency. The outbreak has led to widespread and continuing impacts on the global economy and is affecting many aspects of our business and the operations of others with which we do business. In our response to the pandemic and in an effort to protect our members and employees, we have taken several measures, as described in Item 1A Risk Factors, and their implications on our results of operations have impacted us across all our reportable segments to varying degrees. Throughout the pandemic our warehouses have largely remained open as a result of being deemed an "essential business” in most markets and resulted in strong sales increases in our food and sundries and fresh foods merchandise categories compared to pre-pandemic time periods. This growth in certain of our core business categories has led to improved gross margin and SG&A percentages as we leveraged these sales to achieve greater efficiency. Our e-commerce business has also benefited, as more members have shopped online during the pandemic. Conversely, we have experienced decreases in both the sales and profitability of many of our ancillary and other businesses due to temporary closures or limited demand. Additionally, we paid $564 in incremental wage and sanitation costs during 2020 related to COVID-19. COVID-19 In April 2020, the Board of Directors approved an increase in the quarterly cash dividend from $0.65 to $0.70 per share. In April 2020, we issued $4,000 in aggregate principal amount of Senior Notes, some proceeds of which were used to repay $1,500 of Senior Notes; and In February 2020, we acquired a 35% interest in Navitus Health Solutions, a pharmacy benefit manager. In March 2020, we acquired Innovel Solutions, a company that provides final-mile delivery, installation and white-glove capabilities for big and bulky products across the United States and Puerto Rico; Net income increased 9% to $4,002, or $9.02 per diluted share compared to $3,659, or $8.26 per diluted share in 2019; The effective tax rate in 2020 was 24.4% compared to 22.3% in 2019; SG&A expenses as a percentage of net sales decreased three basis points primarily due to leveraging increased sales and partial reversal of a previous year tax assessment. These benefits were partially offset by incremental wage and sanitation costs as a result of COVID-19; Gross margin percentage increased 18 basis points, driven primarily by certain core merchandise categories, partially offset by certain ancillary and other businesses, which were negatively impacted by COVID-19 related closures or restrictions; Membership fee revenue increased 6% to $3,541, primarily due to membership sign-ups at existing and new warehouses; Net sales increased 9% to $163,220 driven by a 8% increase in comparable sales and sales at new warehouses opened in 2019 and 2020; Our financial performance depends heavily on controlling costs. While we believe that we have achieved successes in this area, some significant costs are partially outside our control, particularly health care and utility expenses. With respect to the compensation of our employees, our philosophy is not to seek to minimize their wages and benefits. Rather, we believe that achieving our longer-term objectives of 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 operates on very low margins, modest changes in various items in the consolidated statements of income, particularly merchandise costs and selling, general and administrative expenses, can have substantial impacts on net income. We opened 16 new warehouses, including 3 relocations: 9 new in the U.S., 3 new in our Other International segment, and 1 net new location in our Canadian segment, compared to 25 new warehouses, including 5 relocations in 2019; • • • • • • • Highlights for 2020 included: 222 22 Membership fees Our fiscal year ends on the Sunday closest to August 31. References to 2020, 2019, and 2018 relate to the 52-week fiscal years ended August 30, 2020, September 1, 2019, and September 2, 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. In discussions of our consolidated operating results, we refer to the impact of changes in foreign currencies relative to the U.S. dollar, which are references 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. • $116,073 Totals $138,434 94,000 301.79 94,000 3,833 $ $ Maximum Dollar Value of Shares that May Yet be Purchased under the Program Total Number of Shares Purchased as Part of Publicly Announced Program(1) Share Purchased Average Price Paid per Total Number of Shares Total fourth quarter August 3-August 30, 2020 July 6-August 2, 2020 June 8-July 5, 2020 May 11-June 7, 2020 Period The following table sets forth information on our common stock repurchase activity for the fourth quarter of 2020 (dollars in millions, except per share data): Issuer Purchases of Equity Securities Payment of dividends is subject to declaration by the Board of Directors. Factors considered in determining dividends include our profitability and expected capital needs. Subject to these qualifications, we presently expect to continue to pay dividends on a quarterly basis. Our common stock is traded on the NASDAQ Global Select Market under the symbol "COST." On September 29, 2020, we had 9,690 stockholders of record. Market Information and Dividend Policy Item 5-Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities PART II Not applicable. Item 4-Mine Safety Disclosures 3,805 93,000 324.51 93,000 Item 6-Selected Financial Data S&P 500 Retail S&P 500 Costco 8/30/20 9/1/19 9/2/18 9/3/17 8/28/16 8/30/15 0 100 200 See discussion of Legal Proceedings in Note 11 to the consolidated financial statements included in Item 8 of this Report. 300 Dollars Comparison of 5-Year Cumulative Total Returns Performance Graph 18 (1) The repurchase program is conducted under a $4,000 authorization approved by our Board of Directors in April 2019, which expires in April 2023. 275,000 321.73 275,000 $ 3,745 88,000 340.17 88,000 3,775 400 Item 3-Legal Proceedings 17 At the end of 2020, our warehouses contained approximately 116.1 million square feet of operating floor space: 81.4 million in the U.S.; 14.3 million in Canada; and 20.4 million in Other International. Total square feet associated with distribution and logistics facilities were approximately 28.0 million. Additionally, we operate various processing, packaging, manufacturing and other facilities to support our business, which includes the production of certain private-label items. Significant changes in or failure to comply with regulations relating to the use, storage, discharge and disposal of hazardous materials, hazardous and non-hazardous wastes and other environmental matters could adversely impact our business, financial condition and results of operations. We are subject to a variety of taxes and tax collection and remittance obligations in the U.S. and numerous foreign jurisdictions. Additionally, at any point in time, we may be under examination for value added, sales-based, payroll, product, import or other non-income taxes. We may recognize additional tax expense, be subject to additional tax liabilities, or incur losses and penalties, due to changes in laws, regulations, administrative practices, principles, assessments by authorities and interpretations related to tax, including tax rules in various jurisdictions. We compute our income tax provision based on enacted tax rates in the countries in which we operate. As tax rates vary among countries, a change in earnings attributable to the various jurisdictions in which we operate could result in an unfavorable change in our overall tax provision. Additionally, changes in the enacted tax rates or adverse outcomes in tax audits, including transfer pricing disputes, could have a material adverse effect on our financial condition and results of operations. We could be subject to additional tax liabilities. Accounting principles and related pronouncements, implementation guidelines, and interpretations we apply to a wide range of matters that are relevant to our business, including self-insurance liabilities, are highly complex and involve subjective assumptions, estimates and judgments by our management. Changes in rules or interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance and have a material impact on our consolidated financial statements. Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial condition and results of operations. Section 404 of the Sarbanes-Oxley Act of 2002 requires management assessments of the effectiveness of internal control over financial reporting and disclosure controls and procedures. If we are unable to maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to record, process and report financial information accurately and to prepare financial statements within required time periods could be adversely affected, which could subject us to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in our financial statements and adversely impact our stock price. We are exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act. These factors include political and economic conditions, regulatory constraints, currency regulations, policy changes such as the withdrawal of the U.K. from the European Union, and other matters in any of the countries or regions in which we operate, now or in the future. Other factors that may impact international operations include foreign trade (including tariffs and trade sanctions), monetary and fiscal policies and the laws and regulations of the U.S. and foreign governments, agencies and similar organizations, and risks associated with having major facilities in locations which have been historically less stable than the U.S. Risks inherent in international operations also include, among others, the costs and difficulties of managing international operations, adverse tax consequences, and difficulty in enforcing intellectual property rights. 15 At the end of 2020, we operated 243 warehouses outside of the U.S., and we plan to continue expanding our international operations. Future operating results internationally could be negatively affected by a variety of factors, many similar to those we face in the U.S., certain of which are beyond our control. We are subject to risks associated with the legislative, judicial, accounting, regulatory, political and economic factors specific to the countries or regions in which we operate, which could adversely affect our business, financial condition and results of operations. Legal and Regulatory Risks We believe that the price of our stock currently reflects high market expectations for our future operating results. Any failure to meet or delay in meeting these expectations, including our warehouse and e- commerce comparable sales growth rates, membership renewal rates, new member sign-ups, gross margin, earnings, earnings per share, new warehouse openings, or dividend or stock repurchase policies could cause the market price of our stock to decline. We are subject to a wide and increasingly broad array of federal, state, regional, local and international laws and regulations relating to the use, storage, discharge and disposal of hazardous materials, hazardous and non-hazardous wastes and other environmental matters. Failure to comply with these laws could result in harm to our members, employees or others, significant costs to satisfy environmental compliance, remediation or compensatory requirements, or the imposition of severe penalties or restrictions on operations by governmental agencies or courts that could adversely affect our business, financial condition and results of operations. Failure to meet financial market expectations could adversely affect the market price and volatility of our stock. Factors associated with climate change could adversely affect our business. To the extent that COVID-19 continues to adversely affect the U.S. and global economy, our business, results of operations, cash flows, or financial condition, it may also heighten other risks described in this section, including but not limited to those related to consumer behavior and expectations, competition, brand reputation, implementation of strategic initiatives, cybersecurity threats, payment-related risks, technology systems disruption, supply chain disruptions, labor availability and cost, litigation, operational risk as a result of remote work arrangements and regulatory requirements. The long-term impact of the pandemic on our business, including consumer behaviors. The pace of recovery when the pandemic subsides; and Unknown consequences on our business performance and initiatives stemming from the substantial investment of time and other resources to the pandemic response; Evolving macroeconomic factors, including general economic uncertainty, unemployment rates, and recessionary pressures; The severity and duration of the pandemic, including whether there is a “second wave" caused by additional periods of increases or spikes in the number of COVID-19 cases, future mutations or related strains of the virus in areas in which we operate; • • • • Other factors and uncertainties include, but are not limited to: In an effort to strengthen our liquidity position, during the year we issued $4,000 million Senior Notes, a portion of which was used to repay, prior to maturity, $1,500 million of our 2.150% and 2.250% Senior Notes. Financial and credit markets have experienced and may continue to experience significant volatility and turmoil. Our continued access to external sources of liquidity depends on multiple factors, including the condition of debt capital markets, our operating performance, and maintaining strong credit ratings. If the impacts of the pandemic continue to disrupt the financial markets, or if rating agencies lower our credit ratings, it could adversely affect our ability to access the debt markets, our cost of funds, and other terms for new debt or other sources of external liquidity, if needed. We use natural gas, diesel fuel, gasoline, and electricity in our distribution and warehouse operations. Government regulations limiting carbon dioxide and other greenhouse gas emissions may increase compliance and merchandise costs, and other regulation affecting energy inputs could materially affect our profitability. Climate change, extreme weather conditions, and rising sea levels could affect our ability to procure commodities at costs and in quantities we currently experience. We also sell a substantial amount of gasoline, the demand for which could be impacted by concerns about climate change and which face increased regulation. The following graph provides information concerning average sales per warehouse over a 10 year period. 16 We are involved in a number of legal proceedings and audits and some of these outcomes could adversely affect our business, financial condition and results of operations. 795 166 629 142 43 99 101 14 87 552 109 443 Total Operations at our facilities require the treatment and disposal of wastewater, stormwater and agricultural and food processing wastes, the use and maintenance of refrigeration systems, including ammonia-based chillers, noise, odor and dust management, the operation of mechanized processing equipment, and other operations that potentially could affect the environment and public health and safety. Failure to comply with current and future environmental, health and safety standards could result in the imposition of fines and penalties, illness or injury of our employees, and claims or lawsuits related to such illnesses or injuries, and temporary closures or limits on the operations of facilities. Building (1) Own Land and Building (1) 119 of the 166 leases are land-only leases, where Costco owns the building. Total Other International Canada United States and Puerto Rico At August 30, 2020, we operated 795 membership warehouses: Warehouse Properties Item 2-Properties None. Item 1B-Unresolved Staff Comments resources. Our business requires compliance with many laws and regulations. Failure to achieve compliance could subject us to lawsuits and other proceedings, and lead to damage awards, fines, penalties, and remediation costs. We are or may become involved in a number of legal proceedings and audits, including grand jury investigations, government and agency investigations, and consumer, employment, tort, unclaimed property laws, and other litigation. We cannot predict with certainty the outcomes of these proceedings and other contingencies, including environmental remediation and other proceedings commenced by governmental authorities. The outcome of some of these proceedings, audits, unclaimed property laws, and other contingencies could require us to take, or refrain from taking, actions which could negatively affect our operations or could require us to pay substantial amounts of money, adversely affecting our financial condition and results of operations. Additionally, defending against these lawsuits and proceedings may involve significant expense and diversion of management's attention and Lease Land and/or Average Sales Per Warehouse* (Sales In Millions) Year Opened 160 $ 155 $ 146 $ 2011 795 $ 206 196 189 176 170 171 171 164 156 164 $ 146 592 2011 & Before 173 158 152 139 130 128 124 115 105 $ 15 $ 158 162 $ 163 $ $149,351 $163,220 Net sales Aug. 28, 2016 (52 weeks) Sept. 3, 2017 (53 weeks) Sept. 2, 2018 (52 weeks) Sept. 1, 2019 (52 weeks) (52 weeks) As of and for the year ended RESULTS OF OPERATIONS Aug. 30, 2020 SELECTED FINANCIAL DATA (dollars in millions, except per share data) The following table sets forth information concerning our consolidated financial condition, operating results, and key operating metrics. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, included in Item 7 of this Report, and our consolidated financial statements and notes thereto, included in Item 8 of this Report. 19 159 $ 2012 and 2017 were 53-week fiscal years Fiscal Year 2020 2019 2018 2017 2016 2015 2014 2013 2012 192 182 $ 176 $ *First year sales annualized. $126,172 144 124 121 $ SA 26 141 119 116 $ 21 138 129 SA $ 142 20 2012 2013 2014 2015 2016 2017 2018 2019 132 $ 13 2020 # of Whses 22222324 137 158 29 116 113 109 99 $ 26 155 144 140 125 115 109 108 176 $ 136 122 112 94 85 83 $ 145 131 118 97 87 $ 30 The following graph compares the cumulative total shareholder return (stock price appreciation and the reinvestment of dividends) on an investment of $100 in Costco common stock, S&P 500 Index, and the S&P 500 Retail Index over the five years from August 30, 2015, through August 30, 2020. 224 24 Payments Due by Fiscal Year Business Corporation Act. The remaining amount available to be purchased under our approved plan was $3,745 at the end of 2020. 28 During 2020 and 2019, we repurchased 643,000 and 1,097,000 shares of common stock, at average prices of $308.45 and $225.16, respectively, totaling approximately $198 and $247, respectively. These amounts may differ from the stock repurchase balances in the accompanying consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of each fiscal year. 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 Stock Repurchase Programs Financing activities also included $1,200 and $500 repayment of our 1.700% and 1.750% Senior Notes, respectively, payment of dividends, withholding taxes on stock-based awards, and repurchases of common stock. Net cash used in financing activities totaled $1,147 in both 2020 and 2019. In April 2020, we issued $4,000 in aggregate principal amount of Senior Notes as follows: $1,250 of 1.375% due June 2027; $1,750 of 1.600% due April 2030; and $1,000 of 1.750% due April 2032. A portion of the proceeds was used to repay, prior to maturity, the outstanding $1,000 and $500 principal balances on the 2.150% and 2.250% Senior Notes, respectively, at a redemption price plus accrued interest as specified in the Notes' agreements. The remaining funds are intended for general corporate purposes. Cash Flows from Financing Activities Our primary requirement 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 2020, we spent $2,810 on capital expenditures, and it is our current intention to spend approximately $3,000 to $3,200 during fiscal 2021. These expenditures are expected to be financed with cash from operations, existing cash and cash equivalents, and short- term investments. We opened 16 new warehouses, including three relocations, in 2020, and plan to open approximately 23 additional new warehouses, including three relocations, in 2021. We have experienced delays in real estate and construction activities due to COVID-19. 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 or based on the current economic environment. Capital Expenditures Dividends Net cash used in investing activities totaled $3,891 in 2020, compared to $2,865 in 2019, and primarily related to capital expenditures. In 2020, we acquired Innovel and a minority interest in Navitus. For more information see Notes 1 and 2 to the consolidated financial statements. Net cash flows from investing activities also includes maturities and purchases of short-term investments. Net cash provided by operating activities totaled $8,861 in 2020, compared to $6,356 in 2019. Our cash flow provided by operations is primarily derived from net sales and membership fees. Cash flow used in operations generally consists of payments to our merchandise suppliers, warehouse operating costs, including payroll and employee benefits, utilities, and credit and debit card processing fees. Cash used in operations also includes payments for income taxes. Changes in our net investment in merchandise inventories (the difference between merchandise inventories and accounts payable) is impacted by several factors, including how fast inventory is sold, payment terms with our suppliers, and the amount of payables paid early to obtain discounts from our suppliers. Cash Flows from Operating Activities 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. We no longer consider earnings after 2017 of our non-U.S. consolidated subsidiaries to be indefinitely reinvested. 27 Our primary sources of liquidity are cash flows generated from our operations, cash and cash equivalents, and short-term investments. Cash and cash equivalents and short-term investments were $13,305 and $9,444 at the end of 2020 and 2019, respectively. Of these balances, unsettled credit and debit card receivables represented approximately $1,636 and $1,434 at the end of 2020 and 2019, respectively. These receivables generally settle within four days. Cash and cash equivalents were positively impacted by a change in exchange rates of $70 in 2020, and negatively impacted by $15 and $37 in 2019 and 2018, respectively. (1,281) (2,947) 5,774 6,356 $ (2,865) (1,147) 2018 Cash Flows from Investing Activities Cash dividends declared in 2020 totaled $2.70 per share, as compared to $2.44 per share in 2019. Dividends totaling $1,479 were paid during 2020, of which $286 related to the dividend declared in August 2019. In April 2020, the Board of Directors increased our quarterly cash dividend from $0.65 to $0.70 per share. In July 2020, the Board of Directors declared a quarterly cash dividend in the amount of $0.70 per share, which was paid on August 14, 2020. Bank Credit Facilities and Commercial Paper Programs We maintain bank credit facilities for working capital and general corporate purposes. At August 30, 2020, we had borrowing capacity under these facilities of $967. Our international operations maintain $500 of the total borrowing capacity under bank credit facilities, of which $204 is guaranteed by the Company. There were no outstanding short-term borrowings under the bank credit facilities at the end of 2020 and 2019. 1,475 1,163 241 Long-term debt (2) 12,584 $ $ - $ 9 2019 12,575 $ Purchase obligations (1) Total 2026 and thereafter 2024 to 2025 2022 to 2023 2021 Contractual obligations At August 30, 2020, our commitments to make future payments under contractual obligations were as follows: Contractual Obligations The Company has letter of credit facilities, for commercial and standby letters of credit, totaling $183. The outstanding commitments under these facilities at the end of 2020 totaled $166, most of which were standby letters of credit which do not expire or have expiration dates within one year. The bank credit facilities have various expiration dates, most of which are within one year, 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 outstanding. $ 5,776 8,861 $ (3,891) (1,147) 2020 (4) 27 7 75 126 $ $ 89 2018 2019 2020 25 Interest income and other, net Other, net Interest income Interest Income and Other, Net April 2020, we issued $4,000 in aggregate principal amount of long-term debt consisting of $1,250 of 1.375% Senior Notes due June 2027; $1,750 of 1.600% Senior Notes due April 2030; and $1,000 of 1.750% Senior Notes due April 2032. A portion of the proceeds was used to repay, prior to maturity, $1,000 and $500 of the 2.150% and 2.250% Senior Notes. For more information on our debt arrangements refer to Note 5 to the consolidated financial statements. 26 Interest expense primarily relates to Senior Notes. In December 2019 and February 2020, we repaid $1,200 and $500 in total outstanding principal of the 1.700% and 1.750% Senior Notes, respectively. In 159 150 $ 160 $ 2018 Foreign-currency transaction gains, net $ 23 92 $ Net cash provided by operating activities Net cash used in investing activities Net cash used in financing activities The following table summarizes our significant sources and uses of cash and cash equivalents: LIQUIDITY AND CAPITAL RESOURCES The effective tax rate for 2019 included discrete net tax benefits of $221, including a benefit of $59 due to excess tax benefits from stock compensation. This also included a tax benefit of $105 related to U.S. taxation of deemed foreign dividends, offset by losses of foreign tax credits, which impacted the effective tax rate. Excluding these benefits, the tax rate was 26.9% for 2019. The effective tax rate for 2020 included discrete net tax benefits of $81, including a benefit of $77 due to excess tax benefits from stock compensation. Excluding these benefits, the tax rate was 25.9% for 2020. 28.4 % 22.3 % 24.4 % 1,263 $ $ 1,061 2018 2019 2020 1,308 $ Effective tax rate Provision for income taxes Provision for Income Taxes The decrease in interest income in 2020 was primarily due to lower interest rates in the U.S. and Canada, partially offset by higher average cash and investment balances. Foreign-currency transaction gains, net include the revaluation and settlement of monetary assets and liabilities and mark-to-market adjustments for forward foreign-exchange contracts by our Canadian and Other International operations. See Derivatives and Foreign Currency sections in Note to the consolidated financial statements. Other, net was impacted by a $36 charge related to the repayment of certain Senior Notes, as discussed above and in Note 5. 121 178 $ $ 8,655 Operating leases (3) (4) 273 As discussed in Note 1 to the consolidated financial statements, the Company estimates its self- insurance liabilities by considering historical claims experience, demographic factors, severity factors, and other actuarial assumptions. The estimated insurance/self-insurance liabilities as of August 30, 2020 were $1,188 million, a portion of which related to workers' compensation and general liability self-insurance liabilities for the United States and Canadian operations. Evaluation of self-insurance liabilities 32 The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. Basis for Opinion As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of September 2, 2019 due to the adoption of Accounting Standards Update 2016-02-Leases (ASC 842). Change in Accounting Principle We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of August 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated October 6, 2020 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. We have audited the accompanying consolidated balance sheets of Costco Wholesale Corporation and subsidiaries (the Company) as of August 30, 2020 and September 1, 2019, the related consolidated statements of income, comprehensive income, equity, and cash flows for the 52-week periods ended August 30, 2020, September 1, 2019 and September 2, 2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of August 30, 2020 and September 1, 2019, and the results of its operations and its cash flows for the 52-week periods ended August 30, 2020, September 1, 2019 and September 2, 2018, in conformity with U.S. generally accepted accounting principles. Opinion on the Consolidated Financial Statements Costco Wholesale Corporation: To the Stockholders and Board of Directors REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Item 8-Financial Statements and Supplementary Data 31 We are exposed to fluctuations in prices for energy, particularly electricity and natural gas, and other commodities used in retail and manufacturing operations, which we seek to partially mitigate through fixed-price contracts for certain of our warehouses and other facilities, predominantly in the U.S. and Canada. We also enter into variable-priced contracts for some purchases of electricity and natural gas, in addition to some of the fuel for our gas stations, on an index basis. These contracts meet the characteristics of derivative instruments, but generally qualify for the "normal purchases and normal sales" exception under authoritative guidance and require no mark-to-market adjustment. Commodity Price Risk Our foreign subsidiaries conduct certain transactions in non-functional currencies, which exposes us to fluctuations in exchange rates. We manage these fluctuations, in part, through the use of forward foreign- exchange contracts, seeking to economically hedge the impact of these fluctuations on known future expenditures denominated in a non-functional foreign-currency. The contracts are intended primarily to economically hedge exposure to U.S. dollar merchandise inventory expenditures made by our international subsidiaries whose functional currency is other than the U.S. dollar. We seek to mitigate risk with the use of these contracts and do not intend to engage in speculative transactions. For additional information related to the Company's forward foreign-exchange contracts, see Notes 1 and 4 to the consolidated financial statements included in Item 8 of this Report. A hypothetical 10% strengthening of the functional currency compared to the non-functional currency exchange rates at August 30, 2020, would have decreased the fair value of the contracts by $111 and resulted in an unrealized loss in the consolidated statements of income for the same amount. Foreign Currency Risk We identified the evaluation of the Company's workers' compensation and general liability self- insurance liabilities for the United States and Canadian operations as a critical audit matter because of the extent of specialized skill and knowledge needed to evaluate the Company's actuarial models and the judgments required to assess the underlying assumptions made by the Company. Specifically, subjective auditor judgment was required to evaluate certain assumptions underlying the Company's actuarial estimates, including reporting and payment patterns used in the projections of the ultimate loss; loss and exposure trends; the selected loss rates and initial expected losses used in the Paid and Incurred Bornhuetter-Ferguson methods; and the selection of the ultimate loss derived from the various methods. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested operating effectiveness of certain internal controls over the Company's self-insurance process. This included controls related to the development and selection of the assumptions listed above used in the actuarial calculation and review of the actuarial report. We involved actuarial professionals with specialized skills and knowledge who assisted in: Assessing the actuarial models used by the Company for consistency with generally accepted actuarial standards Evaluating the Company's ability to estimate self-insurance liabilities by comparing its historical estimate with actual incurred losses and paid losses 34 October 6, 2020 Seattle, Washington /s/ KPMG LLP Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Definition and Limitations of Internal Control Over Financial Reporting We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. Basis for Opinion The nature and amount of our long-term debt may vary as a result of business requirements, market conditions, and other factors. As of the end of 2020, long-term debt with fixed interest rates was $7,657. Fluctuations in interest rates may affect the fair value of the fixed-rate debt. See Note 5 to the consolidated financial statements included in Item 8 of this Report for more information on our long-term debt. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of August 30, 2020 and September 1, 2019, the related consolidated statements of income, comprehensive income, equity, and cash flows for the 52-week periods ended August 30, 2020, September 1, 2019 and September 2, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated October 6, 2020 expressed an unqualified opinion on those consolidated financial statements. Opinion on Internal Control Over Financial Reporting Costco Wholesale Corporation: To the Stockholders and Board of Directors REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 33 October 6, 2020 Seattle, Washington We have served as the Company's auditor since 2002. /s/ KPMG LLP Evaluating the above listed assumptions underlying the Company's actuarial estimates by developing an independent expectation of the self-insurance liabilities and comparing them to the amounts recorded by the Company We have audited Costco Wholesale Corporation and subsidiaries' (the Company) internal control over financial reporting as of August 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. A 100 basis point change in interest rates as of the end of 2020 would have had an immaterial incremental change in fair market value. For those investments that are classified as available-for-sale, the unrealized gains or losses related to fluctuations in market volatility and interest rates are reflected within stockholders' equity in accumulated other comprehensive income in the consolidated balance sheets. Our policy limits investments in the U.S. to direct U.S. government and government agency obligations, repurchase agreements collateralized by U.S. government and government agency obligations, U.S. government and government agency money market funds, and insured bank balances. Our wholly-owned captive insurance subsidiary invests in U.S. government and government agency obligations and U.S. government and government agency money market funds. Our Canadian and Other International subsidiaries' investments are primarily in money market funds, bankers' acceptances, and bank certificates of deposit, generally denominated in local currencies. 30 60 Other (6) 1,138 187 72 205 674 Purchase obligations (equipment, services and other) 1,128 742 36 197 61 Finance lease obligations (4) 1,014 35 979 Construction and land obligations 3,570 2,410 388 499 128 2019 28 232 Our exposure to market risk for changes in interest rates relates primarily to our investment holdings that are diversified among various instruments considered to be cash equivalents, as defined in Note 1 to the consolidated financial statements included in Item 8 of this Report, as well as short-term investments in government and agency securities with effective maturities of generally three months to five years at the date of purchase. The primary objective of our investment activities is to preserve principal and secondarily to generate yields. The majority of our short-term investments are in fixed interest-rate securities. These securities are subject to changes in fair value due to interest rate fluctuations. Interest Rate Risk Our exposure to financial market risk results from fluctuations in interest rates and foreign currency exchange rates. We do not engage in speculative or leveraged transactions or hold or issue financial instruments for trading purposes. Item 7A-Quantitative and Qualitative Disclosures About Market Risk (amounts in millions) See Note 1 to the consolidated financial statements included in Item 8 of this Report for a detailed description of recent accounting pronouncements. Recent Accounting Pronouncements Claims for employee health-care benefits, workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability, inventory loss, and other exposures are funded predominantly through self-insurance. Insurance coverage is maintained in certain instances to seek to limit exposures arising from very large losses. We use different risk management mechanisms, including a wholly-owned captive insurance subsidiary, and participate in a reinsurance program. Liabilities associated with the risks that we retain are not discounted and are estimated by using historical claims experience, demographic factors, severity factors, and other actuarial assumptions. The costs of claims are highly unpredictable and can fluctuate as a result of inflation rates, regulatory or legal changes, and unforeseen developments in claims over time. While we believe our estimates are reasonable and provide for a certain degree of coverage to account for these variables, actual claims and costs could differ significantly from recorded liabilities. Historically, adjustments to our estimates have not been material. Insurance/Self-insurance Liabilities 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 assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on assumptions that we believe to be reasonable, and we continue to review and evaluate these estimates. For further information on significant accounting policies, see discussion in Note 1 to the consolidated financial statements included in Item 8 of this Report. Critical Accounting Estimates 108 In the opinion of management, we have no off-balance sheet arrangements that have had or are reasonably likely to have a material current or future effect on our financial condition or financial statements. 29 29 (6) Includes asset retirement obligations and deferred compensation obligations. The amount excludes $25 of non-current unrecognized tax contingencies and $48 of other obligations due to uncertainty regarding the timing of future cash payments. (5) Excludes certain services negotiated at the individual warehouse or regional level that are not significant and generally contain clauses allowing for cancellation without significant penalty. (1) Includes open purchase orders primarily related to merchandise and supplies. (2) Includes contractual interest payments and excludes deferred issuance costs. (3) Operating lease payments have not been reduced by future sublease income of $101. (4) Includes amounts representing interest. 28,321 2,160 $ 9,223 $ 14,863 $ 2,075 $ $ Total Off-Balance Sheet Arrangements 2020 23 Interest Expense We account for membership fee revenue on a deferred basis, recognized ratably over the one-year membership period. Our membership counts include active memberships as well as memberships that have not renewed within the 12 months prior to the reporting date. Gross Margin Net sales Less merchandise costs Gross margin Gross margin percentage 2020 $ 163,220 144,939 2019 $ 149,351 132,886 2018 $ 138,434 123,152 $ 18,281 11.20 % $ 16,465 11.02 % $ 15,282 11.04 % The increase in membership fees was primarily due to membership sign-ups at existing and new warehouses. At the end of 2020, our member renewal rates were 91% in the U.S. and Canada and 88% worldwide. Our renewal rate is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date. 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 16 basis points, primarily due to increases in fresh foods and softlines, partially offset by a decrease in hardlines. This measure eliminates the impact of changes in sales penetration and gross margins from our warehouse ancillary and other businesses. Fresh foods gross margin increased as a result of efficiencies from increased sales, partially offset by operating losses from our poultry complex. Total gross margin percentage increased 18 basis points compared to 2019. Excluding the impact of gasoline price deflation on net sales, gross margin percentage was 11.10%, an increase of eight basis points. This increase was primarily due to a 32 basis point increase in our core merchandise categories, predominantly fresh foods and food and sundries, partially offset by a decrease in softlines and hardlines. This increase was also positively impacted by our co-branded credit card program, which included an adjustment in 2019 to our estimate of breakage on rewards earned. These increases were partially offset by a decrease of 14 basis points in our warehouse ancillary and other businesses, predominantly certain ancillary businesses that were negatively impacted by COVID-19 related closures or restrictions. However, certain of our ancillary and other businesses, such as tire shop, gasoline and e-commerce businesses, did improve. Gross margin was also negatively impacted by incremental wage and sanitation costs related to COVID-19 of six basis points, a reserve for certain inventory of three basis points, and increased spending by members under the Executive Membership 2% reward program of one basis point. Changes in foreign currencies relative to the U.S. dollar negatively impacted gross margin by approximately $68 in 2020. 2.27% 10% Interest expense Membership Fees Membership fees Membership fees increase Membership fees as a percentage of net sales 2020 2019 2018 $ 3,541 $ 3,352 $ 3,142 6% 7% 2.24 % 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), was impacted by increases in fresh foods and food and sundries and decreases in softlines and hardlines in each of our U.S., Canadian, and Other International segments. Each of our segments were also negatively impacted by the incremental wage and sanitation costs as a result of COVID-19. The segment gross margin percentage increased in our U.S. operations, predominantly in our core merchandise categories which includes the impact from our co-branded credit card program, as discussed above, 2.17 % partially offset by certain ancillary businesses that were negatively impacted by COVID-19 related closures or restrictions. Our Canadian segment gross margin percentage decreased primarily due to certain of our warehouse ancillary and other businesses that were negatively impacted by COVID-19 related closures or restrictions. The segment gross margin percentage increased in our Other International operations primarily due to core merchandise categories, as discussed above, and was also positively impacted by certain warehouse ancillary and other businesses, predominantly e-commerce. These increases were partially offset by increased spending by members under the Executive Membership 2% reward program. 2019 2018 $ 55 $86 $ 68 9 18 4 3 3 3 4 16 25 25 25 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 and facility openings, the timing of the opening relative to our year-end, whether a warehouse is owned or leased, and whether openings are in an existing, new, or international market. In 2020, operations commenced at our new poultry processing plant, and in 2019, we opened our first warehouse in China. 2020 Total warehouse openings, including relocations 17 Canada Selling, General and Administrative Expenses SG&A expenses Other International SG&A expenses as a percentage of net sales 2020 $ 16,332 10.01 % 2018 $ 13,876 2019 $ 14,994 10.04 % SG&A expenses as a percentage of net sales decreased three basis points compared to 2019. SG&A expenses as a percentage of net sales, excluding the impact of gasoline price deflation, was 9.91%, a decrease of 13 basis points. SG&A expenses were negatively impacted by approximately $456, or 28 basis points, due to incremental wage and sanitation costs as a result of COVID-19, and approximately $24 or one basis point due to costs associated with the acquisition of Innovel (see Note 2 to the consolidated financial statements). Operating costs related to warehouse operations and other businesses, which include e-commerce and travel, were lower by 26 basis points, primarily due to leveraging increased sales. SG&A expenses were also benefited by 13 basis points related to a product tax assessment charge in 2019 which was partially reversed in 2020. Stock compensation was lower by two basis points, and central operating costs were lower by one basis point. Our Canadian segment SG&A percentage was higher compared to 2019 due primarily to the incremental wage and sanitation costs related to COVID as outlined above. Changes in foreign currencies relative to the U.S. dollar positively impacted SG&A expenses by approximately $58. Preopening Preopening expenses Warehouse openings, including relocations United States 10.02 % Fiscal Year End (amounts in millions, except share, per share, and warehouse count data) The Company operates on a 52/53 week fiscal year basis with the year ending on the Sunday closest to August 31. References to 2020, 2019, and 2018 relate to the 52-week fiscal years ended August 30, 2020, September 1, 2019, and September 2, 2018, respectively. The consolidated financial statements include the accounts of Costco, its wholly-owned subsidiaries, and subsidiaries in which it has a controlling interest. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company's equity. All material inter- company transactions between and among the Company and its consolidated subsidiaries have been eliminated in consolidation. In February 2020, the Company acquired a 35% interest in Navitus Health Solutions, a pharmacy benefit manager. This investment is included in other long-term assets and is accounted for using the equity-method with earnings/losses recorded in other income in the consolidated statement of income. The Company's net income excludes income attributable to the noncontrolling interest in Taiwan. Unless otherwise noted, references to net income relate to net income attributable to Costco. Costco Wholesale Corporation (Costco or the Company), a Washington corporation, and its subsidiaries operate membership warehouses based on the concept that offering members low prices on a limited selection of nationally-branded and private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. At August 30, 2020, Costco operated 795 warehouses worldwide: 552 in the United States (U.S.) located in 45 states, Washington, D.C., and Puerto Rico, 101 in Canada, 39 in Mexico, 29 in the United Kingdom (U.K.), 27 in Japan, 16 in Korea, 13 in Taiwan, 12 in Australia, three in Spain, and one each in Iceland, France and China. The Company operates e-commerce websites in the U.S., Canada, Mexico, U.K., Korea, Taiwan, Japan, and Australia. Basis of Presentation Description of Business Note 1-Summary of Significant Accounting Policies Use of Estimates NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 286 39 The accompanying notes are an integral part of these consolidated financial statements. 250 $ $ - $ The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions take into account historical and forward looking factors that the Company believes are reasonable, including but not limited to the potential impacts arising from the novel coronavirus (COVID-19) and related public and private sector policies and initiatives. Actual results could differ from those estimates and assumptions. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Cash dividend declared, but not yet paid COSTCO WHOLESALE CORPORATION Cash and Cash Equivalents 41 40 Receivables are recorded net of an allowance for doubtful accounts. The allowance is based on historical experience and application of the specific identification method. Write-offs of receivables were immaterial in 2020, 2019, and 2018. 1,204 Receivables consist primarily of vendor, reinsurance, credit card incentive, third-party pharmacy and other receivables. Vendor receivables include discounts and volume rebates. Balances are generally presented on a gross basis, separate from any related payable due. In certain circumstances, these receivables may be settled against the related payable to that vendor, in which case the receivables are presented on a net basis. Reinsurance receivables are held by the Company's wholly-owned captive insurance subsidiary and primarily represent amounts ceded through reinsurance arrangements gross of the amounts assumed under reinsurance, which are presented within other current liabilities in the consolidated balance sheets. Credit card incentive receivables primarily represent amounts earned under the co-branded credit card arrangement in the U.S. Third-party pharmacy receivables generally relate to amounts due from members' insurers. Other receivables primarily consist of amounts due from governmental entities, mostly tax-related items. Receivables, Net Current financial liabilities have fair values that approximate their carrying values. Long-term financial liabilities include the Company's long-term debt, which are recorded on the balance sheet at issuance price and adjusted for unamortized discounts or premiums and debt issuance costs, and are being amortized to interest expense over the term of the loan. The estimated fair value of the Company's long- term debt is based primarily on reported market values, recently completed market transactions, and estimates based upon interest rates, maturities, and credit. 11 The Company's valuation techniques used to measure the fair value of money market mutual funds are based on quoted market prices, such as quoted net asset values published by the fund as supported in an active market. Valuation methodologies used to measure the fair value of all other non-derivative financial instruments are based on independent external valuation information. The pricing process uses data from a variety of independent external valuation information providers, including trades, bid price or spread, two-sided markets, quotes, benchmark curves including but not limited to treasury benchmarks and Libor and swap curves, discount rates, and market data feeds. All are observable in the market or can be derived principally from or corroborated by observable market data. The Company reports transfers in and out of Levels 1, 2, and 3, as applicable, using the fair value of the individual securities as of the beginning of the reporting period in which the transfer(s) occurred. Level 3: Significant unobservable inputs that are not corroborated by market data. Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. Level 1: Quoted market prices in active markets for identical assets or liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying a fair value hierarchy, which requires maximizing the use of observable inputs when measuring fair value. The three levels of inputs are: The Company accounts for certain assets and liabilities at fair value. The carrying value of the Company's financial instruments, including cash and cash equivalents, receivables and accounts payable, approximate fair value due to their short-term nature or variable interest rates. See Notes 3, 4, and 5 for the carrying value and fair value of the Company's investments, derivative instruments, and fixed-rate debt, respectively. Fair Value of Financial Instruments The Company periodically evaluates unrealized losses in its investment securities for other-than- temporary impairment, using both qualitative and quantitative criteria. In the event a security is deemed to be other-than-temporarily impaired, the Company recognizes the loss in interest income and other, net in the consolidated statements of income. Cash and cash equivalents Short-term investments generally consist of debt securities (U.S. Government and Agency Notes), with maturities at the date of purchase of three months to five years. Investments with maturities beyond five years may be classified, based on the Company's determination, as short-term based on their highly liquid nature and because they represent the investment of cash that is available for current operations. Short-term investments classified as available-for-sale are recorded at fair value using the specific identification method with the unrealized gains and losses reflected in accumulated other comprehensive income (loss) until realized. Realized gains and losses from the sale of available-for-sale securities, if any, are determined on a specific identification basis and are recorded in interest income and other, net in the consolidated statements of income. Short-term investments classified as held-to-maturity are financial instruments that the Company has the intent and ability to hold to maturity and are reported net of any related amortization and are not remeasured to fair value on a recurring basis. Short-Term Investments The Company provides for the daily replenishment of major bank accounts as payments are presented. Included in accounts payable at the end of 2020 and 2019 are $810 and $673, respectively, representing the excess of outstanding payments over cash on deposit at the banks on which the payments were drawn. 40 The Company considers as cash and cash equivalents all cash on deposit, highly liquid investments with a maturity of three months or less at the date of purchase, and proceeds due from credit and debit card transactions with settlement terms of up to four days. Credit and debit card receivables were $1,636 and $1,434 at the end of 2020 and 2019, respectively. $ Net cash used in financing activities 1,052 $ Net change in cash and cash equivalents (37) (15) 70 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (1,281) (1,147) (1,147) (41) (71) Merchandise Inventories Other financing activities, net (689) (1,038) (1,479) (328) (247) (196) Cash dividend payments 3,893 1,187 2,329 CASH AND CASH EQUIVALENTS BEGINNING OF YEAR 143 141 $ $ 124 $ SA SA $ Income taxes, net Interest Cash paid during the year for: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: 6,055 8,384 $ 12,277 $ $ CASH AND CASH EQUIVALENTS END OF YEAR 4,546 6,055 8,384 1,509 Merchandise inventories consist of the following: 5-50 years Canada Operations Other International Canadian Operations Operations United States Goodwill represents the excess of acquisition cost over the fair value of the net assets acquired and is not subject to amortization. The Company reviews goodwill annually in the fourth quarter for impairment or when circumstances indicate carrying value may exceed the fair value. This evaluation is performed at the reporting unit level. If a qualitative assessment indicates that it is more likely than not that the fair value is less than carrying value, a quantitative analysis is completed using either the income or market approach, or a combination of both. The income approach estimates fair value based on expected discounted future cash flows, while the market approach uses comparable public companies and transactions to develop metrics to be applied to historical and expected future operating results. Goodwill is included in other long-term assets in the consolidated balance sheets. The following table summarizes goodwill by reportable segment: Goodwill and Acquired Intangible Assets The Company's asset retirement obligations (ARO) primarily relate to leasehold improvements that at the end of a lease must be removed. These obligations are generally recorded as a discounted liability, with an offsetting asset at the inception of the lease term based upon the estimated fair value of the costs to remove the improvements. These liabilities are accreted over time to the projected future value of the obligation. The ARO assets are depreciated using the same depreciation method as the leasehold improvement assets and are included with buildings and improvements. Estimated ARO liabilities associated with these leases are included in other liabilities in the accompanying consolidated balance sheet. Total The Company determines at inception whether a contract is or contains a lease. The Company initially records right-of-use (ROU) assets and lease obligations for its finance and operating leases based on the discounted future minimum lease payments over the term. As the rate implicit in the Company's leases is not easily determinable, the present value of the sum of the lease payments is calculated using the Company's incremental borrowing rate. The rate is determined using a portfolio approach based on the rate of interest the Company would pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. The Company uses quoted interest rates from financial institutions to derive the incremental borrowing rate. The lease term is defined as the noncancelable period of the lease plus any options to extend when it is reasonably certain that the Company will exercise the option. Impairment of ROU assets is evaluated in a similar manner as described in Property and Equipment, Net above. 43 ळ The Company leases land and/or buildings at warehouses and certain other office and distribution facilities. Leases generally contain one or more of the following options, which the Company can exercise at the end of the initial term: (a) renew the lease for a defined number of years at the then-fair market rental rate or rate stipulated in the lease agreement; (b) purchase the property at the then-fair market value; or (c) a right of first refusal in the event of a third-party offer. Leases The Company evaluates long-lived assets for impairment on an annual basis, when relocating or closing a facility, or when events or changes in circumstances may indicate the carrying amount of the asset group, generally an individual warehouse, may not be fully recoverable. For asset groups held and used, including warehouses to be relocated, the carrying value of the asset group is considered recoverable when the estimated future undiscounted cash flows generated from the use and eventual disposition of the asset group exceed the respective carrying value. In the event that the carrying value is not considered recoverable, an impairment loss is recognized for the asset group to be held and used equal to the excess of the carrying value above the estimated fair value of the asset group. For asset groups classified as held-for-sale (disposal group), the carrying value is compared to the disposal group's fair value less costs to sell. The Company estimates fair value by obtaining market appraisals from third party brokers or using other valuation techniques. There were no impairment charges recognized in 2020, 2019 or 2018. 20,890 21,807 $ $ Some leases include free-rent periods and step-rent provisions, which are recognized on a straight-line basis over the original term of the lease and any extension options that the Company is reasonably certain to exercise from the date the Company has control of the property. Certain leases provide for periodic rent increases based on price indices or the greater of minimum guaranteed amounts or sales volume. Our leases do not contain any material residual value guarantees or material restrictive covenants. Balance at September 1, 2019 $ 13 $ Repurchases of common stock 44 Definite-lived intangible assets, which are not material, are included in other long-term assets on the consolidated balance sheets and are amortized on a straight-line basis over their estimated lives, which approximates the pattern of expected economic benefit. 988 14 $ 27 $ 947 $ $ Balance at August 30, 2020 934 934 Acquisition 1 1 Changes in currency translation 53 13 $ $ 27 (11,736) (12,896) 32,626 34,703 The Company capitalizes certain computer software and costs incurred in developing or obtaining software for internal use. During development, these costs are included in construction in progress. When the assets are ready for their intended use, these costs are included in equipment and fixtures and amortized on a straight-line basis over their estimated useful lives. Property and equipment are stated at cost. Depreciation and amortization expense is computed primarily using the straight-line method over estimated useful lives. Leasehold improvements made after the beginning of the initial lease term are depreciated over the shorter of the estimated useful life of the asset or the remaining term of the initial lease plus any renewals that are reasonably certain at the date the leasehold improvements are made. Property and Equipment, Net 42 42 The Company provides for estimated inventory losses between physical inventory counts using estimates based on experience. The provision is adjusted periodically to reflect physical inventory counts, which generally occur in the second and fourth fiscal quarters. Inventory cost, where appropriate, is reduced by estimates of vendor rebates when earned or as the Company progresses towards earning those rebates, provided that they are probable and reasonably estimable. Merchandise inventories are stated at the lower of cost or market. U.S. merchandise inventories are valued by the cost method of accounting, using the last-in, first-out (LIFO) basis. The Company believes the LIFO method more fairly presents the results of operations by more closely matching current costs with current revenues. The Company records an adjustment each quarter, if necessary, for the projected annual effect of inflation or deflation, and these estimates are adjusted to actual results determined at year-end, after actual inflation or deflation rates and inventory levels have been determined. As of August 30, 2020, and September 1, 2019, U.S. merchandise inventories valued at LIFO approximated first-in, first-out (FIFO) after considering the lower of cost or market principle. Canadian and Other International merchandise inventories are predominantly valued using the cost and retail inventory methods, respectively, using the FIFO basis. 11,395 1,857 2,061 12,242 $ 1,123 1,310 8,415 8,871 $ 2019 2020 $ Merchandise inventories Other International Repair and maintenance costs are expensed when incurred. Expenditures for remodels, refurbishments and improvements that add to or change the way an asset functions or that extend the useful life are capitalized. Assets removed during the remodel, refurbishment or improvement are retired. Assets classified as held-for-sale at the end of 2020 and 2019 were immaterial. The following table summarizes the Company's property and equipment balances at the end of 2020 and 2019: United States Land Equipment and fixtures 1,272 1,276 N/A 7,801 8,749 3-20 years 17,136 17,982 6,417 6,696 $ $ N/A 2019 2020 Lives Estimated Useful Property and equipment, net Accumulated depreciation and amortization Construction in progress Buildings and improvements (217) Short-term investments (330) 12,242 11,395 1,023 1,111 28,120 23,485 21,807 20,890 2,788 2,841 1,025 1,535 $ 45,400 LIABILITIES AND EQUITY CURRENT LIABILITIES Accounts payable Accrued salaries and benefits Accrued member rewards Deferred membership fees $ 14,172 $ 11,679 3,605 55,556 $ 1,550 1,060 1,028 $ 149,351 163,220 $ $ 2018 September 2, September 1, 2019 2020 August 30, 52 Weeks Ended 52 Weeks Ended 52 Weeks Ended COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (amounts in millions, except per share data) Net sales REVENUE Receivables, net Merchandise inventories Other current assets Total current assets OTHER ASSETS Property and equipment, net Operating lease right-of-use assets Other long-term assets TOTAL ASSETS 12,277 $ 8,384 3,176 1,393 1,180 1,851 6,417 Accumulated other comprehensive loss Retained earnings Total Costco stockholders' equity Noncontrolling interests (1,297) (1,436) 12,879 10,258 18,284 15,243 421 341 Total equity 18,705 15,584 TOTAL LIABILITIES AND EQUITY $ 55,556 $ 45,400 The accompanying notes are an integral part of these consolidated financial statements. 37 COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF EQUITY (amounts in millions) 6,698 138,434 4 Common stock $0.01 par value; 900,000,000 shares authorized; 441,255,000 and 439,625,000 shares issued and outstanding 1,711 Current portion of long-term debt Other current liabilities 95 1,699 3,728 3,792 Total current liabilities OTHER LIABILITIES Long-term debt, excluding current portion 24,844 23,237 7,514 5,124 Long-term operating lease liabilities Other long-term liabilities TOTAL LIABILITIES 2,558 1,935 1,455 36,851 29,816 COMMITMENTS AND CONTINGENCIES EQUITY Preferred stock $0.01 par value; 100,000,000 shares authorized; no shares issued and outstanding Additional paid-in capital Membership fees 3,541 3,352 NET INCOME INCLUDING NONCONTROLLING INTERESTS 52 Weeks Ended September 2, 2018 52 Weeks Ended September 1, 2019 52 Weeks Ended August 30, 2020 (amounts in millions) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME COSTCO WHOLESALE CORPORATION 35 The accompanying notes are an integral part of these consolidated financial statements. 441,834 442,923 443,901 438,515 439,755 442,297 Diluted Basic Shares used in calculation (000's) 7.09 $ 8.26 9.02 $ $ Diluted 7.15 Foreign-currency translation adjustment and other, net $ 4,059 $ CURRENT ASSETS September 1, 2019 August 30, 2020 ASSETS (amounts in millions, except par value and share data) CONSOLIDATED BALANCE SHEETS COSTCO WHOLESALE CORPORATION 36 The accompanying notes are an integral part of these consolidated financial statements. 2,949 3,422 4,141 COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO 38 37 80 Less: Comprehensive income attributable to noncontrolling interests 2,987 3,459 4,221 Comprehensive income (192) 3,179 (245) 162 3,704 Accumulated 8.32 (272) 4,480 4,737 5,435 68 86 55 13,876 14,994 16,332 123,152 132,886 144,939 Interest income and other, net Interest expense OTHER INCOME (EXPENSE) Operating income Preopening expenses Selling, general and administrative Merchandise costs OPERATING EXPENSES Total revenue 141,576 152,703 166,761 3,142 (160) 9.05 $ (150) 92 Basic NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO: 3,134 3,659 $ 4,002 $ $ NET INCOME ATTRIBUTABLE TO COSTCO (45) (45) (57) Net income attributable to noncontrolling interests 3,179 3,704 4,059 Net income including noncontrolling interests 1,263 1,061 1,308 Provision for income taxes 4,442 4,765 5,367 INCOME BEFORE INCOME TAXES 121 178 (159) Other $ Additional 52 Weeks Ended 52 Weeks September 1, 2019 Ended September 2, 2018 Net income including noncontrolling interests $ 4,059 $ 3,704 $ 3,179 52 Weeks Ended August 30, 2020 Adjustments to reconcile net income including noncontrolling interests Depreciation and amortization 1,437 Non-cash lease expense 1,645 1,492 194 Stock-based compensation Other non-cash operating activities, net Deferred income taxes 619 595 to net cash provided by operating activities: CASH FLOWS FROM OPERATING ACTIVITIES (amounts in millions) COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS 621 Release of vested RSUs, including tax effects 2,273 (330) (330) (330) Repurchases of common stock (643) (10) Cash dividends declared (188) (1,193) (198) (198) (1,193) (1,193) BALANCE AT AUGUST 30, 2020 441,255 $ 4 $ 6,698 $ (1,297) $ 12,879 $ 18,284 $ 421 $ 18,705 The accompanying notes are an integral part of these consolidated financial statements. 38 544 42 9 (6) (2,998) (2,969) Acquisitions (1,163) Other investing activities, net 30 (4) Net cash used in investing activities (3,891) (2,865) 4 (2,947) CASH FLOWS FROM FINANCING ACTIVITIES Change in bank payments outstanding Proceeds from issuance of long-term debt Repayments of long-term debt Tax withholdings on stock-based awards 137 210 80 3,992 298 (3,200) (89) (86) Common Stock (2,810) 621 Additions to property and equipment 1,231 104 147 (49) Changes in operating assets and liabilities: Merchandise inventories (791) (536) (1,313) Accounts payable 2,261 322 1,561 Other operating assets and liabilities, net 728 623 421 Net cash provided by operating activities 8,861 6,356 5,774 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of short-term investments (1,626) (1,094) (1,060) Maturities and sales of short-term investments 1,078 621 1,678 162 (192) 547 547 547 2,741 (217) -- (217) Repurchases of common stock (1,756) - (26) (296) (322) ☐ │ (217) (322) Cash dividends declared and other 3 (939) (936) (35) (971) 2018 BALANCE AT SEPTEMBER 2, (7) Net income (185) 3,179 BALANCE AT SEPTEMBER 3, 2017 Stock-based compensation Net income Foreign-currency translation adjustment and other, net Stock-based compensation Release of vested restricted stock units (RSUs), including tax effects Shares (000's) Amount Paid-in Capital Comprehensive Income (Loss) Retained Earnings Total Costco Stockholders' Equity Noncontrolling Interests Total Equity 437,204 $ 4 $ 5,800 (1,014) $ 5,988 $ 10,778 $ 301 $ 11,079 --- - 3,134 3,134 45 (185) Foreign-currency translation adjustment and other, net $ 341 (272) (272) (1,097) - (1 (16) (231) (247) (1,057) (1,057) (1,057) 439,625 4 6,417 (1,436) 10,258 15,243 15,584 --- 4,002 4,002 57 4,059 139 139 23 Stock-based compensation (272) 2,533 (247) 4 BALANCE AT SEPTEMBER 1, 2019 Net income Foreign-currency translation adjustment and other, net 438,189 598 6,107 5 1 Repurchases of common stock (1,199) 7,887 304 13,103 12,799 Release of vested RSUs, including tax effects 598 598 (245) 3,659 (237) (8) 3,704 45 3,659 (237) Cash dividends declared and other 33 53 87 403 (1) Included in selling, general and administrative expenses and merchandise costs in the consolidated statements of income. (2) Included in interest expense in the consolidated statements of income. (3) Included in selling, general and administrative expenses and merchandise costs in the consolidated statements of income. Amount excludes property taxes, which were immaterial. 33 Supplemental cash flow information related to leases was as follows: 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows — operating leases Operating cash flows — finance leases Financing cash flows - finance leases Leased assets obtained in exchange for operating lease liabilities Leased assets obtained in exchange for finance lease liabilities EA 258 31 53 252 Thereafter 2020 657 $ 49 3,477 2020 21 22 20 Finance leases 2.23 % 6.34 % The components of lease expense, excluding short-term lease costs and sublease income (which were not material), were as follows: Operating lease costs (1) Finance lease costs: Amortization of lease assets (1) Interest on lease liabilities (2) Variable lease costs (3) Total lease costs $ $ 354 742 As of August 30, 2020, future minimum payments during the next five fiscal years and thereafter are as follows: 2,410 3,570 1,128 781 440 $ 2,789 $ 688 (1) Operating lease payments have not been reduced by future sublease income of $101. (2) Excludes $280 of lease payments for leases that have been signed but not commenced. As of September 1, 2019, future minimum payments, net of sub-lease income of $105, under noncancelable operating leases with terms of at least one year and capital leases reported under ASC 840 were as follows: 2020 2021 2022 2023 2024 2,558 181 134 176 63 212 2021 2022 2023 2024 2025 Thereafter Total(2) Less amount representing interest 317 Present value of lease liabilities Finance Leases $ 273 $ 61 253 62 246 66 Operating Leases (1) 31 852 SA Total long-term debt Less current portion (1) Long-term debt, excluding current portion (1) Net of unamortized debt discounts and issuance costs. 1,250 1,750 1,000 857 7,657 6,852 Less unamortized debt discounts and issuance costs 48 29 95 1,699 $ 7,514 $ Other long-term debt 1.750% Senior Notes due April 2032 1.375% Senior Notes due June 2027 1.600% Senior Notes due April 2030 1,000 2020 2,206 2019 1.700% Senior Notes due December 2019 1.750% Senior Notes due February 2020 $ 1,200 500 2.150% Senior Notes due May 2021 5,124 1,000 500 2.300% Senior Notes due May 2022 800 800 2.750% Senior Notes due May 2024 3.000% Senior Notes due May 2027 1,000 1,000 1,000 2.250% Senior Notes due February 2022 Maturities of long-term debt during the next five fiscal years and thereafter are as follows: 2021 2022 Liabilities Current Operating lease liabilities (2) Finance lease liabilities (2) Long-term Operating lease liabilities Finance lease liabilities (3) Total lease liabilities (1) Included in other long-term assets in the consolidated balance sheets. (2) Included in other current liabilities in the consolidated balance sheets. (3) Included in other long-term liabilities in the consolidated balance sheets. Total lease assets Weighted-average remaining lease term (years) Finance leases Weighted-average discount rate Operating leases 2020 2,788 592 $ 3,380 Operating leases 231 Finance lease assets (1) Assets 2023 2024 2025 Thereafter Total 52 62 $ Operating lease right-of-use assets 95 95 1,114 142 5,411 $ 7,657 Note 6-Leases The tables below present information regarding the Company's lease assets and liabilities. 800 Total Recorded 3,250 Available-for-sale: Basis Gains, Net Unrealized Cost Basis 2020: The Company's investments were as follows: Note 3-Investments 449 As of August 30, 2020, the initial accounting for the acquisition was incomplete, pending determination of the final purchase price, working capital adjustments, the fair value of operating lease right-of-use assets, operating lease liabilities, and other assumed obligations. The net purchase price of $998 was allocated to tangible and intangible assets of $283 and liabilities assumed of $219, based on their preliminary fair values on the acquisition date. The remaining unallocated net purchase price of $934 was recorded as goodwill. Goodwill represents the acquisition's benefits to the Company, which include the ability to serve more members and improve delivery times, enabling growth in certain segments of our U.S. e-commerce operations. The Company assigned this goodwill, which is deductible for tax purposes, to reporting units within the U.S. segment. The changes to the purchase price allocation originally recorded in the third quarter of 2020 were not material. As additional information becomes available, the provisional fair value estimates will be refined. On March 17, 2020, the Company acquired Innovel Solutions for $998, using existing cash and cash equivalents. Cash paid excludes the final settlement of certain holdbacks and provisional amounts, discussed below. As part of the acquisition, in the fourth quarter of 2020, a payment of $25 was made relating to certain holdbacks. Innovel provides final-mile delivery, installation and white-glove capabilities for big and bulky products across the United States and Puerto Rico. Its financial results have been included in the Company's consolidated financial statements from the date of acquisition. Innovel's results of operations were not material to the Company's consolidated results during 2020. Pro forma results are thus not considered meaningful. Note 2-Acquisition of Innovel Adoption of the new standard resulted in an initial increase to assets and liabilities of $2,632, related to recognition of operating lease right-of-use assets and operating lease obligations as of September 2, 2019. Other impacts in the Company's consolidated balance sheet were not material. The standard did not materially impact the consolidated statements of income and cash flows. For more information on the Company's lease arrangements refer to Note 6. In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02 - Leases (ASC 842), which required recognition on the balance sheet for the rights and obligations created by leases with terms greater than 12 months. The Company adopted ASC 842, using the modified retrospective transition method and used September 2, 2019, as the date of initial application. Consequently, the comparative periods presented continue to be in accordance with ASC 840, Leases, previously in effect. The Company elected the package of practical expedients permitted under the transition guidance, allowing the Company to carry forward conclusions related to: (a) whether expired or existing contracts contain leases; (b) lease classification; and (c) initial direct costs for existing leases. The Company has elected not to record operating lease right-of-use assets or lease liabilities associated with leases with durations of 12 months or less. The Company elected the practical expedient allowing aggregation of non-lease components with related lease components when evaluating the accounting treatment for all classes of underlying assets. Recent Accounting Pronouncements Adopted 48 Repurchased shares of common stock are retired, in accordance with the Washington Business Corporation Act. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is deducted by allocation to additional paid-in capital and retained earnings. The amount allocated to additional paid-in capital is the current value of additional paid-in capital per share outstanding and is applied to the number of shares repurchased. Any remaining amount is allocated to retained earnings. See Note 7 for additional information. Government and agency securities $ 436 $ 12 $ Government and agency securities Available-for-sale: Recorded Basis Gains, Net Unrealized Basis Cost 2019: Stock Repurchase Programs 1,028 1,016 $ $ Total short-term investments 580 580 Certificates of deposit Held-to-maturity: 448 12 $ The computation of basic net income per share uses the weighted average number of shares that were outstanding during the period. The computation of diluted net income per share uses the weighted average number of shares in the basic net income per share calculation plus the number of common shares that would be issued assuming vesting of all potentially dilutive common shares outstanding using the treasury stock method for shares subject to RSUs. Net Income per Common Share Attributable to Costco The timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions requires significant judgment. The benefits of uncertain tax positions are recorded in the Company's consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge from tax authorities. When facts and circumstances change, the Company reassesses these probabilities and records any changes as appropriate. In most countries, the Company's Executive members qualify for a 2% reward on qualified purchases (up to a maximum of approximately $1,000 per year), which does not expire and can be redeemed only at Costco warehouses. The Company accounts for this reward as a reduction in sales, net of the estimated impact of non-redemptions (breakage), with the corresponding liability classified as accrued member rewards in the consolidated balance sheets. Estimated breakage is computed based on redemption data. For 2020, 2019 and 2018, the net reduction in sales was $1,707, $1,537, and $1,394 respectively. The Company accounts for membership fee revenue, net of refunds, on a deferred basis, ratably over the one-year membership period. Deferred membership fees at the end of 2020 and 2019 were $1,851 and $1,711, respectively. The Company is the principal for the majority of its transactions and recognizes revenue on a gross basis. The Company is the principal when it has control of the merchandise or service before it is transferred to the member, which generally is established when Costco is primarily responsible for merchandising decisions, maintains the relationship with the member, including assurance of member service and satisfaction, and has pricing discretion. The Company offers merchandise in the following core merchandise categories: food and sundries, hardlines, softlines, and fresh foods. The Company also provides expanded products and services through warehouse ancillary and other businesses. The majority of revenue from merchandise sales is recognized at the point of sale. Revenue generated through e-commerce or special orders is generally recognized upon shipment to the member. For merchandise shipped directly to the member, shipping and handling costs are expensed as incurred as fulfillment costs and included in merchandise costs in the consolidated statements of income. In certain ancillary businesses, revenue is deferred until the member picks up merchandise at the warehouse. Deferred sales are included in other current liabilities in the consolidated balance sheets. The Company adopted Accounting Standards Update (ASU) 2014-09 in 2019, which provided for changes in the recognition of revenue from contracts with customers. The Company recognizes sales for the amount of consideration collected from the member, which includes gross shipping fees where applicable, and is net of sales taxes collected and remitted to government agencies and member returns. The Company reserves for estimated returns based on historical trends in merchandise returns and reduces sales and merchandise costs accordingly. The Company records, on a gross basis, a refund liability and an asset for recovery, which are included in other current liabilities and other current assets, respectively, in the consolidated balance sheets. Revenue Recognition The Company recognizes foreign-currency transaction gains and losses related to revaluing or settling monetary assets and liabilities denominated in currencies other than the functional currency in interest income and other, net in the consolidated statements of income. Generally, these include the U.S. dollar cash and cash equivalents and the U.S. dollar payables of consolidated subsidiaries revalued to their functional currency. Also included are realized foreign-currency gains or losses from settlements of forward foreign-exchange contracts. These items were immaterial in 2020, 2019, and 2018. The functional currencies of the Company's international subsidiaries are the local currency of the country in which the subsidiary is located. Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Translation adjustments are recorded in accumulated other comprehensive loss. Revenues and expenses of the Company's consolidated foreign operations are translated at average exchange rates prevailing during the year. 46 Foreign Currency The Company is exposed to fluctuations in prices for energy, particularly electricity and natural gas, and other commodity products used in retail and manufacturing operations, which it seeks to partially mitigate through the use of fixed-price contracts for certain of its warehouses and other facilities, primarily in the U.S. and Canada. The Company also enters into variable-priced contracts for some purchases of natural gas, in addition to fuel for its gas stations, on an index basis. These contracts meet the characteristics of derivative instruments, but generally qualify for the “normal purchases and normal sales” exception under authoritative guidance and require no mark-to-market adjustment. The unrealized gains or losses recognized in interest income and other, net in the accompanying consolidated statements of income relating to the net changes in the fair value of unsettled forward foreign-exchange contracts were immaterial in 2020, 2019 and 2018. The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of business. It manages these fluctuations, in part, through the use of forward foreign-exchange contracts, seeking to economically hedge the impact of fluctuations of foreign exchange on known future expenditures denominated in a non-functional foreign-currency. The contracts relate primarily to U.S. dollar merchandise inventory expenditures made by the Company's international subsidiaries with functional currencies other than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. The Company seeks to mitigate risk with the use of these contracts and does not intend to engage in speculative transactions. Some of these contracts contain credit-risk-related contingent features that require settlement of outstanding contracts upon certain triggering events. The aggregate fair value amounts of derivative instruments in a net liability position and the amount needed to settle the instruments immediately if the credit-risk-related contingent features were triggered were immaterial at the end of 2020 and 2019. The aggregate notional amounts of open, unsettled forward foreign-exchange contracts were $1,036 and $704 at the end of 2020 and 2019, respectively. See Note 4 for information on the fair value of unsettled forward foreign-exchange contracts at the end of 2020 and 2019. Derivatives The captive receives direct premiums, which are netted against the Company's premium costs in selling, general and administrative expenses, in the consolidated statements of income. The captive participates in a reinsurance program that includes other third-party participants. The reinsurance agreement is one year in duration, and new agreements are entered into by each participant at their discretion at the commencement of the next calendar year. The participant agreements and practices of the reinsurance program limit a participating members' individual risk. Income statement adjustments related to the reinsurance program and related impacts to the consolidated balance sheets are recognized as information becomes known. In the event the Company leaves the reinsurance program, the Company retains its primary obligation to the policyholders for prior activity. Claims for employee health care benefits, workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability, inventory loss, and other exposures are funded predominantly through self-insurance. Insurance coverage is maintained in certain instances to limit exposures arising from very large losses. It uses different risk management mechanisms, including a wholly-owned captive insurance subsidiary (the captive) and participates in a reinsurance program. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated, in part, by considering historical claims experience, demographic factors, severity factors, and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends. At the end of 2020 and 2019, these insurance liabilities were $1,188 and $1,222 in the aggregate, respectively, and were included in accrued salaries and benefits and other current liabilities in the consolidated balance sheets, classified based on their nature. Insurance/Self-insurance Liabilities At the end of 2020 and 2019, the fair value of the Company's long-term debt, including the current portion, was approximately $7,987 and $6,997, respectively. The carrying value of long-term debt consisted of the following: 45 $ 46 Citibank, N.A. ("Citi") became the exclusive issuer of co-branded credit cards to U.S. members in June 2016. The Company receives various forms of consideration, including a royalty on purchases made on the card outside of Costco, a portion of which, after giving rise to estimated breakage, is used to fund the rebate that cardholders receive. The rebates are issued in February and expire on December 31. Breakage is estimated based on redemption data. The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credits and loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts that are more likely than not expected to be realized. Income Taxes 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 and are expensed as incurred. Preopening Expenses Stock-based compensation expense is predominantly included in selling, general and administrative expenses in the consolidated statements of income. Certain stock-based compensation costs are capitalized or included in the cost of merchandise. See Note 8 for additional information on the Company's stock-based compensation plans. Compensation expense for stock-based awards is predominantly recognized using the straight-line method over the requisite service period for the entire award. Awards for employees and non-employee directors provide for accelerated vesting based on cumulative years of service with the Company. Compensation expense for the accelerated shares is recognized upon achievement of the long-service term. The cumulative amount of compensation cost recognized at any point in time equals at least the portion of the grant-date fair value of the award that is vested at that date. The fair value of RSUs is calculated as the market value of the common stock on the measurement date less the present value of the expected dividends forgone during the vesting period. 47 17 The Company sells and otherwise provides proprietary shop cards that do not expire and are redeemable at the warehouse or online for merchandise or membership. Revenue from shop cards is recognized upon redemption, and estimated breakage is recognized based on redemption data. The Company accounts for outstanding shop card balances as a shop card liability, net of estimated breakage. RSUS granted to employees generally vest over five years and allow for quarterly vesting of the pro-rata number of stock-based awards that would vest on the next anniversary of the grant date in the event of retirement or voluntary termination. Actual forfeitures are recognized as they occur. The Company's 401(k) retirement plan is available to all U.S. employees over the age of 18 who have completed 90 days of employment. The plan allows participants to make wage deferral contributions, a portion of which the Company matches. In addition, the Company provides each eligible participant an annual discretionary contribution. The Company also has a defined contribution plan for Canadian employees and contributes a percentage of each employee's wages. Certain subsidiaries in the Company's Other International operations have defined benefit and defined contribution plans that are not material. Amounts expensed under all plans were $676, $614, and $578 for 2020, 2019, and 2018, respectively, and are predominantly included in selling, general and administrative expenses in the consolidated statements of income. Retirement Plans Selling, general and administrative expenses consist primarily of salaries, benefits and workers' compensation costs for warehouse employees (other than fresh foods departments and certain ancillary businesses which are reflected in merchandise costs) as well as all regional and home office employees, including buying personnel. Selling, general and administrative expenses also include substantially all building and equipment depreciation, stock compensation expense, credit and debit card processing fees, utilities, as well as other operating costs incurred to support warehouse and e-commerce website operations. Selling, General and Administrative Expenses The Company has agreements to receive funds from vendors for discounts and a variety of other programs. These programs are evidenced by signed agreements that are reflected in the carrying value of the inventory when earned or as the Company progresses towards earning the rebate or discount, and as a component of merchandise costs as the merchandise is sold. Other vendor consideration is generally recorded as a reduction of merchandise costs upon completion of contractual milestones, terms of the related agreement, or by another systematic approach. Vendor Consideration Merchandise costs consist of the purchase price or manufacturing costs of inventory sold, inbound and outbound shipping charges and all costs related to the Company's depot, fulfillment and manufacturing operations, including freight from depots to selling warehouses, and are reduced by vendor consideration. Merchandise costs also include salaries, benefits, depreciation, and utilities in fresh foods and certain ancillary departments. Merchandise Costs Stock-Based Compensation $ 716 $ 722 In April 2020, the Company issued $4,000 in aggregate principal amount of Senior Notes as follows: $1,250 of 1.375% due June 2027; $1,750 of 1.600% due April 2030; and $1,000 of 1.750% due April 2032. In May 2020, a portion of the proceeds from the issuance were used to repay, prior to maturity, the outstanding $1,000 and $500 principal balances and interest on the 2.150% and 2.250% Senior Notes, respectively. The early redemption resulted in a $36 charge which was recorded in interest income and other, net in 2020. The remaining funds are intended for general corporate purposes. 555 51 The Company's long-term debt consists primarily of Senior Notes, described below. The Company at its option may redeem the Senior Notes at any time, in whole or in part, at a redemption price plus accrued interest. The redemption price is equal to the greater of 100% of the principal amount or the sum of the present value of the remaining scheduled payments of principal and interest to maturity. Additionally, upon certain events, the holder has the right to require the Company to purchase this security at a price of 101% of the principal amount plus accrued and unpaid interest to the date of the event. Interest on all outstanding long-term debt is payable semi-annually. The estimated fair value of Senior Notes is valued using Level 2 inputs. Long-Term Debt The Company maintains various short-term bank credit facilities, with a borrowing capacity of $967 and $865, in 2020 and 2019, respectively. Borrowings on these short-term facilities were immaterial during 2020 and 2019, and there were no outstanding borrowings at the end of 2020 and 2019. Short-Term Borrowings Note 5-Debt Assets and liabilities recognized and disclosed at fair value on a nonrecurring basis include items such as financial assets measured at amortized cost and long-lived nonfinancial assets. These assets are measured at fair value if determined to be impaired. There were no fair value adjustments to these items during 2020 or 2019. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis At August 30, 2020, and September 1, 2019, the Company did not hold any Level 1 or 3 financial assets or liabilities that were measured at fair value on a recurring basis. There were no transfers between levels during 2020 or 2019. (2) The asset and the liability values are included in other current assets and other current liabilities, respectively, in the consolidated balance sheets. (1) At August 30, 2020, $60 cash and cash equivalents and $448 short-term investments are included in the accompanying consolidated balance sheets. At September 1, 2019, $44 cash and cash equivalents and $722 short-term investments are included in the consolidated balance sheets. 777 488 $ $ Total In December 2019, the Company paid the outstanding $1,200 principal balance and interest on the 1.700% Senior Notes, with existing sources of cash and cash equivalents and short-term investments. In February 2020, the Company paid the outstanding $500 principal balance and interest on the 1.750% Senior Notes, with existing sources of cash and cash equivalents and short-term investments. 54 421 $ Operating Leases $ 239 $ 229 202 Capital Leases コロ 193 (4) 51 38 39 39 544 764 Less amount representing interest 343 Net present value of minimum lease payments 53 (21) (2) 15 Due after one year through five years $ Due in one year or less Held-To-Maturity Fair Value Cost Basis Available-For-Sale The maturities of available-for-sale and held-to-maturity securities at the end of 2020 are as follows: 172 $ 264 Gross unrecognized holding gains and losses on available-for-sale securities were not material for the years ended August 30, 2020, and September 1, 2019. At the end of 2020, there were no available-for- sale securities in a continuous unrealized-loss position. At the end of 2019, available-for-sale securities that were in a continuous unrealized-loss position were not material. There were no sales of available-for- sale securities during 2020 or 2019. 338 6 1,054 $ $ 338 Total short-term investments Certificates of deposit Held-to-maturity: 1,060 6 $ 173 $ 275 1 766 508 $ $ Investment in government and agency securities(1) Forward foreign-exchange contracts, in asset position (2) Forward foreign-exchange contracts, in (liability) position (2 2019 2020 Level 2 580 The table below presents information regarding the Company's financial assets and financial liabilities that are measured at fair value on a recurring basis and indicate the level within the hierarchy reflecting the valuation techniques utilized to determine such fair value. Note 4-Fair Value Measurement 50 50 580 448 $ 436 $ $ Total Assets and Liabilities Measured at Fair Value on a Recurring Basis Other long-term debt consists of Guaranteed Senior Notes issued by the Company's Japanese subsidiary, valued using Level 3 inputs. In August 2019, the Company's Japanese subsidiary issued approximately $200 and $100 of Guaranteed Senior Notes at fixed interest rates of 0.28% and 0.42%, respectively. Interest is payable semi-annually, and principal is due in August 2029 and August 2034, respectively. Total provision for income taxes Dividends 224 135 1,078 4,480 754 939 2,787 18,601 $ 141,576 $ 102,286 $ 20,689 $ 45,400 8,869 4,369 32,162 20,890 4,479 2,044 14,367 21,366 $ 19,586 $ 152,703 3,063 924 750 4,737 1,437 1,126 223 1,492 2,186 303 509 2,998 143 $ 111,751 $ 2,046 655 Ancillary and other 15,387 16,590 17,078 Softlines 18,879 19,948 23,204 Fresh foods 22,620 24,570 27,729 Hardlines 56,073 59,672 $ 68,659 $ $ 2,969 13,353 1,900 4,428 19,681 28,207 268 4,303 40,830 The following table summarizes net sales by merchandise category; sales from business centers and e- commerce websites have been allocated to their respective categories: 2020 2019 2018 Food and sundries 8,320 26,550 55,556 5,270 2019 Total assets Additions to property and equipment Property and equipment, net Depreciation and amortization Operating income Total revenue 2020 The Company and its subsidiaries are principally engaged in the operation of membership warehouses in the U.S., Canada, Mexico, U.K., Japan, Korea, Australia, Spain, Iceland, France, and China and through a majority-owned subsidiary in Taiwan. Reportable segments are largely based on management's organization of the operating segments for operational decisions and assessments of financial performance, which considers geographic locations. The material accounting policies of the segments are as described in Note 1. Inter-segment net sales and expenses have been eliminated in computing total revenue and operating income. Certain operating expenses, predominantly stock-based compensation, incurred on behalf of the Company's Canadian and Other International operations, are included in the U.S. operations because those costs generally come under the responsibility of U.S. management. The following table provides information for the Company's reportable segments: Note 12-Segment Reporting 62 62 The Company does not believe that any pending claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company's financial position, results of operations or cash flows; however, it is possible that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be material to the results of an individual fiscal quarter or year. On June 23, 2020, a putative class action was filed against the Company, the "Board of Directors," the "Costco Benefits Committee" and others under the Employee Retirement Income Security Act, in the United States District Court for the Eastern District of Wisconsin. Dustin S. Soulek v. Costco Wholesale, et al., Case No. 20-cv-937. The class is alleged to be beneficiaries of the Costco 401(k) plan from June 23, 2014, and the claims are that the defendants breached their fiduciary duties in the operation and oversight of the plan. The complaint seeks injunctive relief, damages, interest, costs, and attorneys' fees. On September 11, the defendants filed a motion to dismiss the complaint, and on September 21 the plaintiffs filed an amended complaint. Members of the Board of Directors, one other individual, and the Company are defendants in a shareholder derivative action related to the internal controls and related disclosures identified in the putative class actions, alleging that the individual defendants breached their fiduciary duties. Wedekind v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, Richard Libenson, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (W.D. Wash.; filed Dec. 11, 2018). The complaint seeks unspecified damages, disgorgement of compensation, corporate governance changes, and costs and attorneys' fees. Because the complaint derivative in nature, it does not seek monetary damages from the Company, which is a nominal defendant. By agreement among the parties the action has been stayed pending further proceedings in the class action. Similar actions were filed in King County Superior Court on February 20, 2019, Elliott v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, Richard Libenson, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (Case No. 19-2-04824-7), April 16, 2019, Brad Shuman, et ano. v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (Case No. 19-2-10460-1), and June 12, 2019, Rahul Modi v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (Case No. 19-2-15514-1). These actions have also been stayed. The Company and its CEO and CFO are defendants in putative class actions brought on behalf of shareholders who acquired Company stock between June 6 and October 25, 2018. Johnson v. Costco Wholesale Corp., et al. (W.D. Wash.; filed Nov. 5, 2018); Chen v. Costco Wholesale Corp., et al. (W.D. Wash.; filed Dec. 11, 2018). The complaints allege violations of the federal securities laws stemming from the Company's disclosures concerning internal control over financial reporting. They seek unspecified damages, equitable relief, interest, and costs and attorneys' fees. On January 30, 2019, an order was entered consolidating the actions, and a consolidated amended complaint was filed on April 16, 2019. On November 26, 2019, the court entered an order dismissing the consolidated amended complaint and granting the plaintiffs leave to file a further amended complaint. A further amended complaint was filed on March 9, which the court dismissed with prejudice on August 19, 2020. Plaintiffs filed a notice of appeal in September 2020. 61 In December 2017, the United States Judicial Panel on Multidistrict Litigation consolidated numerous cases concerning the impacts of opioid abuses filed against various defendants by counties, cities, hospitals, Native American tribes, third-party payors, and others. In re National Prescription Opiate Litigation (MDL No. 2804) (N.D. Ohio). Included are federal cases that name the Company, including actions filed by counties and cities in Michigan, New Jersey, Oregon, Virginia and South Carolina, a third- party payor in Ohio, and class actions filed on behalf of infants born with opioid-related medical conditions in 40 states, and class actions and individual actions filed on behalf of individuals seeking to recover alleged increased insurance costs associated with opioid abuse in 43 states and American Samoa. In 2019, similar actions were commenced against the Company in state court in Utah. Claims against the Company in state courts in New Jersey, Oklahoma, and Arizona have been dismissed. The Company is defending all of these matters. 3,168 3,319 441,834 The Company is involved in a number of claims, proceedings and litigation arising from its business and property ownership. In accordance with applicable accounting guidance, the Company establishes an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. There may be exposure to loss in excess of any amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss (taking into account where applicable indemnification arrangements concerning suppliers and insurers) and the accrued amount, if any, thereof, and adjusts the amount as appropriate. As of the date of this Report, the Company has recorded immaterial accruals with respect to certain matters described below, in addition to other immaterial accruals for matters not described below. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. In each case, there is a reasonable possibility that a loss may be incurred, including a loss in excess of the applicable accrual. For matters where no accrual has been recorded, the possible loss or range of loss (including any loss in excess of the accrual) cannot, in the Company's view, be reasonably estimated because, among other things: (i) the remedies or penalties sought are indeterminate or unspecified; (ii) the legal and/or factual theories are not well developed; and/ or (iii) the matters involve complex or novel legal theories or a large number of parties. The Company is a defendant in an action under the California Labor Code Private Attorneys General Act (PAGA) alleging violation of California Wage Order 7-2001 for failing to provide seating to member service assistants who act as greeters in the Company's California warehouses. Canela v. Costco Wholesale Corp., et al. (Case No. 5:13-CV-03598; N.D. Cal.; filed July 1, 2013). The complaint seeks relief under the California Labor Code, including civil penalties and attorneys' fees. The Company filed an answer denying the material allegations of the complaint. The action has been remanded to state court. In January 2019, an employee brought similar claims for relief concerning Costco employees engaged at member services counters in California. Rodriguez v. Costco Wholesale Corp. (Case No. RG19001310; Alameda Superior Court). The Company filed an answer denying the material allegations of the complaint. In December 2018, a depot employee raised similar claims, alleging that depot employees in California did not receive suitable seating or appropriate workplace temperature conditions. Lane v. Costco Wholesale Corp. (Dec. 6, 2018 Notice to California Labor and Workforce Development Agency). The Company filed an answer denying the material allegations of the complaint. In October 2019, the parties reached an agreement to settle the seating claims on a representative basis, which received court approval in February 2020. Total revenue 60 In January 2019, a former seasonal employee filed a class action, alleging failure to provide California seasonal employees meal and rest breaks, proper wage statements, and appropriate wages. Jadan v. Costco Wholesale Corp. (Case No. 19-CV-340438; Santa Clara Superior Court). The complaint seeks relief under the California Labor Code, including civil penalties and attorneys' fees. In October 2019, the parties reached an agreement on a class settlement, which received preliminary court approval in July 2020. In March 2019, employees filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide meal and rest periods and itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. Nevarez v. Costco Wholesale Corp. (Case No. 2:19-cv-03454; C.D. Cal.). The Company filed an answer denying the material allegations of the complaint. In December 2019, the court issued an order denying class certification. In January 2020, the plaintiffs dismissed their Labor Code claims without prejudice, and the court remanded the action to state court. The remand is being appealed. In May 2019, an employee filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Rough v. Costco Wholesale Corp. (Case No. 2:19-cv-01340; E.D. Cal.). Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. In August 2019, Rough filed a companion case in state court seeking penalties under PAGA. Rough v. Costco Wholesale Corp. (Case No. FCS053454; Sonoma County Superior Court). Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. The state court action has been stayed pending resolution of the federal action. In June 2019, an employee filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide meal and rest periods, itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Martinez v. Costco Wholesale Corp. (Case No. 3:19-cv-05624; N.D. Cal.). The Company filed an answer denying the material allegations of the complaint. In April 2020, an employee, alleging underpayment of sick pay, filed a class and representative action against the Company, alleging claims under California law for failure to pay all wages at termination and for Labor Code penalties under PAGA. Kristy v. Costco Wholesale Corp. (Case No. 20CV366341; Santa Clara County Superior Court). A motion to dismiss was filed as to plaintiff's amended complaint, the case has been stayed due to the plaintiff's bankruptcy. In July 2020, an employee filed an action under PAGA on behalf of all California non-exempt employees alleging violations of California Labor Code provisions regarding meal and rest periods, minimum wage, overtime, wage statements, reimbursement of expenses, and payment of wages at termination. Schwab v. Costco Wholesale Corporation (Case No. 37-2020-00023551-CU-OE-CTL; San Diego County Superior Court). In August 2020, the Company filed a motion to strike portions of the complaint. 60 11,920 Operating income Additions to property and equipment 38,366 21,807 4,719 2,172 14,916 2,810 492 258 2,060 1,645 242 155 1,248 Note 7-Stockholders' Equity 942 860 3,633 Property and equipment, net Total assets 2018 Total revenue Operating income Depreciation and amortization Additions to property and equipment Property and equipment, net Depreciation and amortization Total assets United States Operations Canadian Operations Other International Operations Total $ 122,142 $ 22,434 $ 22,185 $166,761 Disaggregated Revenue 28,571 25,475 Total net sales 931 $ 844 $ TO COSTCO NET INCOME ATTRIBUTABLE (57) (15) (14) (16) (12) 4,059 1,404 852 947 856 Net income attributable to noncontrolling interests TAXES 1,058 1,277 1,163 1,869 5,367 838 $ Provision for income taxes 330 311 465 1,308 Net income including noncontrolling interests 202 INCOME BEFORE INCOME 1,389 4,002 64 149 (3) Includes a $84 benefit due to a partial reversal of an accrual for a product tax assessment in 2019. (2) Includes $456 of incremental wage and sanitation costs as a result of COVID-19 of which $239 and $217 were recorded in the third and fourth quarters, respectively. (1) Includes $108 of incremental wage and sanitation costs as a result of COVID-19 of which $44 and $64 were recorded in the third and fourth quarters, respectively. 443,901 442,297 442,843 444,231 442,322 443,855 442,021 443,727 441,818 443,680 Diluted Basic Shares used in calculation (000's) 9.02 $ $ 1.89 $ 3.13 NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO: Basic $ 1.91 $ $ 2.10 $ 1.90 $ $ 9.05 Diluted $ 1.90 $ 2.10 3.14 92 (9) 21 53,383 37,266 39,072 37,040 Total revenue 3,541 1,106 815 816 804 Membership fees $ 163,220 $ 52,277 $ 36,451 $ 38,256 $ 36,236 Net sales $ 163,220 $ 149,351 $ 138,434 63 Note 13-Quarterly Financial Data (Unaudited) 166,761 The two tables that follow reflect the unaudited quarterly results of operations for 2020 and 2019. First Quarter (12 Weeks) Second Quarter (12 Weeks) Third Quarter (12 Weeks) Fourth Quarter (16 Weeks) Total (52 Weeks) REVENUE 52 Weeks Ended August 30, 2020 OPERATING EXPENSES Merchandise costs (1) 32,233 1,266 1,179 1,929 5,435 OTHER INCOME (EXPENSE) Interest expense 1,061 (38) (37) (51) (160) Interest income and other, net 35 45 (34) 1,604 443,901 442,923 Operating income 26 34,056 32,249 46,401 144,939 Selling, general and administrative (2) 55 3,732 3,830 5,027 (3) 16,332 Preopening expenses 14 8 3,743 3,134 438,515 5,435 442,297 616 $ $ Total foreign Deferred Current Total state Foreign: Deferred Current Total federal State: Deferred Current Federal: 2018 2019 3,659 $ 439,755 2020 2019 2018 $ 4,204 $ 3,591 $ 328 $ 3,182 1,174 1,260 $ 5,367 $ 4,765 $ 4,442 The provisions for income taxes are as follows: 1,163 56 636 222 Federal taxes at statutory rate 2018 2019 2020 The reconciliation between the statutory tax rate and the effective rate for 2020, 2019, and 2018 is as follows: Except for certain provisions, the Tax Cuts and Jobs Act (2017 Tax Act) is effective for tax years beginning on or after January 1, 2018. The Company is a fiscal-year taxpayer, so most provisions became effective for fiscal 2019, including limitations on the Company's ability to claim foreign tax credits, repeal of the domestic manufacturing deduction, and limitations on certain business deductions. Provisions with significant impacts that were effective starting in the second quarter of fiscal 2018 and throughout fiscal 2019 included: a decrease in the U.S. federal income tax rate, remeasurement of certain net deferred tax liabilities, and a transition tax on deemed repatriation of certain foreign earnings. The decrease in the U.S. federal statutory income tax rate to 21.0% was effective for all of 2020 and 2019 and resulted in a blended rate for the Company of 25.6% for 2018. 1,263 1,308 $ 1,061 $ 450 307 377 (37) (98) 5 487 405 372 (35) 693 550 601 230 178 77 190 26 22 238 204 212 $ 8 $ 1,127 56 Foreign 6,496 $ Number of Units (in 000's) The following table summarizes RSU transactions during 2020: 153,000 performance-based RSUs, of which 123,000 were granted to executive officers subject to the determination of the attainment of performance targets for 2020. This determination occurred in September 2020, at which time at least 33% of the units vested, as a result of the long service of all executive officers. The remaining awards vest upon continued employment over specified periods of time. 5,021,000 time-based RSUs that vest upon continued employment over specified periods of time; • The following awards were outstanding at the end of 2020: 55 55 RSUS granted to employees and to non-employee directors generally vest over five and three years, respectively. Additionally, the terms of the RSUs, including performance-based awards, provide for accelerated vesting for employees and non-employee directors who have attained 25 or more and five or more years of service with the Company, respectively. Recipients are not entitled to vote or receive dividends on unvested and undelivered shares. At the end of 2020, 13,624,000 shares were available to be granted as RSUs under the 2019 Incentive Plan. The Company grants stock-based compensation, primarily to employees and non-employee directors. Grants to all executive officers are performance-based. Through a series of shareholder approvals, there have been amended and restated plans and new provisions implemented by the Company. RSUs are subject to quarterly vesting upon retirement or voluntary termination. Employees who attain at least 25 years of service with the Company receive shares under accelerated vesting provisions on the annual vesting date. The 2019 Incentive Plan authorized the issuance of 17,500,000 shares (10,000,000 RSUs) of common stock for future grants, plus the remaining shares that were available for grant and the future forfeited shares from grants under the previous plan, up to a maximum aggregate of 27,800,000 shares (15,885,000 RSUs). The Company issues new shares of common stock upon vesting of RSUs. Shares for vested RSUs are generally delivered to participants annually, net of shares withheld for taxes. Summary of Restricted Stock Unit Activity Note 8-Stock-Based Compensation Plans These amounts may differ from repurchases of common stock in the consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of each fiscal year. 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. 322 183.13 1,756 247 Cash dividends declared in 2020 totaled $2.70 per share, as compared to $2.44 per share in 2019. The Company's current quarterly dividend rate is $0.70 per share. Stock Repurchase Programs The Company's stock repurchase program is conducted under a $4,000 authorization by the Board of Directors, which expires in April 2023. As of the end of 2020, the remaining amount available under the approved plan was $3,745. The following table summarizes the Company's stock repurchase activity: 2020 2019 2018 Shares Repurchased Weighted-Average Grant Date Fair Value (000's) Total Cost 643 $ 308.45 $ 198 1,097 225.16 Average Price per Share Total Outstanding at the end of 2019 Vested and delivered Domestic Income before income taxes is comprised of the following: Income Taxes Note 9― Taxes 428 467 $ 491 $ $ Stock-based compensation expense, net 116 544 595 $ 128 619 $ 128 Less recognized income tax benefit 2018 2019 2020 Forfeited Outstanding at the end of 2020 2,252 (3,374) (200) 5,174 $ 167.55 Granted 294.08 197.45 207.55 The weighted-average grant date fair value of RSUs granted was $294.08, $224.00, and $156.19 in 2020, 2019, and 2018, respectively. The remaining unrecognized compensation cost related to non-vested RSUs at the end of 2020 was $697 and the weighted-average period of time over which this cost will be recognized is 1.6 years. Included in the outstanding balance at the end of 2020 were approximately 1,733,000 RSUs vested but not yet delivered. Summary of Stock-Based Compensation The following table summarizes stock-based compensation expense and the related tax benefits under the Company's plans: Stock-based compensation expense 188.92 21.0 % $ 1,001 2020 25.6 % Gross increases-tax positions in prior years Gross increases-current year tax positions Gross unrecognized tax benefit at beginning of year A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2020 and 2019 is as follows: 50 58 The Company no longer considers fiscal year earnings of non-U.S. consolidated subsidiaries after 2017 to be indefinitely reinvested and has recorded the estimated incremental foreign withholding (net of available foreign tax credits) on fiscal year earnings and state income taxes payable assuming a hypothetical repatriation to the U.S. The Company continues to consider undistributed earnings of certain non-U.S. consolidated subsidiaries prior to 2018, which totaled $2,955, to be indefinitely reinvested and has not provided for withholding or state taxes. In 2020 and 2019, the Company recorded valuation allowances of $105 and $76, respectively, primarily related to foreign tax credits that the Company believes will not be realized due to limitations on the ability to claim the credits during the carry forward period. The foreign tax credit carry forwards are set to expire beginning in fiscal 2030. The deferred tax accounts at the end of 2020 and 2019 include deferred income tax assets of $406 and $398, respectively, included in other long-term assets; and deferred income tax liabilities of $665 and $543, respectively, included in other long-term liabilities. (145) (259) $ $ (954) (1,950) $ (21) (40) (69) 639 566 1,796 885 (105) (76) Gross decreases-tax positions in prior years Settlements 1,691 (800) (677) (228) (187) (801) (81) 809 Lapse of statute of limitations Gross unrecognized tax benefit at end of year 2020 The Company is subject to multiple examinations for value added, sales-based, payroll, product, import or other non-income taxes in various jurisdictions. In certain cases, the Company has received assessments from the authorities. Subsequent to the end of 2019, the Company received an assessment related to a product tax audit covering multiple years. The Company recorded a charge of $123 in 2019. In the fourth quarter of 2020, the Company reached an agreement with the tax authority on this matter, resulting in a benefit of $84. Other possible losses or range of possible losses associated with these matters are either immaterial or an estimate of the possible loss or range of loss cannot be made at this time. If certain matters or a group of matters were to be decided adversely to the Company, it could result in a charge that might be material to the results of an individual fiscal quarter or year. 59 Note 10-Net Income per Common and Common Equivalent Share The following table shows the amounts used in computing net income per share and the weighted average number of shares of basic and of potentially dilutive common shares outstanding (shares in 000's): Net income attributable to Costco Weighted average basic shares RSUs 21.0 % $ 1,136 Weighted average diluted shares Legal Proceedings 2020 2019 2018 $ 4,002 $ Note 11-Commitments and Contingencies 832 The Company files income tax returns in the United States, various state and local jurisdictions, in Canada, and in several other foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local examination for years before fiscal 2017. The Company is currently subject to examination in California for fiscal years 2013 to present. Accrued interest and penalties related to income tax matters are classified as a component of income tax expense. Accrued interest and penalties recognized during 2020 and 2019 and accrued at the end of each respective period were not material. 2019 27 $ 36 1 8 52 The Company is currently under audit by several jurisdictions in the United States and in several foreign countries. Some audits may conclude in the next 12 months and the unrecognized tax benefits recorded in relation to the audits may differ from actual settlement amounts. It is not practical to estimate the effect, if any, of any amount of such change during the next 12 months to previously recorded uncertain tax positions in connection with the audits. The Company does not anticipate that there will be a material increase or decrease in the total amount of unrecognized tax benefits in the next 12 months. (3) (3) 30 $ (4) (12) 27 The gross unrecognized tax benefit includes tax positions for which the ultimate deductibility is highly certain but there is uncertainty about the timing of such deductibility. At the end of 2020 and 2019, these amounts were immaterial. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of these tax positions would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority. The total amount of such unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods is $28 and $24 at the end of 2020 and 2019, respectively. | 65 Other Taxes 180 0.7 31 (1.4) (77) Other 0.4 19 (2.6) (123) - (0.3) (14) (0.4) (18) (0.5) (24) Employee stock ownership plan (ESOP) 2017 Tax Act 101 State taxes, net 190 3.6 171 3.6 (64) 154 92 1.7 (1) - 32 0.7 3.4 (1.4) Foreign taxes, net $ 1,308 Deferred tax liabilities: Property and equipment Merchandise inventories Operating lease right-of-use assets Foreign branch deferreds Other Total net deferred tax assets Total deferred tax liabilities 2020 $ 80 $ 74 Total 144 Net deferred tax liabilities Valuation allowance 2019 Accrued liabilities and reserves Total deferred tax assets 28.4 % 24.4 % $ 1,061 44 57 The Company recognized total net tax benefits of $81, $221 and $57 in 2020, 2019 and 2018, respectively. These amounts include a benefit of $77, $59 and $33, respectively, related to the stock- based compensation accounting standard adopted in 2018 in addition to the impacts of the 2017 Tax Act noted above. During 2019, the Company recognized net tax benefits of $123 related to the 2017 Tax Act. This benefit primarily included $105 related to U.S. taxation of deemed foreign dividends, partially offset by losses of current year foreign tax credits. During 2018, the Company recognized a net tax expense of $19 related to the 2017 Tax Act. This expense included $142 for the estimated tax on deemed repatriation of foreign earnings, and $43 for the reduction in foreign tax credits and other immaterial items, largely offset by a tax benefit of $166 for the remeasurement of certain deferred tax liabilities. The components of the deferred tax assets (liabilities) are as follows: Operating lease liabilities Foreign tax credit carry forward Deferred income/membership fees 22.3 % $ 1,263 Equity compensation Deferred tax assets: 901 777 916 Net income including 1,061 382 207 314 158 Provision for income taxes noncontrolling interests TAXES 1,492 1,123 1,215 935 INCOME BEFORE INCOME 178 74 36 46 Interest income and other, net 1,110 22 4,765 3,704 $ (10) 8.32 (150) 2.49 $ 2.06 $ 2.02 $ 1.75 $ $ Basic COSTCO: SHARE ATTRIBUTABLE TO NET INCOME PER COMMON Net income attributable to noncontrolling interests 3,659 $ 889 $ 767 $ TO COSTCO NET INCOME ATTRIBUTABLE (45) (13) (10) (12) 906 $ 1,097 (45) 35,396 (34) 47,498 34,740 35,069 3,352 1,050 776 768 758 $ 149,351 $ 46,448 $ 33,964 152,703 $ 34,311 $ 34,628 Membership fees Net sales REVENUE Total revenue Total (52 Weeks) Fourth Quarter (16 Weeks) Third Quarter (12 Weeks) Second Quarter (12 Weeks) First Quarter (12 Weeks) 52 Weeks Ended September 1, 2019 Diluted OPERATING EXPENSES Merchandise costs 30,623 30,720 (36) Interest expense OTHER INCOME (EXPENSE) 4,737 1,463 1,122 1,203 949 Operating income 86 41 14 22 Preopening expenses 14,994 4,684 3,371 3,464 3,475 administrative (1) Selling, general and 132,886 41,310 30,233 (35) $ Form $ Former President, Yahoo! Inc. CEO and Founder, Raftr; Susan L. Decker(a) Director /s/ JOHN W. STANTON John W. Stanton /s/ CHARLES T. MUNGER Charles T. Munger Director Kenneth D. Denman Director /s/ KENNETH D. DENMAN (Principal Accounting Officer) Controller Senior Vice President and Corporate /s/ DANIEL M. HINES Hamilton E. James Chairman of the Board Kenneth D. Denman(a)(c) 71 /s/ MARY (MAGGIE) A. WILDEROTTER Mary (Maggie) A. Wilderotter By Jeffrey S. Raikes Director By /s/ JEFFREY S. RAIKES By Sally Jewell Director /s/ SALLY JEWELL By By By By By Director Venture Partner, Sway Ventures; Former President and Chief Executive Officer, Emotient, Inc. Richard A. Galanti Executive Vice President and 1.73 EXECUTIVE AND SENIOR OFFICERS Jeffrey Abadir (c) Nominating and Governance Committee *2020 Committee Chair (b) Compensation Committee (a) Audit Committee Board Committees Former Executive Chairman, Frontier Communications CEO and Chairman, Grand Reserve Inn; Maggie A. Wilderotter(b)(c) Trilogy International Partners, Inc. and Trilogy Equity Partners Chairman, First Avenue Entertainment LLLP; John W. Stanton(b)* Former CEO, Bill and Melinda Gates Foundation Founder and CEO, The Raikes Foundation; Jeffrey S. Raikes(c)* Vice Chairman of the Board, Berkshire Hathaway Inc.; Chairman of the Board, Daily Journal Corporation Charles T. Munger(a)* Director Emeritus Interior; Former CEO and Director, Recreational Equipment Inc. Richard M. Libenson Former CEO, The Nature Conservancy; Former Secretary of the BOARD OF DIRECTORS President and Chief Executive Officer, Costco Wholesale Sally Jewell(a)(b) DIRECTORS AND OFFICERS W. Craig Jelinek Executive Vice Chair, The Blackstone Group Chairman of the Board, Costco Wholesale; Hamilton E. James Chief Financial Officer, Costco Wholesale /s/ HAMILTON E. JAMES Susan L. Decker Director /s/ SUSAN L. DECKER (Principal Financial Officer) 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document Inline XBRL Taxonomy Extension Label Linkbase Document 101.LAB 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.CAL 101.SCH Inline XBRL Taxonomy Extension Schema Document ✗ Inline XBRL Instance Document 101.INS Section 1350 Certifications 32.1 Rule 13a - 14(a) Certifications 31.1 Registered Public Accounting Firm Consent of Independent 23.1 X Subsidiaries of the Company 21.1 9/1/2019 10/11/2019 10-K Sixth Amendment to Citi, N.A. Co- Branded Credit Card Agreement 10.8.6** 3/13/2019 2/17/2019 10-Q Fifth Amendment to Citi, N.A. Co- Branded Credit Card Agreement 10.8.5** 104 Senior Vice President, General Manager - Bay Area Region Claudine Adamo Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) ** Officer and Director Executive Vice President, Chief Financial Richard A. Galanti /s/ RICHARD A. GALANTI Director President, Chief Executive Officer and /s/ W. CRAIG JELINEK W. Craig Jelinek By By By October 6, 2020 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. and Director Executive Vice President, Chief Financial Officer /s/ RICHARD A. GALANTI Richard A. Galanti By COSTCO WHOLESALE CORPORATION (Registrant) October 6, 2020 Pursuant to the requirements of Section 13 or 15(d) 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. SIGNATURES 70 None. Item 16-Form 10-K Summary Financial Statement Schedules―None. (c) Portions of this exhibit have been omitted under a confidential treatment order issued by the Securities and Exchange Commission. X X X * Management contract, compensatory plan or arrangement. Agreement Senior Vice President, Merchandising - Non-Foods & Ecommerce Donald E. Burdick Patrick J. Callans Kathy Kearney - Merchandise Accounting Controller Jim Kenyon - GMM, Foods & Sundries, Midwest Jeff Ishida - Real Estate, Eastern Division Steven Jewer - GMM, Foods & Sundries, E. Canada Anna Johnston - Information Systems Teresa Jones - Depot Operations Ross Hunt - Administration, Canada Scott Howe - Payroll & Benefits Accounting Graham Hillier - GMM, Non-Foods, Canada David Harruff - Operations, Northwest Timothy Haser - Information Systems Doris Harley - GMM, Foods & Sundries, Southeast Eric Harris - Warehouse Operations & Facilities Jim Harrison - Transportation Martin Groleau - GMM, Membership & Marketing, Canada Peter Gruening - Costco Travel Kevin Green - Operations, Northwest Joseph Grachek III - Internal Audit Jack Frank - Real Estate, Western Division Tom Fox - GMM, Bakery, Food Court & Service Deli Christopher Fleming - Operations, W. Canada Sheri Flies - Global Sustainability & Compliance Anthony Fontana - Operations, Northeast Ken Kimble - GMM, Corporate Foods & Sundries Liz Elsner - Ecommerce Guy Delmonte - Operations, Southeast Jeff Elliott - Treasury Russ Decaire - GMM, Foods & Sundries, Northwest Wendy Davis - Operations, Midwest Anthony Dattilo - Costco Logistics Mike Cruz - Operations, Bakery & Food Court Julie Cruz - Operations, Southeast Don Coleman - Information Systems Jeffrey Cole - Gasoline, Car Wash & Photo Center Mike Cho - Country Manager, Korea Michael Casebier - Operations, Texas Walter Chao - Regional Manager, Taiwan Greg Carter - GMM, Foods & Sundries, Los Angeles Elaina Budge - GMM, Foods & Sundries, Bay Area Paul Cano Operations, Bay Area Marc-André Bally - Ancillary & Business Centers, Canada Tiffany Barbre - Financial Accounting Controller Patty Bauer - Information Systems Christopher Bolves - Operations, Northwest Timothy Bowersock - Information Systems Kimberly Brown - Operations, Texas Debbie Ells - GMM, Non-Foods, Canada Ryan Knisley - Information Systems William Koza - Operations, Midwest Robert Leiss - Operations, Australia Robert Leuck - Operations, Northeast Judith Logan - GMM, Corporate Non-Foods Torsten Lubach - Information Systems Steve Mantanona - GMM, Merchandising, Mexico Randy Martel - Operations, Eastern Canada Mark Mattis - Information Systems Tracy Mauldin-Avery - GMM, Foods & Sundries, San Diego Susan McConnaha - Journeys, Diversity & Inclusion Daniel McMurray - Operations, Midwest [THIS PAGE INTENTIONALLY LEFT BLANK] Karim Zeffouini - Operations, Northeast Janet Wiebke - GMM, Corporate Non-Foods Craig Wilson - Food Safety & Quality Assurance Earl Wiramanaden - GMM, Fresh Foods, International Jason Zapp - GMM, Non-Foods, Canada Jill Whittaker - Operations, San Diego Randy White - Construction Mick Wendell - Construction Jack Weisbly - GMM, Corporate Non-Foods Brenda Weber - Human Resources Sandy Torrey - Corporate Marketing & Publishing Tony Tran-GMM, Fresh Foods, Canada Kevin Trejo - Operations, Bay Area Diane Tucci - Country Manager, Spain Howard Tulk - Operations, Japan Tony Unan - Legal, International Adrian Thummler - Operations, Mexico Chris Tingman - GMM, International Todd Thull - Construction Michael Thompson - Operations W. Canada H. Keith Thompson - Construction Gary Swindells - Country Manager, France Cathy Tabor - Information Systems Mauricio Talayero - CFO, Mexico Ken Theriault - Country Manager, Japan Brian Thomas - Operations, Los Angeles Steve Supkoff - Costco Logistics Richard Stephens - Pharmacy James Stafford - GMM, Foods & Sundries, Northeast Joseph Stanovcak - Operations, San Diego Geoff Shavey - GMM, Corporate Non-Foods Louie Silveira - Country Manager, U.K. & Iceland Dick Snyder - Operations, Midwest Stuart Shamis - Legal, Canada Debbie Sarter - Operations, Los Angeles Scott Schruber - Operations, U.K. Jeanne Rosolino - Operations, San Diego Chris Rylance - Information Systems Drew Sakuma - Operations, Bay Area Art Salas - U.S. Optical Aldyn Royes - Operations, Southeast Giro Rizzuti - GMM, Non-Foods, Canada Steven Powers - Operations, Southeast Paul Pulver - Operations, Northeast Harish Rao - Information Systems Thomas Padilla - Operations, Northwest Daniel Parent - Operations, Eastern Canada Robert Parker - Operations, Business Centers Shawn Parks - Operations, Los Angeles Fred Paulsell - Corporate Purchasing Larry Pifer - Operations, Eastern Canada Steve Pimentel - GMM, Business Delivery Frank Padilla - GMM, Meat & Produce Eric Orren - Construction, International Robert Murvin - GMM, Foods & Sundries, Texas Jim Nelson - GMM, Corporate Non-Foods Pietro Nenci - GMM, Foods & Business Centers, Canada Patrick Noone - Country Manager, Australia Scott O'Brien - GMM, Corporate Foods & Sundries Erin Medved-Burnham - GMM, Corp. Foods & Sundries Joe Moore - Corporate Tax Kathleen Ardourel - Global Ecommerce James Andruski - GMM, Foods & Sundries, W. Canada Michael Anderson - Information Systems VICE PRESIDENTS Senior Vice President, Vertical Integration Jeff Lyons Senior Vice President, Membership, Marketing, Services & Publishing Paul Latham Executive Vice President, COO - Northern Division Senior Vice President, Merchandising - Non-Foods & Ecommerce James Klauer Yoon Kim President and Chief Executive Officer W. Craig Jelinek Senior Vice President, Corporate Controller Senior Vice President, Merchandising - Foods & Sundries Daniel M. Hines Senior Vice President, General Manager - Texas Region Nancy Griese Darby Greek Senior Vice President, Country Manager - Mexico Jaime Gonzalez Executive Vice President and Chief Financial Officer Richard A. Galanti Senior Vice President, General Manager - Midwest Region Senior Vice President, General Manager - Los Angeles Region John B. Gaherty Senior Vice President, General Manager - Eastern Canadian Region Caton Frates Gino Dorico Senior Vice President, Pharmacy Victor A. Curtis Business Development Senior Vice President, Costco Wholesale Industries & Richard C. Chavez Senior Vice President, General Manager - Asia Richard Chang Executive Vice President, Administration David Messner Senior Vice President, Global Ecommerce & Travel Senior Vice President, Real Estate Development Executive Vice President, COO - Southwest Division & Mexico Ali Moayeri Senior Vice President, Information Systems Terry Williams Senior Vice President, General Manager - San Diego Region W. Richard Wilcox Senior Vice President, Merchandising - Fresh Foods Sarah Wehling Senior Vice President, Merchandising - Non Foods, Ecommerce, Membership & Marketing - Canadian Division Azmina Virani Executive Vice President, COO - Merchandising Ron M. Vachris Senior Vice President, Depots & Traffic Senior Vice President, General Counsel & Corporate Secretary John D. Thelan Senior Vice President, General Manager - Western Canadian Region John Sullivan Senior Vice President, General Manager - Northeast Region David Skinner Senior Vice President, General Manager - Southeast Region Adam Self Yoram B. Rubanenko Executive Vice President, Ancillary Businesses, Manufacturing & Business Centers Timothy L. Rose Senior Vice President, Country Manager - Canada Pierre Riel Executive Vice President, COO - Eastern & Canadian Divisions and Chief Diversity Officer Joseph P. Portera Senior Vice President, Ecommerce Senior Vice President, General Manager - Northwest Region Mike Parrott Mario Omoss Senior Vice President, Treasury, Financial Planning & Investor Relations Executive Vice President, COO - International Division Robert E. Nelson III Executive Vice President, Chief Information Officer James P. Murphy Senior Vice President, Construction & Purchasing Paul G. Moulton Russ Miller Co-Branded Credit Card Daniel M. Hines 2/18/2018 /s/ W. CRAIG JELINEK W. Craig Jelinek President, Chief Executive Officer and Director /s/ RICHARD A. GALANTI Richard A. Galanti Executive Vice President, Chief Financial Officer and Director Item 9B-Other Information None. PART III Item 10-Directors, Executive Officers and Corporate Governance Information relating to the availability of our code of ethics for senior financial officers and a list of our executive officers appear in Part I, Item 1 of this Report. The information required by this Item concerning our directors and nominees for director is incorporated herein by reference to the sections entitled "Proposal 1: Election of Directors," "Directors" and "Committees of the Board" in Costco's Proxy Statement for its 2021 annual meeting of shareholders, which will be filed with the SEC within 120 days of the end of our fiscal year ("Proxy Statement"). Item 11-Executive Compensation The information required by this Item is incorporated herein by reference to the sections entitled "Compensation of Directors,” “Executive Compensation," and "Compensation Discussion and Analysis" in Costco's Proxy Statement. Item 12-Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item is incorporated herein by reference to the section entitled "Principal Shareholders" and "Equity Compensation Plan Information” in Costco's Proxy Statement. Item 13-Certain Relationships and Related Transactions, and Director Independence The information required by this Item is incorporated herein by reference to the sections entitled "Proposal 1: Election of Directors," "Directors," "Committees of the Board," "Shareholder Communications to the Board," "Meeting Attendance," "Report of the Compensation Committee of the Board of Directors,” "Certain Relationships and Transactions" and "Report of the Audit Committee” in Costco's Proxy Statement. Item 14-Principal Accounting Fees and Services The information required by this Item is incorporated herein by reference to the sections entitled "Independent Public Accountants" in Costco's Proxy Statement. 67 PART IV Item 15-Exhibits, Financial Statement Schedules (a) (b) Documents filed as part of this report are as follows: 1. 2. Financial Statements: See the listing of Financial Statements included as a part of this Form 10-K in Item 8 of Part II. 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 fourth quarter of 2020 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Financial Statement Schedules: Changes in Internal Control Over Financial Reporting 66 $ 2.05 $ 2.47 $ 8.26 4.4 Basic 439,157 440,284 439,859 439,727 439,755 Diluted 442,749 442,337 442,642 443,400 442,923 (1) Includes a $123 charge for a product tax assessment. 65 99 Item 9-Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A-Controls and Procedures 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 SEC 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 and the Chief Financial Officer, with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of August 30, 2020 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date. Management's Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of our assets; (2) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with appropriate authorizations; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness for future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision of and with the participation of our management, we assessed the effectiveness of our internal control over financial reporting as of August 30, 2020, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on its assessment, management has concluded that our internal control over financial reporting was effective as of August 30, 2020. The attestation of KPMG LLP, our independent registered public accounting firm, on the effectiveness of our internal control over financial reporting is included with the consolidated financial statements in Item 8 of this Report. 60 All schedules have been omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements, including the notes thereto. Exhibits: The required exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference. Exhibit Number National Association, as Trustee, dated as of March 20, 2002 (incorporated by reference to Exhibits 4.1 and 4.2 to the Company's Current Report on the Form 8-K filed on March 25, 2002) 4.2 Form of 1.375% Senior Notes due 8-K 4/17/2020 June 20, 2027 4.3 Form of 1.600% Senior Notes due 8-K 4/17/2020 Incorporated by Reference 68 May 18, 2024 5/16/2017 8-K Form of 2.750% Senior Notes due 4.6 5/16/2017 8-K Form of 2.300% Senior Notes due May 18, 2022 4.5 April 20, 2032 4/17/2020 8-K Form of 1.750% Senior Notes due Corporation and U.S. Bank between Costco Wholesale 3/25/2002 8-K 3.1 Exhibit Description Articles of Incorporation as Incorporated by Reference 3/15/2018 Filed Herewith Form Period Ended Filing Date 10-Q 2/16/2020 3/12/2020 amended of Costco Wholesale Corporation 2.01 3.2 8-K Wholesale Corporation 3.2.1 Amendments to Sections 3.3, 3.4, 8-K 1/29/2020 9/16/2020 and 3.6 of the Bylaws of Costco Wholesale Corporation (to be effective and first apply with respect to the Company's 2022 Annual Meeting of Shareholders) 4.1 First Supplemental Indenture Bylaws as amended of Costco Exhibit Shares used in calculation (000's) Executive Employment Executive Employment Agreement, effective January 1, 2020, between W. Craig Jelinek and Costco Wholesale Corporation 10.6 11/24/2019 12/23/2019 Form of Indemnification 12/13/1999 Agreement 10.7* Deferred Compensation Plan 10-K 9/1/2013 10/16/2013 14A 10.8** 10-Q 10.5.2* 10-Q 11/20/2016 12/16/2016 Agreement, effective January 1, 2017, between W. Craig Jelinek and Costco Wholesale Corporation Extension of the Term of the 10.5.1* 10-Q 11/25/2018 12/20/2018 Agreement, effective January 1, 2019, between W. Craig Jelinek and Costco Wholesale Corporation Extension of the Term of the Executive Employment Citibank, N.A. Co-Branded Credit Card Agreement 5/10/2015 Second Amendment to Citi, N.A. 10-Q 2/14/2016 3/9/2016 Co-Branded Credit Card Agreement 10.8.2** 10.8.3** 10-K 8/28/2016 10/12/2016 10.8.4** Fourth Amendment to Citi, N.A. 10-Q Third Amendment to Citi, N.A. Co- Branded Credit Card Agreement 10-Q/A Filing Date Form 8/31/2015 10.8.1** First Amendment to Citi, N.A. Co- 10-Q 11/22/2015 12/17/2015 Period Ended Branded Credit Card Agreement 69 Incorporated by Reference Exhibit Number Filed Exhibit Description Herewith 69 10.5* April 20, 2030 8-K Incentive Plan 12/19/2014 DEF 14A Seventh Restated 2002 Stock 10.3* 12/17/2019 DEF 14 2019 Incentive Plan 10.2* 10/19/2012 9/2/2012 10-K 10.3.1* Costco Wholesale Executive Health Plan X Description of Common Stock 10/21/2019 Filing Date 5/16/2017 8-K Form of 3.000% Senior Notes due May 18, 2027 4.7 Period Ended Herewith Exhibit Description Number Filed 10.1* 2019 Stock Incentive Plan 4.8 11/24/2019 10.4* 10-Q Fiscal 2020 Executive Bonus Plan Agreement for 2020 Performance- Based Restricted Stock Units- Executive 11/24/2019 12/23/2019 10-Q 2019 Stock Incentive Plan Letter Director Agreement-Non-Executive Restricted Stock Unit Award 12/23/2019 11/24/2019 10.3.4* 10-Q 12/23/2019 10-Q 10.3.2* 2019 Stock Incentive Plan Restricted Stock Unit Award 11/24/2019 12/23/2019 Agreement-Employee Restricted Stock Unit Award Agreement - Non-U.S. Employee 10.3.3* 2019 Stock Incentive Plan Stock Exchange Listing 1918 Eighth Avenue, Suite 2900 Seattle, WA 98101 Transfer Agent KPMG LLP The Nasdaq Global Select Market Stock Symbol: COST [THIS PAGE INTENTIONALLY LEFT BLANK] A copy of Costco's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q will be provided to any shareholder upon written request directed to Investor Relations, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, Washington 98027. Internet users can access recent sales and earnings releases, the annual report and SEC filings, as well as our Costco website, at http://www.costco.com. E-mail users can direct their investor relations questions to investor@costco.com. The SEC maintains a site that contains reports, proxy and information statements, and other information regarding issuers, such as the Company, that file electronically with the SEC at www.sec.gov. Thursday, January 21, 2021 at 2:00 PM Pacific www.virtualshareholdermeeting.com/COST2021 Annual Meeting Shareholder Information ADDITIONAL INFORMATION Computershare [THIS PAGE INTENTIONALLY LEFT BLANK] Independent Public Accountants Costco Shareholder Relations www.fsc.org P.O. Box 505000 COR000075B 0320 Quality and value in 803 locations and on Costco.com WHOLESALE COSTCO FSC® C132107 Correspondence should be mailed to: MIX Paper from responsible sources Website: https://www.computershare.com/investor TDD for Hearing Impaired: (800) 490-1493 Outside U.S.: (201) 680-6578 Telephone: (800) 249-8982 Louisville, KY 40202 Overnight correspondence should be sent to: 462 South 4th Street, Suite 1600 Louisville, KY 40233 FSC WESTERN AUSTRALIA -1 COR000296_0521 UNITED STATES SOUTH AUSTRALIA - 1 VICTORIA-4 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Washington, D.C. 20549 FORM 10-K ☑ SECURITIES AND EXCHANGE COMMISSION Properties or Item 16. Exhibits, Financial Statement Schedules Item 15. PART IV 64 64 64 ठ ठ ठ Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services Item 13. Item 14. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 12. 64 Executive Compensation Item 11. 64 Directors, Executive Officers and Corporate Governance Item 10. PART III 64 Other Information Item 9B. 63 Controls and Procedures Item 9A. 63 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9. 31 Form 10-K Summary Financial Statements and Supplementary Data Signatures 64 NEW SOUTH WALES - 4 QUEENSLAND - 2 Warehouse ancillary businesses operate primarily within or next to our warehouses, encouraging members to shop more frequently. The number of warehouses with gas stations varies significantly by country, and we have no gasoline business in Korea or China. We operated 636 gas stations at the end of 2021. Net sales for our gasoline business represented approximately 9% of total net sales in 2021. Warehouse Ancillary (includes gasoline, pharmacy, optical, food court, hearing aids, and tire installation) and Other Businesses (includes e-commerce, business centers, travel, and other) Fresh Foods (including meat, produce, service deli, and bakery) Non-Foods (previously Hardlines and Softlines; including major appliances, electronics, health and beauty aids, hardware, garden and patio, sporting goods, tires, toys and seasonal, office supplies, automotive care, postage, tickets, apparel, small appliances, furniture, domestics, housewares, special order kiosk, and jewelry) Foods and Sundries (including sundries, dry grocery, candy, cooler, freezer, deli, liquor, and tobacco) • • • Core Merchandise Categories (or core business): We offer merchandise and services in the following categories: In keeping with our policy of member satisfaction, we generally accept returns of merchandise. On certain electronic items, we typically have a 90-day return policy and provide, free of charge, technical support services, as well as an extended warranty. Additional third-party warranty coverage is sold on certain electronic items. Our strategy is to provide our members with a broad range of high-quality merchandise at prices we believe are consistently lower than elsewhere. We seek to limit most items to fast-selling models, sizes, and colors. We carry less than 4,000 active stock keeping units (SKUs) per warehouse in our core warehouse business, significantly less than other broadline retailers. We average anywhere from 9,000 to 11,000 SKUs online, some of which are also available in our warehouses. Many consumable products are offered for sale in case, carton, or multiple-pack quantities only. Our warehouses on average operate on a seven-day, 70-hour week. Gasoline operations generally have extended hours. Because the hours of operation are shorter than other retailers, and due to other efficiencies inherent in a warehouse-type operation, labor costs are lower relative to the volume of sales. Merchandise is generally stored on racks above the sales floor and displayed on pallets containing large quantities, reducing labor required. In general, with variations by country, our warehouses accept certain credit cards, including Costco co-branded cards, debit cards, cash and checks, co-brand cardholder rebates, Executive member 2% reward certificates and our proprietary stored-value card (shop card). Our average warehouse space is approximately 146,000 square feet, with newer units being slightly larger. Floor plans are designed for economy and efficiency in the use of selling space, the handling of merchandise, and the control of inventory. Because shoppers are attracted principally by the quality of merchandise and low prices, our warehouses are not elaborate. By strictly controlling the entrances and exits and using a membership format, we believe our inventory losses (shrinkage) are well below those of typical retail operations. commerce operations we ship merchandise through our depots, our logistics operations for big and bulky items, as well as through drop-ship and other delivery arrangements with our suppliers. 3 We buy most of our merchandise directly from manufacturers and route it to cross-docking consolidation points (depots) or directly to our warehouses. Our depots receive large shipments from manufacturers and quickly ship these goods to warehouses. This process creates freight volume and handling efficiencies, lowering costs associated with traditional multiple-step distribution channels. For our e- 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 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 generally sell inventory before we are required to pay for it, even while taking advantage of early payment discounts. General We report on a 52/53-week fiscal year, consisting of thirteen four-week periods and ending on the Sunday nearest the end of August. The first three quarters consist of three periods each, and the fourth quarter consists of four periods (five weeks in the thirteenth period in a 53-week year). The material seasonal impact in our operations is increased net sales and earnings during the winter holiday season. References to 2021, 2020, and 2019 relate to the 52-week fiscal years ended August 29, 2021, August 30, 2020, and September 1, 2019, respectively. Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983, in Seattle, Washington. We are principally engaged in the operation of membership warehouses in the United States (U.S.) and Puerto Rico, Canada, United Kingdom (U.K.), Mexico, Japan, Korea, Australia, Spain, France, Iceland, China, and through a majority-owned subsidiary in Taiwan. Costco operated 815, 795, and 782 warehouses worldwide at August 29, 2021, August 30, 2020, and September 1, 2019, respectively. The Company operates e-commerce websites in the U.S., Canada, Mexico, U.K., Korea, Taiwan, Japan, and Australia. Our common stock trades on the NASDAQ Global Select Market, under the symbol "COST." Item 1-Business PART I 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,” “likely,” “may,” “might,” “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, including, without limitation, the factors set forth in the section titled "Item 1A-Risk Factors", and other factors noted in the section titled “Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the consolidated financial statements and related notes in Item 8 of this Report. 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. INFORMATION RELATING TO FORWARD LOOKING STATEMENTS 2680 68 67 2 For the fiscal year ended August 29, 2021 Item 8. Quantitative and Qualitative Disclosures About Market Risk The number of shares outstanding of the registrant's common stock as of September 28, 2021, was 441,823,811. DOCUMENTS INCORPORATED BY REFERENCE Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑ The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 14, 2021 was $155,810,963,274. If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. □ Smaller reporting company Emerging growth company Accelerated filer Non-accelerated filer Large accelerated filer Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer," "accelerated filer”, “smaller reporting company", and "emerging growth company” in Rule 12b-2 of the Exchange Act. 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 ☑ No □ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No ☑ Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐ The NASDAQ Global Select Market Name of each exchange on which registered COST Trading Symbol Common Stock, $.01 Par Value Title of each class Registrant's telephone number, including area code: (425) 313-8100 Securities registered pursuant to Section 12(b) of the Act: (Address of principal executive offices) (Zip Code) 999 Lake Drive, Issaquah, WA 98027 (I.R.S. Employer Identification No.) 91-1223280 incorporation or organization) (State or other jurisdiction of (Exact name of registrant as specified in its charter) Costco Wholesale Corporation Commission file number 0-20355 Washington TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Portions of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on January 20, 2022, are incorporated by reference into Part III of this Form 10-K. 30 COSTCO WHOLESALE CORPORATION TABLE OF CONTENTS Item 7A. 21 Management's Discussion and Analysis of Financial Condition and Results of Operations 20 19 220 Reserved Item 6. Item 7. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities PART II Item 5. 19 19 18 18 9 3 Page Mine Safety Disclosures Item 4. Legal Proceedings Item 3. Unresolved Staff Comments Item 2. Item 1B. Risk Factors Item 1A. Business Item 1. PART I ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED AUGUST 29, 2021 AUSTRALIAN CAPITAL TERRITORY-1 Craig Jelinek AUSTRALIA Canada 105 United States and Puerto Rico 572 ALABAMA - 4 ALASKA - 4 ARIZONA-18 ARKANSAS-1 CALIFORNIA - 131 COLORADO-14 CONNECTICUT - 8 DELAWARE-1 FLORIDA-29 GEORGIA - 15 HAWAII - 7 IDAHO - 7 ILLINOIS-23 INDIANA - 8 IOWA - 3 KANSAS - 3 KENTUCKY-4 LOUISIANA -3 MARYLAND - 11 MASSACHUSETTS - 6 MISSOURI - 7 MONTANA -5 NEBRASKA-3 NEVADA - 8 NEW HAMPSHIRE - 1 NEW JERSEY - 21 NEW MEXICO - 3 NEW YORK-19 NORTH CAROLINA - 10 NORTH DAKOTA - 2 OHIO - 12 OKLAHOMA - 3 OREGON - 13 PENNSYLVANIA - 11 SOUTH CAROLINA - 6 SOUTH DAKOTA - 1 TENNESSEE - 6 JALISCO - 3 MÉXICO - 5 COSTCO.COM.MX AGUASCALIENTES - 1 BAJA CALIFORNIA - 4 BAJA CALIFORNIA SUR-1 CHIHUAHUA -2 CIUDAD DE MÉXICO - 5 COAHUILA -1 GUANAJUATO - 3 MEXICO SASKATCHEWAN - 3 COSTCO.CA ALBERTA -19 BRITISH COLUMBIA - 14 MANITOBA - 3 NEW BRUNSWICK - 3 NEWFOUNDLAND AND LABRADOR-1 NOVA SCOTIA -2 ONTARIO - 38 QUÉBEC - 22 CANADA 40 PUERTO RICO - 4 WISCONSIN - 9 WASHINGTON - 32 VIRGINIA - 17 VERMONT -1 UTAH - 12 TEXAS-35 WASHINGTON, D.C. -1 Mexico MICHIGAN - 16 MINNESOTA - 13 MISSISSIPPI - 1 COSTCO.COM In another year of uncertainty, Costco was steadfast in providing goods and services, remaining nimble, and adapting our business as needed to best serve our members and protect our employees. Dear Costco Shareholders: December 9, 2021 Costco Costco WAL Despite ongoing pandemic challenges, we had another strong year in fiscal 2021. Net sales for the 52-week fiscal year totaled $192 billion, an increase of 18%, with a comparable sales increase of 16%. Net income for the 52-week fiscal year was $5 billion, or $11.27 per diluted share, an increase of 25%. Revenue from membership fees increased 9% to $3.9 billion. In December 2020, we paid a special cash dividend of $10 per share or $4.4 billion. The special dividend was the fourth in eight years, which was in addition to a 13% increase in the regular dividend approved in April 2021. FISCAL YEAR ENDED AUGUST 29, 2021 WHOLESALE COSTCO 2021 Coarce SHANNON COSTCO COSTCO NICOLE Bey ANNUAL REPORT MICHOACÁN -1 Fiscal 2021 presented global challenges in the supply of key commodities, transportation capacity, and labor shortages. Inflationary factors, such as higher labor and freight costs, greater transportation and container demand, and scarcity of certain products put pressure on pricing. We worked with our suppliers to explore methods to control costs and avoid or minimize price increases when possible. In a move much anticipated by members, warehouses began a phased return to full sampling using increased safety protocols. Costco food courts were able to resume seating at most locations, with more physical separation and reduced seating capacity. UNITED STATES WHOLESALE COSTCO 828 locations as of December 31, 2021 President and Chief Executive Officer Our other businesses sell products and services that complement our warehouse operations (core and warehouse ancillary businesses). Our e-commerce operations give members convenience and a broader selection of goods and services. Net sales for e-commerce represented approximately 7% of total net sales in 2021. This figure does not consider other services we offer online in certain countries such as business delivery, travel, same-day grocery, and various other services. Our business centers carry items tailored specifically for food services, convenience stores and offices, and offer walk-in shopping and deliveries. Business centers are included in our total warehouse count. Costco Travel offers vacation Cray Jelek In fiscal 2021, we opened warehouses and business centers domestically and internationally, including 12 net new in the U.S., four net new in Canada, three in Japan, and one in Taiwan. The pandemic created challenges in opening buildings, and we expect the pace to increase in fiscal 2022. In fact as of today we have already opened 13 net new buildings in the new fiscal year. Sincerely, As 2021 comes to a close, I extend my thanks and appreciation to our more than 300,000 Costco employees across the globe who consistently impress me with their work ethic, dedication to member service, and their loyalty to our business. Finally, I thank Costco members around the world for their continued support and trust in our business. Together, we've made it through an unimaginable time in our lives, and we're moving forward toward a brighter future. Costco is committed to efforts around social and environmental issues. Regarding diversity and inclusion, we have increased our efforts to expand the recruitment candidate pool and developed a library of resources and training for all levels of employees in order to foster an environment that supports and encourages open dialogue and communication. Regarding the environment, Costco's continuing work on initiatives aligned with the Global Climate Action Plan, the Global Forest Conservation Commitment and UN Sustainable Development Goals, which can be found on our website. We recognize that continuing to address Costco's social and environmental impact is both a business imperative and the right thing to do, and we remain committed to these efforts. We continued to recognize and reward the exceptional performance of hourly employees in operations, extending the $2 per hour premium pay through February 2021. Such action marked an entire year of providing premium pay for those employees who demonstrated outstanding service during an extraordinarily difficult and uncertain time. In March 2021, we permanently increased wages by $1 for hourly warehouse employees. The Kirkland Signature ™ brand, which is synonymous with higher quality and exceptional value, saw strong global growth with sales exceeding $59 billion, compared to $52 billion in the prior year. We focused on driving down costs, improving quality, expanding in-country sourcing options, reducing the environmental impact of transportation, and introducing new and exciting products. TM We operate eight e-commerce websites worldwide, where comparable sales grew by 44% over the previous year. We continue to focus on complementing our core warehouse business with online offerings. Our acquisition of what we now call Costco Logistics has helped improve our delivery times and often lower delivery prices of big and bulky items. As a result, categories such as appliances, exercise equipment, furniture, mattresses and patio products contributed to sales growth this year, despite supply challenges. Other important advancements were achieved in our online business including reduced costs associated with picking items, the addition of frozen grocery 2-day deliveries, and technology enhancements including a streamlined COVID-19 vaccine scheduler. From the Costco family to yours, I wish you a healthy and happy New Year. MORELOS - 1 NUEVO LEÓN - 3 PUEBLA - 1 QUERÉTARO-1 QUINTANA ROO - 1 SAN LUIS POTOSÍ - 1 SINALOA - 1 SONORA - 1 TABASCO - 1 TOYAMA-1 OSAKA - 1 SAITAMA - 2 SHIZUOKA-1 TOKYO-1 IBARAKI – 2 HIROSHIMA-1 HOKKAIDO-2 HYOGO - 2 GUNMA – 1 GIFU-1 YAMAGATA-1 MIYAGI -1 CHIBA - 3 AICHI - 2 KYOTO-1 KUMAMOTO-1 ISHIKAWA-1 KANAGAWA - 3 COSTCO.CO.JP FUKUOKA -2 JAPAN KOREA BUSAN - 1 TAOYUAN CITY -2 TAIPEI CITY-2 TAINAN CITY-1 NEW TAIPEI CITY - 3 TAICHUNG CITY - 2 KAOHSIUNG CITY - 2 CHIAYI CITY-1 HSINCHU CITY-1 COSTCO.CO.KR COSTCO.COM.TW SEJONG-1 SEOUL - 3 ULSAN – 1 INCHEON - 1 GYEONGGI-DO-5 DAEJEON-1 DAEGU - 2 CHUNGCHEONGNAM-DO-1 TAIWAN COSTCO.COM.AU SHANGHAI -1 ENGLAND -25 SCOTLAND - 3 29 Kingdom United 1 2 Iceland China France 14 30 Japan 16 Korea YUCATÁN - 1 VERACRUZ-2 Taiwan WALES-1 2 13 COSTCO.CO.UK UNITED KINGDOM MADRID - 2 BISCAY-1 ANDALUCÍA - 1 SPAIN Australia KAUPTÚN -1 CHINA ICELAND ÎLE-DE-FRANCE - 2 FRANCE 4 Spain JIANGSU - 1 4 Lune 273,000 2021 69 2013 69 1994 68 2011 64 2018 2019 59 57 59 65 1993 Since Age 1995 69 Executive Officer 8 Executive Vice President, Chief Operating Officer, Merchandising. Mr. Vachris was Senior Vice President, Real Estate Development, from August 2015 to June 2016, and Senior Vice President, General Manager, Northwest Region, from 2010 to July 2015. Executive Vice President, Northeast and Southeast Regions. Mr. Rubanenko was Senior Vice President and General Manager, Southeast Region, from 2013 to September 2021, and Vice President, Regional Operations Manager for the Northeast Region, from 1998 to 2013. Executive Vice President, Ancillary Businesses, Manufacturing, and Business Centers. Mr. Rose was Senior Vice President, Merchandising, Foods and Sundries and Private Label, from 1995 to December 2012. Executive Vice President, Chief Operating Officer, Eastern and Canadian Divisions. Mr. Portera has held these positions since 1994 and has been the Chief Diversity Officer since 2010. Executive Vice President, Chief Operating Officer, International. Mr. Murphy was Senior Vice President, International, from 2004 to October 2010. 2018 Executive Vice President, Administration. Mr. Callans was Senior Vice President, Human Resources and Risk Management, from 2013 to December 2018. Executive Vice President, Chief Operating Officer, Southern Division and Mexico. Mr. Miller was Senior Vice President, Western Canada Region, from 2001 to January 2018. 2016 Item 1A-Risk Factors Increased security threats and more sophisticated cyber misconduct pose a risk to our systems, networks, products and services. We rely upon IT systems and networks, some of which are managed by third parties, in connection with virtually all of our business activities. Additionally, we collect, store and process sensitive information relating to our business, members, suppliers and employees. Operating these IT systems and networks, and processing and maintaining this data, in a secure manner, is critical to our business operations and strategy. Increased remote work due to the COVID-19 pandemic has also increased the possible attack surfaces. Threats designed to gain unauthorized access to systems, networks and data, both ours and third parties with whom we work, are increasing in frequency and sophistication. Cybersecurity attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer crimes and advanced persistent threats. Phishing attacks have emerged as particularly prominent, including as vectors for ransomware attacks, which have increased in breadth and frequency. While we train our employees as part of our security efforts, that training cannot be completely effective. These threats pose a risk to the security of our systems and networks and the confidentiality, integrity, and availability of our data. It is possible that our IT systems and networks, or those managed by third parties such as cloud providers or suppliers that otherwise host confidential information, could have vulnerabilities, which could go unnoticed for a period of time. While our cybersecurity and compliance efforts seek to mitigate such risks, there can be no guarantee that the actions and controls we and our third-party service providers have implemented and are implementing, will be sufficient to protect our systems, information or other property. We are required to maintain the privacy and security of personal and business information amidst multiplying threat landscapes and in compliance with privacy and data protection regulations globally. Failure to do so could damage our business, including our reputation with members, suppliers and employees, cause us to incur substantial additional costs, and become subject to litigation and regulatory action. projects could adversely impact our business plans and potentially impair our day to day business operations. Given the high volume of transactions we process, it is important that we build strong digital resiliency to prevent disruption from events such as power outages, computer and telecommunications failures, viruses, internal or external security breaches, errors by employees, and catastrophic events such as fires, earthquakes, tornadoes and hurricanes. Any debilitating failure of our critical IT systems, data centers and backup systems would require significant investments in resources to restore IT services and may cause serious impairment in our business operations including loss of business services, increased cost of moving merchandise and failure to provide service to our members. We are currently making substantial investments in maintaining and enhancing our digital resiliency and failure or delay in these projects could be costly and harmful to our business. Failure to deliver IT transformation efforts efficiently and effectively could result in the loss of our competitive position and adversely impact our financial condition and results of operations. 10 IT systems play a crucial role in conducting our business. These systems are utilized to process a very high volume of transactions, conduct payment transactions, track and value our inventory and produce reports critical for making business decisions. Failure or disruption of these systems could have an adverse impact on our ability to buy products and services from our suppliers, produce goods in our manufacturing plants, move the products in an efficient manner to our warehouses and sell products to our members. We are undertaking large technology and IT transformation projects. The failure of these Availability and performance of our information technology (IT) systems are vital to our business. Failure to successfully execute IT projects and have IT systems available to our business would adversely impact our operations. It is difficult to consistently and successfully predict the products and services that our members will desire. Our success depends, in part, on our ability to identify and respond to trends in demographics and consumer preferences. Failure to identify timely or effectively respond to changing consumer tastes, preferences (including those relating to environmental, social and governance practices) and spending patterns could negatively affect our relationship with our members, the demand for our products and services, and our market share. If we are not successful at predicting our sales trends and adjusting our purchases accordingly, we may have excess inventory, which could result in additional markdowns, or we may experience out-of-stock positions and delivery delays, which could result in higher costs, both of which would reduce our operating performance. This could have an adverse effect on net sales, gross margin and operating income. We may not timely identify or effectively respond to consumer trends, which could negatively affect our relationship with our members, the demand for our products and services, and our market share. We depend on the orderly operation of the merchandise receiving and distribution process, primarily through our depots. We also rely upon processing, packaging, manufacturing and other facilities to support our business, which includes the production of certain private-label items. Although we believe that our operations are efficient, disruptions due to fires, tornadoes, hurricanes, earthquakes, pandemics or other extreme weather conditions or catastrophic events, labor issues or other shipping problems may result in delays in the production and delivery of merchandise to our warehouses, which could adversely affect sales and the satisfaction of our members. Our e-commerce business depends heavily on third- party and in-house logistics providers and that business is negatively affected when these providers are unable to provide services in a timely fashion. Disruptions in merchandise distribution or processing, packaging, manufacturing, and other facilities could adversely affect sales and member satisfaction. 56 We sell many products under our Kirkland Signature brand. Maintaining consistent product quality, competitive pricing, and availability of these products is essential to developing and maintaining member loyalty. These products also generally carry higher margins than national brand products and represent a growing portion of our overall sales. If the Kirkland Signature brand experiences a loss of member acceptance or confidence, our sales and gross margin results could be adversely affected. Our failure to maintain membership growth, loyalty and brand recognition could adversely affect our results of operations. We have made and may continue to make investments and acquisitions to improve the speed, accuracy and efficiency of our supply chains and delivery channels. The effectiveness of these investments can be less predictable than opening new locations and might not provide the anticipated benefits or desired rates of return. 9 We intend to continue to open warehouses in new markets. Associated risks include difficulties in attracting members due to a lack of familiarity with us, attracting members of other wholesale club operators, our lesser familiarity with local member preferences, and seasonal differences in the market. Entry into new markets may bring us into competition with new competitors or with existing competitors with a large, established market presence. We cannot ensure that new warehouses and new e-commerce websites will be profitable and future profitability could be delayed or otherwise materially adversely affected. We seek to expand in existing markets to attain a greater overall market share. A new warehouse may draw members away from our existing warehouses and adversely affect their comparable sales performance, member traffic, and profitability. Our growth is dependent, in part, on our ability to acquire property and build or lease new warehouses and depots. We compete with other retailers and businesses for suitable locations. Local land use and other regulations restricting the construction and operation of our warehouses and depots, as well as local community actions opposed to the location of our warehouses or depots at specific sites and the adoption of local laws restricting our operations and environmental regulations, may impact our ability to find suitable locations and increase the cost of sites and of constructing, leasing and operating warehouses and depots. We also may have difficulty negotiating leases or purchase agreements on acceptable terms. In addition, certain jurisdictions have enacted or proposed laws and regulations that would prevent or restrict the operation or expansion plans of certain large retailers and warehouse clubs, including us. Failure to effectively manage these and other similar factors may affect our ability to timely build or lease and operate new warehouses and depots, which could have a material adverse effect on our future growth and profitability. We may be unsuccessful implementing our growth strategy, including expanding our business in existing markets and new markets, and integrating acquisitions, which could have an adverse impact on our business, financial condition and results of operations. We are highly dependent on the financial performance of our U.S. and Canadian operations. Our financial and operational performance is highly dependent on our U.S. and Canadian operations, which comprised 86% and 81% of net sales and operating income in 2021, respectively. Within the U.S., we are highly dependent on our California operations, which comprised 28% of U.S. net sales in 2021. Our California market, in general, has a larger percentage of higher volume warehouses as compared to our other domestic markets. Any substantial slowing or sustained decline in these operations could materially adversely affect our business and financial results. Declines in financial performance of our U.S. operations, particularly in California, and our Canadian operations could arise from, among other things: slow growth or declines in comparable warehouse sales (comparable sales); negative trends in operating expenses, including increased labor, healthcare and energy costs; failing to meet targets for warehouse openings; cannibalizing existing locations with new warehouses; shifts in sales mix toward lower gross margin products; changes or uncertainties in economic conditions in our markets, including higher levels of unemployment and depressed home values; and failing to consistently provide high quality and innovative new products. Business and Operating Risks The risks described below could materially and adversely affect our business, financial condition and results of operations. We could also be affected by additional risks that apply to all companies operating in the U.S. and globally, as well as other risks that are not presently known to us or that we currently consider to be immaterial. These Risk Factors should be carefully reviewed in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and our consolidated financial statements and related notes in Item 8 of this Report. Membership loyalty and growth are essential to our business. The extent to which we achieve growth in our membership base, increase the penetration of Executive membership, and sustain high renewal rates materially influences our profitability. Damage to our brands or reputation may negatively impact comparable sales, diminish member trust, and reduce renewal rates and, accordingly, net sales and membership fee revenue, negatively impacting our results of operations. packages, hotels, cruises, and other travel products exclusively for Costco members (offered in the U.S., Canada, and the U.K.). We have direct buying relationships with many producers of brand-name merchandise. We do not obtain a significant portion of merchandise from any one supplier. The COVID-19 pandemic created unprecedented supply constraints, including disruptions and delays that have impacted and could continue to impact the flow and availability of certain products. When sources of supply become unavailable, we seek alternative sources. We also purchase and manufacture private-label merchandise, as long as quality and member demand are high and the value to our members is significant. Certain financial information for our segments and geographic areas is included in Note 12 to the consolidated financial statements included in Item 8 of this Report. Human Capital Our Code of Ethics requires that we "Take Care of Our Employees," which is fundamental to the obligation to "Take Care of Our Members." We must also carefully control our selling, general and administrative (SG&A) expenses, so that we can sell high quality goods and services at low prices. Compensation and benefits for employees is our largest expense after the cost of merchandise and is carefully monitored. At the end of 2021, we employed 288,000 employees worldwide. The large majority (approximately 95%) is employed in our membership warehouses and distribution channels and approximately 17,000 employees are represented by unions. We also utilize seasonal employees during peak periods. The total number of employees by segment is: United States Canada Other International Total employees Number of Employees 2021 2020 50 2019 181,000 167,000 47,000 46,000 42,000 49,000 46,000 45,000 254,000 288,000 192,000 Paid cardholders (except affiliates) are eligible to upgrade to an Executive membership in the U.S. and Canada, for an additional annual fee of $60. Executive memberships are also available in Mexico, the U.K., Japan, Korea, and Taiwan, for which the additional annual fee varies. Executive members earn a 2% reward on qualified purchases (generally up to a maximum reward of $1,000 per year), which can be redeemed only at Costco warehouses. This program also offers (except in Mexico and Korea), access to additional savings and benefits on various business and consumer services, such as auto and home insurance, the Costco auto purchase program, and check printing. These services are generally provided by third parties and vary by state and country. Executive members totaled 25.6 million and represented 55% of paid members (excluding affiliates) in the U.S. and Canada and 17% of paid members (excluding affiliates) in our Other International operations at the end of 2021. They generally shop more frequently and spend more than other members. 98,500 105,500 Membership Our members may utilize their memberships at all of our warehouses and websites. Gold Star memberships are available to individuals; Business memberships are limited to businesses, including individuals with a business license, retail sales license or comparable document. Business members may add additional cardholders (affiliates), to which the same annual fee applies. Affiliates are not available for Gold Star members. Our annual fee for these memberships is $60 in our U.S. and Canadian operations and varies in other countries. All paid memberships include a free household card. Our member renewal rate was 91% in the U.S. and Canada and 89% worldwide at the end of 2021. The majority of members renew within six months following their renewal date. Our renewal rate is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date. Our membership counts include active memberships as well as memberships that have not renewed within the 12 months prior to the reporting date. At the end of 2020, we standardized our membership count methodology globally to be consistent with the U.S. and Canada, which resulted in the addition to the count of approximately 2.0 million total cardholders for 2020, of which 1.3 million were paid members. The change did not impact 2019. Membership fee income and the renewal rate calculations were not affected. Our membership was made up of the following (in thousands): Gold Star Business, including affiliates Total paid members Household cards Total cardholders 2021 2020 2019 50,200 46,800 42,900 11,500 11,000 61,700 58,100 53,900 49,900 47,400 44,600 111,600 The potential impacts of a material cybersecurity attack include reputational damage, litigation, government enforcement actions, penalties, disruption to systems, unauthorized release of confidential or otherwise protected information, corruption of data, diminution in the value of our investment in IT systems and increased cybersecurity protection and remediation costs. This could adversely affect our competitiveness, results of operations and financial condition and, critically in light of our business model, loss of member confidence. Further, the insurance coverage we maintain and indemnification arrangements with third-parties may be inadequate to cover claims, costs, and liabilities relating to cybersecurity incidents. In addition, data we collect, store and process is subject to a variety of U.S. and international laws and regulations, such as the European Union's General Data Protection Regulation, California Consumer Privacy Act, Health Insurance Portability and Accountability Act, and other emerging privacy and cybersecurity laws across the various states and around the globe, which may carry significant potential penalties for noncompliance. 11 11,300 We accept payments using a variety of methods, including select credit and debit cards, cash and checks, co-brand cardholder rebates, Executive member 2% reward certificates, and our shop card. As we offer new payment options to our members, we may be subject to additional rules, regulations, compliance requirements, and higher fraud losses. For certain payment methods, we pay interchange and other related acceptance fees, along with additional transaction processing fees. We rely on third parties to provide payment transaction processing services for credit and debit cards and our shop card. It could disrupt our business if these parties become unwilling or unable to provide these services to us. We are also subject to evolving payment card association and network operating rules, including data security rules, certification requirements and rules governing electronic funds transfers. For example, we are subject to Payment Card Industry Data Security Standards, which contain compliance guidelines and standards with regard to our security surrounding the physical and electronic storage, processing and transmission of individual cardholder data. If our internal systems are breached or compromised, we may be liable for card re-issuance costs, subject to fines and higher transaction fees and lose our ability to accept card payments from our members, and our business and operating results could be adversely affected. The commitment to "Take Care of Our Employees" is also the foundation of our approach to diversity, equity and inclusion and creating an inclusive and respectful workplace. In 2021, we added training and communication for managers on topics of race, bias and equity, and greater visibility of our employee demographics. Embracing differences is important to the growth of our Company. It leads to more opportunities, innovation, and employee satisfaction and connects us to the communities where we do business. We believe that our warehouses are among the most productive in the retail industry, owing in substantial part to the commitment and efficiency of our employees. We seek to provide them not merely with employment but careers. Many attributes of our business contribute to the objective; the more significant include: competitive compensation and benefits for those working in our membership warehouses and distributions channels; a commitment to promoting from within; and maintaining a ratio of at least 50% of our employee base being full-time employees. These attributes contribute to what we consider, especially for the industry, a high retention rate. In 2021, in the U.S. that rate was above 90% for employees who have been with us for at least one year. Costco is firmly committed to helping protect the health and safety of our members and employees and to serving our communities. In response to the COVID-19 pandemic and its associated challenges, we began providing premium pay to the majority of our hourly employees in March 2020 and continued for a full year through February 2021, at which time a portion of the premium was built permanently into our hourly wage scales in the U.S. In fall 2020, we also began offering employees additional paid time off to attend to child care and schooling needs through the 2021 school year. As the global effect of coronavirus (COVID-19) continues to evolve, we are closely monitoring the changing situation and complying with public health guidance. For more detailed information regarding our programs and initiatives, see “Employees" within our Sustainability Commitment (located on our website). This report and other information on our website are not incorporated by reference into and do not form any part of this Annual Report. 6 Competition Our industry is highly competitive, based on factors such as price, merchandise quality and selection, location, convenience, distribution strategy, and customer service. We compete on a worldwide basis with global, national, and regional wholesalers and retailers, including supermarkets, supercenters, internet retailers, gasoline stations, hard discounters, department and specialty stores, and operators selling a single category or narrow range of merchandise. Walmart, Target, Kroger, and Amazon are among our significant general merchandise retail competitors in the U.S. We also compete with other warehouse clubs including Walmart's Sam's Club and BJ's Wholesale Club, and many of the major metropolitan areas in the U.S. and certain of our Other International locations have multiple clubs. Intellectual Property We believe that, to varying degrees, our trademarks, trade names, copyrights, proprietary processes, trade secrets, trade dress, domain names and similar intellectual property add significant value to our business and are important to our success. We have invested significantly in the development and protection of our well-recognized brands, including the Costco Wholesale trademarks and our private- label brand, Kirkland Signature. We believe that Kirkland Signature products are high quality, offered at prices that are generally lower than national brands, and help lower costs, differentiate our merchandise offerings, and generally earn higher margins. We expect to continue to increase the sales penetration of our private-label items. We rely on trademark and copyright laws, trade-secret protection, and confidentiality, license and other agreements with our suppliers, employees and others to protect our intellectual property. The availability and duration of trademark registrations vary by country; however, trademarks are generally valid and may be renewed indefinitely as long as they are in use and registrations are maintained. Available Information Our U.S. website is www.costco.com. We make available through the Investor Relations section of that site, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and Forms 3, 4 and 5, and any amendments to those reports, as soon as reasonably practicable after filing such materials with or furnishing such documents to the Securities and Exchange Commission (SEC). The information found on our website is not part of this or any other report filed with or furnished to the SEC. The SEC maintains a site that contains reports, proxy and information statements, and other information regarding issuers, such as the Company, that file electronically with the SEC at www.sec.gov. We have adopted a code of ethics for senior financial officers, pursuant to Section 406 of the Sarbanes- Oxley Act. Copies of the code are available free of charge by writing to Secretary, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, WA 98027. If the Company makes any amendments to this code (other than technical, administrative, or non-substantive amendments) or grants any waivers, including implicit waivers, to the CEO, chief financial officer or principal accounting officer and controller, we will disclose (on our website or in a Form 8-K report filed with the SEC) the nature of the amendment or waiver, its effective date, and to whom it applies. Name 7 Executive Vice President and Chief Financial Officer. Mr. Galanti has been a director since January 1995. Executive Vice President, Chief Operating Officer, Northern Division. Mr. Klauer was Senior Vice President, Non-Foods and E-commerce Merchandise, from 2013 to January 2018. President and Chief Executive Officer. Mr. Jelinek has been President and Chief Executive Officer since January 2012 and a director since February 2010. He was President and Chief Operating Officer from February 2010 to December 2011. Prior to that he was Executive Vice President, Chief Operating Officer, Merchandising since 2004. Position Ron M. Vachris Yoram Rubanenko Timothy L. Rose Joseph P. Portera James P. Murphy Russ D. Miller Patrick J. Callans Jim C. Klauer Richard A. Galanti W. Craig Jelinek Information about our Executive Officers We are subject to payment-related risks. The executive officers of Costco, their position, and ages are listed below. All have over 25 years of service with the Company. Higher energy and gasoline costs, inflation, levels of unemployment, healthcare costs, consumer debt levels, foreign-currency exchange rates, unsettled financial markets, weaknesses in housing and real estate markets, reduced consumer confidence, changes and uncertainties related to government fiscal 14 Our suppliers (and those they depend upon for materials and services) are subject to risks, including labor disputes, union organizing activities, financial liquidity, natural disasters, extreme weather conditions, public health emergencies, supply constraints and general economic and political conditions that could limit their ability to timely provide us with acceptable merchandise. One or more of our suppliers might not adhere to our quality control, packaging, legal, regulatory, labor, environmental or animal welfare standards. These deficiencies may delay or preclude delivery of merchandise to us and might not be identified before we sell such merchandise to our members. This failure could lead to recalls and litigation and otherwise damage our reputation and our brands, increase costs, and otherwise adversely impact our business. We buy from numerous domestic and foreign manufacturers and importers. Our inability to acquire suitable merchandise on acceptable terms or the loss of key suppliers could negatively affect us. We may not be able to develop relationships with new suppliers, and products from alternative sources, if any, may be of a lesser quality or more expensive. Because of our efforts to adhere to high quality standards for which available supply may be limited, particularly for certain food items, the large volumes we demand may not be consistently available. We depend heavily on our ability to purchase quality merchandise in sufficient quantities at competitive prices. As the quantities we require continue to grow, we have no assurances of continued supply, appropriate pricing or access to new products, and any supplier has the ability to change the terms upon which they sell to us or discontinue selling to us. Member demands may lead to out-of-stock positions causing a loss of sales and profits. Suppliers may be unable to timely supply us with quality merchandise at competitive prices or may fail to adhere to our high standards, resulting in adverse effects on our business, merchandise inventories, sales, and profit margins. Prices of certain commodities, including gasoline and consumable goods used in manufacturing and our warehouse retail operations, are historically volatile and are subject to fluctuations arising from changes in domestic and international supply and demand, inflationary pressures, labor costs, competition, market speculation, government regulations, taxes and periodic delays in delivery. Rapid and significant changes in commodity prices and our ability and desire to pass them through to our members may affect our sales and profit margins. These factors could also increase our merchandise costs and selling, general and administrative expenses, and otherwise adversely affect our operations and financial results. General economic conditions can also be affected by events like the outbreak of war or acts of terrorism. Inflationary factors such as increases in merchandise costs may adversely affect our business, financial condition and results of operations. If inflation on merchandise increases beyond our ability to control we may not be able to adjust prices to sufficiently offset the effect of the various cost increases without negatively impacting consumer demand. Certain merchandise categories were impacted by inflation higher than what we have experienced in recent years due to, among other things, the continuing impacts of the pandemic and uncertain economic environment. and tax policies including changes in tax rates, duties, tariffs, or other restrictions, sovereign debt crises, pandemics and other health crises, and other economic factors could adversely affect demand for our products and services, require a change in product mix, or impact the cost of or ability to purchase inventory. Additionally, actions in various countries, particularly China, the United States and the United Kingdom, have raised the cost of many items and created uncertainty with respect to tariff impacts on the costs of some of our merchandise. The degree of our exposure is dependent on (among other things) the type of goods, rates imposed, and timing of the tariffs. The impact to our net sales and gross margin is influenced in part by our merchandising and pricing strategies in response to potential cost increases. While these potential impacts are uncertain, they could have an adverse impact on our results. 13 General economic factors, domestically and internationally, may adversely affect our business, financial condition, and results of operations. The retail business is highly competitive. We compete for members, employees, sites, products and services and in other important respects with a wide range of local, regional and national wholesalers and retailers, both in the United States and in foreign countries, including other warehouse-club operators, supermarkets, supercenters, internet retailers, gasoline stations, hard discounters, department and specialty stores and operators selling a single category or narrow range of merchandise. Such retailers and warehouse club operators compete in a variety of ways, including pricing, selection and availability, services, location, convenience, store hours, and the attractiveness and ease of use of websites and mobile applications. The evolution of retailing in online and mobile channels has improved the ability of customers to comparison shop, which has enhanced competition. Some competitors have greater financial resources and technology capabilities, better access to merchandise, and greater market penetration than we do. Our inability to respond effectively to competitive pressures, changes in the retail markets or customer expectations could result in lost market share and negatively affect our financial results. We face strong competition from other retailers and warehouse club operators, which could adversely affect our business, financial condition and results of operations. Although we maintain specific coverages for catastrophic property losses, we still bear a significant portion of the risk of losses incurred as a result of any physical damage to, or the destruction of, any warehouses, depots, manufacturing or home office facilities, loss or spoilage of inventory, and business interruption. Such losses could materially impact our cash flows and results of operations. Claims for employee health care benefits, workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability, inventory loss, and other exposures are funded predominantly through self-insurance. Insurance coverage is maintained for certain risks to limit exposures arising from very large losses. The types and amounts of insurance may vary from time to time based on our decisions with respect to risk retention and regulatory requirements. Significant claims or events, regulatory changes, a substantial rise in costs of health care or costs to maintain our insurance or the failure to maintain adequate insurance coverage could have an adverse impact on our financial condition and results of operations. We may incur property, casualty or other losses not covered by our insurance. Our success depends on the continued contributions of our employees, including members of our senior management and other key operations, IT, merchandising and administrative personnel. Failure to identify and implement a succession plan for senior management could negatively impact our business. We must attract, train and retain a large and growing number of qualified employees, while controlling related labor costs and maintaining our core values. Our ability to control labor and benefit costs is subject to numerous internal and external factors, including the continuing impacts of the pandemic, regulatory changes, prevailing wage rates, and healthcare and other insurance costs. We compete with other retail and non-retail businesses for these employees and invest significant resources in training and motivating them. There is no assurance that we will be able to attract or retain highly qualified employees in the future, which could have a material adverse effect on our business, financial condition and results of operations. Inability to attract, train and retain highly qualified employees could adversely impact our business, financial condition and results of operations. 12 Omnichannel retailing is rapidly evolving, and we must keep pace with changing member expectations and new developments by our competitors. Our members are increasingly using mobile phones, tablets, computers, and other devices to shop and to interact with us through social media, particularly in the wake of COVID-19. We are making investments in our websites and mobile applications. If we are unable to make, improve, or develop relevant member-facing technology in a timely manner, our ability to compete and our results of operations could be adversely affected. If we do not successfully develop and maintain a relevant omnichannel experience for our members, our results of operations could be adversely impacted. If our merchandise, including food and prepared food products for human consumption, drugs, children's products, pet products and durable goods, do not meet or are perceived not to meet applicable safety or labeling standards or our members' expectations, we could experience lost sales, increased costs, litigation or reputational harm. The sale of these items involves the risk of illness or injury to our members. Such illnesses or injuries could result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, manufacturing, storage, handling and transportation phases, or faulty design. Our suppliers are generally contractually required to comply with product safety laws, and we are dependent on them to ensure that the products we buy comply with safety and other standards. While we are subject to governmental inspection and regulations and work to comply in all material respects with applicable laws and regulations, we cannot be sure that consumption or use of our products will not cause illness or injury or that we will not be subject to claims, lawsuits, or government investigations relating to such matters, resulting in costly product recalls and other liabilities that could adversely affect our business and results of operations. Even if a product liability claim is unsuccessful or is not fully pursued, negative publicity could adversely affect our reputation with existing and potential members and our corporate and brand image, and these effects could be long-term. We might sell products that cause illness or injury to our members, harm to our reputation, and expose us to litigation. Market and Other External Risks 2013 45,000 2012 & Before Period 45,000 3,270 2014 446.15 318,000 3,250 (Sales In Millions) May 10-June 6, 2021 June 7-July 4, 2021 July 5-August 1, 2021 August 2-August 29, 2021 of Shares Purchased Total fourth quarter (1) The repurchase program is conducted under a $4,000 authorization approved by our Board of Directors in April 2019, which expires in April 2023. 19 Performance Graph The following graph compares the cumulative total shareholder return (stock price appreciation and the reinvestment of dividends) on an investment of $100 in Costco common stock, S&P 500 Index, and the S&P 500 Retail Index over the five years from August 28, 2016, through August 29, 2021. Comparison of 5-Year Cumulative Total Returns Dollars 400 300 398.76 318,000 $ 100 0 8/28/16 9/3/17 9/2/18 9/1/19 8/30/20 8/29/21 Costco S&P 500 S&P 500 Retail The following graph provides information concerning average sales per warehouse over a 10 year period. Average Sales Per Warehouse* 2015 200 2020 Year Opened 87 97 118 131 145 173 $ 83 85 94 112 122 136 163 30 $ 108 109 115 125 140 144 155 182 26 $ 206 176 158 # of Whses 2021 63,000 2019 2018 2017 2016 22222223211 20 26 EA $ Totals 140 152 $ 129 138 172 $ 116 119 141 172 $ 121 142 132 412.73 Item 4-Mine Safety Disclosures 3,296 • Item 2-Properties Warehouse Properties At August 29, 2021, we operated 815 membership warehouses: United States and Puerto Rico Canada Other International Total (1) 121 of the 171 leases are land-only leases, where Costco owns the building. Unknown consequences on our business performance and initiatives stemming from the substantial investment of time and other resources to the pandemic response; The pace of recovery when the pandemic subsides. Changes in labor markets affecting us and our suppliers; The severity and duration of the pandemic, including future mutations or related variants of the virus in areas in which we operate; • • • • • Other factors and uncertainties include, but are not limited to: Failure to appropriately respond, or the perception of an inadequate response to evolving events around the pandemic, could cause reputational harm to our brand and subject us to lost sales, as well as claims from employees, members, suppliers, regulators or other parties. Additionally, a future outbreak of confirmed cases of COVID-19 in our facilities could result in temporary or sustained workforce shortages or facility closures, which would negatively impact our business and results of operations. Some jurisdictions have taken measures intended to expand the availability of workers compensation or to change the presumptions applicable to workers compensation measures. These actions may increase our exposure to claims and increase our costs. behaviors change, which may challenge our ability to anticipate and/or adjust inventory levels to meet that demand. Similarly, increased demand for online purchases of products has impacted our fulfillment operations, resulting in delays in deliveries and lost sales from being out of stock for certain SKUs. 15 Evolving macroeconomic factors, including general economic uncertainty, unemployment rates, and recessionary pressures; The pandemic is continuing to impact the global supply chain, with restrictions and limitations on business activities causing disruption and delay, which have strained certain domestic and international supply chains, and could continue to negatively affect the flow or availability of certain products. Member demand for certain products has and may continue to fluctuate as the pandemic progresses and member The long-term impact of the pandemic on our business, including consumer behaviors; and Disruption and volatility within the financial and credit markets. Factors associated with climate change could adversely affect our business. None. Item 1B—Unresolved Staff Comments resources. Our business requires compliance with many laws and regulations. Failure to achieve compliance could subject us to lawsuits and other proceedings, and lead to damage awards, fines, penalties, and remediation costs. We are or may become involved in a number of legal proceedings and audits, including grand jury investigations, government and agency investigations, and consumer, employment, tort, unclaimed property laws, and other litigation. We cannot predict with certainty the outcomes of these proceedings and other contingencies, including environmental remediation and other proceedings commenced by governmental authorities. The outcome of some of these proceedings, audits, unclaimed property laws, and other contingencies could require us to take, or refrain from taking, actions which could negatively affect our operations or could require us to pay substantial amounts of money, adversely affecting our financial condition and results of operations. Additionally, defending against these lawsuits and proceedings may involve significant expense and diversion of management's attention and We are involved in a number of legal proceedings and audits and some of these outcomes could adversely affect our business, financial condition and results of operations. Operations at our facilities require the treatment and disposal of wastewater, stormwater and agricultural and food processing wastes, the use and maintenance of refrigeration systems, including ammonia-based chillers, noise, odor and dust management, the operation of mechanized processing equipment, and other operations that potentially could affect the environment and public health and safety. Failure to comply with current and future environmental, health and safety standards could result in the imposition of fines and penalties, illness or injury of our employees, and claims or lawsuits related to such illnesses or injuries, and temporary closures or limits on the operations of facilities. We are subject to a wide and increasingly broad array of federal, state, regional, local and international laws and regulations relating to the use, storage, discharge and disposal of hazardous materials, hazardous and non-hazardous wastes and other environmental matters. Failure to comply with these laws could result in harm to our members, employees or others, significant costs to satisfy environmental compliance, remediation or compensatory requirements, or the imposition of severe penalties or restrictions on operations by governmental agencies or courts that could adversely affect our business, financial condition and results of operations. Significant changes in or failure to comply with regulations relating to the use, storage, discharge and disposal of hazardous materials, hazardous and non-hazardous wastes and other environmental matters could adversely impact our business, financial condition and results of operations. 17 We are subject to a variety of taxes and tax collection and remittance obligations in the U.S. and numerous foreign jurisdictions. Additionally, at any point in time, we may be under examination for value added, sales-based, payroll, product, import or other non-income taxes. We may recognize additional tax expense, be subject to additional tax liabilities, or incur losses and penalties, due to changes in laws, regulations, administrative practices, principles, assessments by authorities and interpretations related to tax, including tax rules in various jurisdictions. We compute our income tax provision based on enacted tax rates in the countries in which we operate. As tax rates vary among countries, a change in earnings attributable to the various jurisdictions in which we operate could result in an unfavorable change in our overall tax provision. Additionally, changes in the enacted tax rates or adverse outcomes in tax audits, including transfer pricing disputes, could have a material adverse effect on our financial condition and results of operations. To the extent that COVID-19 continues to adversely affect the U.S. and global economy, our business, results of operations, cash flows, or financial condition, it may also heighten other risks described in this section, including but not limited to those related to consumer behavior and expectations, competition, brand reputation, implementation of strategic initiatives, cybersecurity threats, payment-related risks, technology systems disruption, supply chain disruptions, labor availability and cost, litigation, operational risk as a result of remote work arrangements and regulatory requirements. Changes in tax rates, new U.S. or foreign tax legislation, and exposure to additional tax liabilities could adversely affect our financial condition and results of operations. We are exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act. Accounting principles and related pronouncements, implementation guidelines, and interpretations we apply to a wide range of matters that are relevant to our business, including self-insurance liabilities, are highly complex and involve subjective assumptions, estimates and judgments by our management. Changes in rules or interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance and have a material impact on our consolidated financial statements. Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial condition and results of operations. At the end of 2021, we operated 251 warehouses outside of the U.S., and we plan to continue expanding our international operations. Future operating results internationally could be negatively affected by a variety of factors, many similar to those we face in the U.S., certain of which are beyond our control. These factors include political and economic conditions, regulatory constraints, currency regulations, policy changes such as the withdrawal of the U.K. from the European Union, and other matters in any of the countries or regions in which we operate, now or in the future. Other factors that may impact international operations include foreign trade (including tariffs and trade sanctions), monetary and fiscal policies and the laws and regulations of the U.S. and foreign governments, agencies and similar organizations, and risks associated with having major facilities in locations which have been historically less stable than the U.S. Risks inherent in international operations also include, among others, the costs and difficulties of managing international operations, adverse tax consequences, and difficulty in enforcing intellectual property rights. We are subject to risks associated with the legislative, judicial, accounting, regulatory, political and economic factors specific to the countries or regions in which we operate, which could adversely affect our business, financial condition and results of operations. Legal and Regulatory Risks 16 We believe that the price of our stock currently reflects high market expectations for our future operating results. Any failure to meet or delay in meeting these expectations, including our warehouse and e- commerce comparable sales growth rates, membership renewal rates, new member sign-ups, gross margin, earnings, earnings per share, new warehouse openings, or dividend or stock repurchase policies could cause the price of our stock to decline. Failure to meet financial market expectations could adversely affect the market price and volatility of our stock. We use natural gas, diesel fuel, gasoline, and electricity in our distribution and warehouse operations. Government regulations limiting carbon dioxide and other greenhouse gas emissions may increase compliance and merchandise costs, and other regulation affecting energy inputs could materially affect our profitability. Climate change, extreme weather conditions, wildfires, droughts and rising sea levels could affect our ability to procure commodities at costs and in quantities we currently experience. We also sell a substantial amount of gasoline, the demand for which could be impacted by concerns about climate change and which face increased regulation. Section 404 of the Sarbanes-Oxley Act of 2002 requires management assessments of the effectiveness of internal control over financial reporting and disclosure controls and procedures. If we are unable to maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to record, process and report financial information accurately and to prepare financial statements within required time periods could be adversely affected, which could subject us to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in our financial statements and adversely impact our stock price. The pandemic has resulted in widespread and continuing impacts on the global economy and on our employees, members, suppliers and other people and entities with which we do business. There is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders, and business and government shutdowns. The pandemic and any preventative or protective actions that governments or we may take may result in business disruption, reduced member traffic and reduced sales in certain merchandise categories, and increased operating expenses. The continuing impacts of the COVID-19 pandemic are highly unpredictable and volatile and are affecting certain business operations, demand for our products and services, in-stock positions, costs of doing business, availability of labor, access to inventory, supply chain operations, our ability to predict future performance, exposure to litigation, and our financial performance, among other things. The COVID-19 pandemic continues to affect our business, financial condition and results of operations in many respects. PART II Item 5-Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information and Dividend Policy Our common stock is traded on the NASDAQ Global Select Market under the symbol "COST." On September 28, 2021, we had 9,958 stockholders of record. Payment of dividends is subject to declaration by the Board of Directors. Factors considered in determining dividends include our profitability and expected capital needs. Subject to these qualifications, we presently expect to continue to pay dividends on a quarterly basis. Issuer Purchases of Equity Securities The following table sets forth information on our common stock repurchase activity for the fourth quarter of 2021 (dollars in millions, except per share data): Total Number Average Price Paid per Share Program(1) Not applicable. Total Number of Announced Maximum Dollar Value of Shares that May Yet be Purchased under the Program 102,000 $ 381.50 102,000 $ 3,338 108,000 387.32 108,000 Shares Purchased as Part of Publicly See discussion of Legal Proceedings in Note 11 to the consolidated financial statements included in Item 8 of this Report. Item 3-Legal Proceedings At the end of 2021, our warehouses contained approximately 118.9 million square feet of operating floor space: 83.2 million in the U.S.; 14.9 million in Canada; and 20.8 million in Other International. Total square feet associated with distribution and logistics facilities were approximately 31.4 million. Additionally, we operate various processing, packaging, manufacturing and other facilities to support our business, which includes the production of certain private-label items. Natural disasters and extreme weather conditions, such as hurricanes, typhoons, floods, earthquakes, wildfires, droughts; acts of terrorism or violence, including active shooter situations; energy shortages; public health issues, including pandemics and quarantines, particularly in California or Washington state, where our centralized operating systems and administrative personnel are located, could negatively affect our operations and financial performance. Such events could result in physical damage to our properties, limitations on store operating hours, less frequent visits by members to physical locations, the temporary closure of warehouses, depots, manufacturing or home office facilities, the temporary lack of an adequate work force, disruptions to our IT systems, the temporary or long-term disruption in the supply of products from some local or overseas suppliers, the temporary disruption in the transport of goods to or from overseas, delays in the delivery of goods to our warehouses or depots, and the temporary reduction in the availability of products in our warehouses. Public health issues, whether occurring in the U.S. or abroad, could disrupt our operations, disrupt the operations of suppliers or members, or have an adverse impact on consumer spending and confidence levels. These events could also reduce demand for our products or make it difficult or impossible to procure products. We may be required to suspend operations in some or all of our locations, which could have a material adverse effect on our business, financial condition and results of operations. $ Natural disasters, extreme weather conditions, public health emergencies or other catastrophic events could negatively affect our business, financial condition, and results of operations. A portion of the products we purchase is paid for in a currency other than the local currency of the country in which the goods are sold. Currency fluctuations may increase our merchandise costs and may not be passed on to members. Consequently, fluctuations in currency exchange rates may adversely affect our results of operations. During 2021, our international operations, including Canada, generated 28% and 36% of our net sales and operating income, respectively. Our international operations have accounted for an increasing portion of our warehouses, and we plan to continue international growth. To prepare our consolidated financial statements, we translate the financial statements of our international operations from local currencies into U.S. dollars using current exchange rates. Future fluctuations in exchange rates that are unfavorable to us may adversely affect the financial performance of our Canadian and Other International operations and have a corresponding adverse period-over-period effect on our results of operations. As we continue to expand internationally, our exposure to fluctuations in foreign exchange rates may increase. Fluctuations in foreign exchange rates may adversely affect our results of operations. 18 Own Land and Building Lease Land and/or Building (1) Total 454 110 564 89 16 105 101 45 146 644 171 815 63,000 EA $ 109 22 % 5 % 3% 23 % 13 % 5 % Total Company Increases in comparable sales: U.S. 18 % 9% 8% 15% 8% 8% 9% Canada 9% 149,351 23 RESULTS OF OPERATIONS Net Sales 2021 2020 2019 Net Sales Increases in net sales: U.S. Canada Other International $ 192,052 $ 163,220 $ 16 % 23 20% 2% 7% 5 % 13 % 11 % 6% 13 % 9% 6% (1) Excluding the impact of the revenue recognition standard for the year ended September 1, 2019. Net Sales Net sales increased $28,832 or 18% during 2021. The improvement was attributable to an increase in comparable sales of 16%, and sales at new warehouses opened in 2020 and 2021. While sales in all core merchandise categories increased, sales were particularly strong in non-foods. Sales increases were also strong in our warehouse ancillary and other businesses, predominantly e-commerce and gasoline. Certain merchandise categories were impacted by inflation higher than what we have experienced in recent years. Changes in foreign currencies relative to the U.S. dollar positively impacted net sales by approximately $2,759, or 169 basis points, compared to 2020, attributable to our Canadian and Other International operations. Changes in gasoline prices positively impacted net sales by $1,636, or 100 basis points, compared to 2020, due to a 12% increase in the average price per gallon. The volume of gasoline sold increased approximately 10%, positively impacting net sales by $1,469, or 90 basis points. Comparable Sales Comparable sales increased 16% during 2021 and were positively impacted by increases in shopping frequency and average ticket. There was an increase of 44% in e-commerce comparable sales in 2021, driven by an increase of 80% in the first half of the year. 24 24 12 % 5 % 6% 14 % Other International 19% 9% 99 Total Company 16 % 8% 6% Increases in comparable sales excluding the impact of changes in foreign currency and gasoline prices (1) U.S. Canada Other International Total Company 9% Effective March 1, 2021, we permanently increased wages for hourly and most salaried warehouse employees. The estimated annualized pre-tax cost is approximately $400. Additionally, in certain areas in the United States governments have mandated or are considering mandating extra pay for classes of employees that include our employees, which has and will result in higher costs. 2 % During 2021, our sales mix began returning to pre-pandemic levels. This included sales increases in non- foods and in many of our warehouse ancillary and other businesses, certain of which experienced closures or restrictions in 2020. COVID-related supply and logistics constraints have adversely affected some merchandise categories and are expected to do so for the foreseeable future. 160 164 162 159 163 176 182 192 217 2012 2013 2014 2015 2016 2017 155 815 232 205 We paid $515 in incremental wages during 2021 related to COVID-19. The incremental wage and benefit costs associated with COVID-19, which began on March 1, 2020 and ended on February 28, 2021, totaled approximately $825. 113 116 124 137 144 158 2018 186 163 169 170 169 175 188 195 607 $ 155 2019 • 2021 Our fiscal year ends on the Sunday closest to August 31. References to 2021, 2020, and 2019 relate to the 52-week fiscal years ended August 29, 2021, August 30, 2020, and September 1, 2019, 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. Highlights for 2021 included: • • • • We opened 22 new warehouses, including 2 relocations: 12 net new in the U.S., 4 net new in our Canadian segment, and 4 new in our Other International segment, compared to 16 new warehouses, including 3 relocations in 2020; Net sales increased 18% to $192,052 driven by a 16% increase in comparable sales and sales at new warehouses opened in 2020 and 2021; Membership fee revenue increased 9% to $3,877, driven by sign-ups and upgrades to Executive membership; Gross margin percentage decreased seven basis points, driven primarily by a shift in sales penetration from our core merchandise categories to our warehouse ancillary and other businesses; SG&A expenses as a percentage of net sales decreased 40 basis points, primarily due to leveraging increased sales and decreased incremental wages related to COVID-19; The effective tax rate in 2021 was 24.0% compared to 24.4% in 2020; Net income increased 25% to $5,007, or $11.27 per diluted share compared to $4,002, or $9.02 per diluted share in 2020; We paid a special cash dividend of $10.00 per share in December 2020 and in April 2021, increased the quarterly cash dividend from $0.70 to $0.79 per share totaling $5,748. COVID-19 2020 22 22 • Our operating model is generally the same across our U.S., Canadian, and Other International operating segments (see Note 12 to the consolidated financial statements included in Item 8 of this Report). Certain operations in the Other International segment have relatively higher rates of square footage growth, lower wage and benefit costs as a percentage of sales, less or no direct membership warehouse competition, or lack an e-commerce business. *First year sales annualized. In discussions of our consolidated operating results, we refer to the impact of changes in foreign currencies relative to the U.S. dollar, which are references 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. Fiscal Year 2017 was a 53-week fiscal year Item 6-Reserved 20 Item 7-Management's Discussion and Analysis of Financial Conditions and Results of Operations (amounts in millions, except per share, share, membership fee, and warehouse count data) The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to promote understanding of the results of operations and financial condition. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to Financial Statements (Part II, Item 8 of this Form 10-K). This section generally discusses the results of operations for 2021 compared to 2020. For discussion related to the results of operations and changes in financial condition for 2020 compared to 2019 refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal year 2020 Form 10-K, which was filed with the United States Securities and Exchange Commission (SEC) on October 7, 2020. In 2021, we combined the hardlines and softlines merchandise categories into non-foods. This change did not have a material impact on the discussion of our results of operations. Overview 20 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 may 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, all negatively impacting gross margin as a percentage of net sales (gross margin percentage). We believe our gasoline business draws members, but it generally has a lower gross margin percentage relative to our non-gasoline business. It also has lower SG&A expenses as a percent of net sales compared 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 SG&A expenses as a percentage of net sales. A decline in gasoline prices has the inverse effect. Additionally, actions in various countries, particularly China, the United States and the United Kingdom, have created 21 24 uncertainty with respect to how tariffs will affect the costs of some of our merchandise. The degree of our exposure is dependent on (among other things) the type of goods, rates imposed, and timing of the tariffs. Certain merchandise categories were impacted by inflation higher than what we have experienced in recent years. The impact to our net sales and gross margin is influenced in part by our merchandising and pricing strategies in response to cost increases. While these potential impacts are uncertain, they could have an adverse impact on our results. We also achieve net sales growth by opening new warehouses. As our warehouse base grows, available and desirable 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 operating floor space 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 but it generally has a lower gross margin percentage relative to our warehouse operations. The 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 controlling costs. While we believe that we have achieved successes in this area, some significant costs are partially outside our control, particularly health care and utility expenses. With respect to the compensation of our employees, our philosophy is not to seek to minimize their wages and benefits. Rather, we believe that achieving our longer-term objectives of 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 operates on very low margins, modest changes in various items in the consolidated statements of income, particularly merchandise costs and selling, general and administrative expenses, can have substantial impacts on net income. We believe that the most important driver of our profitability is increasing net sales, particularly comparable sales growth. Net sales includes our core merchandise categories (foods and sundries, non- foods, and fresh foods), warehouse ancillary (includes gasoline, pharmacy, optical, food court, hearing aids, and tire installation) and other businesses (includes e-commerce, business centers, travel and other). We define comparable sales as net sales from warehouses open for more than one year, including remodels, relocations and expansions, and 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); and changes in the cost of gasoline and associated competitive conditions. The higher our comparable sales exclusive of these items, the more we can leverage certain of our selling, general and administrative (SG&A) 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 net sales growth is the health of the economies in which we do business, including the effects of inflation or deflation, especially the United States. Net 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 merchandise mix, including increasing the penetration of our private-label items and through online offerings. 4,765 4,059 1,601 1,308 1,061 Net income including noncontrolling interests 5,079 3,704 5,007 (72) (57) (45) NET INCOME ATTRIBUTABLE TO COSTCO $ $ 4,002 $ 5,367 Net income attributable to noncontrolling interests 6,680 16,332 INCOME BEFORE INCOME TAXES 152,703 170,684 144,939 18,461 3,659 132,886 14,994 76 55 86 6,708 5,435 4,737 (171) (160) (150) 143 92 178 Provision for income taxes NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO: 439,755 442,923 $ 7 % 6% 3,352 3,541 $ 3,877 $ 9% 2019 2020 2021 Membership fees increased 9% in 2021, driven by sign-ups and upgrades to Executive membership. Excluding the positive impact of changes in foreign currencies relative to the U.S. dollar, membership fees increased 8%. At the end of 2021, our member renewal rates were 91% in the U.S. and Canada and 89% worldwide. Our renewal rate is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date. We account for membership fee revenue on a deferred basis, recognized ratably over the one-year membership period. Membership fees increase Membership Fees 195,929 3,352 3,541 3,877 149,351 163,220 $ 192,052 $ Membership fees Gross Margin Net sales Less merchandise costs 11.30 $ 9.05 $ 8.32 Diluted $ 11.27 $ 9.02 $ 8.26 Shares used in calculation (000's) Basic Diluted 443,089 442,297 444,346 443,901 The accompanying notes are an integral part of these consolidated financial statements. 34 Gross margin Basic 166,761 26 $ $ 25 (4) 46 27 56 126 89 $ 2019 2020 2021 Interest income and other, net Other, net Foreign-currency transaction gains, net Interest income 2020 2019 $ 192,052 $ 170,684 163,220 $ 144,939 149,351 132,886 $ 143 $ 21,368 92 $ The decrease in interest income in 2021 was primarily due to lower interest rates in the U.S. and Canada, partially offset by higher average cash and investment balances. Foreign-currency transaction gains, net include mark-to-market adjustments for forward foreign-exchange contracts and revaluation or settlement of monetary assets and liabilities by our Canadian and Other International operations. See Derivatives and Foreign Currency sections in Note 1 to the consolidated financial statements included in Item 8 of this Report. During 2020, other, net was impacted by a $36 charge related to the repayment of certain Senior Notes. 8,861 $ (3,891) 8,958 $ (3,535) (6,488) $ 2019 2020 2021 Net cash provided by operating activities Net cash used in investing activities Net cash used in financing activities The following table summarizes our significant sources and uses of cash and cash equivalents: LIQUIDITY AND CAPITAL RESOURCES The effective tax rate for 2021 included discrete net tax benefits of $163, including a benefit of $75 due to excess benefits from stock compensation, $70 related to the special dividend payable through our 401(k) plan, and $19 related to a reduction in the valuation allowance against certain deferred tax assets. Excluding these benefits, the tax rate was 26.4% for 2021. 22.3 % 1,061 2019 24.4 % 1,308 $ 1,601 24.0 % $ 2020 2021 Effective tax rate Provision for income taxes Provision for Income Taxes 178 6,356 $ $ 2019 $ 76 $ 55 $ 86 13 35 83 18 4 4 22 4 16 25 Total warehouse openings, including relocations Preopening expenses include startup costs for new warehouses and relocations, developments in new international markets, new manufacturing and distribution facilities, and expansions at existing warehouses and corporate facilities. Preopening expenses vary due to the number of warehouse and facility openings, the timing of the opening relative to our year-end, whether the warehouse is owned or leased, and whether the opening is in an existing, new or international market. Interest Expense Interest expense 2021 2020 2019 $ 171 $ 160 $ 150 Interest expense primarily relates to Senior Notes. For more information on our debt arrangements, refer to the consolidated financial statements included in Item 8 of this Report. 2020 18,281 2021 Canada 16,465 11.13 % 11.20 % 11.02 % The gross margin of our core merchandise categories (foods and sundries, non-foods and fresh foods), when expressed as a percentage of core merchandise sales (rather than total net sales), increased 23 basis points. This measure eliminates the impact of changes in sales penetration and gross margins from our warehouse ancillary and other businesses. The increase was across all categories, most significantly in non-foods. Total gross margin percentage decreased seven basis points compared to 2020. Excluding the impact of gasoline price inflation on net sales in 2021, gross margin percentage was 11.22%, an increase of two basis points. This increase was due to a two basis point improvement in our core merchandise categories, predominantly non-foods, and in our warehouse ancillary and other businesses, largely e- commerce. The comparison was also positively impacted by a three basis point reserve on inventory recorded in 2020 with no such reserve this year. Gross margin percentage was negatively impacted three basis points due to increased 2% rewards and two basis points due to a LIFO charge for higher merchandise costs. Changes in foreign currencies relative to the U.S. dollar positively impacted gross margin by approximately $301 in 2021. 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), decreased in our U.S. segment, due to our warehouse ancillary and other businesses, our core merchandise categories, and the LIFO charge, partially offset by the reserve for certain inventory in 2020. Our Canadian and Other International segments increased, primarily due to our warehouse ancillary and other businesses and certain of our core merchandise categories. These increases were partially offset by increased 2% rewards. 25 Selling, General and Administrative Expenses SG&A expenses 2021 2020 18,461 $ 9.61% 16,332 2019 14,994 SG&A expenses as a percentage of net sales 10.01 % 10.04 % SG&A expenses as a percentage of net sales decreased 40 basis points compared to 2020. SG&A expenses as a percentage of net sales excluding the impact of gasoline price inflation was 9.69%, a decrease of 32 basis points. Warehouse operations and other businesses were lower by 24 basis points, largely attributable to payroll leveraging increased sales. Incremental wages as a result of COVID-19, which ended on February 28, 2021, were lower by eight basis points. Central operating costs were lower by five basis points. Stock compensation expense was lower by three basis points, and costs associated with the acquisition of Innovel were lower by one basis point. These decreases were offset by an increase of five basis points related to a partial reversal of a product tax assessment in 2020, as well as an increase of four basis points related to a write-off of certain information technology assets in the fourth quarter of 2021 that are no longer expected to be utilized as part of the modernization of our information systems. Changes in foreign currencies relative to the U.S. dollar increased our SG&A expenses by approximately $228 in 2021. Preopening Preopening expenses Warehouse openings, including relocations United States Other International (2,865) (1,147) (1,147) The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. Basis for Opinion We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of August 29, 2021 and August 30, 2020, the related consolidated statements of income, comprehensive income, equity, and cash flows for the 52-week periods ended August 29, 2021, August 30, 2020 and September 1, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated October 5, 2021 expressed an unqualified opinion on those consolidated financial statements. We have audited Costco Wholesale Corporation and subsidiaries' (the Company) internal control over financial reporting as of August 29, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 29, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Opinion on Internal Control Over Financial Reporting To the Stockholders and Board of Directors REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Costco Wholesale Corporation: 32 32 October 5, 2021 Seattle, Washington We have served as the Company's auditor since 2002. Evaluating the Company's ability to estimate self-insurance workers' compensation liabilities by comparing its historical estimates with actual incurred losses and paid losses Evaluating the above listed assumptions underlying the Company's actuarial estimates by developing an independent expectation of the self-insurance workers' compensation liabilities and comparing them to the amounts recorded by the Company Assessing the actuarial models used by the Company for consistency with generally accepted actuarial standards /s/ KPMG LLP The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company's self-insurance workers' compensation process. This included controls related to the development and selection of the assumptions listed above used in the actuarial calculation and review of the actuarial report. We involved actuarial professionals with specialized skills and knowledge who assisted in: We identified the evaluation of the Company's workers' compensation self-insurance liabilities for the United States operations as a critical audit matter because of the extent of specialized skill and knowledge needed to evaluate the underlying assumptions and judgments made by the Company in the actuarial models. Specifically, subjective auditor judgment was required to evaluate the Company's selected loss rates and initial expected losses used in the actuarial models. As discussed in Note 1 to the consolidated financial statements, the Company estimates its self- insurance liabilities by considering historical claims experience, demographic factors, severity factors, and other actuarial assumptions. The estimated self-insurance liabilities as of August 29, 2021 were $1,257 million, a portion of which related to workers' compensation self-insurance liabilities for the United States operations. Evaluation of workers' compensation self-insurance liabilities 31 The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. Definition and Limitations of Internal Control Over Financial Reporting Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. September 1, 2019 52 Weeks Ended August 30, 2020 August 29, 2021 52 Weeks Ended 52 Weeks Ended Interest income and other, net Interest expense OTHER INCOME (EXPENSE) Operating income Preopening expenses Selling, general and administrative Merchandise costs OPERATING EXPENSES Total revenue Membership fees Net sales REVENUE COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (amounts in millions, except per share data) 33 33 October 5, 2021 Seattle, Washington /s/ KPMG LLP A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Basis for Opinion The Company changed its method of accounting for leases as of September 2, 2019, due to the adoption of Accounting Standards Update 2016-02 - Leases (ASC 842). Change in Accounting Principle In the opinion of management, we have no off-balance sheet arrangements that have had or are reasonably likely to have a material current or future effect on our financial condition or financial statements. Off-Balance Sheet Arrangements The Company has letter of credit facilities, for commercial and standby letters of credit, totaling $235. The outstanding commitments under these facilities at the end of 2021 totaled $197, most of which were standby letters of credit which do not expire or have expiration dates within one year. The bank credit facilities have various expiration dates, most of which are within one year, 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 outstanding. We maintain bank credit facilities for working capital and general corporate purposes. At August 29, 2021, we had borrowing capacity under these facilities of $1,050. Our international operations maintain $574 of the total borrowing capacity under bank credit facilities, of which $201 is guaranteed by the Company. Short-term borrowings outstanding under the bank credit facilities at the end of 2021 were immaterial, and there were none outstanding at the end of 2020. Bank Credit Facilities and Commercial Paper Programs Cash dividends declared in 2021 totaled $12.98 per share, as compared to $2.70 per share in 2020. Dividends in 2021 included a special dividend of $10.00 per share, resulting in an aggregate payment of approximately $4,430. In April 2021, the Board of Directors increased our quarterly cash dividend from $0.70 to $0.79 per share. Dividends 28 During 2021 and 2020, we repurchased 1,358,000 and 643,000 shares of common stock, at average prices of $364.39 and $308.45, respectively, totaling approximately $495 and $198, respectively. These amounts may differ from the stock repurchase balances in the accompanying consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of each fiscal year. 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. The remaining amount available to be purchased under our approved plan was $3,250 at the end of 2021. Stock Repurchase Programs In 2020, we issued $4,000 in aggregate principal amount of Senior Notes and repaid $3,200 of Senior Notes. Net cash used in financing activities totaled $6,488 in 2021, compared to $1,147 in 2020. Cash flows used in financing activities primarily related to the payment of dividends, repurchases of common stock, and withholding taxes on stock-based awards. Cash Flows from Financing Activities Our primary requirements for capital are 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 2021, we spent $3,588 on capital expenditures, and it is our current intention to spend approximately $3,800 to $4,200 during fiscal 2022. These expenditures are expected to be financed with cash from operations, existing cash and cash equivalents, and short- term investments. We opened 22 new warehouses, including two relocations, in 2021, and plan to open approximately up to 35 additional new warehouses, including five relocations, in 2022. We have experienced delays in real estate and construction activities due to COVID-19. 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 or based on the current economic environment. Capital Expenditures Net cash used in investing activities totaled $3,535 in 2021, compared to $3,891 in 2020, and is primarily related to capital expenditures. In 2020, we acquired Innovel (Costco Wholesale Logistics) and a minority interest in Navitus. Net cash flows from investing activities also includes purchases and maturities of short-term investments. Net cash provided by operating activities totaled $8,958 in 2021, compared to $8,861 in 2020. Our cash flow provided by operations is primarily from net sales and membership fees. Cash flow used in operations generally consists of payments to merchandise suppliers, warehouse operating costs, including payroll and employee benefits, utilities, and credit and debit card processing fees. Cash used in operations also includes payments for income taxes. Changes in our net investment in merchandise inventories (the difference between merchandise inventories and accounts payable) is impacted by several factors, including how fast inventory is sold, the forward deployment of inventory to accelerate delivery times, payment terms with our suppliers, and early payments to obtain discounts from suppliers. Cash Flows from Investing Activities Cash Flows from Operating Activities Management believes that our cash and investment position and operating cash flows as well as capacity under existing and available credit agreements 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. 27 Purchase obligations consist of contracts primarily related to merchandise, equipment, and third-party services, the majority of which are due in the next 12 months. Construction and land purchase obligations consist of contracts primarily related to the development and opening of new and relocated warehouses, the majority of which (other than leases) are due in the next 12 months. Material contractual obligations arising in the normal course of business primarily consist of purchase obligations, long-term debt and related interest payments, leases, and construction and land purchase obligations. See Notes 5 and 6 to the consolidated financial statements included in Item 8 of this Report for amounts outstanding on August 29, 2021, related to debt and leases. Our primary sources of liquidity are cash flows generated from our operations, cash and cash equivalents, and short-term investments. Cash and cash equivalents and short-term investments were $12,175 and $13,305 at the end of 2021 and 2020, respectively. Of these balances, unsettled credit and debit card receivables represented approximately $1,816 and $1,636 at the end of 2021 and 2020, respectively. These receivables generally settle within four days. Cash and cash equivalents were positively impacted by a change in exchange rates of $46 and $70 in 2021 and 2020, respectively, and negatively impacted by $15 in 2019. 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 assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on assumptions that we believe to be reasonable, and we continue to review and evaluate these estimates. For further information on significant accounting policies, see discussion in Note 1 to the consolidated financial statements included in Item 8 of this Report. Insurance/Self-insurance Liabilities Claims for employee health-care benefits, workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability, inventory loss, and other exposures are funded predominantly through self-insurance. Insurance coverage is maintained for certain risks to seek to limit exposures arising from very large losses. We use different risk management mechanisms, including a wholly-owned captive insurance subsidiary, and participate in a reinsurance program. Liabilities associated with the risks that we retain are not discounted and are estimated by using historical claims experience, demographic factors, severity factors, and other actuarial assumptions. The costs of claims are highly unpredictable and can fluctuate as a result of inflation rates, regulatory or legal changes, and unforeseen developments in claims over time. While we believe our estimates are reasonable and provide for a certain degree of coverage to account for these variables, actual claims and costs could differ significantly from recorded liabilities. Historically, adjustments to our estimates have not been material. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of August 29, 2021, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated October 5, 2021 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. - We have audited the accompanying consolidated balance sheets of Costco Wholesale Corporation and subsidiaries (the Company) as of August 29, 2021 and August 30, 2020, the related consolidated statements of income, comprehensive income, equity, and cash flows for the 52-week periods ended August 29, 2021, August 30, 2020 and September 1, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of August 29, 2021 and August 30, 2020, and the results of its operations and its cash flows for the 52-week periods ended August 29, 2021, August 30, 2020 and September 1, 2019, in conformity with U.S. generally accepted accounting principles. Opinion on the Consolidated Financial Statements Costco Wholesale Corporation: To the Stockholders and Board of Directors REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Item 8-Financial Statements and Supplementary Data 30 We are exposed to fluctuations in prices for energy, particularly electricity and natural gas, and other commodities used in retail and manufacturing operations, which we seek to partially mitigate through fixed-price contracts for certain of our warehouses and other facilities, predominantly in the U.S. and Canada. We also enter into variable-priced contracts for some purchases of electricity and natural gas, in addition to some of the fuel for our gas stations, on an index basis. These contracts meet the characteristics of derivative instruments, but generally qualify for the "normal purchases and normal sales" exception under authoritative guidance and require no mark-to-market adjustment. Commodity Price Risk Interest Income and Other, Net Our foreign subsidiaries conduct certain transactions in non-functional currencies, which exposes us to fluctuations in exchange rates. We manage these fluctuations, in part, through the use of forward foreign- exchange contracts, seeking to economically hedge the impact of these fluctuations on known future expenditures denominated in a non-functional foreign-currency. The contracts are intended primarily to economically hedge exposure to U.S. dollar merchandise inventory expenditures made by our international subsidiaries whose functional currency is other than the U.S. dollar. We seek to mitigate risk with the use of these contracts and do not intend to engage in speculative transactions. For additional information related to the Company's forward foreign-exchange contracts, see Notes 1 and 4 to the consolidated financial statements included in Item 8 of this Report. A hypothetical 10% strengthening of the functional currency compared to the non-functional currency exchange rates at August 29, 2021, I would have decreased the fair value of the contracts by $149 and resulted in an unrealized loss in the consolidated statements of income for the same amount. The nature and amount of our long-term debt may vary as a result of business requirements, market conditions, and other factors. As of the end of 2021, long-term debt with fixed interest rates was $7,531. Fluctuations in interest rates may affect the fair value of the fixed-rate debt. See Note 5 to the consolidated financial statements included in Item 8 of this Report for more information on our long-term debt. A 100 basis point change in interest rates as of the end of 2021 would have had an immaterial incremental change in fair market value. For those investments that are classified as available-for-sale, the unrealized gains or losses related to fluctuations in market volatility and interest rates are reflected within stockholders' equity in accumulated other comprehensive income in the consolidated balance sheets. Our policy limits investments in the U.S. to direct U.S. government and government agency obligations, repurchase agreements collateralized by U.S. government and government agency obligations, U.S. government and government agency money market funds, and insured bank balances. Our wholly-owned captive insurance subsidiary invests in U.S. government and government agency obligations and U.S. government and government agency money market funds. Our Canadian and Other International subsidiaries' investments are primarily in money market funds, bankers' acceptances, and bank certificates of deposit, generally denominated in local currencies. Our exposure to market risk for changes in interest rates relates primarily to our investment holdings that are diversified among various instruments considered to be cash equivalents, as defined in Note 1 to the consolidated financial statements included in Item 8 of this Report, as well as short-term investments in government and agency securities with effective maturities of generally three months to five years at the date of purchase. The primary objective of our investment activities is to preserve principal and secondarily to generate yields. The majority of our short-term investments are in fixed interest-rate securities. These securities are subject to changes in fair value due to interest rate fluctuations. Interest Rate Risk Our exposure to financial market risk results from fluctuations in interest rates and foreign currency exchange rates. We do not engage in speculative or leveraged transactions or hold or issue financial instruments for trading purposes. Item 7A-Quantitative and Qualitative Disclosures About Market Risk (amounts in millions) 29 29 We do not expect that any recently issued accounting pronouncements will have a material effect on our financial statements. Recent Accounting Pronouncements Foreign Currency Risk 41 $ Gross margin percentage 2021 Tax withholdings on stock-based awards 2,329 CASH AND CASH EQUIVALENTS BEGINNING OF YEAR 12,277 8,384 6,055 CASH AND CASH EQUIVALENTS END OF YEAR $ 11,258 $ 12,277 $ 8,384 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ Income taxes, net (amounts in millions, except share, per share, and warehouse count data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COSTCO WHOLESALE CORPORATION 38 The accompanying notes are an integral part of these consolidated financial statements. 286 3,893 - $ - $ Cash dividend declared, but not yet paid SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: 141 1,187 124 $ 1,052 $ 149 $ 1,527 $ $ $ (1,019) Net change in cash and cash equivalents (15) to net cash provided by operating activities: Depreciation and amortization Non-cash lease expense Stock-based compensation Other non-cash operating activities, net Deferred income taxes 1,781 1,645 1,492 286 194 665 619 595 Note 1-Summary of Significant Accounting Policies 85 9 59 104 147 Changes in operating assets and liabilities: Merchandise inventories (1,892) (791) (6,488) (1,147) (1,147) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 46 70 42 Description of Business Costco Wholesale Corporation (Costco or the Company), a Washington corporation, and its subsidiaries operate membership warehouses based on the concept that offering members low prices on a limited selection of nationally-branded and private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. At August 29, 2021, Costco operated 815 warehouses worldwide: 564 in the United States (U.S.) located in 46 states, Washington, D.C., and Puerto Rico, 105 in Canada, 39 in Mexico, 30 in Japan, 29 in the United Kingdom (U.K.), 16 in Korea, 14 in Taiwan, 12 in Australia, three in Spain, and one each in Iceland, France and China. The Company operates e-commerce websites in the U.S., Canada, U.K., Mexico, Korea, Taiwan, Japan, and Australia. Basis of Presentation The consolidated financial statements include the accounts of Costco, its wholly-owned subsidiaries, and subsidiaries in which it has a controlling interest. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company's equity. All material inter- company transactions between and among the Company and its consolidated subsidiaries have been eliminated in consolidation. The Company's net income excludes income attributable to the noncontrolling interest in Taiwan. Unless otherwise noted, references to net income relate to net income attributable to Costco. 8,871 1,456 1,310 2,511 14,215 $ 2,061 12,242 Merchandise inventories are stated at the lower of cost or market. U.S. merchandise inventories are valued by the cost method of accounting, using the last-in, first-out (LIFO) basis. The Company believes the LIFO method more fairly presents the results of operations by more closely matching current costs with current revenues. The Company records an adjustment each quarter, if necessary, for the projected annual effect of inflation or deflation, and these estimates are adjusted to actual results determined at year-end, after actual inflation or deflation rates and inventory levels have been determined. An immaterial charge was recorded to merchandise costs to increase the cumulative LIFO valuation on merchandise inventories at August 29, 2021. As of August 30, 2020, U.S. merchandise inventories valued at LIFO approximated first-in, first-out (FIFO) after considering the lower of cost or market principle. Canadian and Other International merchandise inventories are predominantly valued using the cost and retail inventory methods, respectively, using the FIFO basis. The Company provides for estimated inventory losses between physical inventory counts using estimates based on experience. The provision is adjusted periodically to reflect physical inventory counts, which generally occur in the second and fourth fiscal quarters. Inventory cost, where appropriate, is reduced by estimates of vendor rebates when earned or as the Company progresses towards earning those rebates, provided that they are probable and reasonably estimable. 41 11 Property and Equipment, Net Property and equipment are stated at cost. Depreciation and amortization expense is computed primarily using the straight-line method over estimated useful lives. Leasehold improvements made after the beginning of the initial lease term are depreciated over the shorter of the estimated useful life of the asset or the remaining term of the initial lease plus any renewals that are reasonably certain at the date the leasehold improvements are made. The Company capitalizes certain computer software and costs incurred in developing or obtaining software for internal use. During development, these costs are included in construction in progress. To the extent that the assets become ready for their intended use, these costs are included in equipment and fixtures and amortized on a straight-line basis over their estimated useful lives. In the fourth quarter of 2021, the Company recognized an $84 write-off of certain information technology assets, which was recorded in selling, general and administrative expenses, in the consolidated statements of income. Repair and maintenance costs are expensed when incurred. Expenditures for remodels, refurbishments and improvements that add to or change the way an asset functions or that extend the useful life are capitalized. Assets removed during the remodel, refurbishment or improvement are retired. Assets classified as held-for-sale at the end of 2021 and 2020 were immaterial. The following table summarizes the Company's property and equipment balances at the end of 2021 and 2020: Land Buildings and improvements Equipment and fixtures Construction in progress 1,507 N/A 8,749 9,505 3-20 years 17,982 10,248 $ 19,139 6,696 7,507 $ N/A 2020 2021 Estimated Useful Lives 5-50 years 3,704 2020 $ Fiscal Year End The Company operates on a 52/53-week fiscal year basis with the year ending on the Sunday closest to August 31. References to 2021, 2020, and 2019 relate to the 52-week fiscal years ended August 29, 2021, August 30, 2020, and September 1, 2019, respectively. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions take into account historical and forward-looking factors that the Company believes are reasonable, including but not limited to the potential impacts arising from the novel coronavirus (COVID-19) and related public and private sector policies and initiatives. Actual results could differ from those estimates and assumptions. Cash and Cash Equivalents The Company considers as cash and cash equivalents all cash on deposit, highly liquid investments with a maturity of three months or less at the date of purchase, and proceeds due from credit and debit card transactions with settlement terms of up to four days. Credit and debit card receivables were $1,816 and $1,636 at the end of 2021 and 2020, respectively. 39 The Company provides for the daily replenishment of major bank accounts as payments are presented. Included in accounts payable at the end of 2021 and 2020, are $999 and $810, respectively, representing the excess of outstanding payments over cash on deposit at the banks on which the payments were drawn. Short-Term Investments Short-term investments generally consist of debt securities (U.S. Government and Agency Notes), with maturities at the date of purchase of three months to five years. Investments with maturities beyond five years may be classified, based on the Company's determination, as short-term based on their highly liquid nature and because they represent the investment of cash that is available for current operations. Short-term investments classified as available-for-sale are recorded at fair value using the specific identification method with the unrealized gains and losses reflected in accumulated other comprehensive income (loss) until realized. Realized gains and losses from the sale of available-for-sale securities, if any, are determined on a specific identification basis and are recorded in interest income and other, net in the consolidated statements of income. These available-for-sale investments have a low level of inherent credit risk given they are issued by the U.S. Government and Agencies. Changes in their fair value are primarily attributable to changes in interest rates and market liquidity. Short-term investments classified as held-to-maturity are financial instruments that the Company has the intent and ability to hold to maturity and are reported net of any related amortization and are not remeasured to fair value on a recurring basis. The Company periodically evaluates unrealized losses in its investment securities for credit impairment, using both qualitative and quantitative criteria. In the event a security is deemed to be impaired as the result of a credit loss, the Company recognizes the loss in interest income and other, net in the consolidated statements of income. Fair Value of Financial Instruments The Company accounts for certain assets and liabilities at fair value. The carrying value of the Company's financial instruments, including cash and cash equivalents, receivables and accounts payable, approximate fair value due to their short-term nature or variable interest rates. See Notes 3, 4, and 5 for the carrying value and fair value of the Company's investments, derivative instruments, and fixed-rate debt, respectively. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying a fair value hierarchy, which requires maximizing the use of observable inputs when measuring fair value. The three levels of inputs are: Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. Level 3: Significant unobservable inputs that are not corroborated by market data. Merchandise inventories Other International Canada United States Merchandise inventories consist of the following: Merchandise Inventories 2021 Receivables are recorded net of an allowance for credit losses which considers creditworthiness of vendors and third parties, historical experience and current economic trends. Write-offs of receivables were immaterial in 2021, 2020, and 2019. Receivables, Net Current financial liabilities have fair values that approximate their carrying values. Long-term financial liabilities include the Company's long-term debt, which are recorded on the balance sheet at issuance price and adjusted for unamortized discounts or premiums and debt issuance costs, and are being amortized to interest expense over the term of the loan. The estimated fair value of the Company's long- term debt is based primarily on reported market values, recently completed market transactions, and estimates based upon interest rates, maturities, and credit. value of the individual securities as of the beginning of the reporting period in which the transfer(s) occurred. 40 40 The Company's valuation techniques used to measure the fair value of money market mutual funds are based on quoted market prices, such as quoted net asset values published by the fund as supported in an active market. Valuation methodologies used to measure the fair value of all other non-derivative financial instruments are based on independent external valuation information. The pricing process uses data from a variety of independent external valuation information providers, including trades, bid price or spread, two-sided markets, quotes, benchmark curves including but not limited to treasury benchmarks and LIBOR or Secured Overnight Financing Rate and swap curves, discount rates, and market data feeds. All are observable in the market or can be derived principally from or corroborated by observable market data. The Company reports transfers in and out of Levels 1, 2, and 3, as applicable, using the fair Receivables consist primarily of vendor, reinsurance, credit card incentive, third-party pharmacy and other receivables. Vendor receivables include discounts and volume rebates. Balances are generally presented on a gross basis, separate from any related payable due. In certain circumstances, these receivables may be settled against the related payable to that vendor, in which case the receivables are presented on a net basis. Reinsurance receivables are held by the Company's wholly-owned captive insurance subsidiary and primarily represent amounts ceded through reinsurance arrangements gross of the amounts assumed under reinsurance, which are presented within other current liabilities in the consolidated balance sheets. Credit card incentive receivables primarily represent amounts earned under the co-branded credit card arrangement in the U.S. Third-party pharmacy receivables generally relate to amounts due from members' insurers. Other receivables primarily consist of amounts due from governmental entities, mostly tax-related items. 1,276 $ 5,079 $ 10,258 15,243 341 15,584 4,002 4,002 5 57 4,059 Foreign-currency translation adjustment and other, net 139 139 including tax effects Stock-based compensation (1,436) 621 2,273 (330) Repurchases of common stock (643) (10) Cash dividends declared BALANCE AT AUGUST 30, 2020 Net income |8 621 21 23 162 Release of vested RSUs, 6,417 4 439,625 (272) (272) (272) - - (16) 2,533 (1,097) :== 598 (237) = 4 $ 6,107 $ ----3,659 598 (245) (8) (237) 598 3,704 45 3,659 $ 13,103 304 12,799 $ (1,199) $ 7,887 $ Net income SEPTEMBER 1, 2019 BALANCE AT (1,057) (1,057) _ _____ _ _ (1,057) _ 621 other (247) Retained Earnings Total Costco Stockholders' Equity Noncontrolling Interests Total Equity Cash dividends declared and (330) (330) (188) 181 668 668 (312) (312) (472) (5,748) (495) (495) (5,748) (5,748) $ 4 $ 7,031 $ (1,137) $ 11,666 $ 17,564 $ $ September 1, 2019 52 Weeks Ended 52 Weeks Ended August 30, 2020 52 Weeks Ended August 29, 2021 Adjustments to reconcile net income including noncontrolling interests 21 Net income including noncontrolling interests (amounts in millions) COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS 37 The accompanying notes are an integral part of these consolidated financial statements. $ 18,078 514 CASH FLOWS FROM OPERATING ACTIVITIES 4,059 160 BALANCE AT (198) (198) (1,193) (1,193) (1,193) 441,255 4 6,698 (1,297) 12,879 18,284 421 5,007 5,007 རྒྱས 18,705 72 Cash dividends declared (23) (312) 1,928 (1,358) Repurchases of common stock including tax effects AUGUST 29, 2021 Release of vested RSUs, Stock-based compensation 160 441,825 adjustment and other, net Foreign-currency translation 5,079 668 37,658 34,703 (14,166) 2,415 2,558 2,642 TOTAL LIABILITIES Other long-term liabilities Long-term operating lease liabilities 7,514 6,692 Long-term debt, excluding current portion OTHER LIABILITIES 3,728 24,844 29,441 4,561 95 1,935 799 2,042 Total current liabilities Other current liabilities Current portion of long-term debt Deferred membership fees 1,393 1,671 Accrued member rewards 3,605 4,090 Accrued salaries and benefits 14,172 16,278 $ $ 1,851 41,190 36,851 COMMITMENTS AND CONTINGENCIES Additional Common Stock (amounts in millions) CONSOLIDATED STATEMENTS OF EQUITY COSTCO WHOLESALE CORPORATION 36 The accompanying notes are an integral part of these consolidated financial statements. 55,556 59,268 $ 18,705 421 514 18,078 TOTAL LIABILITIES AND EQUITY TOTAL EQUITY 18,284 17,564 12,879 EQUITY Preferred stock $0.01 par value; 100,000,000 shares authorized; no shares issued and outstanding Common stock $0.01 par value; 900,000,000 shares authorized; 441,825,000 and 441,255,000 shares issued and outstanding 4 Additional paid-in capital 7,031 Accounts payable 6,698 (1,137) (1,297) Retained earnings Total Costco stockholders' equity Noncontrolling interests 11,666 Accumulated other comprehensive loss CURRENT LIABILITIES LIABILITIES AND EQUITY 55,556 CONSOLIDATED BALANCE SHEETS COSTCO WHOLESALE CORPORATION 35 The accompanying notes are an integral part of these consolidated financial statements. 3,422 4,141 5,167 COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO $ 37 80 93 3,459 (245) 3,704 Less: Comprehensive income attributable to noncontrolling interests 4,221 COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (amounts in millions) NET INCOME INCLUDING NONCONTROLLING INTERESTS Foreign-currency translation adjustment and other, net 52 Weeks Ended August 29, 2021 (amounts in millions, except par value and share data) 5,079 52 Weeks Ended September 1, 2019 4,059 181 162 Comprehensive income 5,260 52 Weeks Ended August 30, 2020 Shares CURRENT ASSETS ASSETS 59,268 $ 2,841 3,381 2,788 2,890 21,807 23,492 28,120 29,505 1,023 1,312 12,242 14,215 1,550 1,803 1,028 917 Short-term investments Receivables, net Merchandise inventories Other current assets Total current assets OTHER ASSETS Cash and cash equivalents Property and equipment, net Other long-term assets TOTAL ASSETS August 29, 2021 August 30, 2020 11,258 $ 12,277 Operating lease right-of-use assets (231) Paid-in Other 934 Balance at August 30, 2020 Changes in currency translation and other (1) 947 $ 6 27 $ 14 $ 988 1 Balance at August 29, 2021 $ 953 $ 28 $ 15 $ 996 934 (1) Other consists of changes to the purchase price allocation. See Note 2. Definite-lived intangible assets, which are not material, are included in other long-term assets on the consolidated balance sheets and are amortized on a straight-line basis over their estimated lives, which approximates the pattern of expected economic benefit. Insurance/Self-insurance Liabilities Claims for employee health care benefits, workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability, inventory loss, and other exposures are funded predominantly through self-insurance. Insurance coverage is maintained for certain risks to limit exposures arising from very large losses. The Company uses different risk management mechanisms, including a wholly-owned captive insurance subsidiary (the captive) and participates in a reinsurance program. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated, in part, by considering historical claims experience, demographic factors, severity factors, and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends. At the end of 2021 and 2020, these insurance liabilities were $1,257 and $1,188 in the aggregate, respectively, and were included in accrued salaries and benefits and other current liabilities in the consolidated balance sheets, classified based on their nature. The captive receives direct premiums, which are netted against the Company's premium costs in selling, general and administrative expenses, in the consolidated statements of income. The captive participates in a reinsurance program that includes other third-party participants. The reinsurance agreement is one year in duration, and new agreements are entered into by each participant at their discretion at the commencement of the next calendar year. The participant agreements and practices of the reinsurance program limit a participating members' individual risk. Income statement adjustments related to the reinsurance program and related impacts to the consolidated balance sheets are recognized as information becomes known. In the event the Company leaves the reinsurance program, the Company retains its primary obligation to the policyholders for prior activity. Derivatives The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of business. It manages these fluctuations, in part, through the use of forward foreign-exchange contracts, seeking to economically hedge the impact of fluctuations of foreign exchange on known future expenditures denominated in a non-functional foreign-currency. The contracts relate primarily to U.S. dollar merchandise inventory expenditures made by the Company's international subsidiaries with functional currencies other than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. The Company seeks to mitigate risk with the use of these contracts and does not intend to engage in speculative transactions. Some of these contracts contain credit-risk-related contingent features that require settlement of outstanding contracts upon certain triggering events. There were no derivative instruments in a net liability position at the end of 2021 and for those in a net liability position at the end of 2020, the amount needed to settle the instruments immediately if the credit-risk- related contingent features were triggered was immaterial. The aggregate notional amounts of open, unsettled forward foreign-exchange contracts were $1,331 and $1,036 at the end of 2021 and 2020, respectively. See Note 4 for information on the fair value of unsettled forward foreign-exchange contracts at the end of 2021 and 2020. The unrealized gains or losses recognized in interest income and other, net in the accompanying consolidated statements of income relating to the net changes in the fair value of unsettled forward foreign-exchange contracts were immaterial in 2021, 2020 and 2019. The Company is exposed to fluctuations in prices for energy, particularly electricity and natural gas, and other commodity products used in retail and manufacturing operations, which it seeks to partially mitigate through the use of fixed-price contracts for certain of its warehouses and other facilities, primarily in the U.S. and Canada. The Company also enters into variable-priced contracts for some purchases of natural gas, in addition to fuel for its gas stations, on an index basis. These contracts meet the characteristics of 44 (536) Accounts payable 1,838 2,261 322 43 Acquisition 1 1 (12,896) $ 23,492 $ Accumulated depreciation and amortization Property and equipment, net 21,807 The Company evaluates long-lived assets for impairment on an annual basis, when relocating or closing a facility, or when events or changes in circumstances may indicate the carrying amount of the asset group, generally an individual warehouse, may not be fully recoverable. For asset groups held and used, including warehouses to be relocated, the carrying value of the asset group is considered recoverable when the estimated future undiscounted cash flows generated from the use and eventual disposition of the asset group exceed the respective carrying value. In the event that the carrying value is not considered recoverable, an impairment loss is recognized for the asset group to be held and used equal to the excess of the carrying value above the estimated fair value of the asset group. For asset groups classified as held-for-sale (disposal group), the carrying value is compared to the disposal group's fair value less costs to sell. The Company estimates fair value by obtaining market appraisals from third party brokers or using other valuation techniques. Impairment charges recognized in 2021 were immaterial. There were no impairment charges recognized in 2020 or 2019. Leases The Company leases land and/or buildings at warehouses and certain other office and distribution facilities. Leases generally contain one or more of the following options, which the Company can exercise at the end of the initial term: (a) renew the lease for a defined number of years at the then-fair market rental rate or rate stipulated in the lease agreement; (b) purchase the property at the then-fair market value; or (c) a right of first refusal in the event of a third-party offer. 42 42 Some leases include free-rent periods and step-rent provisions, which are recognized on a straight-line basis over the original term of the lease and any extension options that the Company is reasonably certain to exercise from the date the Company has control of the property. Certain leases provide for periodic rent increases based on price indices or the greater of minimum guaranteed amounts or sales volume. Our leases do not contain any material residual value guarantees or material restrictive covenants. The Company determines at inception whether a contract is or contains a lease. The Company initially records right-of-use (ROU) assets and lease obligations for its finance and operating leases based on the discounted future minimum lease payments over the term. The lease term is defined as the noncancelable period of the lease plus any options to extend when it is reasonably certain that the Company will exercise the option. As the rate implicit in the Company's leases is not easily determinable, the present value of the sum of the lease payments is calculated using the Company's incremental borrowing rate. The rate is determined using a portfolio approach based on the rate of interest the Company would pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. The Company uses quoted interest rates from financial institutions to derive the incremental borrowing rate. Impairment of ROU assets is evaluated in a similar manner as described in Property and Equipment, net above. The Company's asset retirement obligations (ARO) primarily relate to leasehold improvements that at the end of a lease must be removed. These obligations are generally recorded as a discounted liability, with an offsetting asset at the inception of the lease term based upon the estimated fair value of the costs to remove the improvements. These liabilities are accreted over time to the projected future value of the obligation. The ARO assets are depreciated using the same depreciation method as the leasehold improvement assets and are included with buildings and improvements. Estimated ARO liabilities associated with these leases are included in other liabilities in the accompanying consolidated balance sheet. Goodwill and Acquired Intangible Assets Goodwill represents the excess of acquisition cost over the fair value of the net assets acquired and is not subject to amortization. The Company reviews goodwill annually in the fourth quarter for impairment or when circumstances indicate carrying value may exceed the fair value. This evaluation is performed at the reporting unit level. If a qualitative assessment indicates that it is more likely than not that the fair value is less than carrying value, a quantitative analysis is completed using either the income or market approach, or a combination of both. The income approach estimates fair value based on expected discounted future cash flows, while the market approach uses comparable public companies and transactions to develop metrics to be applied to historical and expected future operating results. Goodwill is included in other long-term assets in the consolidated balance sheets. The following table summarizes goodwill by reportable segment: United States Changes in currency translation 53 13 $ $ 27 $ Other operating assets and liabilities, net 13 Balance at September 1, 2019 Total Operations Other International Canadian Operations Operations $ 1,057 728 623 Repayments of long-term debt (94) (3,200) (89) (312) (330) (272) Repurchases of common stock (496) (196) (247) Cash dividend payments (5,748) (1,479) (1,038) Other financing activities, net (67) BALANCE AT SEPTEMBER 2, 2018 Net income Foreign-currency translation adjustment and other, net Stock-based compensation 298 Release of vested restricted stock units (RSUs), including tax effects (000's) Amount Capital 438,189 $ Comprehensive Income (Loss) Net cash used in financing activities (9 (71) Repurchases of common stock Accumulated 3,992 41 Net cash provided by operating activities 8,958 8,861 6,356 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of short-term investments (1,331) (1,626) (1,094) Maturities and sales of short-term investments 1,446 1,678 1,231 Additions to property and equipment (3,588) (2,810) (2,998) Acquisitions Proceeds from short-term borrowings 210 137 188 Change in bank payments outstanding CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of long-term debt (4) (2,865) (3,535) Net cash used in investing activities 30 (62) Other investing activities, net (1,163) (3,891) (247) 536 Foreign Currency Cash paid for amounts included in the measurement of lease liabilities: 2020 2021 Supplemental cash flow information related to leases was as follows: 51 (3) Included in selling, general and administrative expenses and merchandise costs in the consolidated statements of income. (1) Included in selling, general and administrative expenses and merchandise costs in the consolidated statements of income. (2) Included in interest expense in the consolidated statements of income. 403 534 $ $ 87 151 33 37 31 50 252 296 $ 2020 Operating cash flows — operating leases Operating cash flows - finance leases $ 282 $ 2025 2024 2023 2022 Finance Leases Operating Leases (1) As of August 29, 2021, future minimum payments during the next five fiscal years and thereafter are as follows: 317 399 2021 Leased assets obtained in exchange for finance lease liabilities 350 Leased assets obtained in exchange for operating lease liabilities 49 67 - Financing cash flows - finance leases 33 37 258 354 Total lease costs Variable lease costs (3) Interest on lease liabilities (2) 222 $ 2021 3,380 3,890 $ 592 2,788 2,890 $ 1,000 2020 2021 231 EA Operating leases Weighted-average discount rate Finance leases Operating leases Weighted-average remaining lease term (years) (1) Included in other long-term assets in the consolidated balance sheets. (2) Included in other current liabilities in the consolidated balance sheets. (3) Included in other long-term liabilities in the consolidated balance sheets. Total lease liabilities derivative instruments, but generally qualify for the “normal purchases and normal sales" exception under authoritative guidance and require no mark-to-market adjustment. Operating lease liabilities $ 2026 72 2,642 Amortization of lease assets (1) Finance lease costs: Operating lease costs (1) The components of lease expense, excluding short-term lease costs and sublease income (which were not material), were as follows: 6.34 % 2.23 % 4.91 % 2.16% Finance leases 31 20 22 2020 22 21 3,477 3,916 $ 657 980 2,558 21 260 $ 107 207.55 94 4,349 $ (137) (2,764) 1,982 5,174 $ Weighted-Average Grant Date Fair Value Number of Units (in 000's) Outstanding at the end of 2021 369.15 Special cash dividend Vested and delivered Granted Outstanding at the end of 2020 The following table summarizes RSU transactions during 2021: 131,000 performance-based RSUs, of which 104,000 were granted to executive officers subject to the determination of the attainment of performance targets for 2021. This determination occurred in September 2021, at which time at least 33% of the units vested, as a result of the long service of all executive officers. The remaining awards vest upon continued employment over specified periods of time. 4,218,000 time-based RSUs, which vest upon continued employment or service over specified periods of time; and • • The following awards were outstanding at the end of 2021: Forfeited RSUS granted to employees and to non-employee directors generally vest over five and three years, respectively. Additionally, the terms of the RSUs, including performance-based awards, provide for accelerated vesting for employees and non-employee directors who have attained 25 or more and five or more years of service with the Company, respectively. Recipients are not entitled to vote or receive dividends on unvested and undelivered shares. At the end of 2021, 12,001,000 shares were available to be granted as RSUs under the 2019 Incentive Plan. 235.64 N/A 54 54 467 491 $ 525 $ $ Stock-based compensation expense, net 128 128 253.53 595 665 $ 140 Stock-based compensation expense Less recognized income tax benefit 2019 2020 2021 The following table summarizes stock-based compensation expense and the related tax benefits: Summary of Stock-Based Compensation The weighted-average grant date fair value of RSUs granted was $369.15, $294.08, and $224.00 in 2021, 2020, and 2019, respectively. The remaining unrecognized compensation cost related to non-vested RSUs at the end of 2021 was $728 and the weighted-average period of time over which this cost will be recognized is 1.6 years. Included in the outstanding balance at the end of 2021 were approximately 1,516,000 RSUs vested but not yet delivered. 257.88 619 $ Long-term Summary of Restricted Stock Unit Activity In conjunction with a special cash dividend paid in the second quarter of 2021, and in accordance with the plans, the number of shares subject to outstanding RSUs was increased on the dividend record date to preserve their value. They were adjusted by multiplying the number of outstanding shares by a factor of 1.019 (rounded up to a whole share), representing the ratio of the Nasdaq closing price of $391.77 on November 30, 2020, which was the last trading day immediately prior to the ex-dividend date, to the Nasdaq opening price of $384.50 on the ex-dividend date, December 1, 2020. The outstanding RSUs increased by approximately 94,000. The adjustment did not result in additional stock-based compensation expense, as the fair value of the awards did not change. As further required by the plans, the maximum number of shares issuable was proportionally adjusted, which resulted in an additional 220,000 RSU shares available to be granted. 1,052 2,864 $ $ 537 791 1,589 3,655 1,070 2,507 (1) Operating lease payments have not been reduced by future sublease income of $99. (2) Excludes $665 of lease payments for leases that have been signed but not commenced. Less amount representing interest Present value of lease liabilities Thereafter 74 192 159 191 87 232 92 273 Total (2) 53 529 Note 7-Equity The Company grants stock-based compensation, primarily to employees and non-employee directors. Grants to all executive officers are generally performance-based. Through a series of shareholder approvals, there have been amended and restated plans and new provisions implemented by the Company. RSUs are subject to quarterly vesting upon retirement or voluntary termination. Employees who attain at least 25 years of service with the Company receive shares under accelerated vesting provisions on the annual vesting date. The 2019 Incentive Plan authorized the issuance of 17,500,000 shares (10,000,000 RSUs) of common stock for future grants, plus the remaining shares that were available for grant and the future forfeited shares from grants under the previous plan, up to a maximum aggregate of 27,800,000 shares (15,885,000 RSUs). The Company issues new shares of common stock upon vesting of RSUs. Shares for vested RSUs are generally delivered to participants annually, net of shares withheld for taxes. Note 8-Stock-Based Compensation These amounts may differ from repurchases of common stock in the consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of each fiscal year. 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. 225.16 1,097 247 198 495 364.39 $ 308.45 52 1,358 $ 643 Share (000's) Average Price per Shares Repurchased 2021 2020 2019 The Company's stock repurchase program is conducted under a $4,000 authorization by the Board of Directors, which expires in April 2023. As of the end of 2021, the remaining amount available under the approved plan was $3,250. The following table summarizes the Company's stock repurchase activity: Stock Repurchase Programs Cash dividends declared in 2021 totaled $12.98 per share, as compared to $2.70 per share in 2020. Dividends in 2021 included a special dividend of $10.00 per share, resulting in an aggregate payment of approximately $4,430. The Company's current quarterly dividend rate is $0.79 per share. Dividends Total Cost Finance lease liabilities (2) Finance lease liabilities (3) Current Certificates of deposit Held-to-maturity: Government and agency securities Available-for-sale: 2020: 917 6 911 $ $ Total short-term investments 536 Certificates of deposit Held-to-maturity: 381 6 $ 375 $ $ Government and agency securities Available-for-sale: Total short-term investments Cost Basis Unrealized Gains, Net Recorded Basis 191 $ 190 185 Operating lease liabilities (2) 190 $ $ Due in one year or less Held-To-Maturity Fair Value Cost Basis Basis Available-For-Sale Gross unrecognized holding gains and losses on available-for-sale securities were not material for the years ended August 29, 2021, and August 30, 2020. At the end of 2021 and 2020, there were no available-for-sale securities in a continuous unrealized-loss position. There were no sales of available-for- sale securities during 2021 or 2020. 1,028 12 $ 580 580 1,016 $ $ 448 12 $ 436 $ The maturities of available-for-sale and held-to-maturity securities at the end of 2021 are as follows: Gains, Net Recorded Unrealized The Company's 401(k) retirement plan is available to all U.S. employees over the age of 18 who have completed 90 days of employment. The plan allows participants to make wage deferral contributions, a portion of which the Company matches. In addition, the Company provides each eligible participant an annual discretionary contribution. The Company also has a defined contribution plan for Canadian employees and contributes a percentage of each employee's wages. Certain subsidiaries in the Company's Other International operations have defined benefit and defined contribution plans, which are not material. Amounts expensed under all plans were $748, $676, and $614 for 2021, 2020, and 2019, respectively, and are predominantly included in selling, general and administrative expenses in the consolidated statements of income. Retirement Plans Selling, general and administrative expenses consist primarily of salaries, benefits and workers' compensation costs for warehouse employees (other than fresh foods departments and certain ancillary businesses which are reflected in merchandise costs) as well as all regional and home office employees, including buying personnel. Selling, general and administrative expenses also include substantially all building and equipment depreciation, stock compensation expense, credit and debit card processing fees, utilities, as well as other operating costs incurred to support warehouse and e-commerce website operations. Selling, General and Administrative Expenses The Company has agreements to receive funds from vendors for discounts and a variety of other programs. These programs are evidenced by signed agreements that are reflected in the carrying value of the inventory when earned or as the Company progresses towards earning the rebate or discount, and as a component of merchandise costs as the merchandise is sold. Other vendor consideration is generally recorded as a reduction of merchandise costs upon completion of contractual milestones, terms of the related agreement, or by another systematic approach. Vendor Consideration Merchandise costs consist of the purchase price or manufacturing costs of inventory sold, inbound and outbound shipping charges and all costs related to the Company's depot, fulfillment and manufacturing operations, including freight from depots to selling warehouses, and are reduced by vendor consideration. Merchandise costs also include salaries, benefits, depreciation, and utilities in fresh foods and certain ancillary departments. Merchandise Costs Citibank, N.A. became the exclusive issuer of co-branded credit cards to U.S. members in June 2016. The Company receives various forms of consideration, including a royalty on purchases made on the card outside of Costco, a portion of which, after giving rise to estimated breakage, is used to fund the rebate that cardholders receive. The rebates are issued in February and expire on December 31. Breakage is estimated based on redemption data. Stock-Based Compensation The Company sells and otherwise provides proprietary shop cards that do not expire and are redeemable at the warehouse or online for merchandise or membership. Revenue from shop cards is recognized upon redemption, and estimated breakage is recognized based on redemption data. The Company accounts for outstanding shop card balances as a shop card liability, net of estimated breakage. Shop card liabilities are included in other current liabilities in the consolidated balance sheets. 5 In most countries, the Company's Executive members qualify for a 2% reward on qualified purchases, subject to an annual maximum value, which does not expire and can be redeemed only at Costco warehouses. The Company accounts for this reward as a reduction in sales, net of the estimated impact of non-redemptions (breakage), with the corresponding liability classified as accrued member rewards in the consolidated balance sheets. Estimated breakage is computed based on redemption data. For 2021, 2020, and 2019, the net reduction in sales was $2,047, $1,707, and $1,537 respectively. The Company accounts for membership fee revenue, net of refunds, on a deferred basis, ratably over the one-year membership period. Deferred membership fees at the end of 2021 and 2020 were $2,042 and $1,851, respectively. The Company is the principal for the majority of its transactions and recognizes revenue on a gross basis. The Company is the principal when it has control of the merchandise or service before it is transferred to the member, which generally is established when Costco is primarily responsible for merchandising decisions, maintains the relationship with the member, including assurance of member service and satisfaction, and has pricing discretion. The Company offers merchandise in the following core merchandise categories: foods and sundries, non- foods (previously hardlines and softlines), and fresh foods. The Company also provides expanded products and services through warehouse ancillary and other businesses. The majority of revenue from merchandise sales is recognized at the point of sale. Revenue generated through e-commerce or special orders is generally recognized upon shipment to the member. For merchandise shipped directly to the member, shipping and handling costs are expensed as incurred as fulfillment costs and included in merchandise costs in the consolidated statements of income. In certain ancillary businesses, revenue is deferred until the member picks up merchandise at the warehouse. Deferred sales are included in other current liabilities in the consolidated balance sheets. The Company adopted Accounting Standards Update (ASU) 2014-09 in 2019, which provided for changes in the recognition of revenue from contracts with customers. The Company recognizes sales for the amount of consideration collected from the member, which includes gross shipping fees where applicable, and is net of sales taxes collected and remitted to government agencies and member returns. The Company reserves for estimated returns based on historical trends in merchandise returns and reduces sales and merchandise costs accordingly. The Company records, on a gross basis, a refund liability and an asset for recovery, which are included in other current liabilities and other current assets, respectively, in the consolidated balance sheets. Revenue Recognition The Company recognizes foreign-currency transaction gains and losses related to revaluing or settling monetary assets and liabilities denominated in currencies other than the functional currency in interest income and other, net in the consolidated statements of income. Generally, these include the U.S. dollar cash and cash equivalents and the U.S. dollar payables of consolidated subsidiaries revalued to their functional currency. Also included are realized foreign-currency gains or losses from settlements of forward foreign-exchange contracts. These items were immaterial in 2021, 2020, and 2019. The functional currencies of the Company's international subsidiaries are the local currency of the country in which the subsidiary is located. Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Translation adjustments are recorded in accumulated other comprehensive loss. Revenues and expenses of the Company's consolidated foreign operations are translated at average exchange rates prevailing during the year. 45 536 RSUS granted to employees generally vest over five years and allow for quarterly vesting of the pro-rata number of stock-based awards that would vest on the next anniversary of the grant date in the event of retirement or voluntary termination. Actual forfeitures are recognized as they occur. 46 Basis Cost 2021: The Company's investments were as follows: Note 3-Investments The net purchase price of $999 has been allocated to the tangible and intangible assets of $294 and liabilities assumed of $235, based on fair values on the acquisition date. The remaining unallocated net purchase price of $940 was recorded as goodwill. Goodwill represents the acquisition's benefits to the Company, which include the ability to serve more members and improve delivery times, enabling growth in certain segments of our U.S. e-commerce operations. The Company assigned this goodwill, which is deductible for tax purposes, to reporting units within the U.S. segment. Changes to the purchase price allocation originally recorded in 2020 were not material. On March 17, 2020, the Company acquired Innovel Solutions for $999, using existing cash and cash equivalents. Innovel (now known as Costco Wholesale Logistics or CWL) provides final-mile delivery, installation and white-glove capabilities for big and bulky products in the United States and Puerto Rico. Its financial results have been included in the Company's consolidated financial statements from the date of acquisition. Note 2-Acquisition of Innovel 47 46 Repurchased shares of common stock are retired, in accordance with the Washington Business Corporation Act. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is deducted by allocation to additional paid-in capital and retained earnings. The amount allocated to additional paid-in capital is the current value of additional paid-in capital per share outstanding and is applied to the number of shares repurchased. Any remaining amount is allocated to retained earnings. See Note 7 for additional information. The computation of basic net income per share uses the weighted average number of shares that were outstanding during the period. The computation of diluted net income per share uses the weighted average number of shares in the basic net income per share calculation plus the number of common shares that would be issued assuming vesting of all potentially dilutive common shares outstanding using the treasury stock method for shares subject to RSUs. Net Income per Common Share Attributable to Costco The timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions requires significant judgment. The benefits of uncertain tax positions are recorded in the Company's consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge from tax authorities. When facts and circumstances change, the Company reassesses these probabilities and records any changes as appropriate. The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credits and loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts that are more likely than not expected to be realized. Income Taxes Preopening expenses include startup costs for new warehouses and relocations, developments in new international markets, new manufacturing and distribution facilities, and expansions at existing warehouses and corporate facilities and are expensed as incurred. Preopening Expenses Stock-based compensation expense is predominantly included in selling, general and administrative expenses in the consolidated statements of income. Certain stock-based compensation costs are capitalized or included in the cost of merchandise. See Note 8 for additional information on the Company's stock-based compensation plans. Compensation expense for stock-based awards is predominantly recognized using the straight-line method over the requisite service period for the entire award. Awards for employees and non-employee directors provide for accelerated vesting based on cumulative years of service with the Company. Compensation expense for the accelerated shares is recognized upon achievement of the long-service term. The cumulative amount of compensation cost recognized at any point in time equals at least the portion of the grant-date fair value of the award that is vested at that date. The fair value of RSUs is calculated as the market value of the common stock on the measurement date less the present value of the expected dividends forgone during the vesting period. Stock Repurchase Programs Total Due after one year through five years 375 $ Maturities of long-term debt during the next five fiscal years and thereafter are as follows: (1) Net of unamortized debt discounts and issuance costs. 7,514 6,692 $ Long-term debt, excluding current portion 95 799 Less current portion (1) 48 2022 40 7,657 7,531 Total long-term debt 857 731 Other long-term debt 1,000 $ 1.750% Senior Notes due April 2032 Less unamortized debt discounts and issuance costs 1,750 2023 2025 Liabilities Total lease assets Operating lease right-of-use assets Finance lease assets (1) Assets The tables below present information regarding the Company's lease assets and liabilities. Note 6-Leases 7,531 $ 5,295 2024 100 1,109 91 800 $ 50 50 Total Thereafter 2026 136 1,750 1,000 1,250 (1) At August 29, 2021, $12 cash and cash equivalents and $381 short-term investments are included in the accompanying consolidated balance sheets. At August 30, 2020, $60 cash and cash equivalents and $448 short-term investments are included in the consolidated balance sheets. 1,250 408 $ (21) (2) 1 508 393 $ 17 2020 (2) The asset and the liability values are included in other current assets and other current liabilities, respectively, in the consolidated balance sheets. 2021 $ Total Investment in government and agency securities (1) Forward foreign-exchange contracts, in asset position (2) Forward foreign-exchange contracts, in (liability) position (2) The table below presents information regarding the Company's financial assets and financial liabilities that are measured at fair value on a recurring basis and indicate the level within the hierarchy reflecting the valuation techniques utilized to determine such fair value. Assets and Liabilities Measured at Fair Value on a Recurring Basis Note 4-Fair Value Measurement 48 536 381 $ Level 2 At August 29, 2021, and August 30, 2020, the Company did not hold any Level 1 or 3 financial assets or liabilities that were measured at fair value on a recurring basis. There were no transfers between levels during 2021 or 2020. 488 Assets and liabilities recognized and disclosed at fair value on a nonrecurring basis include items such as financial assets measured at amortized cost and long-lived nonfinancial assets. These assets are measured at fair value if determined to be impaired. Fair value adjustments to nonfinancial assets during 2021 were immaterial and there were no fair value adjustments to these items during 2020. 1,000 1,000 1,000 1,000 800 800 $ Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis 2021 2.300% Senior Notes due May 2022 2.750% Senior Notes due May 2024 3.000% Senior Notes due May 2027 1.375% Senior Notes due June 2027 1.600% Senior Notes due April 2030 2020 Note 5-Debt In April 2020, the Company issued $4,000 in aggregate principal amount of Senior Notes as follows: $1,250 of 1.375% due June 2027; $1,750 of 1.600% due April 2030; and $1,000 of 1.750% due April 2032. In May 2020, a portion of the proceeds from the issuance were used to repay, prior to maturity, the outstanding $1,000 and $500 principal balances and interest on the 2.150% and 2.250% Senior Notes, respectively. The early redemption resulted in a $36 charge which was recorded in interest income and other, net in 2020. Other long-term debt consists of Guaranteed Senior Notes issued by the Company's Japanese subsidiary, valued using Level 3 inputs. In June 2021, the Japanese subsidiary repaid approximately $94 of its Guaranteed Senior Notes. 49 449 The Company's long-term debt consists primarily of Senior Notes, described below. The Company at its option may redeem the Senior Notes at any time, in whole or in part, at a redemption price plus accrued interest. The redemption price is equal to the greater of 100% of the principal amount or the sum of the present value of the remaining scheduled payments of principal and interest to maturity. Additionally, upon certain events, the holder has the right to require the Company to purchase this security at a price of 101% of the principal amount plus accrued and unpaid interest to the date of the event. Interest on all outstanding long-term debt is payable semi-annually. The estimated fair value of Senior Notes is valued using Level 2 inputs. Long-Term Debt The Company maintains various short-term bank credit facilities, with a borrowing capacity of $1,050 and $967, in 2021 and 2020, respectively. Borrowings on these short-term facilities were immaterial during 2021 and 2020. Short-term borrowings outstanding were $41 at the end of 2021. There were no outstanding balances at the end of 2020. Short-Term Borrowings At the end of 2021 and 2020, the fair value of the Company's long-term debt, including the current portion, was approximately $7,692 and $7,987, respectively. The carrying value of long-term debt consisted of the following: 1. Financial Statements: See the listing of Financial Statements included as a part of this Form 10-K in Item 8 of Part II. Documents filed as part of this report are as follows: Financial Statement Schedules: All schedules have been omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements, including the notes thereto. 64 2. (a) (105) PART IV 1,749 3,591 4,204 $ 4,931 $ 2019 2020 2021 Total provision for income taxes Total foreign 1,163 Deferred Foreign: Total state Deferred Current State: Total federal Deferred Current Federal: Current 1,174 $ 6,680 $ 276 26 8 11 178 230 265 550 693 802 222 77 84 328 616 $ 718 $ 2019 2020 2021 4,765 5,367 $ The provisions for income taxes are as follows: 238 Total Domestic Gross increases-tax positions in prior years Gross decreases-tax positions in prior years Lapse of statute of limitations Gross unrecognized tax benefit at end of year $ 2021 2020 30 $ 27 2 Gross increases-current year tax positions 1 8 (3) (1) 33 $ (3) 30 The gross unrecognized tax benefit includes tax positions for which the ultimate deductibility is highly certain but there is uncertainty about the timing of such deductibility. At the end of 2021 and 2020, these amounts were immaterial. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of these tax positions would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority. The total amount of such unrecognized tax benefits that if recognized would favorably affect the effective income tax rate in future periods is $30 and $28 at the end of 2021 and 2020, respectively. Accrued interest and penalties related to income tax matters are classified as a component of income tax expense. Accrued interest and penalties recognized during 2021 and 2020, and accrued at the end of each respective period were not material. The Company is currently under audit by several jurisdictions in the United States and abroad. Some audits may conclude in the next 12 months, and the unrecognized tax benefits recorded in relation to the audits may differ from actual settlement amounts. It is not practical to estimate the effect, if any, of any amount of such change during the next 12 months to previously recorded uncertain tax positions in connection with the audits. The Company does not anticipate that there will be a material increase or decrease in the total amount of unrecognized tax benefits in the next 12 months. 2 Gross unrecognized tax benefit at beginning of year A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2021 and 2020 is as follows: 56 Income before income taxes is comprised of the following: Income Taxes Note 9- Taxes 1,691 (935) (800) (216) (228) (744) (801) (92) (81) (40) (1,987) (1,950) (310) $ (259) The deferred tax accounts at the end of 2021 and 2020 include deferred income tax assets of $444 and $406, respectively, included in other long-term assets; and deferred income tax liabilities of $754 and $665, respectively, included in other long-term liabilities. In 2021 and 2020, the Company had valuation allowances of $214 and $105, respectively, primarily related to foreign tax credits that the Company believes will not be realized due to carry forward limitations. The foreign tax credit carry forwards are set to expire beginning in fiscal 2030. The Company no longer considers fiscal year earnings of non-U.S. consolidated subsidiaries after 2017 to be indefinitely reinvested (other than China) and has recorded the estimated incremental foreign withholding taxes (net of available foreign tax credits) and state income taxes payable assuming a hypothetical repatriation to the U.S. The Company continues to consider undistributed earnings of certain non-U.S. consolidated subsidiaries, which totaled $3,070, to be indefinitely reinvested and has not provided for withholding or state taxes. 56 Foreign The Company files income tax returns in the United States, various state and local jurisdictions, in Canada, and in several other foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local examination for years before fiscal 2017. The Company is currently subject to examination in California for fiscal years 2013 to present. 204 372 Valuation allowance Total deferred tax assets Other Accrued liabilities and reserves Operating lease liabilities Foreign tax credit carry forward Deferred income/membership fees Equity compensation Deferred tax assets: Total net deferred tax assets The components of the deferred tax assets (liabilities) are as follows: During 2019, the Company recognized net tax benefits of $123 related to the 2017 Tax Act. This benefit included $105 related to U.S. taxation of deemed foreign dividends, partially offset by losses of current year foreign tax credits. 55 22.3 % 24.4 % $ 1,061 24.0 % $ 1,308 $1,601 Total 0.7 31 The Company recognized total net tax benefits of $163, $81 and $221 in 2021, 2020 and 2019, respectively. These include benefits of $75, $77 and $59, respectively, related to the stock-based compensation accounting standard adopted in 2018, in addition to the impacts of the 2017 Tax Act noted above. During 2021, there was a net tax benefit of $70 related to the portion of the special dividend paid through our 401(k) plan. Deferred tax liabilities: Property and equipment Merchandise inventories (214) 1,796 1,891 62 639 681 832 769 101 146 144 161 80 72 $ 2020 2021 Net deferred tax liabilities Total deferred tax liabilities Other Foreign branch deferreds Operating lease right-of-use assets (1.4) 557 (77) (46) 21.0 % 21.0 % $ 1,001 21.0 % $ 1,127 $ 1,403 Federal taxes at statutory rate 2019 2020 2021 The reconciliation between the statutory tax rate and the effective rate for 2021, 2020, and 2019 is as follows: State taxes, net Except for certain provisions, the Tax Cuts and Jobs Act (2017 Tax Act) was effective for tax years beginning on or after January 1, 2018. Most provisions became effective for the Company for 2019, including limitations on the ability to claim foreign tax credits, repeal of the domestic manufacturing deduction, and limitations on certain business deductions. Provisions with significant impacts that were effective starting in the second quarter of 2018 and throughout 2019 included: a lower U.S. federal income tax rate, remeasurement of certain net deferred tax liabilities, and a transition tax on deemed repatriation of certain foreign earnings. The lower U.S. tax rate of 21.0% was effective for all of 2021, 2020, and 2019. 1,308 $ 1,601 $ $ 307 377 523 (98) (34) 405 1,061 243 3.6 190 Other (2.6) (123) 2017 Tax Act (0.4) (18) (0.5) (24) (1.3) (91) Employee stock ownership plan (ESOP) - (1) 1.7 92 1.4 92 Foreign taxes, net 3.6 171 3.6 (0.7) Item 15-Exhibits, Financial Statement Schedules Other Taxes 44 1,126 143 223 1,492 2,186 303 509 2,998 14,367 4,737 2,044 20,890 32,162 4,369 8,869 45,400 The following table summarizes net sales by merchandise category; sales from e-commerce websites and business centers have been allocated to their respective merchandise categories: 2021 2020 2019 4,479 750 924 3,063 942 5,435 1,248 155 242 1,645 2,060 258 492 2,810 14,916 2,172 4,719 21,807 38,366 5,270 11,920 55,556 $ 111,751 $ 21,366 $ 19,586 $ 152,703 Foods and Sundries 860 $ 68,659 $ Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of our assets; (2) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with appropriate authorizations; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that I could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness for future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision of and with the participation of our management, we assessed the effectiveness of our internal control over financial reporting as of August 29, 2021, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on its assessment, management has concluded that our internal control over financial reporting was effective as of August 29, 2021. The attestation of KPMG LLP, our independent registered public accounting firm, on the effectiveness of our internal control over financial reporting is included with the consolidated financial statements in Item 8 of this Report. 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 fourth quarter of 2021 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 63 Item 9B-Other Information None. Management's Annual Report on Internal Control Over Financial Reporting PART III Information relating to the availability of our code of ethics for senior financial officers and a list of our executive officers appear in Part I, Item 1 of this Report. The information required by this Item concerning our directors and nominees for director is incorporated herein by reference to the sections entitled "Proposal 1: Election of Directors," "Directors" and "Committees of the Board" in Costco's Proxy Statement for its 2022 annual meeting of shareholders, which will be filed with the SEC within 120 days of the end of our fiscal year ("Proxy Statement"). Item 11-Executive Compensation The information required by this Item is incorporated herein by reference to the sections entitled "Compensation of Directors,” “Executive Compensation," and "Compensation Discussion and Analysis" in Costco's Proxy Statement. Item 12-Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item is incorporated herein by reference to the section entitled "Principal Shareholders" and "Equity Compensation Plan Information” in Costco's Proxy Statement. Item 13-Certain Relationships and Related Transactions, and Director Independence The information required by this Item is incorporated herein by reference to the sections entitled “Proposal 1: Election of Directors,” “Directors," "Committees of the Board," "Shareholder Communications to the Board," "Meeting Attendance," "Report of the Compensation Committee of the Board of Directors," "Certain Relationships and Transactions" and "Report of the Audit Committee” in Costco's Proxy Statement. Item 14-Principal Accounting Fees and Services The information required by this Item is incorporated herein by reference to the sections entitled "Independent Public Accountants" in Costco's Proxy Statement. Item 10-Directors, Executive Officers and Corporate Governance 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 SEC 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 and the Chief Financial Officer, with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of August 29, 2021 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date. Evaluation of Disclosure Controls and Procedures Item 9A-Controls and Procedures 59,672 Non-Foods 55,966 44,807 41,160 Fresh Foods 27,183 23,204 19,948 Warehouse Ancillary and Other Businesses 31,626 26,550 28,571 Total net sales $ 192,052 $ 163,220 $ 149,351 62 62 Item 9-Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 77,277 $ The Company is subject to multiple examinations for value added, sales-based, payroll, product, import or other non-income taxes in various jurisdictions. In certain cases, the Company has received assessments from the authorities. In the fourth quarter of 2020, the Company reached an agreement on a product tax audit resulting in a benefit of $84. The Company recorded a charge of $123 in 2019 regarding this matter. Other possible losses or range of possible losses associated with these examinations are either immaterial or an estimate of the possible loss or range of loss cannot be made at this time. If certain matters or a group of matters were to be decided adversely to the Company, could result in a charge that might be material to the results of an individual fiscal quarter or year. 3,633 22,185 In January 2019, a former seasonal employee filed a class action, alleging failure to provide California seasonal employees meal and rest breaks, proper wage statements, and appropriate wages. Jadan v. Costco Wholesale Corp. (Case No. 19-CV-340438; Santa Clara Superior Court). The complaint seeks relief under the California Labor Code, including civil penalties and attorneys' fees. In October 2019, the parties reached an agreement on a class settlement for an immaterial amount, which received court approval in January 2021. In March 2019, employees filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide meal and rest periods and itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. Nevarez v. Costco Wholesale Corp. (Case No. 2:19-cv-03454; C.D. Cal.). The Company filed an answer denying the material allegations of the complaint. In December 2019, the court issued an order denying class certification. In January 2020, the plaintiffs dismissed their Labor Code claims without prejudice, and the court remanded the action to state court. The remand was appealed; the appeal in abeyance due to a pending settlement for an immaterial amount that was agreed upon in February 2021. The preliminary approval hearing of the settlement is scheduled for October 2021. In May 2019, an employee filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Rough v. Costco Wholesale Corp. (Case No. 2:19-cv-01340; E.D. Cal.). Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. The Company has moved for partial summary judgement, and the parties have filed competing motions regarding class certification. In August 2019, the plaintiff filed a companion case in state court seeking penalties under PAGA. Rough v. Costco Wholesale Corp. (Case No. FCS053454; Sonoma County Superior Court). Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. The state court action has been stayed pending resolution of the federal action. In June 2019, an employee filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide meal and rest periods, itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Martinez v. Costco Wholesale Corp. (Case No. 3:19-cv-05624-EMC; N.D. Cal.). The Company filed an answer denying the material allegations of the complaint. In June 2021, the plaintiff agreed to dismiss his claims for failure to provide meal and rest breaks and to pay minimum wages. In July 2021, the parties reached an agreement settling for an immaterial amount the remaining claim and related derivative claims. In April 2020, an employee, alleging underpayment of sick pay, filed a class and representative action against the Company, alleging claims under California law for failure to pay all wages at termination and for Labor Code penalties under PAGA. Kristy v. Costco Wholesale Corp. (Case No. 5:20-cv-04119; N.D. Cal.). The case was stayed due to the plaintiff's bankruptcy, and his individual claim was settled for an immaterial amount. A request for dismissal of the class and representative action is pending. In July 2020, an employee filed an action under PAGA on behalf of all California non-exempt employees alleging violations of California Labor Code provisions regarding meal and rest periods, minimum wage, overtime, wage statements, reimbursement of expenses, and payment of wages at termination. Schwab v. Costco Wholesale Corporation (Case No. 37-2020-00023551-CU-OE-CTL; San Diego County Superior Court). In August 2020, the Company filed a motion to strike portions of the complaint, which was denied, and an answer has been filed denying the material allegations of the complaint. 59 In December 2020, a former employee filed suit against the Company asserting collective and class claims on behalf of non-exempt employees under the Fair Labor Standards Act and New York Labor Law for failure to pay for all hours worked on a weekly basis and failure to provide proper wage statements and notices. The plaintiff also asserts individual retaliation claims. Cappadora v. Costco Wholesale Corp. (Case No. 1:20-cv-06067; E.D.N.Y.). An amended complaint was filed, and the Company has denied the material allegations of the amended complaint. In August 2021, a former employee filed a similar suit, asserting collective and class claims on behalf of non-exempt employees under the FLSA and New York law. Umadat v. Costco Wholesale Corp. (Case No. 2:21-cv-4814; E.D.N.Y.). The Company has not yet responded to the complaint. In February 2021, a former employee filed a class action against the Company alleging violations of California Labor Code regarding payment of wages, meal and rest periods, wage statements, reimbursement of expenses, payment of final wages to terminated employees, and for unfair business practices. Edwards v. Costco Wholesale Corp. (Case No. 5:21-cv-00716: C.D. Cal.). In May 2021, the Company filed a motion to dismiss the complaint, which was granted with leave to amend. In June 2021, the plaintiff filed an amended complaint, which the Company moved to dismiss later that month. The court granted the motion in part in July 2021 with leave to amend. In August 2021, the plaintiff filed a second amended complaint and filed a separate representative action under PAGA asserting the same Labor Code claims and seeking civil penalties and attorneys' fees. The Company has filed an answer to the second amended class action complaint denying the material allegations. 58 In July 2021, a former temporary staffing employee filed a class action against the Company and a staffing company alleging violations of the California Labor Code regarding payment of wages, meal and rest periods, wage statements, the timeliness of wages and final wages, and for unfair business practices. Dimas v. Costco Wholesale Corp. (Case No. STK-CV-UOE-2021-0006024; San Joaquin Superior Court). The Company has not yet responded to the complaint. The Company and its CEO and CFO were defendants in putative class actions brought on behalf of shareholders who acquired Company stock between June 6 and October 25, 2018. Johnson v. Costco Wholesale Corp., et al. (W.D. Wash.; filed Nov. 5, 2018); Chen v. Costco Wholesale Corp., et al. (W.D. Wash.; filed Dec. 11, 2018). The complaints alleged violations of the federal securities laws stemming from the Company's disclosures concerning internal control over financial reporting. A consolidated amended complaint was filed on April 16, 2019. On November 26, 2019, the court entered an order dismissing the consolidated amended complaint and granting the plaintiffs leave to file a further amended complaint. A further amended complaint was filed on March 9, which the court dismissed with prejudice on August 19, 2020. On July 20, 2021, the Ninth Circuit affirmed the dismissal. 60 60 Members of the Board of Directors, one other individual, and the Company were defendants in a shareholder derivative action related to the internal controls and related disclosures identified in the putative class actions, alleging that the individual defendants breached their fiduciary duties. Wedekind v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, Richard Libenson, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (W.D. Wash.; filed Dec. 11, 2018). Similar actions were filed in King County Superior Court on February 20, 2019, Elliott v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, Richard Libenson, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (Case No. 19-2-04824-7), April 16, 2019, Brad Shuman, et ano. v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (Case No. 19-2-10460-1), and June 12, 2019, Rahul Modi v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (Case No. 19-2-15514-1). In light of the dismissal in Johnson noted above, the plaintiffs in the derivative actions agreed voluntarily to dismiss their complaints. On June 23, 2020, a putative class action was filed against the Company, the “Board of Directors," the "Costco Benefits Committee” and others under the Employee Retirement Income Security Act, in the United States District Court for the Eastern District of Wisconsin. Dustin S. Soulek v. Costco Wholesale, et al., Case No. 1:20-cv-937. The class is alleged to be beneficiaries of the Costco 401(k) plan from June 23, 2014, and the claims are that the defendants breached their fiduciary duties in the operation and oversight of the plan. The complaint seeks injunctive relief, damages, interest, costs, and attorneys' fees. On September 11, 2020, the defendants filed a motion to dismiss the complaint, and on September 21 the plaintiffs filed an amended complaint, which the defendants have also moved to dismiss. The Company does not believe that any pending claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company's financial position, results of operations or cash flows; however, it is possible that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be material to the results of an individual fiscal quarter or year. 61 Note 12-Segment Reporting The Company is principally engaged in the operation of membership warehouses through wholly owned subsidiaries in the U.S., Canada, Mexico, Japan, U.K., Korea, Australia, Spain, Iceland, France, and China and through a majority-owned subsidiary in Taiwan. Reportable segments are largely based on management's organization of the operating segments for operational decisions and assessments of financial performance, which considers geographic locations. The material accounting policies of the segments are as described in Note 1. Inter-segment net sales and expenses have been eliminated in computing total revenue and operating income. Certain operating expenses, predominantly stock-based compensation, incurred on behalf of the Company's Canadian and Other International operations, are included in the U.S. operations because those costs generally come under the responsibility of U.S. management. Beginning in December 2017, the United States Judicial Panel on Multidistrict Litigation has consolidated numerous cases concerning the impacts of opioid abuses filed against various defendants by counties, cities, hospitals, Native American tribes, third-party payors, and others. In re National Prescription Opiate Litigation (MDL No. 2804) (N.D. Ohio). Included are cases that name the Company, including actions filed by counties and cities in Michigan, New Jersey, Oregon, Virginia and South Carolina, a third-party payor in Ohio, and a hospital in Texas, class actions filed on behalf of infants born with opioid-related medical conditions in 40 states, and class actions and individual actions filed on behalf of individuals seeking to recover alleged increased insurance costs associated with opioid abuse in 43 states and American Samoa. Claims against the Company in state courts in New Jersey, Oklahoma, Utah, and Arizona have been dismissed. The Company is defending all of the pending matters. In December 2018, a depot employee raised similar claims, alleging that depot employees in California did not receive suitable seating or reasonably comfortable workplace temperature conditions. Lane v. Costco Wholesale Corp. (Case No. CIVDS 1908816; San Bernardino Superior Court). The Company filed an answer denying the material allegations of the complaint. In October 2019, the parties reached an agreement to settle for an immaterial amount the seating claims on a representative basis, which received court approval in February 2020. The workplace temperature claims continue in litigation. The Company is a defendant in an action commenced in August 2013 under the California Labor Code Private Attorneys General Act (PAGA) alleging violation of California Wage Order 7-2001 for failing to provide seating to employees who work at entrance and exit doors in California warehouses. Canela v. Costco Wholesale Corp., et al. (Case No. 2013-1-CV-248813; Santa Clara Superior Court). The complaint seeks relief under the California Labor Code, including civil penalties and attorneys' fees. The Company filed an answer denying the material allegations of the complaint. The Company is involved in a number of claims, proceedings and litigations arising from its business and property ownership. In accordance with applicable accounting guidance, the Company establishes an accrual for legal proceedings if and when those matters present loss contingencies that are both probable and reasonably estimable. There may be exposure to loss in excess of any amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss (taking into account where applicable indemnification arrangements concerning suppliers and insurers) and the accrued amount, if any, thereof, and adjusts the amount as appropriate. As of the date of this Report, the Company has recorded immaterial accruals with respect to certain matters described below, in addition to other immaterial accruals for matters not described below. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. In each case, there is a reasonable possibility that a loss may be incurred, including a loss in excess of the applicable accrual. For matters where no accrual has been recorded, the possible loss or range of loss (including any loss in excess of the accrual) cannot, in the Company's view, be reasonably estimated because, among other things: (i) the remedies or penalties sought are indeterminate or unspecified; (ii) the legal and/or factual theories are not well developed; and/or (iii) the matters involve complex or novel legal theories or a large number of parties. 57 Note 10-Net Income per Common and Common Equivalent Share The following table shows the amounts used in computing net income per share and the weighted average number of shares of basic and of potentially dilutive common shares outstanding (shares in 000's): Net income attributable to Costco Weighted average basic shares RSUs Weighted average diluted shares Note 11-Commitments and Contingencies Legal Proceedings 2021 2020 2019 $ 5,007 $ 443,089 4,002 $ 442,297 3,659 439,755 1,257 444,346 1,604 3,168 443,901 442,923 The following table provides information for the Company's reportable segments: $166,761 2021 Operating income 1,270 6,708 1,339 177 265 1,781 2,612 272 704 1,176 3,588 2,317 5,182 23,492 39,589 5,962 1,677 59,268 $ 122,142 $ 22,434 $ 15,993 4,262 $ 141,398 $ 27,298 $ 27,233 $ 195,929 Total Depreciation and amortization Additions to property and equipment Property and equipment, net Total assets 2020 Total revenue Operating income Depreciation and amortization Additions to property and equipment Property and equipment, net Total assets 2019 Total revenue Operating income Depreciation and amortization Additions to property and equipment Property and equipment, net Total assets Disaggregated Revenue United States Operations Canadian Operations Other International Operations Total revenue 13,717 Kevin Green - Operations, Midwest Martin Groleau - GMM, Ecommerce Marketing, Operations & Contact Center, Canada Exhibit Number Jaime Gonzalez Senior Vice President, Merchandising - Fresh Foods Sarah George Executive Vice President and Chief Financial Officer Senior Vice President, General Manager - Midwest Region Richard A. Galanti Senior Vice President, General Manager - Los Angeles Region John B. Gaherty Senior Vice President, General Manager - Eastern Canadian Region Caton Frates Senior Vice President, General Manager - Southeast Region Gino Dorico Wendy Davis Senior Vice President, Pharmacy Victor A. Curtis Business Development Senior Vice President, Costco Wholesale Industries & Senior Vice President, Country Manager - Mexico Jeff Cole Senior Vice President, Costco Wholesale Industries & Richard C. Chavez Senior Vice President, General Manager - Asia Richard Chang Executive Vice President, Administration Senior Vice President, Merchandising - Non-Foods & Ecommerce Patrick J. Callans Senior Vice President, General Manager - Bay Area Region Claudine Adamo Jeffrey Abadir (c) Nominating and Governance Committee *2021 Committee Chair (b) Compensation Committee (a) Audit Committee Board Committees Former Executive Chairman, Frontier Communications Business Development CEO and Chairman, Grand Reserve Inn; Darby Greek Senior Vice President, Merchandising - Foods & Sundries Daniel M. Hines Senior Vice President, General Manager - Northeast Region Adam Self Executive Vice President, COO - Eastern Division Yoram B. Rubanenko Executive Vice President, Ancillary Businesses, Manufacturing & Business Centers Timothy L. Rose Senior Vice President, Country Manager - Canada Pierre Riel Executive Vice President, COO - Eastern & Canadian Divisions and Chief Diversity Officer Joseph P. Portera Senior Vice President, Ecommerce Mike Parrott Senior Vice President, General Manager - Northwest Region Senior Vice President, General Manager - Texas Region Nancy Griese Mario Omoss Executive Vice President, COO - International Division Robert E. Nelson III Senior Vice President, Construction & Purchasing James P. Murphy Ali Moayeri Executive Vice President, COO - Southwest Division & Mexico Russ Miller Senior Vice President, Real Estate Development David Messner Executive Vice President, COO - Northern Division Senior Vice President, Merchandising - Non-Foods & Ecommerce James Klauer Yoon Kim President and Chief Executive Officer W. Craig Jelinek Senior Vice President, Corporate Controller Senior Vice President, Treasury, Financial Planning & Investor Relations Maggie A. Wilderotter(b)(c) Trilogy International Partners, Inc. and Trilogy Equity Partners Chairman, First Avenue Entertainment LLLP; Senior Vice President and Corporate Daniel M. Hines /s/ DANIEL M. HINES Hamilton E. James Chairman of the Board 80 68 Director Mary (Maggie) A. Wilderotter /s/ MARY (MAGGIE) A. WILDEROTTER By Jeffrey S. Raikes Director By /s/ JEFFREY S. RAIKES Controller By By By By By /s/ HAMILTON E. JAMES By Director Susan L. Decker /s/ SUSAN L. DECKER (Principal Financial Officer) Officer and Director Executive Vice President, Chief Financial Richard A. Galanti /s/ SALLY JEWELL Sally Jewell Director (Principal Accounting Officer) /s/ KENNETH D. DENMAN Kenneth D. Denman Director John W. Stanton(b)* Former CEO, Bill and Melinda Gates Foundation Co-Founder, The Raikes Foundation; Jeffrey S. Raikes(c)* Vice Chairman of the Board, Berkshire Hathaway Inc.; Chairman of the Board, Daily Journal Corporation Charles T. Munger(a)* Director Emeritus Former Interim CEO, The Nature Conservancy; Former Secretary of the Interior; Former CEO and Director, Recreational Equipment Inc. Richard M. Libenson BOARD OF DIRECTORS Sally Jewell(a)(b) President and Chief Executive Officer, Costco Wholesale DIRECTORS AND OFFICERS W. Craig Jelinek Executive Vice Chairman, The Blackstone Group Chairman of the Board, Costco Wholesale; Hamilton E. James Chief Financial Officer, Costco Wholesale Executive Vice President and Richard A. Galanti and Chief Executive Officer, Emotient, Inc. General Partner, Sway Ventures; Former President Kenneth D. Denman(a)(c) Former President, Yahoo! Inc. CEO and Founder, Raftr; Susan L. Decker(a) Director John W. Stanton /s/ JOHN W. STANTON /s/ CHARLES T. MUNGER Charles T. Munger Director Walt Shafer /s/ RICHARD A. GALANTI Senior Vice President, General Manager - Lincoln Premium Poultry Louie Silveira David Skinner [THIS PAGE INTENTIONALLY LEFT BLANK] Janet Wiebke - GMM, Corporate Non-Foods Craig Wilson - Food Safety & Quality Assurance Earl Wiramanaden - GMM, Fresh Foods, International Jason Zapp - GMM, Non-Foods, Canada Karim Zeffouini - Operations, Northeast Jill Whittaker - Operations, San Diego Randy White - Construction Jack Weisbly - GMM, Corporate Non-Foods Mick Wendell - Construction Brenda Weber - Human Resources Adrian Thummler - Operations, Mexico Chris Tingman - GMM, International Tony Tran - GMM, Fresh Foods, Canada Kevin Trejo - Operations, Bay Area Diane Tucci - Country Manager, Spain Howard Tulk - Operations, Japan Tony Unan - Legal, International Todd Thull - Construction Michael Thompson - Operations, W. Canada H. Keith Thompson - Construction Cathy Tabor - Information Systems Mauricio Talayero - CFO, Mexico Ken Theriault - Country Manager, Japan Brian Thomas - Operations, Los Angeles Gary Swindells - Country Manager, France Steve Supkoff - Costco Logistics [THIS PAGE INTENTIONALLY LEFT BLANK] Joseph Stanovcak - Operations, San Diego Cheryl Smeby - GMM, Corporate Non-Foods Dick Snyder - Operations, Midwest Geoff Shavey - GMM, Corporate Non-Foods Stuart Shamis - Legal, Canada Scott Schruber - Operations, U.K. Art Salas - U.S. Optical Drew Sakuma - Operations, Bay Area Moises Saenz - Country Manager, Mexico Chris Rylance - Information Systems Jason Rothman - Assistant Accounting Controller Giro Rizzuti - GMM, Non-Foods, Canada Jeanne Rosolino - Operations, San Diego Scott Riekers - Operations, Northeast Frank Padilla - GMM, Bakery, Service Deli & Food Court Thomas Padilla - Operations, Northwest Daniel Parent - Operations, E. Canada Robert Parker - Operations, Business Centers Fred Paulsell - Corporate Purchasing Larry Pifer - Operations, E. Canada Nevin Pottinger - Operations, W. Canada Paul Pulver - Operations, Northeast Harish Rao - Information Systems Eric Orren - Construction, International James Stafford - GMM, Foods & Sundries, Northeast Patrick Noone - Country Manager, Australia Scott O'Brien - GMM, Corporate Foods & Sundries ADDITIONAL INFORMATION Copies of Costco's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q will be provided to any shareholder upon written request to Investor Relations, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, Washington 98027. Internet users can access recent sales and earnings releases, the annual report and SEC filings, as well as our Costco website, at http://www.costco.com. E-mail users can direct their investor relations questions to investor@costco.com. The SEC maintains a site that contains reports, proxy and information statements, and other information regarding issuers, such as the Company, that file electronically with the SEC at www.sec.gov. (b) Exhibits: The required exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference. COR000075 0421 Quality and value in 828 locations and on Costco.com WHOLESALE COSTCO FSC® C132107 Paper from responsible sources MIX www.fsc.org FSC Website: https://www.computershare.com/investor TDD for Hearing Impaired: (800) 490-1493 Outside U.S.: (201) 680-6578 Telephone: (800) 249-8982 Shareholder Information Louisville, KY 40202 Louisville, KY 40233 P.O. Box 505000 Correspondence should be mailed to: Costco Shareholder Relations Computershare Transfer Agent The Nasdaq Global Select Market Stock Symbol: COST Stock Exchange Listing 1918 Eighth Avenue, Suite 2900 Seattle, WA 98101 KPMG LLP Independent Public Accountants Thursday, January 20, 2022 at 2:00 PM Pacific www.virtualshareholdermeeting.com/COST2022 Annual Meeting Overnight correspondence should be sent to: 462 South 4th Street, Suite 1600 Pietro Nenci - GMM, Foods & Sundries and Ecommerce Foods & Sundries, Canada Jim Nelson - GMM, Corporate Non-Foods Keith Neal - GMM, Produce Julie Cruz - Operations, Southeast Michael Cotton - Operations, Northwest Don Coleman - Information Systems Frank Chislette - Operations, E. Canada Mike Cho - Country Manager, Korea Greg Carter - GMM, Foods & Sundries, Los Angeles Michael Casebier - Operations, Texas Walter Chao - Regional Manager, Taiwan Angela Chaparro - Operations, Los Angeles Jon Bubitz - GMM, Corporate Non-Foods Elaina Budge - GMM, Foods & Sundries, Bay Area Paul Cano - Operations, Bay Area Timothy Bowersock - Information Systems Kimberly Brown - Operations, Texas Marc-André Bally - Ancillary & Business Centers, Canada Tiffany Barbre - Assistant Accounting Controller Patty Bauer - Information Systems Christopher Bolves - Operations, Northwest Kathleen Ardourel - Global Ecommerce James Andruski - GMM, Foods & Sundries, W. Canada Michael Anderson - Information Systems Kim Alexander - GMM, Corporate Non-Foods Senior Vice President, CIO - Information Systems Ben Culver - Fuel, Car Wash & Ecommerce Photo Anthony Dattilo - Costco Logistics Senior Vice President, General Manager - San Diego Region Terry Williams Senior Vice President, Merchandising - Non Foods, Ecommerce, Membership & Marketing - Canadian Division Azmina Virani Executive Vice President, COO - Merchandising Ron M. Vachris & Publishing Senior Vice President, Membership, Marketing, Services Sandy Torrey Senior Vice President, Depots & Traffic John D. Thelan Senior Vice President, General Counsel & Corporate Secretary John Sullivan Senior Vice President, Pharmacy Senior Vice President, General Manager - Western Canadian Region Richard Stephens W. Richard Wilcox Dennis Davenport - Operations, Los Angeles Russ Decaire - GMM, Foods & Sundries, Northwest Guy Delmonte - Operations, Southeast Jeff Elliott - Treasury Robert Murvin - GMM, Foods & Sundries, Texas Joe Moore - Corporate Tax Leah Monica - Member Service Centers Erin Medved-Burnham - GMM, Corp. Foods & Sundries Daniel McMurray - Operations, Midwest Tracy Mauldin-Avery - GMM, Foods & Sundries, San Diego Susan McConnaha - Community Relations, Journeys, Diversity & Inclusion Mark Mattis - Information Systems Randy Martel - Operations, E. Canada Steve Mantanona - GMM, Merchandising, Mexico Ken Kimble - GMM, Corporate Foods & Sundries Ryan Knisley - Information Systems William Koza - Operations, Midwest Robert Leiss - Operations, Australia Robert Leuck - Operations, Northeast Torsten Lubach - Information Systems Jim Kenyon - GMM, Foods & Sundries, Midwest Peter Kelly - Country Manager, U.K. & Iceland Anna Johnston - Information Systems Teresa Jones - Depot Operations Steven Jewer - GMM, Foods & Sundries, E. Canada Jeff Ishida - Real Estate, Eastern Division Bob Huskey - GMM, Meat Scott Howe - Assistant Accounting Controller Ross Hunt - Administration, Canada Doug Holbrook - Deli, Meat & Produce Operations John Hickey - GMM, Foods & Sundries, Southeast Region Timothy Haser - Information Systems VICE PRESIDENTS David Harruff - Operations, Northwest Jim Harrison - Transportation Doris Harley - GMM, Foods & Sundries, Southeast Eric Harris - Warehouse Operations & Facilities Brad Hanna - Pharmacy Peter Gruening - Costco Travel Christopher Fleming - Operations, W. Canada Sheri Flies - Global Sustainability & Compliance Anthony Fontana - Operations, Northeast Jack Frank - Real Estate, Western Division Joseph Grachek III - Internal Audit Liz Elsner - Ecommerce Debbie Ells - GMM, Non-Foods, Canada Senior Vice President, General Manager - Europe Director EXECUTIVE AND SENIOR OFFICERS /s/ W. CRAIG JELINEK W. Craig Jelinek 2019 Stock Incentive Plan 10.3.3* Number Exhibit Description Exhibit 99 65 Agreement - Non-U.S. Employee Restricted Stock Unit Award 11/24/2019 12/23/2019 10-Q 2019 Stock Incentive Plan 10.3.2* Restricted Stock Unit Award Agreement-Employee 11/24/2019 12/23/2019 10-Q 2019 Stock Incentive Plan 10.3.1* 12/19/2014 DEF 14A Seventh Restated 2002 Stock Incentive Plan 10.3* 12/17/2019 DEF 14 2019 Incentive Plan 10.2* 9/2/2012 10/19/2012 Restricted Stock Unit Award 10-K Incorporated by Reference Herewith 10-Q Extension of the Term of the 10.5.1* Corporation and Costco Wholesale 2017, between W. Craig Jelinek Agreement, effective January 1, 10/15/2020 12/16/2016 11/20/2016 10-Q Executive Employment 10.5* 8-K Filed Fiscal 2021 Executive Bonus Plan 12/23/2019 11/24/2019 10-Q 2019 Stock Incentive Plan Letter Agreement for 2020 Performance- Based Restricted Stock Units- Executive 10.3.4* Director Agreement-Non-Executive 12/23/2019 11/24/2019 10-Q Filing Date Period Ended Form 10.4* Costco Wholesale Executive Health Plan 10.1* 10/7/2020 National Association, as Trustee, 3/25/2002 8-K First Supplemental Indenture between Costco Wholesale Corporation and U.S. Bank 4.1 Annual Meeting of Shareholders) 9/16/2020 1/29/2020 Wholesale Corporation (to be effective and first apply with respect to the Company's 2022 and 3.6 of the Bylaws of Costco 8-K Amendments to Sections 3.3, 3.4, 3.2.1 dated as of March 20, 2002 (incorporated by reference to Exhibits 4.1 and 4.2 to the Company's Current Report on the Form 8-K filed on March 25, 2002) Wholesale Corporation Bylaws as amended of Costco 3.2 amended of Costco Wholesale Corporation 3/12/2020 Filing Date Period Ended 2/16/2020 10-Q Form Filed Herewith Incorporated by Reference Articles of Incorporation as Exhibit Description 3.1 8-K 4.2 Form of 1.375% Senior Notes due June 20, 2027 8-K 8/30/2020 10-K Description of Common Stock 4.8 5/16/2017 8-K President, Chief Executive Officer and 4.7 May 18, 2024 5/16/2017 8-K Form of 2.750% Senior Notes due 4.6 May 18, 2022 5/16/2017 8-K Form of 2.300% Senior Notes due 4.5 April 20, 2032 4/17/2020 8-K Form of 1.750% Senior Notes due 4.4 April 20, 2030 4/17/2020 8-K Form of 1.600% Senior Notes due 4.3 4/17/2020 11/25/2018 12/20/2018 Executive Employment Form of 3.000% Senior Notes due May 18, 2027 2019, between W. Craig Jelinek 32.1 X Rule 13a14(a) Certifications 31.1 Registered Public Accounting Firm Consent of Independent 23.1 Subsidiaries of the Company 21.1 Co-Branded Credit Card Agreement 3/10/2021 2/14/2021 10-Q Section 1350 Certifications Seventh Amendment to Citi, N.A. Filing Date 10/11/2019 Incorporated by Reference 9/1/2019 10-K Sixth Amendment to Citi, N.A. Co- Branded Credit Card Agreement 10.8.6** Period Ended Form Herewith Exhibit Description Filed Exhibit Number 66 10.8.7** 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document Agreement, effective January 1, By By By October 5, 2021 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. and Director Executive Vice President, Chief Financial Officer /s/ RICHARD A. GALANTI Richard A. Galanti By COSTCO WHOLESALE CORPORATION (Registrant) October 5, 2021 Pursuant to the requirements of Section 13 or 15(d) 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. SIGNATURES 67 None. Item 16-Form 10-K Summary (c) Financial Statement Schedules―None. Portions of this exhibit have been omitted under a confidential treatment order issued by the Securities and Exchange Commission. X X ** * Management contract, compensatory plan or arrangement. Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) 104 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.CAL 60 Branded Credit Card Agreement Inline XBRL Taxonomy Extension Calculation Linkbase Document 2/17/2019 10-K Deferred Compensation Plan 10.7* Agreement 12/13/1999 14A Form of Indemnification 10.6 Corporation and Costco Wholesale 2021, between W. Craig Jelinek Agreement, effective January 1, Executive Employment 10.8** 10-Q 10.5.3* Corporation and Costco Wholesale 2020, between W. Craig Jelinek Agreement, effective January 1, Executive Employment 11/24/2019 12/23/2019 10-Q Extension of the Term of the 10.5.2* Corporation 3/13/2019 and Costco Wholesale Extension of the Term of the Citibank, N.A. Co-Branded Credit 11/22/2020 12/16/2020 9/1/2013 5/10/2015 10-Q Fifth Amendment to Citi, N.A. Co- 10-Q/A 10.8.5** Agreement Co-Branded Credit Card 3/15/2018 2/18/2018 10-Q 10.8.4** Branded Credit Card Agreement 8/28/2016 10/12/2016 10-K Third Amendment to Citi, N.A. Co- Fourth Amendment to Citi, N.A. 11/22/2015 12/17/2015 Agreement Co-Branded Credit Card 3/9/2016 2/14/2016 10-Q 10/16/2013 8/31/2015 Second Amendment to Citi, N.A. 10.8.2** Card Agreement 10-Q First Amendment to Citi, N.A. Co- Branded Credit Card Agreement 10.8.1** 10.8.3** Smaller reporting company Emerging growth company Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No □ ☑ Accelerated filer Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑ If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financials statements. If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ㅁㅁㅁ 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 ☑ No ☐ Large accelerated filer Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non- accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer,” “smaller reporting company,” and “emerging growth company" in Rule 12b-2 of the Exchange Act. Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑ Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). □ Non-accelerated filer Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑ Item 1B. The number of shares outstanding of the registrant's common stock as of October 3, 2023, was 442,740,572. Properties The NASDAQ Global Select Market Item 3. Unresolved Staff Comments Item 2. Risk Factors Item 1A. Business Item 1. PART I TABLE OF CONTENTS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 3, 2023 COSTCO WHOLESALE CORPORATION Portions of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on January 18, 2024, are incorporated by reference into Part III of this Form 10-K. DOCUMENTS INCORPORATED BY REFERENCE The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 12, 2023 was $221,351,787,419. Name of each exchange on which registered AUSTRALIAN CAPITAL TERRITORY-1 Common Stock, $.005 Par Value Washington, D.C. 20549 SECURITIES AND EXCHANGE COMMISSION UNITED STATES ☑ AUCKLAND -1 NEW ZEALAND FORM 10-K WESTERN AUSTRALIA - 2 COSTCO.COM.AU AUSTRALIA COSTCO.COM.TW CHIAYI CITY -1 HSINCHU CITY-1 KAOHSIUNG CITY - 2 NEW TAIPEI CITY - 3 TAICHUNG CITY - 2 TAINAN CITY-1 TAIPEI CITY-2 TAOYUAN CITY - 2 TAIWAN Legal Proceedings SHANGHAI - 2 JIANGSU -1 ZHEJIANG-2 NEW SOUTH WALES - 4 QUEENSLAND - 3 SOUTH AUSTRALIA - 1 VICTORIA - 4 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 3, 2023 or Trading Symbol Title of each class Securities registered pursuant to Section 12(b) of the Act: Registrant's telephone number, including area code: (425) 313-8100 (Address of principal executive offices) (Zip Code) 999 Lake Drive, Issaquah, WA 98027 (I.R.S. Employer Identification No.) 91-1223280 incorporation or organization) (State or other jurisdiction of Washington (Exact name of registrant as specified in its charter) Costco Wholesale Corporation Commission file number 0-20355 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COST Item 4. 3 Page PART IV 62 62 62 233 Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services Item 15. Item 14. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 12. 62 62 22 Executive Compensation Item 13. Exhibits, Financial Statement Schedules Item 16. Form 10-K Summary CHINA 4 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 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 often sell inventory before we are required to pay for it, even while taking advantage of early payment discounts. General We report on a 52/53-week fiscal year, consisting of thirteen four-week periods and ending on the Sunday nearest the end of August. The first three quarters consist of three periods each, and the fourth quarter consists of four periods (five weeks in the thirteenth period in a 53-week year). The material seasonal impact in our operations is increased net sales and earnings during the winter holiday season. References to 2023 relate to the 53-week fiscal year ended September 3, 2023. References to 2022 and 2021 relate to the 52-week fiscal years ended August 28, 2022, and August 29, 2021. Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983, in Seattle, Washington. We are principally engaged in the operation of membership warehouses in the United States (U.S.) and Puerto Rico, Canada, Mexico, Japan, the United Kingdom (U.K.), Korea, Australia, Taiwan, China, Spain, France, Iceland, New Zealand, and Sweden. Costco operated 861, 838, and 815 warehouses worldwide at September 3, 2023, August 28, 2022, and August 29, 2021. The Company operates e-commerce websites in the U.S., Canada, Mexico, the U.K., Korea, Taiwan, Japan, and Australia. Our common stock trades on the NASDAQ Global Select Market, under the symbol "COST." Item 1-Business PART I 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 and may relate to such matters as net 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. In some cases, forward-looking statements can be identified because they contain words such as "anticipate,” “believe,” "continue," "could,” “estimate,” “expect,” “intend,” “likely,” “may,” “might,” “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, including, without limitation, the factors set forth in the section titled "Item 1A-Risk Factors", and other factors noted in the section titled "Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the consolidated financial statements and related notes in Item 8 of this Report. 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. INFORMATION RELATING TO FORWARD LOOKING STATEMENTS 67 66 63 866 Signatures Item 11. Directors, Executive Officers and Corporate Governance Item 10. PART III 21 Management's Discussion and Analysis of Financial Condition and Results of Operations 20 19 120 Reserved Item 6. Item 7. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities PART II Item 5. 19 19 19 18 9 4 Item 7A. Mine Safety Disclosures Quantitative and Qualitative Disclosures About Market Risk Item 8. 62 62 61 61 2 2 2 2 Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Item 9C. Other Information Item 9B. Controls and Procedures Item 9A. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9. 31 Financial Statements and Supplementary Data 29 YAMAGATA-1 COR000296 1623 SHIZUOKA-1 TOCHIGI-1 TOKYO-1 United States and 108 Canada 40 México S COSTCO 871 locations as of December 31, 2023 EWHOLESALE Ron Vachris President & COO In Valen Chief Executive Officer Craig Jelinek Cray Jelek Sincerely, Finally, we would like to thank Costco members around the world. Thank you for your loyal support and trust in Costco. May the year ahead bring you and your families good health, happiness, peace and prosperity. Puerto Rico We extend our deepest gratitude and compliments to our more than 316,000 employees. Their exemplary service to our members, dedication to maintaining our core values and culture, and support of one another is why our employees are our greatest competitive advantage. 600 COSTCO.COM ALABAMA - 4 NEW HAMPSHIRE - 1 NEW JERSEY - 21 NEW MEXICO - 3 NEW YORK - 19 NORTH CAROLINA - 10 NORTH DAKOTA - 2 MONTANA -5 NEBRASKA-3 NEVADA - 8 MISSOURI -9 MISSISSIPPI-1 MINNESOTA - 13 MASSACHUSETTS - 6 MICHIGAN - 16 MARYLAND - 11 MAINE -1 LOUISIANA - 3 KENTUCKY-4 IOWA 4 KANSAS-3 HAWAII - 7 IDAHO - 7 ILLINOIS-23 INDIANA - 9 GEORGIA - 17 FLORIDA - 31 ALASKA - 4 ARIZONA - 20 ARKANSAS-1 CALIFORNIA - 135 COLORADO-16 CONNECTICUT - 8 DELAWARE -1 UNITED STATES OHIO - 13 As this letter was being finalized, we were saddened to learn that Charlie Munger had peacefully passed away, just five weeks shy of his hundredth birthday. Charlie was a long-time fan of Costco, serving on our Board for more than 26 years. No one loved Costco more than Charlie and our company benefited greatly from his wisdom, his business acumen, his passion for our business, his strong moral ethos and his common sense. We will miss Charlie dearly and will take with us the many fond memories that he bestowed on us, personally, and on our company. We are dedicated more than ever to operate in a sustainable manner. Our merchandise teams concentrated on decreasing packaging and plastic use, utilizing post-consumer recycled content, and finding ways to increase sell units on pallets, trucks and containers, which maximizes space and therefore reduces emissions and costs. We also continue to focus on diversity through inclusion, employee development, community involvement and supplier diversity. Embracing differences is important to the growth of our company, as it leads to opportunities, innovation and employee satisfaction. WARCREE GRIPON CO COSTCO Donovan KIRKLA 680 CONSUMER PACK ANIC BANAN QUALITY FRE OLG X80CK 85-214.8 c SONY CLE 1599.99 COSTCO The coming months will see changes at the executive level. After nearly two years as Costco's President and COO, Ron Vachris will transition to the role of CEO, with Craig Jelinek retiring from the CEO role after serving in that capacity for more than twelve years. As has been the case since Ron became President and COO, we expect a smooth and seamless transition, maintaining the culture and operational excellence that Costco has been known for throughout many years. JULIE COSTCO Our ecommerce business provides a broader selection of merchandise that complements our warehouses. This includes appliances, home furnishings, consumer electronics, lawn and garden, health and beauty aids, apparel, and 2-Day Grocery Delivery. Costco Next, a Costco marketplace that offers an additional selection of products, has over 60 suppliers and continues to grow. This year we introduced new Kirkland Signature ™ items, which illustrate our commitment to provide cost savings and improve quality. Our new bakery items included a peanut-butter chocolate pie, a lemon blueberry loaf, and a lemon meringue cheesecake; each was met with tremendous enthusiasm. Other new KS items included cat food, garlic butter shrimp, barbecue grills and yellow golf balls, each showing significant savings over comparable brand name products. In fiscal year 2023, Costco's expansion included opening 23 net new locations: 13 in the U.S., three in China, two each in Japan and Australia and one in South Korea, in addition to our first warehouses in New Zealand (Auckland) and Sweden (Stockholm). Net sales for the 53-week year totaled $237.7 billion, an increase of 7%, with a comparable sales increase of 3%. Net income was $6.3 billion, or $14.16 per diluted share, an increase of 8%. Revenue from membership fees increased 8% to $4.6 billion, and our membership base grew to nearly 128 million cardholders, with a 90% renewal rate. The successes and challenges we faced in fiscal year 2023 reinforced the foundational business model of Costco, focusing on the most productive items and bringing quality goods to market in volume. Although we experienced inflationary pressures and general economic uncertainties, our buying and operations staff ensured that quality and value remained priorities. Forty years ago this past September, the first Costco warehouse opened in Seattle. We grew to nearly three billion dollars in sales in less than six years. Our operating philosophy then and now remains simple: provide our members quality merchandise and services at the lowest possible prices. We achieve this through our commitment to carrying out our mission statement and adhering to our code of ethics. Dear Costco Shareholders, December 7, 2023 XXL THAO COSTCO FISCAL YEAR ENDED SEPTEMBER 3, 2023 ANNUAL REPORT 2023 WHOLESALE KING OKLAHOMA - 4 TOYAMA-1 PENNSYLVANIA - 11 FRANCE MADRID - 2 BISCAY-1 ANDALUCÍA-1 SPAIN ICELAND KAUPTÚN - 1 ÎLE-DE-FRANCE - 2 COSTCO.CO.UK ENGLAND - 25 SCOTLAND -3 WALES - 1 1 New Zealand 15 Australia 14 Spain UNITED KINGDOM SWEDEN STOCKHOLM-1 KOREA COSTCO.CO.KR BUSAN -1 CHEONAN -1 DAEGU - 2 OREGON - 13 SAITAMA - 2 OSAKA - 2 MIYAGI -1 KYOTO-1 KUMAMOTO-1 ISHIKAWA-1 KANAGAWA - 3 FUKUOKA -2 GIFU-1 GUNMA - 2 HIROSHIMA -1 HOKKAIDO-2 HYOGO - 2 IBARAKI – 2 CHIBA - 3 AICHI - 2 COSTCO.CO.JP JAPAN ULSAN -1 SEJONG-1 SEOUL - 4 GYEONGGI-DO-5 INCHEON - 1 2 France DAEJEON-1 GIMHAE - 1 United YUCATÁN - 1 TABASCO-1 VERACRUZ-2 SONORA - 1 NUEVO LEÓN - 3 PUEBLA - 1 QUERÉTARO-1 QUINTANA ROO - 1 SAN LUIS POTOSÍ -1 SINALOA - 1 MICHOACÁN - 1 MORELOS-1 BAJA CALIFORNIA - 4 BAJA CALIFORNIA SUR - 1 CHIHUAHUA - 2 CIUDAD DE MÉXICO - 5 COAHUILA -1 GUANAJUATO - 3 COSTCO.COM.MX AGUASCALIENTES - 1 MÉXICO VIRGINIA - 17 WASHINGTON - 33 WISCONSIN - 11 WASHINGTON, D.C. - 1 PUERTO RICO - 4 VERMONT -1 UTAH-14 TEXAS-38 29 Kingdom SOUTH CAROLINA - 6 SOUTH DAKOTA - 1 TENNESSEE - 7 CANADA COSTCO.CA JALISCO - 3 MÉXICO - 5 BRITISH COLUMBIA - 14 MANITOBA - 3 Iceland ALBERTA - 19 China Taiwan 33 5 18 Korea Japan Sweden SASKATCHEWAN - 3 1 QUÉBEC - 23 ONTARIO 40 NEW BRUNSWICK - 3 NEWFOUNDLAND AND LABRADOR-1 NOVA SCOTIA - 2 1 Executive Vice President, Chief Operating Officer, Southwest Division. Mr. Frates was Senior Vice President, Los Angeles Region, from 2015 to May 2022. 2019 61 2021 Executive Vice President, Merchandising. Ms. Adamo was Senior Vice President, Non-Foods, from 2018 to February 2022, and Vice President, Non-Foods, from 2013 to 2018. 59 2021 63 Pierre Riel 2022 53 2022 55 Executive Vice President, Chief Operating Officer, International Division. Mr. Riel was Senior Vice President, Country Manager, Canada, from 2019 to March 2022, and Senior Vice President, Eastern Canada Region, from 2001 to 2019. 2022 Executive Vice President, General Counsel & Corporate Secretary. Mr. Sullivan has been General Counsel since 2016 and Corporate Secretary since 2010. 60 Item 1A-Risk Factors 80 Executive Vice President, Chief Operating Officer, Eastern Division. Mr. Rubanenko was Senior Vice President and General Manager, Southeast Region, from 2013 to September 2021, and Vice President, Regional Operations Manager for the Northeast Region, from 1998 to 2013. Executive Vice President and Chief Financial Officer. Mr. Galanti 1993 has been a director since January 1995. Senior Executive Vice President, U.S. Operations. Mr. Miller was Executive Vice President, Chief Operating Officer, Southwest Division and Mexico, from January 2018 to May 2022. Mr. Miller was Senior Vice President, Western Canada Region, from 2001 to January 2018. The risks described below could materially and adversely affect our business, financial condition and results of operations. We could also be affected by additional risks that apply to all companies operating in the U.S. and globally, as well as other risks that are not presently known to us or that we currently consider to be immaterial. These Risk Factors should be carefully reviewed in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and our consolidated financial statements and related notes in Item 8 of this Report. Executive Officer Since Age 71 1995 2016 58 67 52 Executive Vice President, Chief Operating Officer, Northern Division. Mr. Klauer was Senior Vice President, Non-Foods and E- commerce Merchandise, from 2013 to January 2018. 2018 61 2018 66 Russ D. Miller Patrick J. Callans Yoram B. Rubanenko John Sullivan Claudine E. Adamo Caton Frates Executive Vice President, Administration. Mr. Callans was Senior Vice President, Human Resources and Risk Management, from 2013 to December 2018. 9 13 We are highly dependent on the financial performance of our U.S. and Canadian operations. We accept payments using a variety of methods, including select credit and debit cards, cash and checks, co-brand cardholder rebates, Executive member 2% reward certificates, and our shop card. As we offer new payment options to our members, we may be subject to additional rules, regulations, compliance requirements, and higher fraud losses. For certain payment methods, we pay interchange and other related acceptance fees, along with additional transaction processing fees. We rely on third parties to provide payment transaction processing services for credit and debit cards and our shop card. It could disrupt our business if these parties become unwilling or unable to provide these services to us. We are also subject to fee increases by these service providers. We must comply with evolving payment card association and network operating rules, including data security rules, certification requirements and rules governing electronic funds transfers. For example, we are subject to Payment Card Industry Data Security Standards, which contain compliance guidelines and standards with regard to our security surrounding the physical and electronic storage, processing and transmission of individual cardholder data. If our internal systems are breached or compromised, we may be liable for card re-issuance costs, subject to fines and higher transaction fees and lose our ability to accept card payments from our members, and our business and operating results could be adversely affected. Our failure to offer payment methods desired by our members could create a competitive disadvantage. We might sell products that cause illness or injury to our members, harm to our reputation, and expose us to litigation. If our merchandise, including food and prepared food products for human consumption, drugs, children's products, pet products and durable goods, do not meet or are perceived not to meet applicable safety or labeling standards or our members' expectations, we could experience lost sales, increased costs, litigation or reputational harm. The sale of these items involves the risk of illness or injury to our members. Such illnesses or injuries could result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, manufacturing, storage, handling and transportation phases, or faulty design. Our suppliers are generally contractually required to comply with product safety laws, and we are dependent on them to ensure that the products we buy comply with safety and other standards. While we are subject to governmental inspection and regulations and work to comply in all material respects with applicable laws and regulations, we cannot be sure that consumption or use of our products will not cause illness or injury or that we will not be subject to claims, lawsuits, or government investigations relating to such matters, resulting in costly product recalls and other liabilities that could adversely affect our business and results of operations. Even if a product liability claim is unsuccessful or is not fully pursued, negative publicity could adversely affect our reputation with existing and potential members and our corporate and brand image, and these effects could be long-term. If we do not successfully develop and maintain a relevant omnichannel experience for our members, our results of operations could be adversely impacted. Omnichannel retailing is rapidly evolving, and we must keep pace with changing member expectations and new developments by our competitors. Our members are increasingly using mobile phones, tablets, computers, and other devices to shop and to interact with us through social media. We are making investments in our websites and mobile applications. If we are unable to make, improve, or develop relevant member-facing technology in a timely manner, our ability to compete and our results of operations could be adversely affected. Inability to attract, train and retain highly qualified employees could adversely impact our business, financial condition and results of operations. Our success depends on the continued contributions of our employees, including members of our senior management and other key operations, IT, merchandising and administrative personnel. Failure to identify President and Chief Operating Officer. Mr. Vachris has been a director since February 2022. Mr. Vachris previously served as Executive Vice President of Merchandising from June 2016 to January 2022, as Senior Vice President, Real Estate Development, from August 2015 to June 2016, and Senior Vice President, General Manager, Northwest Region, from 2010 to July 2015. and implement a succession plan for senior management could negatively impact our business. We must attract, train and retain a large and growing number of qualified employees, while controlling related labor costs and maintaining our core values. Our ability to control labor and benefit costs is subject to numerous internal and external factors, including regulatory changes, prevailing wage rates, union relations and healthcare and other insurance costs. We compete with other retail and non-retail businesses for these employees and invest significant resources in training and motivating them. There is no assurance that we will be able to attract or retain highly qualified employees in the future, which could have a material adverse effect on our business, financial condition and results of operations. We may incur property, casualty or other losses not covered by our insurance. Claims for employee health care benefits, workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability, inventory loss, and other exposures are funded predominantly through self-insurance. Insurance coverage is maintained for certain risks to limit exposures arising from very large losses. The types and amounts of insurance may vary from time to time based on our decisions with respect to risk retention and regulatory requirements. Significant claims or events, regulatory changes, a substantial rise in costs of health care or costs to maintain our insurance or the failure to maintain adequate insurance coverage could have an adverse impact on our financial condition and results of operations. Although we maintain specific coverages for catastrophic property losses, we still bear a significant portion of the risk of losses incurred as a result of any physical damage to, or the destruction of, any warehouses, depots, manufacturing or home office facilities, loss or spoilage of inventory, and business interruption. Such losses could materially impact our cash flows and results of operations. Market and Other External Risks We face strong competition from other retailers and warehouse club operators, which could adversely affect our business, financial condition and results of operations. The retail business is highly competitive. We compete for members, employees, sites, products and services and in other important respects with a wide range of local, regional and national wholesalers and retailers, both in the United States and in foreign countries, including other warehouse-club operators, supermarkets, supercenters, online retailers, gasoline stations, hard discounters, department and specialty stores and operators selling a single category or narrow range of merchandise. Such retailers and warehouse club operators compete vigorously and in a variety of ways, including pricing, selection and availability, services, location, convenience, store hours, and the attractiveness and ease of use of websites and mobile applications. The evolution of retailing in online and mobile channels has improved the ability of customers to comparison shop, which has enhanced competition. Some competitors have greater financial resources and technology capabilities, better access to merchandise, and greater market penetration than we do. Our inability to respond effectively to competitive pressures, changes in the retail markets or customer expectations could result in lost market share and negatively affect our financial results. General economic factors, domestically and internationally, may adversely affect our business, financial condition, and results of operations. Higher energy and gasoline costs, inflation, levels of unemployment, healthcare costs, consumer debt levels, foreign-currency exchange rates, unsettled financial markets, weaknesses in housing and real estate markets, reduced consumer confidence, changes and uncertainties related to government fiscal, monetary and tax policies including changes in interest rates, tax rates, duties, tariffs, or other restrictions, sovereign debt crises, pandemics and other health crises, and other economic factors could adversely affect demand for our products and services, require a change in product mix, or impact the cost of or ability to purchase inventory. Additionally, trade-related actions in various countries, particularly China and the United States, have affected the costs of some of our merchandise. The degree of our exposure is dependent on (among other things) the type of goods, rates imposed, and timing of the tariffs. The impact 14 We are subject to payment-related risks. 12 The potential impacts of a cybersecurity attack include reputational damage, litigation, government enforcement actions, penalties, disruption to systems and operations, unauthorized release of confidential or otherwise protected information, corruption of data, diminution in the value of our investment in IT systems and increased cybersecurity protection and remediation costs. This could adversely affect our competitiveness, results of operations and financial condition and, critically in light of our business model, loss of member confidence. Further, the insurance coverage we maintain and indemnification arrangements with third parties may be inadequate to cover claims, costs, and liabilities relating to cybersecurity incidents. In addition, data we collect, store and process is subject to a variety of U.S. and international laws and regulations, such as the European Union's General Data Protection Regulation, California Consumer Privacy Act, Health Insurance Portability and Accountability Act, and other privacy and cybersecurity laws across the various states and around the globe, which may carry significant potential penalties for noncompliance. Increased security threats and more sophisticated cyber misconduct pose a risk to our systems, networks, products and services. We rely upon IT systems and networks, some of which are managed by or belong to third parties, including suppliers, partners, vendors, and service providers. Additionally, we collect, store and process sensitive information relating to our business, members, employees, and other third parties. Operating these IT systems and networks, and processing and maintaining this data, in a secure manner, is critical to our business operations and strategy. Increased remote work has also increased the possible attack surfaces. Attempts to gain unauthorized access to systems, networks and data, both ours and third parties with whom we work, are increasing in frequency and sophistication, and in some cases, these attempts are successful. Cybersecurity attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer crimes and advanced persistent threats. Phishing attacks have emerged as particularly prominent, including as vectors for ransomware attacks, which have increased in breadth and frequency. While we train our employees as part of our security efforts, that training cannot be completely effective. These threats pose a risk to the security of our systems and networks and the confidentiality, integrity, and availability of our data. Our IT systems and networks, or those managed by third parties such as cloud providers or suppliers that otherwise host or have access to confidential information, periodically have vulnerabilities, which may go unnoticed for a period of time. Our logging capabilities, or the logging capabilities of third parties, are also not always complete or sufficiently detailed, affecting our ability to fully investigate and understand the scope of security events. While our cybersecurity and compliance efforts seek to mitigate such risks, there can be no guarantee that the actions and controls we and our third-party service providers have implemented and are implementing, will be sufficient to protect our systems, information or other property. Our financial and operational performance is highly dependent on our U.S. and Canadian operations, which comprised 87% and 84% of net sales and operating income in 2023. Within the U.S., we are highly dependent on our California operations, which comprised 27% of U.S. net sales in 2023. Our California market, in general, has a larger percentage of higher volume warehouses as compared to our other domestic markets. Any substantial slowing or sustained decline in these operations could materially adversely affect our business and financial results. Declines in financial performance of our U.S. operations, particularly in California, and our Canadian operations could arise from, among other things: slow growth or declines in comparable warehouse sales (comparable sales); negative trends in operating expenses, including increased labor, healthcare and energy costs; failing to meet targets for warehouse openings; cannibalizing existing locations with new warehouses; shifts in sales mix toward lower gross margin products; changes or uncertainties in economic conditions in our markets, including higher levels of unemployment and depressed home values; and failing to consistently provide high quality and innovative new products. We may be unsuccessful implementing our growth strategy, including expanding our business in existing markets and new markets, and integrating acquisitions, which could have an adverse impact on our business, financial condition and results of operations. Our growth is dependent, in part, on our ability to acquire property and build or lease new warehouses and depots. We compete with other retailers and businesses for suitable locations. Local land use and other regulations restricting the construction and operation of our warehouses and depots, as well as local community actions opposed to the location of our warehouses or depots at specific sites and the adoption of local laws restricting our operations and environmental regulations, may impact our ability to find suitable locations and increase the cost of sites and of constructing, leasing and operating warehouses and depots. We also may have difficulty negotiating leases or purchase agreements on acceptable terms. In addition, certain jurisdictions have enacted or proposed laws and regulations that would prevent or restrict the operation or expansion plans of certain large retailers and warehouse clubs, including us. Failure to effectively manage these and other similar factors may affect our ability to timely build or lease and operate new warehouses and depots, which could have a material adverse effect on our future growth and profitability. We seek to expand in existing markets to attain a greater overall market share. A new warehouse may draw members away from our existing warehouses and adversely affect their comparable sales performance, member traffic, and profitability. We intend to continue to open warehouses in new markets. Associated risks include difficulties in attracting members due to a lack of familiarity with us, attracting members of other wholesale club operators, our lesser familiarity with local member preferences, and seasonal differences in the market. Entry into new markets may bring us into competition with new competitors or with existing competitors with a large, established market presence. We cannot ensure that new warehouses and new e-commerce websites will be profitable and future profitability could be delayed or otherwise materially adversely affected. We have made and may continue to make investments and acquisitions to improve the speed, accuracy and efficiency of our supply chains and delivery channels. The effectiveness of these investments can be less predictable than opening new locations and might not provide the anticipated benefits or desired rates of return. 10 10 Our failure to maintain membership growth, loyalty and brand recognition could adversely affect our results of operations. Business and Operating Risks Membership loyalty and growth are essential to our business. The extent to which we achieve growth in our membership base, increase the penetration of Executive membership, and sustain high renewal rates materially influences our profitability. Damage to our brands or reputation may negatively impact comparable sales, diminish member trust, and reduce renewal rates and, accordingly, net sales and membership fee revenue, negatively impacting our results of operations. Disruptions in merchandise distribution or processing, packaging, manufacturing, and other facilities could adversely affect sales and member satisfaction. We depend on the orderly operation of the merchandise receiving and distribution process, primarily through our depots. We also rely upon processing, packaging, manufacturing and other facilities to support our business, which includes the production of certain private-label items. Although we believe that our operations are efficient, disruptions due to fires, tornadoes, hurricanes, earthquakes, pandemics or other extreme weather conditions or catastrophic events, labor issues or other shipping problems may result in delays in the production and delivery of merchandise to our warehouses, which could adversely affect sales and the satisfaction of our members. Our e-commerce operations depend heavily on third- party and in-house logistics providers and is negatively affected when these providers are unable to provide services in a timely fashion. We may not timely identify or effectively respond to consumer trends, which could negatively affect our relationship with our members, the demand for our products and services, and our market share. It is difficult to consistently and successfully predict the products and services that our members will desire. Our success depends, in part, on our ability to identify and respond to trends in demographics and consumer preferences. Failure to identify timely or effectively respond to changing consumer tastes, preferences (including those relating to environmental, social and governance practices) and spending patterns could negatively affect our relationship with our members, the demand for our products and services, and our market share. If we are not successful at predicting our sales trends and adjusting our purchases accordingly, we may have excess inventory, which could result in additional markdowns, or we may experience out-of-stock positions and delivery delays, which could result in higher costs, both of which would reduce our operating performance. This could have an adverse effect on net sales, gross margin and operating income. Availability and performance of our information technology (IT) systems are vital to our business. Failure to successfully execute IT projects and have IT systems available to our business would adversely impact our operations. IT systems play a crucial role in conducting our business. These systems are utilized to process a very high volume of transactions, conduct payment transactions, track and value our inventory and produce reports critical for making business decisions. Failure or disruption of these systems could have an adverse impact on our ability to buy products and services from our suppliers, produce goods in our manufacturing plants, move the products in an efficient manner to our warehouses and sell products to our members. We are undertaking large technology and IT transformation projects. The failure of these projects could adversely impact our business plans and potentially impair our day to day business operations. Given the high volume of transactions we process, it is important that we build strong digital resiliency to prevent disruption from events such as power outages, computer and telecommunications 11 failures, viruses, internal or external security breaches, errors by employees, and catastrophic events such as fires, earthquakes, tornadoes and hurricanes. Any debilitating failure of our critical IT systems, data centers and backup systems would require significant investments in resources to restore IT services and may cause serious impairment in our business operations including loss of business services, increased cost of moving merchandise and failure to provide service to our members. We are currently making substantial investments in maintaining and enhancing our digital resiliency and failure or delay in these projects could be costly and harmful to our business. Failure to deliver IT transformation efforts efficiently and effectively could result in the loss of our competitive position and adversely impact our financial condition and results of operations. Insufficient IT capacity could also impact our capacity for timely, complete and accurate financial and non-financial reporting required by law. We are required to maintain the privacy and security of personal and business information amidst multiplying threat landscapes and in compliance with privacy and data protection regulations globally. Failure to do so could damage our business, including our reputation with members, suppliers and employees, cause us to incur substantial additional costs, and become subject to litigation and regulatory action. We sell many products under our Kirkland Signature brand. Maintaining consistent product quality, competitive pricing, and availability of these products is essential to developing and maintaining member loyalty. These products also generally carry higher margins than national brand products and represent a growing portion of our overall sales. If the Kirkland Signature brand experiences a loss of member acceptance or confidence, our sales and gross margin results could be adversely affected. Chief Executive Officer. Mr. Jelinek has been a director since February 2010. Mr. Jelinek previously was President and CEO from January 2012 to February 2022. He was President and Chief Operating Officer from February 2010 to December 2011. Prior to that he was Executive Vice President, Chief Operating Officer, Merchandising since 2004. 208,000 Jim C. Klauer 2023 2022 2021 58,800 54,000 50,200 12,200 11,800 11,500 71,000 65,800 61,700 56,900 53,100 49,900 127,900 118,900 111,600 Paid cardholders (except affiliates) are eligible to upgrade to an Executive membership in the U.S., for an additional annual fee of $60. Executive memberships are also available in Canada, Mexico, the U.K., Japan, Korea, Taiwan, and Australia, for which the additional fee varies. Executive members earn a 2% reward on qualified purchases (generally up to a maximum reward of $1,000 per year), redeemable at Costco warehouses. This program offers services that vary by state and country and provide access to additional savings and benefits on various business and consumer services, such as auto and home insurance, the Costco auto purchase program, and check printing. Executive members totaled 32.3 million and represented 45.4% of paid members. The sales penetration of Executive members represented approximately 72.8% of worldwide net sales in 2023. Total cardholders 6 Household cards Business, including affiliates Our warehouses on average operate on a seven-day, 70-hour week. Gasoline operations generally have extended hours. Because the hours of operation are shorter than many other retailers, and due to other efficiencies inherent in a warehouse-type operation, labor costs are lower relative to the volume of sales. Merchandise is generally stored on racks above the sales floor and displayed on pallets containing large quantities, reducing labor required. In general, with variations by country, our warehouses accept certain credit cards, including Costco co-branded cards, debit cards, cash and checks, Executive member 2% reward certificates, co-brand cardholder rebates, and our proprietary stored-value card (shop card). Our strategy is to provide our members with a broad range of high-quality merchandise at prices we believe are consistently lower than elsewhere. We seek to limit most items to fast-selling models, sizes, and colors. We carry less than 4,000 active stock keeping units (SKUs) per warehouse in our core warehouse business, significantly less than other broadline retailers. We average anywhere from 9,000 to 11,000 SKUs online, some of which are also available in our warehouses. Many consumable products are offered for sale in case, carton, or multiple-pack quantities only. In keeping with our policy of member satisfaction, we generally accept returns of merchandise. On certain electronic items, we typically have a 90-day return policy and provide, free of charge, technical support services, as well as an extended warranty. Additional third-party warranty coverage is sold on certain electronic items. We offer merchandise and services in the following categories: Core Merchandise Categories (or core business): • Foods and Sundries (including sundries, dry grocery, candy, cooler, freezer, deli, liquor, and tobacco) Non-Foods (including major appliances, electronics, health and beauty aids, hardware, garden and patio, sporting goods, tires, toys and seasonal, office supplies, automotive care, postage, tickets, apparel, small appliances, furniture, domestics, housewares, special order kiosk, and jewelry) Fresh Foods (including meat, produce, service deli, and bakery) Warehouse Ancillary (includes gasoline, pharmacy, optical, food court, hearing aids, and tire installation) and Other Businesses (includes e-commerce¹, business centers¹, travel, and other) Warehouse ancillary businesses operate primarily within or next to our warehouses, encouraging members to shop more frequently. The number of warehouses with gas stations varies significantly by country, and we have no gasoline business in Korea, China, or Sweden. We operated 692 gas stations at the end of 2023. Our gasoline business represented approximately 13% of total net sales in 2023. 1 E-commerce and business centers are allocated to the appropriate merchandise categories in the Net Sales portion of Item 7. 5 Our other businesses sell products and services that complement our warehouse operations (core and warehouse ancillary businesses). Our e-commerce operations give members convenience and a broader selection of goods and services. Net sales for e-commerce represented approximately 6% of total net sales in 2023. This figure does not include other services we offer online in certain countries such as business delivery, travel, same-day grocery, and various other services. Our business centers carry items tailored specifically for food services, convenience stores and offices, and offer walk-in shopping and deliveries. Business centers are included in our total warehouse count. Costco Travel offers vacation packages, car rentals, cruises, hotels, and other travel products exclusively for Costco members (offered in the U.S., Canada, and the U.K.). We have direct buying relationships with many producers of brand-name merchandise. We do not obtain a significant portion of merchandise from any one supplier. When sources of supply become unavailable, we seek alternatives. We also purchase and manufacture private-label merchandise, as long as quality and member demand are high and the value to our members is significant. Certain financial information for our segments and geographic areas is included in Note 11 to the consolidated financial statements included in Item 8 of this Report. Membership Our members may utilize their memberships at all of our warehouses and websites. Gold Star memberships are available to individuals; Business memberships are limited to businesses, including individuals with a business license, retail sales license, or comparable document. Business members may add additional cardholders (affiliates), to which the same annual fee applies. Affiliates are not available for Gold Star members. Our annual fee for these memberships is $60 in the U.S. and varies in other countries. All paid memberships include a free household card. Gold Star Total paid members Human Capital Our Code of Ethics requires that we "Take Care of Our Employees," which is fundamental to the obligation to "Take Care of Our Members." We must also carefully control our selling, general and administrative (SG&A) expenses, so that we can sell high quality goods and services at low prices. Compensation and benefits for employees is our largest expense after the cost of merchandise and is carefully monitored. Employee Base Well Being Costco strives to provide our employees with competitive wages and excellent benefits. In March 2023, we increased the top of the wage scales by 85 cents per hour in the U.S, Canada and Puerto Rico. In September of 2023, we increased the starting wage to at least $18.50 for all entry-level positions in the U.S. We have also expanded our benefits in the U.S. to include additional mental health support for children and adults at little to no cost to our employees. Costco is firmly committed to protecting the health and safety of our members and employees and to serving our communities. 7 For more detailed information regarding our programs and initiatives, see “Employees" within our Sustainability Commitment (located on our website). The Sustainability Commitment and other information on our website are not incorporated by reference into and do not form any part of this Annual Report. Competition Our industry is highly competitive, based on factors such as price, merchandise quality and selection, location, convenience, distribution strategy, and customer service. We compete on a worldwide basis with global, national, and regional wholesalers and retailers, including supermarkets, supercenters, online retailers, gasoline stations, hard discounters, department and specialty stores, and operators selling a single category or narrow range of merchandise. Walmart, Target, Kroger, and Amazon are among our significant general merchandise retail competitors in the U.S. We also compete with other warehouse clubs, including Walmart's Sam's Club and BJ's Wholesale Club in the U.S. Many of the major metropolitan areas in the U.S. and certain of our Other International locations have multiple competing clubs. Intellectual Property We believe that, to varying degrees, our trademarks, trade names, copyrights, proprietary processes, trade secrets, trade dress, domain names and similar intellectual property add significant value to our business and are important to our success. We have invested significantly in the development and protection of our well-recognized brands, including the Costco Wholesale trademarks and our private- label brand, Kirkland Signature. We believe that Kirkland Signature products are high quality, offered at prices that are generally lower than national brands, and help lower costs, differentiate our merchandise offerings, and generally earn higher margins. We expect to continue to increase the sales penetration of our private-label items. We rely on trademark and copyright laws, trade-secret protection, and confidentiality, license and other agreements with our suppliers, employees and others to protect our intellectual property. The availability and duration of trademark registrations vary by country; however, trademarks are generally valid and may be renewed indefinitely as long as they are in use and registrations are maintained. Available Information Our U.S. website is www.costco.com. We make available through the Investor Relations section of that site, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and Forms 3, 4 and 5, and any amendments to those reports, as soon as reasonably practicable after filing such materials with or furnishing such documents to the Securities and Exchange Commission (SEC). The information found on our website is not part of this or any other report filed with or furnished to the SEC. The SEC maintains a site that contains reports, proxy and information statements, and other information regarding issuers, such as the Company, that file electronically with the SEC at www.sec.gov. We have a code of ethics for senior financial officers, pursuant to Section 406 of the Sarbanes-Oxley Act. Copies of the code are available free of charge by writing to Secretary, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, WA 98027. If the Company makes any amendments to this code (other than technical, administrative, or non-substantive amendments) or grants any waivers, including implicit waivers, to the Chief Executive Officer, Chief Financial Officer or principal accounting officer and controller, we will disclose (on our website or in a Form 8-K report filed with the SEC) the nature of the amendment or waiver, its effective date, and to whom it applies. 8 Information about our Executive Officers The executive officers of Costco, their position, and ages are listed below. All have over 25 years of service with the Company, with the exception of Mr. Sullivan who has 22 years of service. Name W. Craig Jelinek Ron M. Vachris Richard A. Galanti The commitment to "Take Care of Our Employees" is also the foundation of our approach to promoting diversity, equity and inclusion and creating an inclusive and respectful workplace. We strive for an environment where all employees feel that they belong, are accepted, included, respected and supported because of who they are. We demonstrate leadership commitment to equity through consistent communication, employee development and education, support of diversity and inclusion initiatives within the organization, community involvement, and supplier diversity. Costco continues its efforts to develop future leaders, including through the supervisor in training programs. In 2023, over 7,800 hourly employees completed the 6-week course. Diversity, Equity and Inclusion We believe that our warehouses are among the most productive in the retail industry, owing largely to the commitment and efficiency of our employees. We seek to provide them not merely with employment but careers. Many attributes of our business contribute to the objective. The more significant include: competitive compensation and benefits for those working in our membership warehouses and distributions channels; a commitment to promoting from within; and a target ratio of at least 50% of our employee base being full-time employees. These attributes contribute to what we consider, especially for the industry, a high retention rate. In 2023, in the U.S. that rate was approximately 90% for employees who have been with us for at least one year. Growth and Engagement At the end of 2023, we employed 316,000 employees worldwide. Approximately 95% are employed in our membership warehouses and distribution channels, and approximately 5% are represented by unions. We also utilize seasonal employees. The total number of employees by segment was: United States Canada Other International Total employees 2023 2022 2021 Position 202,000 51,000 50,000 47,000 57,000 52,000 49,000 316,000 304,000 288,000 192,000 Our member renewal rate was 92.7% in the U.S. and Canada and 90.4% worldwide at the end of 2023. The majority of members renew within six months following their renewal date. Our renewal rate, which excludes affiliates of Business members, is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date. Our membership counts include active memberships as well as memberships that have not renewed within the 12 months prior to the reporting date. Our membership was made up of the following (in thousands): We buy most of our merchandise directly from suppliers and route it to cross-docking consolidation points (depots) or directly to our warehouses. Our depots receive large shipments from suppliers and quickly ship these goods to warehouses. This process creates freight volume and handling efficiencies, lowering costs associated with traditional multiple-step distribution channels. Our e-commerce operations ship merchandise through our depots and logistics operations, as well as through drop-ship and other delivery arrangements with our suppliers. Our average warehouse space is approximately 147,000 square feet, with newer units being slightly larger. Floor plans are designed for economy and efficiency in the use of selling space, the handling of merchandise, and the control of inventory. Because shoppers are attracted principally by the quality of merchandise and low prices, our warehouses are not elaborate. By strictly controlling the entrances and exits and using a membership format, we believe our inventory losses (shrinkage) are well below those of typical retail operations. 119 21 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" - consistently providing the most competitive values. Merchandise costs in 2023 continued to be impacted by inflation, however at a lower rate than what we experienced in 2022. The impact to our net sales and gross margin is influenced in part by our merchandising and pricing strategies in response to cost increases. Those strategies can include, but are not limited to, working with our suppliers to share in absorbing cost increases, earlier-than-usual purchasing and in greater volumes, as well as passing cost increases on to our members. Our investments in merchandise pricing may 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, all negatively impacting gross margin and gross margin as a percentage of net sales (gross margin percentage). We believe that the most important driver of our profitability is increasing net sales, particularly comparable sales. Net sales includes our core merchandise categories (foods and sundries, non-foods, and fresh foods), warehouse ancillary (gasoline, pharmacy, optical, food court, hearing aids, and tire installation) and other businesses (e-commerce, business centers, travel and other). Comparable sales is defined as net sales from warehouses open for more than one year, including remodels, relocations and expansions, and sales related to e-commerce websites operating for more than one year. The measure is intended as supplemental information and is not a substitute for net sales presented in accordance with U.S. generally accepted accounting principles (U.S. GAAP). 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 our international operations); inflation or deflation and changes in the cost of gasoline and associated competitive conditions. The higher our comparable sales exclusive of these items, the more we can leverage our SG&A 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 net sales growth is the health of the economies in which we do business, including the effects of inflation or deflation, especially the United States. Net 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 merchandise mix, including increasing the penetration of our private-label items, and through online offerings. Overview The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to promote understanding of the results of operations and financial condition. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to Financial Statements (Part II, Item 8 of this Form 10-K). This section generally discusses the results of operations for 2023 compared to 2022. For discussion related to the results of operations and changes in financial condition for 2022 compared to 2021 refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal year 2022 Form 10-K, which was filed with the United States Securities and Exchange Commission (SEC) on October 5, 2022. Item 7-Management's Discussion and Analysis of Financial Conditions and Results of Operations (amounts in millions, except per share, share, membership fee, and warehouse count data) 20 20 Item 6-Reserved 2017 and 2023 were 53-week fiscal years but have been normalized for purposes of comparability *First year sales annualized. Fiscal Year 2023 2022 2021 2020 2019 2018 21 We believe our gasoline business enhances traffic in our warehouses, but it generally has a lower gross margin percentage and lower SG&A expense, relative to our non-gasoline businesses. 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 SG&A expenses as a percentage of net sales. A decline in gasoline prices has the inverse effect. Government actions in various countries relating to tariffs, particularly China and the United States, have affected the costs of some of our merchandise. The degree of our exposure is dependent on (among other things) the type of goods, rates imposed, and timing of the tariffs. Higher tariffs could adversely impact our results. We also achieve net sales growth by opening new warehouses. As our warehouse base grows, available and desirable 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, domestically and internationally, generally has a lower gross margin percentage than our warehouse operations. The effective tax rate in 2023 was 25.9%, compared to 24.6% in 2022; SG&A expenses as a percentage of net sales increased 20 basis points, due to increased costs in warehouse operations and other businesses, primarily wage increases effective in March and July 2022, and March 2023, as well as lower sales growth; Gross margin percentage increased nine basis points, driven primarily by a smaller LIFO charge in 2023 compared to 2022 and our core merchandise categories. This was partially offset by charges of $391, predominantly related to the discontinuation of our charter shipping activities; Net sales increased 7% to $237,710, driven by a 3% increase in comparable sales, sales at new warehouses opened in 2022 and 2023, and the benefit of one additional week of sales in 2023; Membership fee revenue increased 8% to $4,580, driven by new member sign-ups, upgrades to Executive membership, and one additional week of membership fees in 2023; We opened 26 new warehouses, including three relocations: 13 net new in the U.S. and 10 new in our Other International segment. We opened the same number of new warehouses, including relocations, in 2022; • • • 2017 • Highlights for 2023 versus 2022 include: Our fiscal year ends on the Sunday closest to August 31. References to 2023 relate to the 53-week fiscal year ended September 3, 2023. References to 2022 and 2021 relate to the 52-week fiscal years ended August 28, 2022, and August 29, 2021. 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. 222 22 In discussions of our consolidated operating results, we refer to the impact of changes in foreign currencies relative to the U.S. dollar, which are differences between the foreign-exchange rates we use to convert the financial results of our international operations from local currencies into U.S. dollars. This impact of foreign-exchange rate changes is calculated based on the difference between the current and prior period's currency exchange rates. The impact of changes in gasoline prices on net sales is calculated based on the difference between the current and prior period's average price per gallon sold. Results expressed excluding the impacts of foreign exchange and gasoline prices should be reviewed in conjunction with results reported in accordance with U.S. GAAP. Our operating model is generally the same across our U.S., Canadian, and Other International operating segments (see Note 11 to the consolidated financial statements included in Item 8 of this Report). Certain operations in the Other International segment have relatively higher rates of square footage growth, lower wage and benefit costs as a percentage of sales, less or no direct membership warehouse competition, or lack e-commerce or business delivery. Our financial performance depends heavily on controlling costs. While we believe that we have achieved successes in this area, some significant costs are partially outside our control, particularly health care and utility expenses. With respect to the compensation of our employees, our philosophy is not to seek to minimize their wages and benefits. Rather, we believe that achieving our longer-term objectives of 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 operates on very low margins, modest changes in various items in the consolidated statements of income, particularly merchandise costs and SG&A expenses, can have substantial impacts on net income. The 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. • 2016 2015 2014 199 189 163 136 122 112 94 85 $164 $83 212 204 173 145 131 118 97 $87 23 Net income increased 8% to $6,292, or $14.16 per diluted share compared to $5,844, or $13.14 per diluted share in 2022; 165 170 $252 $245 $217 $192 $182 $176 $163 $159 165 $162 861 Totals 268 259 228 201 191 184 $164 In January 2023, the Board of Directors authorized a new share repurchase program in the amount of $4,000; and • In April 2023, the Board of Directors approved a 13% increase in the quarterly cash dividend. 5 % 13 % 10% 8% 12% 12% 8% 14 % 11 % 10 % 44 % 10 % (6)% 16 % 14 % 3 % 19% 7 % 4 % 3 % 13 % 10 % 3,877 4,224 $ 9% 8% 4,580 $ $ 2021 2022 2023 (5)% 24 Membership fees increase Membership fees Membership Fees Comparable sales increased 3% during 2023 and were positively impacted by increases in shopping frequency, partially offset by a decrease in average ticket. During 2023, changes in foreign currencies relative to the U.S. dollar negatively impacted net sales by approximately $3,484, 156 basis points, compared to 2022, attributable to our Canadian and Other International operations. The volume of gasoline sold increased approximately 7%, positively impacting net sales by $2,148, or 96 basis points. Lower gasoline prices negatively impacted net sales by $1,592, or 71 basis points, compared to 2022, with a 6% decrease in the average price per gallon. Comparable Sales Net sales increased $14,980 or 7% during 2023. The improvement was attributable to an increase in comparable sales of 3%, sales at new warehouses opened in 2022 and 2023, and one additional week of sales in 2023. Sales increased $12,761, or 7% in core merchandise categories, led by foods and sundries and fresh foods; while non-foods decreased. Sales increased $2,219, or 5% in warehouse ancillary and other businesses, led by pharmacy, food court, and travel. Net Sales 43 % 24 20% 15 % 2% U.S. Changes in comparable sales excluding the impact of changes in foreign-currency and gasoline prices: E-commerce Total Company Other International $ 237,710 2023 Canada Canada U.S. Total Company Other International Canada Changes in net sales: U.S. Net Sales Net Sales RESULTS OF OPERATIONS 23 Changes in comparable sales: Other International Total Company E-commerce 15% 16 % 3 % 18 % 16 % 7 % 23 % 10 % 9% 22 % 16 % 4 % 16 % 17 % 7% $ 192,052 $ 222,730 2021 2022 29 141 247 206 Maximum Dollar Value of Shares that May Yet be Purchased under the Program 107,000 $ 102,000 97,000 127,000 433,000 3,740 Total Number of Shares Purchased as Part of Publicly Announced Program(1) 3,687 3,563 (1) The repurchase program is conducted under a $4,000 authorization approved by our Board of Directors in January 2023, which expires in January 2027. This authorization revoked previously authorized but unused amounts, totaling $2,568. 19 Performance Graph The following graph compares the cumulative total shareholder return assuming reinvestment of dividends on an investment of $100 in Costco common stock, S&P 500 Index, S&P Retail Select Index, and the previously selected S&P 500 Retail Index over the five years from September 2, 2018, through September 3, 2023. The S&P Retail Select Index will prospectively replace in the graph the S&P 500 Retail Index to show a broader representation of industry performance and a broader index of peers. Comparison of 5-Year Cumulative Total Returns $300 $200 3,634 $100 530.67 Total fourth quarter Issuer Purchases of Equity Securities The following table sets forth information on our common stock repurchase activity for the fourth quarter of 2023 (dollars in millions, except per share data): Total Number June 5-July 2, 2023 Period May 8-June 4, 2023 of Shares Purchased 107,000 $ 433,000 $ 102,000 498.28 523.05 July 3-July 30, 2023 97,000 548.20 July 31-September 3, 2023 127,000 550.58 Average Price Paid per Share $0 2018 2019 663 22222222215 $151 $150 158 $140 158 172 2014 & Before 172 184 193 $129 138 172 208 216 $116 152 2015 2016 2017 2020 2021 2022 2023 Costco S&P 500 S&P 500 Retail S&P Retail Select The following graph provides information concerning average sales per warehouse over a 10-year period. Average Sales Per Warehouse* (Sales In Millions) Year Opened # of Whses 2023 2022 2021 2020 2019 2018 Payment of dividends is subject to declaration by the Board of Directors. Factors considered in determining dividends include our profitability and expected capital needs. Subject to these qualifications, we presently expect to continue to pay dividends on a quarterly basis. 237 Our common stock is traded on the NASDAQ Global Select Market under the symbol "COST." On October 3, 2023, we had 10,331 stockholders of record. Item 5-Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The severity and duration of pandemics; • • • • Evolving macroeconomic factors, including general economic uncertainty, unemployment rates, and recessionary pressures; Changes in labor markets affecting us and our suppliers; Unknown consequences on our business performance and initiatives stemming from the substantial investment of time and other resources to the pandemic response; • The pace of post-pandemic recovery; Factors associated with climate change could adversely affect our business. We use natural gas, diesel fuel, gasoline, and electricity in our distribution and warehouse operations. Government regulations limiting carbon dioxide and other greenhouse gas emissions and other environmental restrictions may increase compliance and merchandise costs, and other regulation affecting energy inputs could materially affect our profitability. As the economy transitions to lower carbon intensity we cannot guarantee that we will make adequate investments or successfully implement strategies that will effectively achieve our climate-related goals, which could lead to negative perceptions among members and other stakeholders and result in reputational harm. Climate change, extreme weather conditions, wildfires, droughts and rising sea levels could affect our ability to procure commodities at costs and in quantities we currently experience. We also sell a substantial amount of gasoline, the demand for which could be impacted by concerns about climate change and increased regulations. More stringent fuel economy standards, changing public policies aimed at increasing the adoption of zero-emission and alternative fuel vehicles and other 16 regulations related to climate change, and evolving consumer preferences will affect our future operations and will adversely impact certain elements of our profitability and require significant capital expenditures. Failure to meet financial market expectations could adversely affect the market price and volatility of our stock. We believe that the price of our stock currently reflects high market expectations for our future operating results. Any failure to meet or delay in meeting these expectations, including our warehouse and e- commerce comparable sales growth rates, membership renewal rates, new member sign-ups, gross margin, earnings, earnings per share, new warehouse openings, or dividend or stock repurchase policies could cause the price of our stock to decline. Legal and Regulatory Risks We are subject to risks associated with the legislative, judicial, accounting, regulatory, political and economic factors specific to the countries or regions in which we operate, which could adversely affect our business, financial condition and results of operations. The long-term impact of the pandemic on our business, including consumer behaviors; and Disruption and volatility within the financial and credit markets. At the end of 2023, we operated 270 warehouses outside of the U.S. (31% of all warehouse locations), and we plan to continue expanding our international operations. Future operating results internationally could be negatively affected by a variety of factors, many similar to those we face in the U.S., certain of which are beyond our control. These factors include political and economic conditions, regulatory constraints, currency regulations, policy changes, and other matters in any of the countries or regions in which we operate, now or in the future. Other factors that may impact international operations include foreign trade (including tariffs and trade sanctions), monetary and fiscal policies and the laws and regulations of the U.S. and foreign governments, agencies and similar organizations, and risks associated with having major facilities in locations which have been historically less stable than the U.S. Risks inherent in international operations also include, among others, the costs and difficulties of managing international operations, adverse tax consequences, and difficulty in enforcing intellectual property rights. New reporting obligations globally are increasing the cost and complexity of doing business. The emergence, severity, magnitude and duration of global or regional health crises are uncertain and difficult to predict. A pandemic, such as COVID-19, could affect certain business operations, demand for our products and services, in-stock positions, costs of doing business, availability of labor, access to inventory, supply chain operations, our ability to predict future performance, exposure to litigation, and our financial performance, among other things. Other factors and uncertainties include, but are not limited to: Natural disasters and extreme weather conditions, including those impacted by climate change, such as hurricanes, typhoons, floods, earthquakes, wildfires, droughts; acts of terrorism or violence, including active shooter situations; and energy shortages; particularly in California or Washington state, where our centralized operating systems and administrative personnel are located, could negatively affect our operations and financial performance. Such events could result in physical damage to our properties, limitations on store operating hours, less frequent visits by members to physical locations, the temporary closure of warehouses, depots, manufacturing or home office facilities, the temporary lack of an adequate work force, disruptions to our IT systems, the temporary or long-term disruption in the supply of products from some local or overseas suppliers, the temporary disruption in the transport of goods to or from overseas, delays in the delivery of goods to our warehouses or depots, and the temporary reduction in the availability of products in our warehouses. These events could also reduce demand for our products or make it difficult or impossible to procure products. We may be required to suspend operations in some or all of our locations, which could have a material adverse effect on our business, financial condition and results of operations. 176 158 142 $121 214 202 to our net sales and gross margin is influenced in part by our merchandising and pricing strategies in response to potential cost increases. Higher tariffs could adversely impact our results. Prices of certain commodities, including gasoline and consumable goods used in manufacturing and our warehouse retail operations, are historically volatile and are subject to fluctuations arising from changes in domestic and international supply and demand, inflationary pressures, labor costs, competition, market speculation, government regulations, taxes and periodic delays in delivery. Rapid and significant changes in commodity prices and our ability and desire to pass them through to our members may affect our sales and profit margins. These factors could also increase our merchandise costs and selling, general and administrative expenses, and otherwise adversely affect our operations and financial results. General economic conditions can also be affected by events like the outbreak of hostilities, including but not limited to the Ukraine conflict, or acts of terrorism. Pandemics and other health crises, including COVID-19, could affect our business, financial condition and results of operations in many respects. Inflationary factors such as increases in merchandise costs may adversely affect our business, financial condition and results of operations. We may not be able to adjust prices to sufficiently offset the effect of cost increases without negatively impacting consumer demand. We depend heavily on our ability to purchase quality merchandise in sufficient quantities at competitive prices. As the quantities we require continue to grow, we have no assurances of continued supply, appropriate pricing or access to new products, and any supplier has the ability to change the terms upon which they sell to us or discontinue selling to us. Member demands may lead to out-of-stock positions causing a loss of sales and profits. We buy from numerous domestic and foreign suppliers and importers. Our inability to acquire suitable merchandise on acceptable terms or the loss of key suppliers could negatively affect us. We may not be able to develop relationships with new suppliers, and products from alternative sources, if any, may be of a lesser quality or more expensive. Because of our efforts to adhere to high-quality standards for which available supply may be limited, particularly for certain food items, the large volumes we demand may not be consistently available. Our efforts to secure supply could lead to commitments that prove to be unsuccessful in the short and long-term. Our suppliers (and those they depend upon for materials and services) are subject to risks, including labor disputes, union organizing activities, financial liquidity, natural disasters, extreme weather conditions, public health emergencies, supply constraints and general economic and political conditions and other risks similar to those we face that could limit their ability to timely provide us with acceptable merchandise. One or more of our suppliers might not adhere to our quality control, packaging, legal, regulatory, labor, environmental or animal welfare standards. These deficiencies may delay or preclude delivery of merchandise to us and might not be identified before we sell such merchandise to our members. This failure could lead to recalls and litigation and otherwise damage our reputation and our brands, increase costs, and otherwise adversely impact our business. Fluctuations in foreign exchange rates may adversely affect our results of operations. During 2023, our international operations, including Canada, generated 27% and 34% of our net sales and operating income. Our international operations have accounted for an increasing portion of our warehouses, and we plan to continue international growth. To prepare our consolidated financial statements, we translate the financial statements of our international operations from local currencies into U.S. dollars using current exchange rates. Future fluctuations exchange rates that are unfavorable to us may adversely affect the financial performance of our Canadian and Other International operations and have a corresponding adverse period-over-period effect on our results of operations. As we continue to expand internationally, our exposure to fluctuations in foreign exchange rates may increase. 15 A portion of the products we purchase is paid for in a currency other than the local currency of the country in which the goods are sold. Currency fluctuations may increase our merchandise costs and may not be passed on to members and thus may adversely affect our results of operations. Natural disasters, extreme weather conditions, or other catastrophic events could negatively affect our business, financial condition, and results of operations. Suppliers may be unable to timely supply us with quality merchandise at competitive prices or may fail to adhere to our high standards, resulting in adverse effects on our business, merchandise inventories, sales, and profit margins. Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial condition and results of operations. Accounting principles and related pronouncements, implementation guidelines, and interpretations we apply to a wide range of matters that are relevant to our business, including self-insurance liabilities, are highly complex and involve subjective assumptions, estimates and judgments by our management. Changes in rules or interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance and have a material impact on our consolidated financial statements. We are exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act and otherwise. 477 114 591 90 17 107 110 677 53 Lease Land and/or Building Total 163 861 (1) 132 of the 184 leases are land-only leases, where Costco owns the building. At the end of 2023, our warehouses contained approximately 126.3 million square feet of operating floor space: 87.6 million in the U.S.; 15.3 million in Canada; and 23.4 million in Other International. Total square feet associated with distribution and logistics facilities were approximately 33.1 million. Additionally, we operate various processing, packaging, manufacturing and other facilities to support our business, which includes the production of certain private-label items. Item 3-Legal Proceedings See discussion of Legal Proceedings in Note 10 to the consolidated financial statements included in Item 8 of this Report. Item 4-Mine Safety Disclosures Not applicable. PART II 184 Own Land and Building (1) Total Section 404 of the Sarbanes-Oxley Act of 2002 requires management assessments of the effectiveness of internal control over financial reporting and disclosure controls and procedures. If we are unable to maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to record, process and report financial information accurately and to prepare financial statements within required time periods could be adversely affected, which could subject us to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in our financial statements and adversely impact our stock price. Uncertainties around our developing systems concerning controls for non-financial reporting also create risks. 17 Changes in tax rates, new U.S. or foreign tax legislation, and exposure to additional tax liabilities could adversely affect our financial condition and results of operations. We are subject to a variety of taxes and tax collection and remittance obligations in the U.S. and numerous foreign jurisdictions. Additionally, at any point in time, we may be under examination for value added, sales-based, payroll, product, import or other non-income taxes. We may recognize additional tax expense, be subject to additional tax liabilities, or incur losses and penalties, due to changes in laws, regulations, administrative practices, principles, assessments by authorities and interpretations related to tax, including tax rules in various jurisdictions. We compute our income tax provision based on enacted tax rates in the countries in which we operate. As tax rates vary among countries, a change in earnings attributable to the various jurisdictions in which we operate could result in an unfavorable change in our overall tax provision. Additionally, changes in the enacted tax rates or adverse outcomes in tax audits, including transfer pricing disputes, could have a material adverse effect on our financial condition and results of operations. Changes in or failure to comply with regulations relating to the use, storage, discharge and disposal of hazardous materials, hazardous and non-hazardous wastes and other environmental matters (such as recycling and extended producer responsibility requirements) could adversely impact our business, financial condition and results of operations. We are subject to a wide and increasingly broad array of federal, state, regional, local and international laws and regulations relating to the use, storage, discharge and disposal of hazardous materials, hazardous and non-hazardous wastes and other environmental matters. Failure to comply with these laws could result in harm to our members, employees or others, significant costs to satisfy environmental compliance, remediation or compensatory requirements, or the imposition of severe penalties or restrictions on operations by governmental agencies or courts that could adversely affect our business, financial condition and results of operations. Operations at our facilities require the treatment and disposal of wastewater, stormwater and agricultural and food processing wastes, the use and maintenance of refrigeration systems, including ammonia-based chillers, noise, odor and dust management, the operation of mechanized processing equipment, and other operations that potentially could affect the environment and public health and safety. Failure to comply with current and future environmental, health and safety standards could result in the imposition of fines and penalties, illness or injury of our employees, and claims or lawsuits related to such illnesses or injuries, and temporary closures or limits on the operations of facilities. We are involved in a number of legal proceedings and audits and some of these outcomes could adversely affect our business, financial condition and results of operations. Our business requires compliance with many laws and regulations. Failure to achieve compliance could subject us to lawsuits and other proceedings and lead to damage awards, fines, penalties, and remediation costs. We are or may become involved in a number of legal proceedings and audits, including grand jury investigations, government and agency investigations, and consumer, employment, tort, unclaimed property laws, and other litigation. We cannot predict with certainty the outcomes of these proceedings and other contingencies, including environmental remediation and other proceedings commenced by governmental authorities. The outcome of some of these proceedings, audits, unclaimed property laws, and other contingencies could require us to take, or refrain from taking, actions which could negatively affect our operations or could require us to pay substantial amounts of money, adversely affecting our financial condition and results of operations. Additionally, defending against these lawsuits and proceedings may involve significant expense and diversion of management's attention and resources. Item 1B-Unresolved Staff Comments None. 18 Item 2-Properties Warehouse Properties At September 3, 2023, we operated 861 membership warehouses: United States and Puerto Rico Canada Other International Market Information and Dividend Policy $132 9% (3,535) 2021 2022 2023 26 26 Net cash used in financing activities Net cash provided by operating activities Net cash used in investing activities The following table summarizes our significant sources and uses of cash and cash equivalents: LIQUIDITY AND CAPITAL RESOURCES The effective tax rate for 2022 was impacted by net discrete tax benefits of $130, primarily due to excess tax benefits related to stock compensation. Excluding discrete net tax benefits, the tax rate was 26.2%. The effective tax rate for 2023 was impacted by net discrete tax benefits of $62, primarily due to excess tax benefits related to stock compensation. Excluding discrete net tax benefits, the tax rate was 26.6%. 24.0 % $ 1,601 $ 2021 25.9 % 1,925 $ 2022 2023 $ 2,195 Effective tax rate Provision for income taxes Provision for Income Taxes The increase in interest income in 2023 was due to higher global interest rates and higher average cash and investment balances. Foreign-currency transaction gains, net include 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 Note 1 to the consolidated financial statements included in Item 8 of this Report. 143 205 $ 533 $ $ 24.6 % 46 11,068 $ 8,958 The preparation of our consolidated financial statements in accordance with U.S. GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on assumptions that we believe to be reasonable, and we continue to review and evaluate these estimates. For further information on significant accounting policies, see discussion in Note 1 to the consolidated financial statements included in Item 8 of this Report. Critical Accounting Estimates In the opinion of management, we have no off-balance sheet arrangements that have had or are reasonably likely to have a material current or future effect on our financial condition or financial statements. Off-Balance Sheet Arrangements The Company has letter of credit facilities, for commercial and standby letters of credit, totaling $217. The outstanding commitments under these facilities at the end of 2023 totaled $182, most of which were standby letters of credit that do not expire or have expiration dates within one year. The bank credit facilities have various expiration dates, most within one year, 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 outstanding. We maintain bank credit facilities for working capital and general corporate purposes. At September 3, 2023, we had borrowing capacity under these facilities of $1,234. Our international operations maintain $756 of this capacity under bank credit facilities, of which $167 is guaranteed by the Company. Short-term borrowings outstanding under the bank credit facilities, which are included in other current liabilities on the consolidated balance sheets, were immaterial at the end of 2023 and 2022. Bank Credit Facilities and Commercial Paper Programs Cash dividends declared in 2023 totaled $3.84 per share, as compared to $3.38 per share in 2022. In April 2023, the Board of Directors increased our quarterly cash dividend from $0.90 to $1.02 per share. Dividends Stock Repurchase Programs Net cash used in financing activities totaled $2,614 in 2023, compared to $4,283 in 2022. Cash flows used in financing activities primarily related to the payment of dividends, repurchases of common stock, and withholding taxes on stock-based awards. In 2022, cash flow used in financing activities included payments to our former joint-venture partner for a dividend and the purchase of their equity interest in Taiwan, totaling $1,050 in the aggregate, and repayments of our 2.300% Senior Notes. Cash Flows from Financing Activities 27 7,392 $ Our primary requirements for capital are 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 2023, we spent $4,323 on capital expenditures, and it is our current intention to spend approximately $4,400 to $4,600 during fiscal 2024. These expenditures are expected to be financed with cash from operations, existing cash and cash equivalents, and short- term investments. We opened 26 new warehouses, including three relocations, in 2023, and plan to open up to 28 additional new warehouses, including one relocation, in 2024. 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 and the economic environment. Net cash used in investing activities totaled $4,972 in 2023, compared to $3,915 in 2022, and is primarily related to capital expenditures. Net cash flows from investing activities also includes purchases and maturities of short-term investments. Cash Flows from Investing Activities Net cash provided by operating activities totaled $11,068 in 2023, compared to $7,392 in 2022. Our cash flow provided by operations is primarily from net sales and membership fees. Cash flow used in operations generally consists of payments to merchandise suppliers, warehouse operating costs, including payroll and employee benefits, utilities, and credit and debit card processing fees. Cash used in operations also includes payments for income taxes. Changes in our net investment in merchandise inventories (the difference between merchandise inventories and accounts payable) is impacted by several factors, including inventory levels and turnover, the forward deployment of inventory to accelerate delivery times, payment terms with suppliers, and early payments to obtain discounts. Cash Flows from Operating Activities Management believes that our cash and investment position and operating cash flows, with capacity under existing and available credit agreements, 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. Purchase obligations consist of contracts primarily related to merchandise, equipment, and third-party services, the majority of which are due in the next 12 months. Construction and land-purchase obligations consist of contracts primarily related to the development and opening of new and relocated warehouses, the majority of which (other than leases) are due in the next 12 months. Material contractual obligations arising in the normal course of business primarily consist of purchase obligations, long-term debt and related interest payments, leases, and construction and land purchase obligations. See Notes 4 and 5 to the consolidated financial statements included in Item 8 of this Report for amounts outstanding on September 3, 2023, related to debt and leases. Our primary sources of liquidity are cash flows from operations, cash and cash equivalents, and short- term investments. Cash and cash equivalents and short-term investments were $15,234 and $11,049 at September 3, 2023, and August 28, 2022. Of these balances, unsettled credit and debit card receivables represented $2,282 and $2,010. These receivables generally settle within four days. Changes in foreign exchange rates impacted cash and cash equivalents positively by $15 and $46 in 2023 and 2021, and negatively by $249 in 2022. (6,488) (4,283) (2,614) (3,915) (4,972) Capital Expenditures 28 38 56 2022 2023 25 SG&A expenses as a percentage of net sales SG&A expenses Selling, General and Administrative Expenses 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. segment, due to a smaller LIFO charge and increases in core merchandise categories, primarily foods and sundries, partially offset by the charges related to the discontinuation of our charter shipping activities discussed above and warehouse ancillary and other businesses. Gross margin percentage increased in our Canada segment, attributable to increases in core merchandise categories and warehouse ancillary and other businesses. Our Other International gross margin percentage decreased, largely due to decreases in core merchandise categories, partially offset by warehouse ancillary and other businesses. All segments were negatively impacted by increased 2% rewards. The gross margin in core merchandise categories, when expressed as a percentage of core merchandise sales (rather than total net sales), increased two basis points, driven by foods and sundries and non- foods, partially offset by fresh foods. This measure eliminates the impact of changes in sales penetration and gross margins from our warehouse ancillary and other businesses. Gross margin percentage increased nine basis points compared to 2022. Excluding the impact of gasoline price deflation on net sales, gross margin was 10.50%, an increase of two basis points. This two basis point increase was positively impacted by: 18 basis points due to a smaller LIFO charge in 2023 compared to 2022, and seven basis points due to core merchandise categories, predominantly foods and sundries. These were offset by: 16 basis points due to the downsizing and then discontinuation of our charter shipping activities; four basis points due to increased 2% rewards; and three basis points due to warehouse ancillary and other businesses, predominantly e-commerce, partially offset by gasoline and business centers. Changes in foreign currencies relative to the U.S. dollar negatively impacted gross margin by approximately $349, compared to 2022, attributable to our Canadian and Other International Operations. 11.13 % $ 21,368 10.48 % 23,348 2021 $ $ 192,052 170,684 199,382 $ 222,730 2021 2022 2023 $ 237,710 212,586 Gross margin percentage Gross margin Less merchandise costs Net sales Gross Margin We account for membership fee revenue on a deferred basis, recognized ratably over the one-year membership period. Membership fee revenue increased 8% in 2023, driven by new member sign-ups, upgrades to Executive membership, and the benefit of an additional week. Changes in foreign currencies relative to the U.S. dollar negatively impacted membership fees by $76 compared to 2022. At the end of 2023, our member renewal rates were 92.7% in the U.S. and Canada and 90.4% worldwide. More members auto renewing and higher penetration of Executive members benefit renewal rates. Our renewal rate, which excludes affiliates of Business members, is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date. $ 25,124 10.57 % 34 $ 21,590 19,779 $ 18,537 106 29 41 $ 61 470 $ 2021 2022 2023 Interest income and other, net Other, net Foreign-currency transaction gains, net Interest income $ Interest Income and Other, Net Interest expense 171 158 $ 160 $ $ 2021 2022 2023 Interest Expense SG&A expenses as a percentage of net sales increased 20 basis points compared to 2022. SG&A expenses as a percentage of net sales excluding the impact of gasoline price deflation was 9.02%, an increase of 14 basis points. The comparison to last year was negatively impacted by 16 basis points in warehouse operations and other businesses, largely driven by wage increases effective in March and July 2022, and March 2023, as well as lower sales growth. Central operating costs were also higher by six basis points. SG&A was positively impacted by eight basis points due to the prior year's write-off of information technology assets and a charge related to granting our employees additional vacation. Changes in foreign currencies relative to the U.S. dollar decreased SG&A expenses by approximately $281 compared to 2022, attributable to our Canadian and Other International Operations. 9.65 % 8.88 % 9.08 % Interest expense is primarily related to Senior Notes and financing leases. For more information on our debt arrangements, refer to the consolidated financial statements included in Item 8 of this Report. 20 On January 19, 2023, the Board of Directors authorized a new share repurchase program in the amount of $4,000, which expires in January 2027. During 2023 and 2022, we repurchased 1,341,000 and 863,000 shares of common stock, at average prices of $504.68 and $511.46, totaling approximately $677 and $442. These amounts may differ from the accompanying consolidated statements of cash flows due to changes in unsettled repurchases at the end of each fiscal year. Purchases are made from time to time, as conditions warrant, in the open market or in block purchases, pursuant to plans under SEC Rule 10b5-1. Repurchased shares are retired, in accordance with the Washington Business Corporation Act. The remaining amount available to be purchased under our approved plan was $3,563 at the end of 2023. Claims for employee health-care benefits, workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability, inventory loss, and other exposures are funded predominantly through self-insurance. Insurance coverage is maintained for certain risks to seek to limit exposures arising from very large losses. We use various risk management mechanisms, including a wholly-owned captive insurance subsidiary, and participate in a reinsurance program. Liabilities associated with the risks that we retain are not discounted and are estimated using historical claims experience, demographic factors, severity factors, and other actuarial assumptions. The costs of claims are highly unpredictable and can fluctuate as a result of inflation rates, regulatory or legal changes, and unforeseen developments in claims. While we believe our estimates are reasonable, actual claims and costs could differ significantly from recorded liabilities. Historically, adjustments to our estimates have not been material. Evaluating the Company's ability to estimate self-insurance workers' compensation liabilities by comparing its historical estimates with actual incurred losses and paid losses Evaluating the above listed assumptions underlying the Company's actuarial estimates by developing an independent expectation of the self-insurance workers' compensation liabilities and comparing them to the amounts recorded by the Company. Assessing the actuarial models used by the Company for consistency with generally accepted actuarial standards /s/ KPMG LLP The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company's self- insurance workers' compensation process. This included controls related to the development and selection of the assumptions listed above used in the actuarial calculation and review of the actuarial report. We involved actuarial professionals with specialized skills and knowledge who assisted in: We identified the evaluation of the Company's workers' compensation self-insurance liabilities for the United States operations as a critical audit matter because of the extent of specialized skill and knowledge needed to evaluate the underlying assumptions and judgments made by the Company in the actuarial models. Specifically, subjective auditor judgment was required to evaluate the Company's selected loss rates and initial expected losses used in the actuarial models. As discussed in Note 1 to the consolidated financial statements, the Company estimates its self-insurance liabilities by considering historical claims experience, demographic factors, severity factors, and other actuarial assumptions. The estimated self-insurance liabilities as of September 3, 2023, were $1,513 million, a portion of which related to workers' compensation self-insurance liabilities for the United States operations. Evaluation of workers' compensation self-insurance liabilities We have served as the Company's auditor since 2002. 32 The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. Basis for Opinion We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 3, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated October 10, 2023, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. We have audited the accompanying consolidated balance sheets of Costco Wholesale Corporation and subsidiaries (the Company) as of September 3, 2023, and August 28, 2022, the related consolidated statements of income, comprehensive income, equity, and cash flows for the 53-week period ended September 3, 2023, and the 52-week periods ended August 28, 2022, and August 29, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 3, 2023, and August 28, 2022, and the results of its operations and its cash flows for each of the 53-week period ended September 3, 2023, and the 52-week periods ended August 28, 2022, and August 29, 2021, in conformity with U.S. generally accepted accounting principles. Opinion on the Consolidated Financial Statements 32 Seattle, Washington October 10, 2023 33 34 October 10, 2023 Seattle, Washington Insurance/Self-insurance Liabilities Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Definition and Limitations of Internal Control Over Financial Reporting We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. Basis for Opinion We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of September 3, 2023, and August 28, 2022, the related consolidated statements of income, comprehensive income, equity, and cash flows for the 53-week period ended September 3, 2023, and the 52-week periods ended August 28, 2022, and August 29, 2021, and the related notes (collectively, the consolidated financial statements), and our report dated October 10, 2023, expressed an unqualified opinion on those consolidated financial statements. We have audited Costco Wholesale Corporation and subsidiaries' (the Company) internal control over financial reporting as of September 3, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 3, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Opinion on Internal Control Over Financial Reporting Costco Wholesale Corporation: To the Stockholders and Board of Directors REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 33 Costco Wholesale Corporation: To the Stockholders and Board of Directors /s/ KPMG LLP 32 We are exposed to fluctuations in prices for energy, particularly electricity and natural gas, and other commodities used in retail and manufacturing operations, which we seek to partially mitigate through fixed-price contracts for certain of our warehouses and other facilities, predominantly in the U.S. and Canada. We also enter into variable-priced contracts for some purchases of electricity and natural gas, in addition to some of the fuel for our gas stations, on an index basis. These contracts meet the characteristics of derivative instruments, but generally qualify for the "normal purchases and normal sales" exception under authoritative guidance and require no mark-to-market adjustment. Our foreign subsidiaries conduct certain transactions in non-functional currencies, which exposes us to fluctuations in exchange rates. We manage these fluctuations, in part, through the use of forward foreign- exchange contracts, seeking to economically hedge the impact of these fluctuations on known future expenditures denominated in a non-functional foreign-currency. The contracts are intended primarily to economically hedge exposure to U.S. dollar merchandise inventory expenditures made by our international subsidiaries. We seek to mitigate risk with the use of these contracts and do not intend to engage in speculative transactions. For additional information related to the Company's forward foreign- exchange contracts, see Notes 1 and 3 to the consolidated financial statements included in Item 8 of this Report. A hypothetical 10% strengthening of the functional currency compared to the non-functional currency exchange rates at September 3, 2023, would have decreased the fair value of the contracts by $109 and resulted in an unrealized loss in the consolidated statements of income for the same amount. Commodity Price Risk Foreign Currency Risk 30 30 29 29 Item 8-Financial Statements and Supplementary Data The nature and amount of our long-term debt may vary as a result of business requirements, market conditions, and other factors. As of the end of 2023, long-term debt with fixed interest rates was $6,484. Fluctuations in interest rates may affect the fair value of the fixed-rate debt. See Note 4 to the consolidated financial statements included in Item 8 of this Report for more information on our long-term debt. Our policy limits investments in the U.S. to direct U.S. government and government agency obligations, repurchase agreements collateralized by U.S. government and government agency obligations, U.S. government and government agency money market funds, and insured bank balances. Our wholly-owned captive insurance subsidiary invests in U.S. government and government agency obligations and U.S. government and government agency money market funds. Our Canadian and Other International subsidiaries' investments are primarily in money market funds, bankers' acceptances, and bank certificates of deposit, generally denominated in local currencies. Our exposure to market risk for changes in interest rates relates primarily to our investment holdings that are diversified among various instruments considered to be cash equivalents, as defined in Note 1 to the consolidated financial statements included in Item 8 of this Report, as well as short-term investments in government and agency securities with effective maturities of generally three months to five years at the date of purchase. The primary objective of our investment activities is to preserve principal and secondarily to generate yields. The majority of our short-term investments are in fixed interest-rate securities. These securities are subject to changes in fair value due to interest rate fluctuations. Interest Rate Risk Our exposure to financial market risk results from fluctuations in interest rates and foreign currency exchange rates. We do not engage in speculative or leveraged transactions or hold or issue financial instruments for trading purposes. Item 7A-Quantitative and Qualitative Disclosures About Market Risk (amounts in millions) Recent Accounting Pronouncements REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM A 100 basis point change in interest rates as of the end of 2023 would have had an immaterial incremental change in fair market value. For those investments that are classified as available-for-sale, the unrealized gains or losses related to fluctuations in market volatility and interest rates are reflected within stockholders' equity in accumulated other comprehensive income in the consolidated balance sheets. COSTCO WHOLESALE CORPORATION We do not expect that any recently issued accounting pronouncements will have a material effect on our financial statements. Page INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 36 35 37 39 38 + W W W W & w 31 40 Notes to Consolidated Financial Statements Consolidated Statements of Cash Flows Consolidated Statements of Equity Consolidated Balance Sheets Consolidated Statements of Comprehensive Income Consolidated Statements of Income Reports of Independent Registered Public Accounting Firm 778 (686) (35) Release of vested RSUs, (686) 24 20,647 adjustment and other, net Foreign-currency translation 6,292 6,292 6,292 5 20,642 Stock-based compensation ཚེ | Release of vested RSUs, 71 (1,137) 7,031 15,585 11,666 17,564 514 18,078 5,915 1,702 Foreign-currency translation adjustment and other, net Stock-based compensation including tax effects Dividend to noncontrolling .---- 5,844 5,8 :- - 728 -- 5,844 Net income (1,829) Repurchases of common stock 2 - (208) (208) | interest Acquisition of noncontrolling interest (363) (363) (363) 728 728 7 4 (721) (499) 6,884 (505) (842) 442,664 (1,498) (1,498) (1,498) 2 Net income AUGUST 28, 2022 BALANCE AT other (442) (442) (427) (15) (863) Cash dividends declared and (337) including tax effects 441,825 (5,748) 24 $ 5,915 6,292 August 28, 2022 52 Weeks Ended 53 Weeks Ended September 3, 2023 52 Weeks Ended August 29, 2021 COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO Less: Comprehensive income attributable to noncontrolling interests Comprehensive income Foreign-currency translation adjustment and other, net NET INCOME INCLUDING NONCONTROLLING INTERESTS (amounts in millions) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME COSTCO WHOLESALE CORPORATION 35 13.17 $ 11.30 14.16 $ 13.14 $ (721) 11.27 443,651 443,089 444,452 444,757 444,346 The accompanying notes are an integral part of these consolidated financial statements. 443,854 14.18 $ 6,316 5,079 1,534 10,203 13,700 $ August 28, 2022 September 3, 2023 TOTAL ASSETS Other long-term assets Operating lease right-of-use assets Property and equipment, net OTHER ASSETS Total current assets Other current assets Merchandise inventories Receivables, net Short-term investments Cash and cash equivalents ASSETS 181 5,260 93 36 6,316 $ 5,194 5,158 $ The accompanying notes are an integral part of these consolidated financial statements. 36 CURRENT ASSETS COSTCO WHOLESALE CORPORATION CONSOLIDATED BALANCE SHEETS (amounts in millions, except par value and share data) 5,167 846 $ Basic 6,708 7,793 8,114 Operating income 18,537 19,779 21,590 Selling, general and administrative 170,684 199,382 212,586 Merchandise costs 195,929 226,954 242,290 3,877 4,224 REVENUE Net sales Membership fees Total revenue OPERATING EXPENSES COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (amounts in millions, except per share data) OTHER INCOME (EXPENSE) 53 Weeks Ended 52 Weeks Ended September 3, 2023 August 28, 2022 August 29, 2021 237,710 $ 222,730 $ 192,052 4,580 52 Weeks Ended Diluted Interest expense (158) Shares used in calculation (000's) Diluted Basic ATTRIBUTABLE TO COSTCO: NET INCOME PER COMMON SHARE 5,007 $ 5,844 6,292 $ $ NET INCOME ATTRIBUTABLE TO COSTCO (72) (71) Net income attributable to noncontrolling interests 5,079 5,915 6,292 (171) Interest income and other, net 533 205 143 INCOME BEFORE INCOME TAXES (160) 8,487 6,680 Provision for income taxes 2,195 1,925 1,601 Net income including noncontrolling interests 7,840 2,285 2,241 16,651 Total Noncontrolling Total Costco Stockholders' Retained Earnings Comprehensive Income (Loss) Capital Amount Paid-in Shares (000's) Additional Common Stock BALANCE AT Cash dividends declared Repurchases of common stock Release of vested restricted stock units (RSUs), including tax effects Stock-based compensation Foreign-currency translation adjustment and other, net 20,647 TOTAL LIABILITIES AND EQUITY 68,994 $ 64,166 The accompanying notes are an integral part of these consolidated financial statements. 37 Equity COSTCO WHOLESALE CORPORATION (amounts in millions) Accumulated Other BALANCE AT AUGUST 30, 2020 Net income CONSOLIDATED STATEMENTS OF EQUITY 25,058 Interests 441,255 (5,748) (5,748) (495) (495) (472) (312) (312) (312) (23) (1,358) 1,928 : 668 160 668 668 181 21 160 5,079 $ 4 $ 6,698 $ (1,297) $ Equity 12,879 18,284 $ 421 $ 18,705 5,007 5,007 72 $ TOTAL EQUITY 5 Noncontrolling interests Long-term debt, excluding current portion Total current liabilities Other current liabilities Current portion of long-term debt Deferred membership fees OTHER LIABILITIES 1,911 2,150 Accrued member rewards 4,381 4,278 Accrued salaries and benefits 17,848 17,483 $ $ Accounts payable CURRENT LIABILITIES 17,907 1,709 1,499 35,879 32,696 26,684 Long-term operating lease liabilities 24,646 2,774 3,718 4,050 68,994 $ 64,166 LIABILITIES AND EQUITY 2,713 Other long-term liabilities TOTAL LIABILITIES COMMITMENTS AND CONTINGENCIES Common stock $0.005 par value; 900,000,000 shares authorized; 442,793,000 and 442,664,000 shares issued and outstanding 2 Additional paid-in capital 7,340 2 6,884 Accumulated other comprehensive loss Preferred stock $0.005 par value; 100,000,000 shares authorized; no shares issued and outstanding (1,805) Retained earnings 19,521 15,585 Total Costco stockholders' equity 25,058 20,642 (1,829) AUGUST 29, 2021 EQUITY 43,936 2,337 2,174 1,081 73 6,254 5,611 43,519 33,583 5,377 6,484 2,426 2,482 2,550 2,555 31,998 Reclassification Reclassifications were made to the 2022 and 2021 consolidated statements of cash flows to conform with current year presentation. 52 Weeks Ended August 29, 2021 Repayments of short-term borrowings (935) (6) Proceeds from short-term borrowings 917 53 41 Repayments of long-term debt Tax withholdings on stock-based awards Repurchases of common stock Cash dividend payments Financing lease payments Dividend to noncontrolling interest Acquisition of noncontrolling interest Other financing activities, net (75) CASH FLOWS FROM FINANCING ACTIVITIES (800) (62) (3,535) Net cash used in investing activities CASH FLOWS FROM INVESTING ACTIVITIES Purchases of short-term investments (1,622) (1,121) (1,331) Maturities and sales of short-term investments 937 1,145 1,446 Additions to property and equipment (4,323) (3,891) (3,588) Other investing activities, net 36 (48) (3,915) 8,958 (94) (363) Net change in cash and cash equivalents 3,497 (249) (1,055) 46 (1,019) CASH AND CASH EQUIVALENTS BEGINNING OF YEAR 10,203 CASH AND CASH EQUIVALENTS END OF YEAR $ 13,700 $ 11,258 10,203 $ 12,277 11,258 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: 15 (303) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (4,283) (312) (676) (439) (496) (1,251) (1,498) (5,748) (291) (176) (67) (208) (842) (4) Net cash used in financing activities (2,614) 188 (6,488) 7,392 11,068 1,057 (303) (303) (303) 1,470 (1,341) 778 778 24 24 SEPTEMBER 3, 2023 BALANCE AT other Cash dividends declared and Repurchases of common stock 53 Weeks Ended September 3, 2023 52 Weeks Ended August 28, 2022 (24) CASH FLOWS FROM OPERATING ACTIVITIES (653) (677) (amounts in millions) COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS 38 The accompanying notes are an integral part of these consolidated financial statements. $ 25,058 25,058 $ (1,805) $ 19,521 $ 7,340 $ $ 2 442,793 $ (1,703) (1,698) (1,703) 5 (677) Net income including noncontrolling interests $ 6,292 39 144 Changes in operating assets and liabilities: Merchandise inventories Accounts payable 1,228 (4,003) (1,892) (382) 1,891 1,838 Other operating assets and liabilities, net Net cash provided by operating activities 172 549 495 Impairment of assets and other non-cash operating activities, net 665 724 $ 5,915 $ 5,079 Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities: Depreciation and amortization Interest 2,077 1,781 Non-cash lease expense 412 377 286 Stock-based compensation 774 1,900 $ (4,972) $ 2023 Estimated Useful Lives Property and equipment, net Accumulated depreciation and amortization Construction in progress Equipment and fixtures Buildings and improvements Land The following table summarizes the Company's property and equipment balances at the end of 2023 and 2022: Repair and maintenance costs are expensed when incurred. Expenditures for remodels, refurbishments and improvements that add to or change asset function or useful life are capitalized. Assets removed during the remodel, refurbishment or improvement are retired. Assets classified as held-for-sale at the end of 2023 and 2022 were immaterial. 42 42 The Company capitalizes certain computer software and costs incurred in developing or obtaining software for internal use. During development, these costs are included in construction in progress. To the extent that the assets become ready for their intended use, these costs are included in equipment and fixtures and amortized on a straight-line basis over their estimated useful lives. Property and equipment are stated at cost. Depreciation and amortization expense is computed primarily using the straight-line method over estimated useful lives. Leasehold improvements made after the beginning of the initial lease term are depreciated over the shorter of the estimated useful life of the asset or the remaining term of the initial lease plus any renewals that are reasonably certain at the date the leasehold improvements are made. Property and Equipment, Net 2022 The Company provides for estimated inventory losses between physical inventory counts using estimates based on experience. The provision is adjusted periodically to reflect physical inventory counts, which generally occur in the second and fourth fiscal quarters. Inventory cost, where appropriate, is reduced by estimates of vendor rebates when earned or as the Company progresses towards earning those rebates, provided that they are probable and reasonably estimable. N/A 7,955 26,684 $ $ (15,286) (16,685) 39,932 43,369 1,582 1,266 N/A 10,275 11,512 3-20 years 20,120 22,001 5-50 years 8,590 $ Merchandise inventories are stated at the lower of cost or market. U.S. merchandise inventories are valued by the cost method of accounting, using the last-in, first-out (LIFO) basis. The Company believes the LIFO method more fairly presents the results of operations by more closely matching current costs with current revenues. The Company records an adjustment each quarter, if necessary, for the projected annual effect of inflation or deflation, and these estimates are adjusted to actual results determined at year-end, after actual inflation or deflation rates and inventory levels have been determined. An immaterial LIFO charge was recorded in 2023. Due to inflation in 2022, a $438 charge was recorded to merchandise costs to increase the cumulative LIFO valuation on merchandise inventories at August 28, 2022. Canadian and Other International merchandise inventories are predominantly valued using the cost and retail inventory methods, respectively, using the first-in, first-out (FIFO) basis. 17,907 2,781 The Company's valuation techniques used to measure the fair value of money market mutual funds are based on quoted market prices, such as quoted net asset values published by the fund as supported in an active market. Valuation methodologies used to measure the fair value of all other non-derivative financial instruments are based on independent external valuation information. The pricing process uses data from a variety of independent external valuation information providers, including trades, bid price or spread, two-sided markets, quotes, benchmark curves including but not limited to treasury benchmarks, Secured Overnight Financing Rate and swap curves, discount rates, and market data feeds. All are observable in the market or can be derived principally from or corroborated by observable market data. The Company reports transfers in and out of Levels 1, 2, and 3, as applicable, using the fair value of the individual securities as of the beginning of the reporting period in which the transfer(s) occurred. Level 3: Significant unobservable inputs that are not corroborated by market data. Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. Level 1: Quoted market prices in active markets for identical assets or liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying a fair value hierarchy, which requires maximizing the use of observable inputs when measuring fair value. The three levels of inputs are: The Company accounts for certain assets and liabilities at fair value. The carrying value of the Company's financial instruments, including cash and cash equivalents, receivables and accounts payable, approximate fair value due to their short-term nature or variable interest rates. See Notes 2, 3, and 4 for the carrying value and fair value of the Company's investments, derivative instruments, and fixed-rate debt. Fair Value of Financial Instruments The Company periodically evaluates unrealized losses in its investment securities for credit impairment, using both qualitative and quantitative criteria. In the event a security deemed to be impaired as the result of a credit loss, the Company recognizes the loss in interest income and other, net in the consolidated statements of income. years may be classified, based on the Company's determination, as short-term based on their highly liquid nature and because they represent the investment of cash that is available for current operations. Short-term investments classified as available-for-sale are recorded at fair value using the specific identification method with the unrealized gains and losses reflected in accumulated other comprehensive income (loss) until realized. Realized gains and losses from the sale of available-for-sale securities, if any, are determined on a specific identification basis and are recorded in interest income and other, net in the consolidated statements of income. These available-for-sale investments have a low level of inherent credit risk given they are issued by the U.S. Government and Agencies. Changes in their fair value are primarily attributable to changes in interest rates and market liquidity. Short-term investments classified as held-to-maturity are financial instruments that the Company has the intent and ability to hold to maturity and are reported net of any related amortization and are not remeasured to fair value on a recurring basis. 40 40 Short-term investments generally consist of debt securities (U.S. Government and Agency Notes), with maturities at the date of purchase of three months to five years. Investments with maturities beyond five Short-Term Investments The Company considers as cash and cash equivalents all cash on deposit, highly liquid investments with a maturity of three months or less at the date of purchase, and proceeds due from credit and debit card transactions with settlement terms of up to four days. Credit and debit card receivables were $2,282 and $2,010 at the end of 2023 and 2022. Cash and Cash Equivalents Current financial liabilities have fair values that approximate their carrying values. Long-term financial liabilities include the Company's long-term debt, which are recorded on the balance sheet at issuance price and adjusted for unamortized discounts or premiums and debt issuance costs. Discounts, premiums and debt issuance costs are amortized to interest expense over the term of the loan. The estimated fair value of the Company's long-term debt is based primarily on reported market values, recently completed market transactions, and estimates based upon interest rates, maturities, and credit. 41 11 Income taxes, net 2,919 16,651 $ 1,966 1,579 13,160 12,153 $ 2022 2023 24,646 $ Other International Canada United States Merchandise inventories consist of the following: Merchandise Inventories The valuation allowance related to receivables was not material to our consolidated financial statements at the end of 2023 and 2022. Receivables consist primarily of vendor, reinsurance, credit card incentive, third-party pharmacy and other receivables. Vendor receivables include discounts and volume rebates. Balances are generally presented on a gross basis, separate from any related payable due. In certain circumstances, these receivables may be settled against the related payable to that vendor, in which case the receivables are presented on a net basis. Reinsurance receivables are held by the Company's wholly-owned captive insurance subsidiary and primarily represent amounts ceded through reinsurance arrangements gross of the amounts assumed under reinsurance, which are presented within other current liabilities in the consolidated balance sheets. Credit card incentive receivables primarily represent amounts earned under co-branded credit card arrangements. Third-party pharmacy receivables generally relate to amounts due from members' insurers. Other receivables primarily consist of amounts due from governmental entities, mostly tax-related items. Merchandise inventories The Company evaluates long-lived assets for impairment on an annual basis, when relocating or closing a facility, or when events or changes in circumstances may indicate the carrying amount of the asset group, generally an individual warehouse, may not be fully recoverable. For asset groups held and used, including warehouses to be relocated, the carrying value of the asset group is considered recoverable when the estimated future undiscounted cash flows generated from the use and eventual disposition of the asset group exceed the respective carrying value. In the event that the carrying value is not considered recoverable, an impairment loss is recognized for the asset group to be held and used equal to the excess of the carrying value above the estimated fair value of the asset group. For asset groups classified as held-for-sale (disposal group), the carrying value is compared to the disposal group's fair value less costs to sell. The Company estimates fair value by obtaining market appraisals from third party brokers or using other valuation techniques. Impairment charges recognized in 2023 were immaterial. In 2022 and 2021, the Company recognized write-offs of $118 and $84 for information technology assets which are reflected in SG&A. Receivables, Net The Company leases land, buildings, and/or equipment at warehouses and certain other office and distribution facilities. Leases generally contain one or more of the following options, which the Company can exercise at the end of the initial term: (a) renew the lease for a defined number of years at the then- fair market rental rate or rate stipulated in the lease agreement; (b) purchase the property at the then-fair market value or purchase price stated in the agreement; or (c) a right of first refusal in the event of a third- party offer. COSTCO WHOLESALE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions, except share, per share, and warehouse count data) Note 1-Summary of Significant Accounting Policies Description of Business Costco Wholesale Corporation (Costco or the Company), a Washington corporation, and its subsidiaries operate membership warehouses based on the concept that offering members low prices on a limited selection of nationally-branded and private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. At September 3, 2023, Costco operated 861 warehouses worldwide: 591 in the United States (U.S.) located in 46 states, Washington, D.C., and Puerto Rico, 107 in Canada, 40 in Mexico, 33 in Japan, 29 in the United Kingdom (U.K.), 18 in Korea, 15 in Australia, 14 in Taiwan, five in China, four in Spain, two in France, and one each in Iceland, New Zealand, and Sweden. The Company operates e-commerce websites in the U.S., Canada, the U.K., Mexico, Korea, Taiwan, Japan, and Australia. Basis of Presentation The consolidated financial statements include the accounts of Costco and its subsidiaries. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company's equity. All material inter-company transactions between and among the Company and its consolidated subsidiaries have been eliminated in consolidation. Unless otherwise noted, references to net income relate to net income attributable to Costco. Fiscal Year End The Company operates on a 52/53-week fiscal year basis with the year ending on the Sunday closest to August 31. References to 2023 relate to the 53-week fiscal year ended September 3, 2023. References to 2022 and 2021 relate to the 52-week fiscal years ended August 28, 2022, and August 29, 2021. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions take into account historical and forward-looking factors that the Company believes are reasonable. Actual results could differ from those estimates and assumptions. 44 Claims for employee health-care benefits, workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability, inventory loss, and other exposures are funded predominantly through self-insurance. Insurance coverage is maintained for certain risks to limit exposures arising from very large losses. The Company uses various risk management mechanisms, including a wholly-owned captive insurance subsidiary (the captive) and participates in a reinsurance program. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated using historical claims experience, demographic factors, severity factors, and other actuarial Insurance/Self-insurance Liabilities 39 Definite-lived intangible assets, which are not material, are included in other long-term assets on the consolidated balance sheets and are amortized on a straight-line basis over their estimated lives, which approximates the pattern of expected economic benefit. The accompanying notes are an integral part of these consolidated financial statements. 184 125 $ 2,234 $ Leases 145 $ 1,940 $ 149 1,527 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: Cash dividend declared, but not yet paid Capital expenditures included in liabilities SA SA 452 $ - $ - 170 $ 156 $ EA SA 888 994 $ 26 $ 28 $ 953 $ $ Balance at August 29, 2021 Total Other International Canada United States Goodwill and Acquired Intangible Assets The Company's asset retirement obligations (ARO) primarily relate to leasehold improvements that must be removed at the end of a lease. These obligations are generally recorded as a discounted liability, with an offsetting asset at the inception of the lease term, based upon the estimated fair value of the costs to remove the improvements. These liabilities are accreted over time to the projected future value of the obligation. The ARO assets are depreciated using the same depreciation method as the leasehold improvement assets and are included with buildings and improvements. Estimated ARO liabilities associated with these leases are included in other liabilities in the accompanying consolidated balance sheet. reasonably certain that the Company will exercise the option. As the rate implicit in the Company's leases is not easily determinable, the present value of the sum of the lease payments is calculated using the Company's incremental borrowing rate. The rate is determined using a portfolio approach based on the rate of interest the Company would pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. The Company uses quoted interest rates from financial institutions to derive the incremental borrowing rate. Impairment of ROU assets is evaluated in a similar manner as described in Property and Equipment, Net above. During 2023, the Company recognized charges totaling $391, primarily related to the impairment of certain leased assets associated with charter shipping activities. This charge is included in merchandise costs. 43 15 $ The Company determines at inception whether a contract is or contains a lease. Non-lease components and the lease components to which they relate are accounted for together as a single lease component for all asset classes. The Company initially records right-of-use (ROU) assets and lease obligations for its finance and operating leases based on the discounted future minimum lease payments over the term. The lease term is defined as the noncancelable period of the lease plus any options to extend when it is Some leases include free-rent periods and step-rent provisions, which are recognized on a straight-line basis over the original term of the lease and any extension options that the Company is reasonably certain to exercise from the date the Company has control of the property. Certain leases provide for periodic rent increases based on price indices or the greater of minimum guaranteed amounts or sales volume, which are recognized as variable lease payments. Our leases do not contain any material residual value guarantees or material restrictive covenants. 15 $ 996 Goodwill represents the excess of acquisition cost over the fair value of the net assets acquired and is not subject to amortization. The Company reviews goodwill annually in the fourth quarter for impairment or when circumstances indicate carrying value may exceed the fair value. This evaluation is performed at the reporting unit level. If a qualitative assessment indicates that it is more likely than not that the fair value is less than carrying value, a quantitative analysis is completed using either the income or market approach, or a combination of both. The income approach estimates fair value based on expected discounted future cash flows, while the market approach uses comparable public companies and transactions to develop metrics to be applied to historical and expected future operating results. Goodwill is included in other long-term assets in the consolidated balance sheets. The following table summarizes goodwill by reportable segment: - Changes in currency translation Balance at September 3, 2023 1 $ (1) Changes in currency translation 993 13 $ 2 27 $ 953 $ Balance at August 28, 2022 (3) (2) (1) 953 $ 62 from time to time, as conditions warrant, in the open market or in block purchases and pursuant to plans under SEC Rule 10b5-1. Note 7-Stock-Based Compensation The 2019 Incentive Plan authorized the issuance of 17,500,000 shares (10,000,000 RSUs) of common stock for future grants, plus the remaining shares that were available for grant and the future forfeited shares from grants under the previous plan, up to a maximum aggregate of 27,800,000 shares (15,885,000 RSUs). The Company issues new shares of common stock upon vesting of RSUs. Shares for vested RSUs are generally delivered to participants annually, net of shares withheld for taxes. Summary of Restricted Stock Unit Activity • At the end of 2023, 8,747,000 shares were available to be granted as RSUs, and the following awards were outstanding: • Cash dividends declared in 2023 totaled $3.84 per share, as compared to $3.38 in 2022. The Company's current quarterly dividend rate is $1.02 per share. 2,869,000 time-based RSUs, which vest upon continued employment or service over specified periods of time; and 176,000 performance-based RSUs, of which 135,000 were granted to executive officers subject to the determination of the attainment of performance targets for 2023. This determination occurred in September 2023, at which time at least 33% of the units vested, as a result of the long service of all executive officers, with the exception of one executive officer who has less than 25 years of service. The remaining awards vest upon continued employment over specified periods of time. Please refer to Note 1 for accelerated vesting requirements. 52 Total Cost 364.39 495 442 677 504.68 $ 511.46 Average Price per Share Shares Repurchased (000's) 1,341 $ 863 1,358 2021 2023 2022 The following table summarizes RSU transactions during 2023: The Company's stock repurchase program is conducted under a $4,000 authorization by the Board of Directors, which expires in January 2027. As of the end of 2023, the remaining amount available under the authorization was $3,563. The following table summarizes the Company's stock repurchase activity: Stock Repurchase Programs These amounts may differ from repurchases of common stock in the consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of each fiscal year. Purchases are made Outstanding at the end of 2022 The weighted-average grant date fair value of RSUs granted was $471.47, $476.06, and $369.15 in 2023, 2022, and 2021. The remaining unrecognized compensation cost related to non-vested RSUs at the end of 2023 was $790 and the weighted-average period of time over which this cost will be recognized is 1.6 years. Included in the outstanding balance at the end of 2023 were approximately 1,050,000 RSUs vested but not yet delivered. Number of Units (in 000's) 665 140 Dividends 724 $ 154 774 $ 163 Less recognized income tax benefit $ Stock-based compensation expense 2021 2022 2023 The following table summarizes stock-based compensation expense and the related tax benefits: Granted Summary of Stock-Based Compensation 398.31 352.53 471.47 338.41 (116) 3,045 $ Outstanding at the end of 2023 Forfeited Vested and delivered Weighted-Average Grant Date Fair Value (2,102) 1,814 3,449 $ 405.63 Note 6-Equity Financing lease assets obtained in exchange for new or modified leases 1,432 399 794 100 350 231 202 or modified leases Operating lease assets obtained in exchange for new 67 176 291 Financing cash flows finance leases As of September 3, 2023, future minimum payments during the next five fiscal years and thereafter are as follows: 37 54 Operating cash flows — finance leases 282 277 $ 287 $ $ operating leases Operating cash flows of lease liabilities: 2021 2022 Stock-based compensation expense, net 45 (1) Operating lease payments have not been reduced by future sublease income of $83. (2) Excludes $843 of lease payments for leases that have been signed but not commenced. 2024 2026 2,646 $ 785 755 2,217 3,401 1,579 2,271 92 191 91 206 100 2025 226 230 180 277 $ $ Finance Leases Operating Leases (1) Present value of lease liabilities Less amount representing interest Total (2) Thereafter 2028 2027 175 $ 2021 570 $ 3.6 243 3.4 267 3.6 302 State taxes, net 21.0 % 21.0 % $ 1,403 21.0 % $ 1,646 $ 1,782 Federal taxes at statutory rate Foreign taxes, net 2021 2023 follows: The reconciliation between the statutory tax rate and the effective rate for 2023, 2022, and 2021 is as 1,601 1,925 $ 2,195 $ $ 523 834 722 (34) (17) 2022 (10) 160 231 2023 54 54 The Company recognized total net tax benefits of $62, $130 and $163 in 2023, 2022 and 2021. These include benefits of $54, $94 and $75, related to stock-based compensation. During 2021, there was a net tax benefit of $70 related to the portion of the special dividend paid through the Company's 401(k) plan. 24.0% 24.6 % $ 1,601 25.9 % $ 1,925 $2,195 Total (0.7) (46) (2.5) 1.9 (196) (24) Other (1.3) (91) (0.3) (23) (0.3) (25) Employee stock ownership plan (ESOP) 1.4 92 3.0 (0.3) 557 851 732 2021 2022 2023 Total provision for income taxes Total foreign Deferred Current Foreign: Total state Deferred Current State: 6,264 $ Total federal Current Federal: The provisions for income taxes are as follows: Total Foreign Domestic Income before income taxes is comprised of the following: Income Taxes Note 8-Taxes 53 53 525 Deferred 5,759 $ 4,931 2,223 276 328 384 11 (5) 10 265 333 374 802 763 1,089 84 (35) 718 798 $ 1,056 $ 33 $ 2021 2022 2023 6,680 7,840 $ 8,487 $ $ 1,749 2,081 611 $ Cash paid for amounts included in the measurement 3.97 % 51 901 110 111 $ $ Due in one year or less Held-To-Maturity Fair Value Cost Basis Available-For-Sale The maturities of available-for-sale and held-to-maturity securities at the end of 2023 are as follows: Gross unrecognized holding gains and losses on available-for-sale securities were not material for the years ended September 3, 2023, and August 28, 2022. At those dates, there were no available-for-sale securities in a material continuous unrealized-loss position. There were no sales of available-for-sale securities during 2023 or 2022. 846 (5) $ 317 $ 851 $ 317 Total short-term investments Certificates of deposit Held-to-maturity: 529 (5) $ 534 $ $ Government and agency securities Available-for-sale: Basis Losses, Net Due after one year through five years 337 330 Due after five years Note 4-Debt 49 449 Assets and liabilities recognized and disclosed at fair value on a nonrecurring basis include items such as financial assets measured at amortized cost and long-lived nonfinancial assets. These assets are measured at fair value if determined to be impaired. Please see Note 1 for additional information. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis At September 3, 2023, and August 28, 2022, the Company did not hold any Level 1 or 3 financial assets or liabilities that were measured at fair value on a recurring basis. There were no transfers between levels during 2023 or 2022. (1) The asset and the liability values are included in other current assets and other current liabilities, respectively, in the consolidated balance sheets. 561 644 $ (2) (7) 34 529 633 $ 18 Recorded 2022 Level 2 $ Total Investment in government and agency securities Forward foreign-exchange contracts, in asset position" Forward foreign-exchange contracts, in (liability) position (1) The table below presents information regarding the Company's financial assets and financial liabilities that are measured at fair value on a recurring basis and indicate the level within the hierarchy reflecting the valuation techniques utilized to determine such fair value. Assets and Liabilities Measured at Fair Value on a Recurring Basis Note 3-Fair Value Measurement 901 633 $ 650 $ $ Total 193 202 2023 Unrealized Basis Cost 47 The Company grants stock-based compensation, primarily to employees and non-employee directors. Grants to executive officers are generally performance-based. Through a series of shareholder approvals, there have been amended and restated plans and new provisions implemented by the Company. Restricted Stock Units (RSUs) granted to employees and to non-employee directors generally vest over five years and three years and are subject to quarterly vesting in the event of retirement or voluntary termination. Employees who attain at least 25 years of service with the Company receive shares under accelerated vesting provisions on the annual vesting date. Forfeitures are recognized as they occur. Compensation expense for awards is predominantly recognized using the straight-line method over the requisite service period for the entire award. The terms of the RSUs, including performance-based awards, provide for accelerated vesting for employees and non-employee directors who have attained 25 or more and five or more years of service with the Company, respectively. Recipients are not entitled to vote or receive dividends on unvested and undelivered shares. Compensation expense for the accelerated shares is recognized upon achievement of the long-service term. The cumulative amount of compensation cost recognized at any point in time equals at least the portion of the grant-date fair value of the award that is vested at that date. The fair value of RSUs is calculated as the market value of the Stock-Based Compensation Supplemental cash flow information related to leases was as follows: Retirement Plans Selling, general and administrative expenses consist primarily of salaries, benefits and workers' compensation costs for warehouse employees (other than fresh foods departments and certain ancillary businesses which are reflected in merchandise costs) as well as all regional and home office employees, including buying personnel. Selling, general and administrative expenses also include substantially all building and equipment depreciation, stock compensation expense, credit and debit card processing fees, utilities, preopening, as well as other operating costs incurred to support warehouse and e-commerce website operations. Selling, General and Administrative Expenses The Company receives funds from vendors for discounts and a variety of other programs. These programs are evidenced by agreements that are reflected in the carrying value of the inventory when earned or as the Company progresses towards earning the rebate or discount, and as a component of merchandise costs as the merchandise sold. Other vendor consideration is generally recorded as a reduction of merchandise costs upon completion of contractual milestones, terms of the related agreement, or by another systematic approach. Vendor Consideration Merchandise costs consist of the purchase price or manufacturing costs of inventory sold, inbound and outbound shipping charges and all costs related to the Company's depot, fulfillment and manufacturing operations, and are reduced by vendor consideration. Merchandise costs also include salaries, benefits, depreciation, and utilities in fresh foods departments and certain ancillary businesses. Merchandise Costs 46 46 The Company sells and otherwise provides proprietary shop cards that do not expire and are redeemable at the warehouse or online for merchandise or membership. Revenue from shop cards is recognized upon redemption, and estimated breakage is recognized based on redemption data. The Company accounts for outstanding shop card balances as a shop card liability, net of estimated breakage. Shop card liabilities are included in other current liabilities in the consolidated balance sheets. Citibank, N.A. is the exclusive issuer of co-branded credit cards to U.S. members. The Company receives various forms of consideration from Citibank, including a royalty on purchases made on the card outside of Costco. A portion of the royalty is used to fund the rebate that cardholders receive, after taking into consideration breakage, which is calculated based on rebate redemption data. The rebates are issued in February and expire on December 31. The Company also maintains co-branded credit card arrangements in Canada and certain other International subsidiaries. common stock on the measurement date less the present value of the expected dividends forgone during the vesting period. In most countries, the Company's Executive members qualify for a 2% reward on qualified purchases, subject to an annual maximum value, which does not expire and is redeemable at Costco warehouses. The Company accounts for this reward as a reduction in sales, net of the estimated impact of non- redemptions (breakage), with the corresponding liability classified as accrued member rewards in the consolidated balance sheets. Estimated breakage is computed based on redemption data. For 2023, 2022, and 2021, the net reduction in sales was $2,576, $2,307, and $2,047. The Company is the principal for the majority of its transactions and recognizes revenue on a gross basis. The Company is the principal when it has control of the merchandise or service before it is transferred to the member, which generally is established when Costco is primarily responsible for merchandising decisions, pricing discretion, and maintains the relationship with the member, including assurance of member service and satisfaction. The Company offers merchandise in the following core merchandise categories: foods and sundries, non- foods, and fresh foods. The Company also provides expanded products and services through warehouse ancillary and other businesses. The majority of revenue from merchandise sales is recognized at the point of sale. Revenue generated through e-commerce or special orders is generally recognized upon shipment to the member. For merchandise shipped directly to the member, shipping and handling costs are expensed as incurred as fulfillment costs and included in merchandise costs in the consolidated statements of income. In certain ancillary businesses, revenue is deferred until the member picks up merchandise at the warehouse. Deferred sales are included in other current liabilities in the consolidated balance sheets. The Company recognizes sales for the amount of consideration collected from the member, which includes gross shipping fees where applicable, and is net of sales taxes collected and remitted to government agencies and member returns. The Company reserves for estimated returns based on historical trends in merchandise returns and reduces sales and merchandise costs accordingly. The Company records, on a gross basis, a refund liability and an asset for recovery, which are included in other current liabilities and other current assets, respectively, in the consolidated balance sheets. Revenue Recognition forward foreign-exchange contracts. These items were $46 and $84 in 2023 and 2022 and immaterial in 2021. 45 The Company recognizes foreign-currency transaction gains and losses related to revaluing or settling monetary assets and liabilities denominated in currencies other than the functional currency in interest income and other, net in the consolidated statements of income. Generally, these include the U.S. dollar cash and cash equivalents and the U.S. dollar payables of consolidated subsidiaries revalued to their functional currency. Also included are realized foreign-currency gains or losses from settlements of The functional currencies of the Company's international subsidiaries are their local currencies. Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Translation adjustments are recorded in accumulated other comprehensive loss. Revenues and expenses of the Company's consolidated foreign operations are translated at average exchange rates prevailing during the year. Foreign Currency The Company is exposed to fluctuations in prices for energy, particularly electricity and natural gas, and other commodity products used in retail and manufacturing operations, which it seeks to partially mitigate through the use of fixed-price contracts for certain of its warehouses and other facilities, primarily in the U.S. and Canada. The Company also enters into variable-priced contracts for some purchases of natural gas, in addition to fuel for its gas stations, on an index basis. These contracts meet the characteristics of derivative instruments, but generally qualify for the “normal purchases and normal sales" exception under authoritative guidance and require no mark-to-market adjustment. The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of business. It manages these fluctuations, in part, through the use of forward foreign-exchange contracts, seeking to economically hedge the impact of fluctuations of foreign exchange on known future expenditures denominated in a non-functional foreign-currency. The contracts relate primarily to U.S. dollar merchandise inventory expenditures made by the Company's international subsidiaries with functional currencies other than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. The Company seeks to mitigate risk with the use of these contracts and does not intend to engage in speculative transactions. Some of these contracts contain credit-risk-related contingent features that require settlement of outstanding contracts upon certain triggering events. The aggregate fair value amounts of derivative instruments in a net liability position and the amount needed to settle the instruments immediately if the credit-risk-related contingent features were triggered were immaterial at the end of 2023 and 2022. The aggregate notional amounts of open, unsettled forward foreign-exchange contracts were $1,068 and $1,242 at the end of 2023 and 2022. See Note 3 for information on the fair value of unsettled forward foreign-exchange contracts at the end of 2023 and 2022. The unrealized gains or losses recognized in interest income and other, net in the accompanying consolidated statements of income relating to the net changes in the fair value of unsettled forward foreign-exchange contracts were immaterial in 2023, 2022 and 2021. Derivatives The captive receives direct premiums, which are netted against the Company's premium costs in SG&A expenses in the consolidated statements of income. The captive participates in a reinsurance program that includes third-party participants. The participant agreements and practices of the reinsurance program are designed to limit a participating members' individual risk. Income statement adjustments related to the reinsurance program and related impacts to the consolidated balance sheets are recognized as information becomes known. In the event the Company leaves the reinsurance program, the Company retains its primary obligation to the policyholders for prior activity. assumptions. The estimated accruals for these liabilities could be significantly affected if future occurrences, claims, or expenses differ from these assumptions and historical trends. At the end of 2023 and 2022, these insurance liabilities were $1,513 and $1,364 in the aggregate, and were included in accrued salaries and benefits and other current liabilities in the consolidated balance sheets, classified based on their nature. The Company accounts for membership fee revenue, net of refunds, on a deferred basis, ratably over the one-year membership period. Deferred membership fees at the end of 2023 and 2022 were $2,337 and $2,174. Short-Term Borrowings Stock-based compensation expense is predominantly included in SG&A expenses in the consolidated statements of income. Certain stock-based compensation costs are capitalized or included in the cost of merchandise. See Note 7 for additional information on the Company's stock-based compensation plans. The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases, credits and loss carry- forwards. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts that are more likely than not expected to be realized. The timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions requires significant judgment. The benefits of uncertain tax positions are recorded in the Company's consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge from tax authorities. When facts and circumstances change, the Company reassesses these probabilities and records changes as appropriate. 2022: 48 48 1,534 (17) $ 1,551 $ $ Total short-term investments 901 901 Certificates of deposit Held-to-maturity: 633 (17) $ Income Taxes 650 $ Government and agency securities Basis Recorded Unrealized Losses, Net Basis Cost Available-for-sale: 2023: The Company's investments were as follows: Note 2-Investments Repurchased shares of common stock are retired, in accordance with the Washington Business Corporation Act. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is deducted by allocation to additional paid-in capital and retained earnings. The amount allocated to additional paid-in capital is the current value of additional paid-in capital per share outstanding and is applied to the number of shares repurchased. Any remaining amount is allocated to retained earnings. See Note 6 for additional information. Stock Repurchase Programs The computation of basic net income per share uses the weighted average number of shares that were outstanding during the period. The computation of diluted net income per share uses the weighted average number of shares in the basic net income per share calculation plus the number of common shares that would be issued assuming vesting of all potentially dilutive common shares outstanding using the treasury stock method for shares subject to RSUs. Net Income per Common Share Attributable to Costco $ The Company maintains various short-term bank credit facilities, with a borrowing capacity of $1,234 and $1,257, in 2023 and 2022. Short-term borrowings outstanding were immaterial at the end of 2023 and 2022. The Company's 401(k) retirement plan is available to all U.S. employees over the age of 18 who have completed 90 days of employment. The plan allows participants to make wage deferral contributions, a portion of which the Company matches. In addition, the Company provides each eligible participant an annual discretionary contribution. The Company also has a defined contribution plan for employees in Canada and contributes a percentage of each employee's wages. Certain subsidiaries in the Company's Other International operations have defined benefit and defined contribution plans, which are not material. Amounts expensed under all plans were $914, $824, and $748 for 2023, 2022, and 2021, and are predominantly included in SG&A expenses in the consolidated statements of income. The Company's long-term debt consists primarily of Senior Notes, described below. The Company at its option may redeem the Senior Notes at any time, in whole or in part, at a redemption price plus accrued interest. The redemption price is equal to the greater of 100% of the principal amount or the sum of the present value of the remaining scheduled payments of principal and interest to maturity. Additionally, upon certain events, a holder has the right to require a repurchase at a price of 101% of the principal amount plus accrued and unpaid interest. Interest on all outstanding long-term debt is payable semi-annually. The estimated fair value of Senior Notes is valued using Level 2 inputs. 20 2022 24 222 20 2023 4,349 4,078 $ $ 1,383 1,303 2,482 2,426 245 129 239 220 $ EA Weighted-average discount rate Finance leases Operating leases Weighted-average remaining lease term (years) (1) Included in other long-term assets in the consolidated balance sheets. (2) Included in other current liabilities in the consolidated balance sheets. (3) Included in other long-term liabilities in the consolidated balance sheets. 4,394 4,038 $ $ 1,620 2,774 2,713 $ 1,325 270 17 Operating leases Finance leases Long-Term Debt (1) Included in selling, general and administrative expenses and merchandise costs in the consolidated statements of income. (2) Included in interest expense and merchandise costs in the consolidated statements of income. 534 627 $ 692 $ $ Total lease costs 151 157 160 Variable lease costs (1) 37 45 54 $ 50 169 Amortization of lease assets (1) Finance lease costs: 296 297 $ 309 $ $ Operating lease costs (1 2022 2023 The components of lease expense, excluding short-term lease costs and sublease income (which were not material), were as follows: 2.26% 4.47 % 2.47 % 128 2022 Interest on lease liabilities (2) Total lease liabilities 73 1,081 Less current portion (1) 33 26 Less unamortized debt discounts and issuance costs 6,590 6,484 Total long-term debt 590 484 Other long-term debt 1,000 1,000 1.750% Senior Notes due April 2032 1,750 1,750 1.600% Senior Notes due April 2030 1,250 1,250 1,000 1,000 1,000 $ 2.750% Senior Notes due May 2024 3.000% Senior Notes due May 2027 1.375% Senior Notes due June 2027 2022 2023 At the end of 2023 and 2022, the fair value of the Company's long-term debt, including the current portion, was approximately $5,738 and $6,033. The carrying value of long-term debt consisted of the following: 2023 Other long-term debt consists of Guaranteed Senior Notes issued by the Company's Japanese subsidiary, valued using Level 3 inputs. In May 2023, the Japanese subsidiary repaid $75 of its Guaranteed Senior Notes. Long-term debt, excluding current portion 5,377 $ 1,000 (1) Net of unamortized debt discounts and issuance costs. Operating lease liabilities 6,484 Finance lease liabilities (3) Long-term Operating lease liabilities (2) Finance lease liabilities (2) Current Liabilities Finance lease assets (1) Operating lease right-of-use assets Assets The tables below present information regarding the Company's lease assets and liabilities. Note 5-Leases 6,484 $ 2,974 Total lease assets 76 2025 2,250 2026 2028 Thereafter Maturities of long-term debt during the next five fiscal years and thereafter are as follows: 2027 50 103 Total 1,081 2024 $ 50 Form 8-K filed on March 25, 2002) 3/25/2002 4.2 Company's Current Report on the National Association, as Trustee, dated as of March 20, 2002 (incorporated by reference to Exhibits 4.1 and 4.2 to the Corporation and U.S. Bank Form of 1.375% Senior Notes due between Costco Wholesale 8-K 8/10/2023 3.2 4.1 8-K Bylaws as amended of Costco Wholesale Corporation Corporation amended of Costco Wholesale 10/5/2022 Filing Date Form 8-K Period Ended 8/28/2022 10-K First Supplemental Indenture 4/17/2020 5/16/2017 4.3 Description of Common Stock 4.8 Filed Herewith 5/16/2017 8-K Form of 3.000% Senior Notes due May 18, 2027 4.7 May 18, 2024 5/16/2017 8-K Form of 2.750% Senior Notes due June 20, 2027 4.6 Form of 2.300% Senior Notes due May 18, 2022 4.5 April 20, 2032 4/17/2020 8-K Form of 1.750% Senior Notes due 4.4 April 20, 2030 4/17/2020 8-K Form of 1.600% Senior Notes due 8-K Incorporated by Reference Item 9C-Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Exhibit Description Not Applicable. During the fiscal quarter ended September 3, 2023, no director or officer of the Company adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement, as each term is defined in Item 408(a) of Regulation S-K. During 2023 we had three individual cardholders under a business membership in the name of the Embassy of the Islamic Republic of Iran at our subsidiary in Mexico. Gross revenue during 2023 attributable to the membership was approximately $1,276, and our estimated profit on these transactions was approximately $100. The membership was canceled during the second quarter of 2023. The Company does not intend to continue these activities. Disclosure pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 and Section 13(r) of the Securities Exchange Act of 1934, as amended. Item 9B-Other Information (amounts in whole dollars) 61 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 fourth quarter of 2023 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Changes in Internal Control Over Financial Reporting Based on its assessment, management has concluded that our internal control over financial reporting was effective as of September 3, 2023. The attestation of KPMG LLP, our independent registered public accounting firm, on the effectiveness of our internal control over financial reporting is included with the consolidated financial statements in Item 8 of this Report. Under the supervision of and with the participation of our management, we assessed the effectiveness of our internal control over financial reporting as of September 3, 2023, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness for future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of our assets; (2) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with appropriate authorizations; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that I could have a material effect on our financial statements. Management's Annual Report on Internal Control Over Financial Reporting 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 SEC 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 and the Chief Financial Officer, with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of September 3, 2023, and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date. Evaluation of Disclosure Controls and Procedures Item 9A-Controls and Procedures Item 9-Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 60 60 192,052 222,730 $ 10-K 237,710 $ PART III Articles of Incorporation as Item 10-Directors, Executive Officers and Corporate Governance Item 11-Executive Compensation 3.1 Exhibit Number Exhibits: The required exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference. All schedules have been omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements, including the notes thereto. (b) Financial Statement Schedules: 2. See the listing of Financial Statements included as a part of this Form 10-K in Item 8 of Part II. Financial Statements: 1. Documents filed as part of this report are as follows: (a) Item 15-Exhibits, Financial Statement Schedules PART IV 62 The information required by this Item is incorporated herein by reference to the sections entitled "Independent Public Accountants" in Costco's Proxy Statement. Our independent registered public accounting firm is KPMG LLP, Seattle, WA, Auditor Firm ID: 185. Item 14-Principal Accounting Fees and Services The information required by this Item is incorporated herein by reference to the sections entitled “Proposal 1: Election of Directors," "Directors," "Committees of the Board," "Shareholder Communications to the Board," "Meeting Attendance," "Report of the Compensation Committee of the Board of Directors," "Certain Relationships and Transactions" and "Report of the Audit Committee” in Costco's Proxy Statement. Item 13-Certain Relationships and Related Transactions, and Director Independence The information required by this Item is incorporated herein by reference to the section entitled "Principal Shareholders" and "Equity Compensation Plan Information” in Costco's Proxy Statement. Item 12-Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item is incorporated herein by reference to the sections entitled "Compensation of Directors,” “Executive Compensation," and "Compensation Discussion and Analysis" in Costco's Proxy Statement. Information relating to the availability of our code of ethics for senior financial officers and a list of our executive officers appear in Part I, Item 1 of this Report. The information required by this Item concerning our directors and nominees for director is incorporated herein by reference to the sections entitled "Proposal 1: Election of Directors," "Directors" and "Committees of the Board" in Costco's Proxy Statement for its 2024 annual meeting of shareholders, which will be filed with the SEC within 120 days of the end of our fiscal year ("Proxy Statement"). 8/28/2022 12/20/2018 10.1* Corporation and Costco Wholesale 2020, between W. Craig Jelinek Agreement, effective January 1, Executive Employment 11/24/2019 12/23/2019 10-Q Extension of the Term of the 10.5.2* Corporation and Costco Wholesale 2019, between W. Craig Jelinek Agreement, effective January 1, Executive Employment 11/25/2018 10-Q Extension of the Term of the 10.5.1* Corporation and Costco Wholesale 2017, between W. Craig Jelinek Agreement, effective January 1, 12/16/2016 10.5.3* 11/20/2016 Extension of the Term of the 11/22/2020 12/16/2020 $ 64 and Costco Wholesale Corporation Agreement, effective January 1, 2023, between W. Craig Jelinek Executive Employment 11/20/2022 12/29/2022 10-Q Extension of the Term of the 10.5.5* Corporation and Costco Wholesale 2022, between W. Craig Jelinek Agreement, effective January 1, Executive Employment 11/21/2021 12/22/2021 10-Q Extension of the Term of the 10.5.4* Corporation and Costco Wholesale 2021, between W. Craig Jelinek Agreement, effective January 1, Executive Employment 10-Q 10/5/2022 10-Q 10.5* 10-Q 2019 Stock Incentive Plan 10.3.1* 12/19/2014 DEF 14A Seventh Restated 2002 Stock Incentive Plan 10.3* Filing Date Period Ended Form Filed Herewith Exhibit Description Number Exhibit Incorporated by Reference 63 12/17/2019 DEF 14 2019 Incentive Plan 10.2* 9/2/2012 10/19/2012 10-K Costco Wholesale Executive Health Plan 11/24/2019 Executive Employment 12/23/2019 Agreement-Employee 11/9/2022 8-K Fiscal 2023 Executive Bonus Plan 10.4* Agreement for 2020 Performance- Based Restricted Stock Units- Executive 12/23/2019 11/24/2019 10-Q 2019 Stock Incentive Plan Letter 10.3.4* Director Agreement-Non-Executive Restricted Stock Unit Award 11/24/2019 12/23/2019 10-Q 2019 Stock Incentive Plan 10.3.3* Agreement - Non-U.S. Employee Restricted Stock Unit Award 11/24/2019 12/23/2019 10-Q 2019 Stock Incentive Plan 10.3.2* Restricted Stock Unit Award Total net sales Net deferred tax liabilities 46,474 Net income attributable to Costco The following table shows the amounts used in computing net income per share and the weighted average number of shares of basic and of potentially dilutive common shares outstanding (shares in 000's): Note 9-Net Income per Common and Common Equivalent Share The Company is subject to multiple examinations for value added, sales-based, payroll, product, import or other non-income taxes in various jurisdictions. In certain cases, the Company has received assessments from the authorities. Possible losses or range of possible losses associated with these matters are either immaterial or an estimate of the possible loss or range of loss cannot be made at this time. If certain matters or a group of matters were to be decided adversely to the Company, it could result in a charge that might be material to the results of an individual fiscal quarter or year. Other Taxes The Company files income tax returns in the United States, various state and local jurisdictions, in Canada, and in several other foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local examination for years before fiscal 2018. The Company is currently subject to examination in California for fiscal years 2013 to present. The Company is currently under audit by several jurisdictions in the United States and abroad. Some audits may conclude in the next 12 months, and the unrecognized tax benefits recorded in relation to the audits may differ from actual settlement amounts. It is not practical to estimate the effect, any, of any amount of such change during the next 12 months to previously recorded uncertain tax positions in connection with the audits. The Company does not anticipate that there will be a material increase or decrease in the total amount of unrecognized tax benefits in the next 12 months. Accrued interest and penalties related to income tax matters are classified as a component of income tax expense. Accrued interest and penalties recognized during 2023 and 2022, and accrued at the end of each respective period were not material. The gross unrecognized tax benefit includes tax positions for which the ultimate deductibility is highly certain but there is uncertainty about the timing of such deductibility. At the end of 2023 and 2022, these amounts were immaterial. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of these tax positions would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority. The total amount of such unrecognized tax benefits that if recognized would favorably affect the effective income tax rate in future periods is $14 and $15 at the end of 2023 and 2022. 55 55 16 Weighted average basic shares 16 $ Gross unrecognized tax benefit at end of year (6) (1) Lapse of statute of limitations (12) Gross decreases-settlements (12) (11) Gross decreases-tax positions in prior years 12 11 Gross increases-tax positions in prior years $ RSUs Weighted average diluted shares Note 10-Commitments and Contingencies Beginning in December 2017, the United States Judicial Panel on Multidistrict Litigation consolidated numerous cases concerning the impacts of opioid abuses filed against various defendants by counties, cities, hospitals, Native American tribes, third-party payors, and others. In re National Prescription Opiate Litigation (MDL No. 2804) (N.D. Ohio). Included are cases filed against the Company by counties and cities in Michigan, New Jersey, Oregon, Virginia and South Carolina, a third-party payor in Ohio, and a hospital in Texas, class actions filed on behalf of infants born with opioid-related medical conditions in 40 states, and class actions and individual actions filed on behalf of individuals seeking to recover alleged In May 2022, an employee filed a PAGA action against the Company alleging claims under the California Labor Code regarding the payment of wages, meal and rest periods, the timeliness of wages and final wages, wage statements, accurate records and business expenses. Gonzalez v. Costco Wholesale Corp. (Case No. 22AHCV00255; Los Angeles Superior Court). The Company filed an answer denying the allegations. In March 2022, an employee filed a class action against the Company alleging violations of the California Labor Code regarding the failure to: pay wages, provide meal and rest periods, provide accurate wage statements, timely pay final wages, and reimburse business expenses. Diaz v. Costco Wholesale Corp. (Case No. 22STCV09513; Los Angeles Superior Court). In December 2022, the case was settled for an immaterial amount, and the case was dismissed. In September 2021, an employee filed a class action against the Company alleging violations of the California Labor Code regarding failure to provide sick pay, failure to timely pay wages due at separation from employment, and for violations of California's unfair competition law. De Benning v. Costco Wholesale Corp. (Case No. 34-2021-00309030-CU-OE-GDS; Sacramento Superior Court). In April 2022, a settlement for an immaterial amount was agreed upon, subject to court approval. Final approval of the settlement was granted on February 10, 2023. In July 2021, a former temporary staffing employee filed a class action against the Company and a staffing company alleging violations of the California Labor Code regarding payment of wages, meal and rest periods, wage statements, the timeliness of wages and final wages, and for unfair business practices. Dimas v. Costco Wholesale Corp. (Case No. STK-CV-UOE-2021-0006024; San Joaquin Superior Court). The Company has moved to compel arbitration of the plaintiff's individual claims and to dismiss the class action complaint. On September 7, 2021, the same plaintiff filed a separate representative action under PAGA, asserting the same Labor Code violations and seeking civil penalties and attorneys' fees. The case has been stayed pending arbitration of the plaintiff's individual claims. In February 2021, a former employee filed a class action against the Company alleging violations of California Labor Code regarding payment of wages, meal and rest periods, wage statements, reimbursement of expenses, payment of final wages to terminated employees, and for unfair business practices. Edwards v. Costco Wholesale Corp. (Case No. 5:21-cv-00716: C.D. Cal.). On September 27, 2022, the parties reached a settlement for an immaterial amount, which is subject to court approval. In August 2021, a former employee filed a similar suit, asserting class claims on behalf of certain non- exempt employees under New York Labor Law for failure to pay on a weekly basis. Umadat v. Costco Wholesale Corp. (Case No. 2:21-cv-4814; E.D.N.Y.). The Company filed an answer, denying the material allegations of the complaint. In August 2023, the parties reached an agreement in principle on a settlement for an immaterial amount. In April 2022, a former employee filed a similar suit, asserting class claims on behalf of certain non-exempt employees under New York Labor Law, as well as under the Fair Labor Standards Act, for failure to pay on a weekly basis and failure to pay overtime. Burian v. Costco Wholesale Corp. (Case No. 2:22-cv-02108; E.D.N.Y.). The case was settled for an immaterial amount and was dismissed with prejudice in May 2023. claims asserted in the federal action under the New York Labor Law and seeking preliminary approval of the class settlement. Cappadora and Sancho v. Costco Wholesale Corp. (Index No. 604757/2022; Nassau County Supreme Court). Following final approval of the settlement, the case was dismissed on April 14, 2023. 57 In December 2020, a former employee filed suit against the Company asserting collective and class claims on behalf of non-exempt employees under the Fair Labor Standards Act and New York Labor Law for failure to pay for all hours worked, failure to pay certain non-exempt employees on a weekly basis, and failure to provide proper wage statements and notices. The plaintiff also asserted individual retaliation claims. Cappadora v. Costco Wholesale Corp. (Case No. 1:20-cv-06067; E.D.N.Y.). Based on an agreement in principle concerning settlement of the matter, involving a proposed payment by the Company of an immaterial amount, the federal action has been dismissed. In April 2022, Cappadora and a second plaintiff filed an action against the Company in New York state court, asserting the same class In May 2019, an employee filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Rough v. Costco Wholesale Corp. (Case No. 2:19-cv-01340; E.D. Cal.). Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. In September 2021, the court granted the Company's motion for partial summary judgment and denied class certification. In August 2019, the plaintiff filed a companion case in state court seeking penalties under PAGA. Rough v. Costco Wholesale Corp. (Case No. FCS053454; Sonoma County Superior Court). Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. The state court action has been stayed pending resolution of the federal action. In September 2023 the parties reached an agreement in principle on a settlement for an immaterial amount. In March 2019, employees filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide meal and rest periods and itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Relief was sought under the California Labor Code, including civil penalties and attorneys' fees. Nevarez v. Costco Wholesale Corp. (Case No. 2:19-cv-03454; C.D. Cal.). The Company filed an answer denying the material allegations of the complaint. In December 2019, the court issued an order denying class certification. In January 2020, the plaintiffs dismissed their Labor Code claims without prejudice, and the court remanded the action to state court. Settlement for an immaterial amount was agreed upon in February 2021. Final court approval of the settlement was granted on May 3, 2022. A proposed intervenor appealed the denial of her motion to intervene, and the appeal was dismissed on February 15, 2023. In June 2022, a business center employee raised similar claims, alleging failure to provide seating to employees who work at membership refund desks in California warehouses and business centers. Rodriguez v. Costco Wholesale Corp. (Case No. 22CV012847; Alameda Superior Court). The complaint seeks relief under the California Labor Code, including civil penalties and attorneys' fees. The Company filed an answer denying the material allegations of the complaint. The Company is a defendant in an action commenced in July 2013 under the California Labor Code Private Attorneys General Act (PAGA) alleging violation of California Wage Order 7-2001 for failing to provide seating to employees who work at entrance and exit doors in California warehouses. Canela v. Costco Wholesale Corp. (Case No. 2013-1-CV-248813; Santa Clara Superior Court). The complaint sought relief under the California Labor Code, including civil penalties and attorneys' fees. On April 26, 2023, the court entered a final judgment in favor of the Company. The plaintiff appealed the judgment in June 2023. respect to certain matters described below, in addition to other immaterial accruals for matters not described below. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but monitors for developments that make the contingency both probable and reasonably estimable. In each case, there is a reasonable possibility that a loss may be incurred, including a loss in excess of the applicable accrual. For matters where no accrual has been recorded, the possible loss or range of loss (including any loss in excess of the accrual) cannot, in the Company's view, be reasonably estimated because, among other things: the remedies or penalties sought are indeterminate or unspecified; the legal and/or factual theories are not well developed; and/or the matters involve complex or novel legal theories or a large number of parties. 56 50 The Company is involved in many claims, proceedings and litigations arising from its business and property ownership. In accordance with applicable accounting guidance, the Company establishes an accrual for legal proceedings if and when those matters present loss contingencies that are both probable and reasonably estimable. There may be losses in excess of amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss (taking into account where applicable indemnification arrangements concerning suppliers and insurers) and the accrued amount, if any, thereof, and adjusts the amount as appropriate. The Company has recorded immaterial accruals with 5,007 443,089 1,257 444,346 1,106 444,757 5,844 $ 443,651 6,292 $ 443,854 598 444,452 $ 2021 2022 2023 Legal Proceedings 1 1 Gross increases-current year tax positions 33 727 678 201 250 302 309 84 89 $ 2022 2023 Total deferred tax liabilities Foreign branch deferreds Operating lease right-of-use assets Merchandise inventories Property and equipment Deferred tax liabilities: Total net deferred tax assets 31,626 Total deferred tax assets Other Accrued liabilities and reserves Operating lease liabilities Foreign tax credit carry forward Deferred income/membership fees Equity compensation Deferred tax assets: The components of the deferred tax assets (liabilities) are as follows: 761 58 694 5 16 $ Gross unrecognized tax benefit at beginning of year 2022 2023 A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2023 and 2022 is as follows: The Company generally no longer considers fiscal year earnings of non-U.S. consolidated subsidiaries after 2017 to be indefinitely reinvested (other than China and Taiwan) and has recorded the estimated incremental foreign withholding taxes (net of available foreign tax credits) and state income taxes payable assuming a hypothetical repatriation to the U.S. The Company considers undistributed earnings of certain non-U.S. consolidated subsidiaries, which totaled $3,225, to be indefinitely reinvested and has not provided for withholding or state taxes. In 2023 and 2022, the Company had valuation allowances of $422 and $313, primarily related to foreign tax credits that the Company believes will not be realized due to carry forward limitations. The foreign tax credit carry forwards are set to expire beginning in fiscal 2030. The deferred tax accounts at the end of 2023 and 2022 include deferred income tax assets of $491 and $445, included in other long-term assets; and deferred income tax liabilities of $795 and $724, included in other long-term liabilities. (279) (304) $ $ (1,979) (1,989) (85) (87) (701) (655) (231) (380) (962) (867) 1,700 1,685 (313) (422) 2,013 2,107 20 increased insurance costs associated with opioid abuse in 43 states and American Samoa. Claims against the Company filed in federal court outside the MDL have been asserted by certain counties and cities in Florida and Georgia; claims filed by certain cities and counties in New York are pending in state court. Claims against the Company in state courts in New Jersey, Oklahoma, Utah, and Arizona have been dismissed. The Company is defending all of the pending matters. Valuation allowance In February 2023, Go Green Norcal, LLC filed an arbitration demand against the Company. The demand alleged a breach of a supply agreement and sought unspecified damages and cancellation of a loan from the Company. In March 2023, the Company filed its answer, denying any breach by the Company, along with counterclaims against Go Green and an affiliate for breach of contract, negligent misrepresentation, and an accounting. In August 2023 the plaintiff asserted that its damages exceed $70 million. 1,781 265 177 1,339 6,708 1,145 1,093 4,470 27,233 $ 195,929 27,298 $ $ 141,398 $ 64,166 2,612 12,704 44,904 24,646 4,982 2,459 17,205 3,891 708 388 2,795 1,900 284 180 6,558 704 3,588 15,993 Members of the Board of Directors, six corporate officers and the Company were defendants in a shareholder derivative action filed in June 2022 related to chicken welfare and alleged breaches of fiduciary duties. Smith, et ano. v. Vachris, et al., Superior Court of the State of Washington, County of King, No, 22-2-08937-7SEA. The complaint sought from the individual defendants' damages, injunctive relief, costs, and attorneys' fees. On March 28, 2023, the court granted the defendants' motion to dismiss the action. The plaintiffs subsequently made a demand that the Board of Directors take various actions, including among other things, pursuing claims against directors and officers of the type asserted in the litigation. A demand review committee of the Board has been appointed to make a recommendation to the Board as to the demand. 48,693 Warehouse Ancillary and Other Businesses 27,183 29,527 31,977 Fresh Foods 55,966 61,100 60,865 Non-Foods 77,277 85,629 $ 96,175 $ $ Foods and Sundries 2021 2022 2023 The following table summarizes net sales by merchandise category; sales from e-commerce websites and business centers have been allocated to the applicable merchandise categories: 59,268 13,717 5,962 39,589 23,492 5,182 2,317 1,436 7,793 272 1,346 1,179 The Company does not believe that any pending claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company's financial position, results of operations or cash flows; it is possible that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be material to the results of an individual fiscal quarter or year. 59 Note 11-Segment Reporting The Company is principally engaged in the operation of membership warehouses through wholly owned subsidiaries in the U.S., Canada, Mexico, Japan, the U.K., Korea, Australia, Taiwan, China, Spain, France, Iceland, New Zealand, and Sweden. Reportable segments are largely based on management's organization of the operating segments for operational decisions and assessments of financial performance, which considers geographic locations. The material accounting policies of the segments are as described in Note 1. Inter-segment net sales and expenses have been eliminated in computing total revenue and operating income. The following table provides information for the Company's reportable segments: 2023 Total revenue Operating income Depreciation and amortization Additions to property and equipment Property and equipment, net Total assets In January 2023 the Company received a Civil Investigative Demand from the U.S. Attorney's Office, Western District of Washington, requesting documents. The government is conducting a False Claims Act investigation concerning whether the Company presented or caused to be presented to the federal government for payment false claims relating to prescription medications. 2022 Operating income Depreciation and amortization Additions to property and equipment Property and equipment, net Total assets 2021 Total revenue Operating income Depreciation and amortization Canada United States Disaggregated Revenue Total assets Total revenue Property and equipment, net Additions to property and equipment 33,056 $ 32,604 $ 242,290 1,274 $ 176,630 $ Total Other International 8,114 1,599 183 295 2,077 3,288 281 754 5,392 4,323 2,443 5,481 26,684 49,189 6,420 13,385 68,994 $ 165,294 $ 31,675 $ 29,985 $ 226,954 5,268 18,760 1,448 /s/ KENNETH D. DENMAN By Director /s/ RICHARD A. GALANTI Richard A. Galanti Executive Vice President, Chief Financial Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. October 10, 2023 By By By By By October 10, 2023 W. Craig Jelinek Chief Executive Officer and Director /s/ RICHARD A. GALANTI Richard A. Galanti Executive Vice President, Chief Financial Officer and Director Pursuant to the requirements of Section 13 or 15(d) 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. (Principal Financial Officer) /s/ RON M. VACHRIS Ron M. Vachris President, Chief Operating Officer and COSTCO WHOLESALE CORPORATION (Registrant) /s/ W. CRAIG JELINEK By /s/ CHARLES T. MUNGER Chief Executive Officer and Founder, Raftr; Former President, Yahoo! Inc. Kenneth D. Denman(a)*(c) General Venture Partner, Sway Ventures; Former President and Chief Executive Officer, Emotient, Inc. Helena B. Foulkes Executive Chair, Follett Higher Education Group; Former President, CVS Pharmacy; Former Chief Executive Officer, Hudson's Bay Company Richard A. Galanti Executive Vice President and Chief Financial Officer, Costco Wholesale Hamilton E. James Chairman of the Board, Costco Wholesale; Susan L. Decker(a) Chairman, Jefferson River Capital; W. Craig Jelinek Chief Executive Officer, Costco Wholesale DIRECTORS AND OFFICERS BOARD OF DIRECTORS Sally Jewell(a)(b) Global Board Treasurer, The Nature Conservancy; Former U.S. Secretary of the Interior; Former Chief Executive Officer and Director, Recreational Equipment Inc. Jeffrey S. Raikes(c)* Co-Founder, The Raikes Foundation; Former Chief Executive Officer, Bill and Melinda Gates Foundation John W. Stanton(b)* Chairman, First Avenue Entertainment LLLP; Trilogy International Partners, Inc.; and Trilogy Equity Partners Ron M. Vachris Former Executive Vice Chairman, The Blackstone Group Mary (Maggie) A. Wilderotter Director /s/ MARY (MAGGIE) A. WILDEROTTER Jeffrey S. Raikes Director Charles T. Munger Director By /s/ HAMILTON E. JAMES By By By By By SIGNATURES /s/ JOHN W. STANTON John W. Stanton Director 67 Hamilton E. James Chairman of the Board /s/ DANIEL M. HINES Daniel M. Hines Senior Vice President and Corporate Controller (Principal Accounting Officer) /s/ SUSAN L. DECKER Susan L. Decker Director /s/ SALLY JEWELL Sally Jewell Director /s/ JEFFREY S. RAIKES Kenneth D. Denman Director 60 Exhibit Description None. 10.8.11 Eleventh Amendment to Citi, N.A. Co-Branded Credit Card Agreement 10-Q 2/12/2023 3/9/2023 10.8.12# Twelfth Amendment to Citi, N.A. 11/20/2022 12/29/2022 Co-Branded Credit Card 21.1 Subsidiaries of the Company 23.1 Consent of Independent X Registered Public Accounting Firm 31.1 Agreement 10-Q Tenth Amendment to Citi, N.A. Co- Branded Credit Card Agreement 10.8.10 Seventh Amendment to Citi, N.A. 10-Q 2/14/2021 3/10/2021 Co-Branded Credit Card Agreement 10.8.8 Eighth Amendment to Citi, N.A. 10-Q 2/13/2022 3/10/2022 Co-Branded Credit Card Agreement 10.8.9 Ninth Amendment to Citi, N.A. Co- Branded Credit Card Agreement 10-Q 11/20/2022 12/29/2022 Rule 13a - 14(a) Certifications 66 X Section 1350 Certifications 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) X X Incorporated by Reference Period Ended X Filing Date ** Management contract, compensatory plan or arrangement. Portions of this exhibit have been omitted under a confidential treatment order issued by the Securities and Exchange Commission. # Certain information in this exhibit has been omitted because it is both (i) not material and (ii) customarily and actually treated by the registrant as private or confidential. (c) Financial Statement Schedules―None. Item 16-Form 10-K Summary * Inline XBRL Taxonomy Extension Label Linkbase Document 101.LAB X ✗ 101.INS Inline XBRL Instance Document X 101.SCH Inline XBRL Taxonomy Extension Schema Document 99 65 X President and Chief Operating Officer, Costco Wholesale Maggie A. Wilderotter(b)(c) Exhibit Number Filed Herewith Form 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document X 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 32.1 Former Chief Executive Officer and Chairman, Grand Reserve Inn; Former Chief Executive Officer and Executive Chairman, Frontier Communications Senior Vice President, Lincoln Premium Poultry Geoff Shavey (a) Audit Committee COSTCO WHOLESALE A commitment to quality and value at 871 locations and on Costco.com COR000075 0623 9/1/2019 10/11/2019 Branded Credit Card Agreement WHOLESALE Incorporated by Reference Filed Number 10.6 Exhibit Description Form of Indemnification Herewith Form Period Ended Exhibit COSTCO FSC® C132107 Paper from responsible sources Independent Public Accountants KPMG LLP 401 Union Street, Suite 2800 Seattle, WA 98101 Stock Exchange Listing The Nasdaq Global Select Market Stock Symbol: COST Transfer Agent Computershare Costco Shareholder Relations Correspondence should be mailed to: P.O. Box 43006 Providence RI 02940 Overnight correspondence should be sent to: 150 Royall St., Suite 101 Canton, MA 02021 Telephone: (800) 249-8982 TDD for Hearing Impaired: (800) 490-1493 Outside U.S.: (201) 680-6578 Website: https://www.computershare.com/investor FSC www.fsc.org MIX 14A Thursday, January 18, 2024 at 2:00 PM Pacific www.virtualshareholdermeeting.com/COST2024 Filing Date 12/13/1999 10.7* 10.8.4** Fourth Amendment to Citi, N.A. 10-Q 2/18/2018 3/15/2018 Co-Branded Credit Card Agreement 8/28/2016 10/12/2016 10.8.5** 10-Q 2/17/2019 3/13/2019 Branded Credit Card Agreement 10.8.6# Sixth Amendment to Citi, N.A. Co- 10-K Fifth Amendment to Citi, N.A. Co- 10-K Third Amendment to Citi, N.A. Co- Branded Credit Card Agreement 10.8.3** Deferred Compensation Plan 10-K 10.8** Citibank, N.A. Co-Branded Credit Card Agreement 10-Q/A 5/10/2015 9/1/2013 10/16/2013 8/31/2015 10.8.1** First Amendment to Citi, N.A. Co- Branded Credit Card Agreement 10-Q 11/22/2015 12/17/2015 10.8.2** Second Amendment to Citi, N.A. Co-Branded Credit Card 10-Q 2/14/2016 3/9/2016 Agreement Agreement Board Committees Annual Meeting Shareholder Information Senior Vice President, Merchandising - Foods and Sundries Darby Greek Senior Vice President, General Manager - Texas Region Peter Gruening Senior Vice President, Membership, Marketing and Member Service Centers Daniel M. Hines Senior Vice President, Corporate Controller W. Craig Jelinek** Executive Vice President and Chief Financial Officer Sarah George Chief Executive Officer Senior Vice President, Depots and Traffic Yoon Kim Senior Vice President, Merchandising - Non-Foods James Klauer** Executive Vice President, COO - Northern Division Bill Koza Senior Vice President, General Manager - Midwest Region David Messner Teresa Jones Executive Vice President, COO - Southwest Division Richard A. Galanti** Senior Vice President, Global Sustainability and Compliance Caton Frates** Senior Vice President, Country Manager - Canada Sheri Flies (b) Compensation Committee (c) Nominating and Governance Committee *2023 Committee Chair Claudine Adamo** Executive Vice President, COO - Merchandising Marc-Andre Bally EXECUTIVE AND SENIOR OFFICERS Senior Vice President, General Manager - Eastern Canada Region Patrick J. Callans** Executive Vice President, Administration Greg Carter II Senior Vice President, General Manager - Los Angeles Region Richard Chang Senior Vice President, General Manager - Asia Angelina Chaparro Senior Vice President, General Manager - Bay Area Region Jeffrey Cole Senior Vice President, Costco Wholesale Industries and Business Development Wendy Davis Senior Vice President, General Manager - Southeast Region Gino Dorico Senior Vice President, Real Estate Development Copies of Costco's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q will be provided to any shareholder upon written request to Investor Relations, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, Washington 98027. Internet users can access recent sales and earnings releases, the annual report and SEC filings, as well as our Costco website, at www.costco.com. E-mail users can direct investor relations questions to investor@costco.com. The SEC maintains a site that contains reports, proxy and information statements, and other information regarding issuers, such as the Company, that file electronically with the SEC, at www.sec.gov. Russ Miller** Ali Moayeri Senior Vice President, Pharmacy John Sullivan** Executive Vice President, General Counsel and Corporate Secretary Sandy Torrey Senior Vice President, Membership, Marketing, Member Service Centers and Travel Ron M. Vachris** President and Chief Operating Officer Richard Stephens Azmina Virani Senior Vice President, Human Resources W. Richard Wilcox Senior Vice President, General Manager - San Diego Region Terry Williams Senior Vice President, CIO - Information Systems ** Executive Committee Member ADDITIONAL INFORMATION Senior Vice President, General Manager - Western Canada Region Brenda Weber Senior Vice President, General Manager - Europe Louie Silveira Senior Vice President, Merchandising - Non-Foods Senior Vice President, Construction and Purchasing Pietro Nenci Senior Vice President, Merchandising - Corporate Foods, Non-Foods and Ecommerce, Canada Scott O'Brien Senior Vice President, Merchandising - Fresh Foods Mario Omoss Senior Vice President, General Manager - Northwest Region Rob Parker Senior Vice President, Business Centers Mike Parrott Senior Vice President, Ecommerce Pierre Riel** Executive Vice President, COO - International Division Yoram B. Rubanenko** Executive Vice President, COO - Eastern Division Adam Self Senior Vice President, General Manager - Northeast Region Walt Shafer Senior Executive Vice President, COO - Warehouse Operations, U.S. and Mexico 10.8.7