COST » Topics » Liquidity and Capital Resources (dollars in thousands, except per share data)

This excerpt taken from the COST 10-Q filed Jun 16, 2006.

Liquidity and Capital Resources (dollars in thousands, except per share data)

Cash Flows

The Company’s primary sources of liquidity are cash flows generated from warehouse operations and existing cash and cash equivalents and short-term investments balances, which were $3,301,752 and $3,459,857

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands, except earnings per share and warehouse number data) (Continued)

 

at May 7, 2006 and August 28, 2005, respectively. Of the $3,301,752 balance, approximately $605,649 represented debit and credit card receivables, primarily related to weekend sales immediately prior to the quarter-end close.

Net cash provided by operating activities totaled $1,226,441 in the first thirty-six weeks of fiscal 2006 compared to $1,253,583 in the first thirty-six weeks of fiscal 2005. The decrease of $27,142 resulted primarily from a decrease in net merchandise inventories (merchandise inventory less accounts payable) of $195,011. This was offset by the change in receivables, other current assets, deferred income, accrued and other current liabilities of $143,217, principally related to the timing in the payment of income taxes.

Net cash used in investing activities totaled $644,055 in the first thirty-six weeks of 2006 compared to $1,637,941 in the first thirty-six weeks of fiscal 2005, a decrease of $993,886. The decrease in investing activities relates primarily to a decrease in the net investment in short-term investments of $1,121,138 offset by an increase of $127,994 in additions to property and equipment related to the Company’s warehouse expansion and remodel projects. The decrease in the net investment in short-term investments was due to the Company’s stock repurchase activity.

Net cash used in financing activities totaled $653,119 in the first thirty-six weeks of 2006 compared to $260,960 provided by financing activities in the first thirty-six weeks of fiscal 2005. The decrease of $914,079 primarily resulted from the repurchase of common stock in the first thirty-six weeks of fiscal 2006, which used $911,415 of cash. There was no repurchase of common stock in the first thirty-six weeks of fiscal 2005.

Dividends

On April 25, 2006, Costco’s Board of Directors announced the declaration of a quarterly cash dividend of $0.13 per share ($0.52 on an annualized basis), a 13% increase from the $0.115 per share ($0.46 per share on an annualized basis). The dividend was payable on May 26, 2006, to shareholders of record on May 10, 2006.

Expansion Plans

Costco’s primary requirement for new capital is to finance land, building and equipment costs for new warehouses plus the costs of initial warehouse operations and working capital requirements. While there can be no assurance that current expectations will be realized, and plans are subject to change upon further review, it is management’s current intention to spend approximately $1,300,000 during fiscal 2006 worldwide for real estate, construction, remodeling and equipment for warehouse clubs and related operations. Through the end of the third quarter, the Company incurred expenditures of approximately $756,000. Future expenditures will be financed with a combination of cash provided from operations, the use of cash and cash equivalents and short-term investments, and other financing sources as required. Expansion plans during the remainder of fiscal 2006 are to open an additional ten to eleven new warehouse clubs, including the relocation of one warehouse.

Bank Credit Facilities and Commercial Paper

A wholly-owned Canadian subsidiary has a $180,500 commercial paper program ($167,000 at August 28, 2005) supported by a $54,150 bank credit facility ($50,000 at August 28, 2005) with a Canadian bank, which is guaranteed by the Company and expires in March 2007. At May 7, 2006, there were no amounts outstanding under the Canadian commercial paper program and $2,000 was outstanding under the bank credit facility. At August 28, 2005, no amounts were outstanding under the Canadian commercial paper program or the bank credit facility. Applicable interest rates on the credit facility at May 7, 2006 and August 28, 2005, were 4.40% and 4.25%, respectively. At May 7, 2006, standby letters of credit totaling $20,400 issued under the bank credit

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands, except earnings per share and warehouse number data) (Continued)

 

facility left $33,750 available for commercial paper support. At August 28, 2005, standby letters of credit totaling $23,000 issued under the bank credit facility left $27,000 available for commercial paper support.

The Company’s wholly-owned Japanese subsidiary has a short-term $13,298 bank line of credit that expires in February 2007. At May 7, 2006 and August 28, 2005, $3,546 and $5,477, respectively, were borrowed under the line of credit, and $4,432 and $3,652, respectively, were used to support standby letters of credit. A second $13,298 bank line of credit also expires in February 2007. At May 7, 2006 and August 28, 2005, $6,206 and $9,129, respectively, were borrowed under the second facility. Applicable interest rates on the credit facilities at May 7, 2006 and August 28, 2005, were .68% and .84%, respectively.

The Company’s Korean subsidiary has a short-term $12,775 bank line of credit, which expires in February 2007. At May 7, 2006 and August 28, 2005, no amounts were borrowed under the line of credit and $1,881 and $1,668, respectively, were used to support standby letters of credit. Applicable interest rates on the credit facility at May 7, 2006 and August 28, 2005 were 5.16% and 4.51%, respectively.

The Company’s Taiwan subsidiary has a $5,373 bank revolving credit facility that expires in January 2007. At May 7, 2006 and August 28, 2005, no amounts were borrowed under the credit facility and $806 and $2,495, respectively, were used to support standby letters of credit. A second $15,804 bank revolving credit facility is in place, which expires in July 2006. At May 7, 2006 and August 28, 2005, no amounts, were borrowed under the second credit facility and $2,134 and $790, respectively, were used to support standby letters of credit. Applicable interest rates on the credit facility at May 7, 2006 and August 28, 2005, were 3.93% and 3.75%, respectively.

The Company’s wholly-owned United Kingdom subsidiary has a $111,492 bank revolving credit facility expiring in February 2007, and a $55,746 bank overdraft facility renewable on a yearly basis in March 2007. At May 7, 2006, $48,313 was outstanding under the revolving credit facility with an applicable interest rate of 5.05% and no amounts were outstanding under the bank overdraft facility. At August 28, 2005, $39,750 was outstanding under the revolving credit facility with an applicable interest rate of 5.30% and no amounts were outstanding under the bank overdraft facility.

On November 15, 2005, upon the expiration of the Company’s $150,000 bank credit facility with a group of nine banks, the Company terminated its $500,000 commercial paper program. At August 28, 2005, no amounts were outstanding under the commercial paper program and no amounts were outstanding under the credit facility. The applicable interest rate on the credit facility at August 28, 2005, was 3.92%.

Letters of Credit

The Company has letter of credit facilities (for commercial and standby letters of credit), totaling $400,280. The outstanding commitments under these facilities at May 7, 2006 and August 28, 2005 totaled $57,683 and $131,169, respectively, including $52,217 and $64,532, respectively, in standby letters of credit.

Financing Activities

During the third quarter and first thirty-six weeks of fiscal 2006, $12,406 and $177,278, respectively, in principal amount of the Company’s 3 1/2% Zero Coupon Convertible Subordinated Notes were converted by note holders into 419,000 and 6,051,000 shares of common stock, respectively.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands, except earnings per share and warehouse number data) (Continued)

 

Stock Repurchase Programs

On November 30, 2001, the Company’s Board of Directors approved a stock repurchase program, authorizing the repurchase of up to $500,000 of Costco Common Stock through November 30, 2004. On October 25, 2004, the Board renewed the program for another three years. Through the end of fiscal 2005, the Company repurchased 9,205,100 shares of common stock at an average price of $44.89, totaling approximately $413,000, including commissions.

On August 29, 2005, the Board authorized an additional stock repurchase program of up to $1,000,000. On January 25, 2006, the Board increased the authorization by an additional $1,000,000. During the third quarter of fiscal 2006, the Company purchased 5,319,000 shares at an average price of $54.45, totaling approximately $290,000, including commissions. During the first thirty-six weeks of fiscal 2006, the Company repurchased 18,455,000 shares at an average price of $50.40, totaling approximately $930,000, including commissions, exhausting the remaining amount approved by the Board of Directors in October 2004 and reducing the amount of share value available to be purchased under the plans approved in fiscal 2006 to approximately $1,157,000. Purchases are made from time-to-time as conditions warrant in the open market or in block purchases, or pursuant to share repurchase plans under SEC Rule 10b5-1. Repurchased shares are retired.

Derivatives

The Company has limited involvement with derivative financial instruments and uses them only to manage well-defined interest rate and foreign exchange risks. Forward foreign exchange contracts are used to hedge the impact of fluctuations of foreign exchange on inventory purchases and typically have very short terms. The aggregate notional amount of foreign exchange contracts outstanding at May 7, 2006 and August 28, 2005 was $45,106 and $42,466, respectively. The majority of the forward foreign exchange contracts were entered into by the Company’s wholly-owned United Kingdom subsidiary, primarily to hedge U.S. dollar merchandise inventory purchases. The Company monitors its foreign currency exchange exposures to ensure the overall effectiveness of its foreign currency hedge positions.

The Company also holds interest rate swaps to manage the interest rate risk associated with its borrowings and the mix of fixed-rate and variable-rate debt. As of May 7, 2006 and August 28, 2005, the Company had “fixed-to-floating” interest rate swaps with an aggregate notional amount of $300,000 and an aggregate fair value of $1,062 and $7,688, respectively. This amount was recorded in other current assets as of May 7, 2006 and other assets as of August 28, 2005, on the Company’s condensed consolidated balance sheet. These swaps were entered into effective March 25, 2002, and are designated and qualify as fair value hedges of the Company’s $300,000 5 1/2% Senior Notes. As the terms of the swaps match those of the underlying hedged debt, the changes in the fair value of these swaps are offset by corresponding changes in the carrying amount of the hedged debt and result in no net earnings impact.

This excerpt taken from the COST 10-Q filed Mar 23, 2006.

Liquidity and Capital Resources (dollars in thousands, except per share data)

 

Cash Flows

 

The Company’s primary sources of liquidity are cash flows generated from warehouse operations and existing cash and cash equivalents and short-term investments balances, which were $3,517,391 and $3,459,857 at February 12, 2006 and August 28, 2005, respectively. Of the $3,517,391 balance, approximately $540,006 represented debit and credit card receivables, primarily related to weekend sales immediately prior to the quarter-end close.

 

Net cash provided by operating activities totaled $943,778 in the first half of fiscal 2006 compared to $764,274 in the first half of fiscal 2005, an increase of $179,504. This increase resulted primarily from the change in operating assets and liabilities year-over-year of $258,818, principally relating to the timing in the payment of income taxes in the first half of fiscal 2006 as compared to the first half of fiscal 2005. This was offset by an increase in net merchandise inventories (merchandise inventory less accounts payable) of $76,657 in the first half of fiscal 2006 as compared to the first half of fiscal 2005.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands, except earnings per share) (Continued)

 

Net cash used in investing activities totaled $377,550 in the first half of 2006 compared to $834,941 in the first half of fiscal 2005, a decrease of $457,391. The decrease in investing activities relates primarily to a decrease in the net investment in short-term investments of $551,091 offset by an increase of $94,126 in additions to property and equipment related to the Company’s warehouse expansion and remodel projects.

 

Net cash used in financing activities totaled $407,414 in the first half of 2006 compared to $269,429 provided by financing activities in the first half of fiscal 2005. The decrease of $676,843 primarily resulted from the repurchase of common stock in the first half of fiscal 2006, which used $611,474 of cash. There was no repurchase of common stock in the first half of fiscal 2005.

 

Dividends

 

On January 26, 2006, Costco’s Board of Directors announced the declaration of a quarterly cash dividend of $0.115 per share, payable on February 24, 2006 to shareholders of record on February 9, 2006. At the end of the Company’s second quarter of fiscal 2006 and 2005, a dividends payable (current liability) of $54,100 and $47,734 (reflecting a $0.10 per share dividend payment), respectively, was established.

 

Expansion Plans

 

Costco’s primary requirement for new capital is to finance land, building and equipment costs for new warehouses plus the costs of initial warehouse operations and working capital requirements. While there can be no assurance that current expectations will be realized, and plans are subject to change upon further review, it is management’s current intention to spend approximately $1,100,000 to $1,250,000 during fiscal 2006 in the United States and Canada for real estate, construction, remodeling and equipment for warehouse clubs and related operations; and approximately $100,000 to $150,000 for international expansion, including the United Kingdom, Asia, Mexico and other potential markets. Through the end of the second quarter of fiscal 2006, the Company incurred expenditures of approximately $503,624. Future expenditures will be financed with a combination of cash provided from operations, the use of cash and cash equivalents and short-term investments, and other financing sources as required. Expansion plans during the remainder of fiscal 2006 are to open an additional 16 to 18 new warehouse clubs.

 

Bank Credit Facilities and Commercial Paper

 

On November 15, 2005, upon the expiration of the Company’s $150,000 bank credit facility with a group of nine banks, the Company terminated its $500,000 commercial paper program. At August 28, 2005, no amounts were outstanding under the commercial paper program and no amounts were outstanding under the credit facility. The applicable interest rate on the credit facility at August 28, 2005, was 3.92%.

 

A wholly-owned Canadian subsidiary has a $174,000 commercial paper program ($167,000 at August 28, 2005) supported by a $52,158 bank credit facility ($50,000 at August 28, 2005) with a Canadian bank, which is guaranteed by the Company and expires in March 2007. At February 12, 2006 and August 28, 2005, no amounts were outstanding under the Canadian commercial paper program or the bank credit facility. Applicable interest rates on the credit facility at February 12, 2006 and August 28, 2005, were 5.25% and 4.25%, respectively. At February 12, 2006, standby letters of credit totaling $20,358 issued under the bank credit facility left $31,800 available for commercial paper support. At August 28, 2005, standby letters of credit totaling $23,000 issued under the bank credit facility left $27,000 available for commercial paper support.

 

The Company’s wholly-owned Japanese subsidiary has a short-term $12,816 bank line of credit that expires in February 2007. At February 12, 2006 and August 28, 2005, $5,127 and $5,477, respectively, were borrowed

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands, except earnings per share) (Continued)

 

under the line of credit, and $3,418 and $3,652, respectively, were used to support standby letters of credit. A second $12,816 bank line of credit also expires in February 2007. At February 12, 2006 and August 28, 2005, $12,816 and $9,129, respectively, were borrowed under the second facility. Applicable interest rates on the credit facilities at February 12, 2006 and August 28, 2005, were .66% and .84%, respectively.

 

The Company’s Korean subsidiary has a short-term $12,451 bank line of credit, which expires in February 2007. At February 12, 2006 and August 28, 2005, no amounts were borrowed under the line of credit and $1,660 and $1,668, respectively, were used to support standby letters of credit. Applicable interest rates on the credit facility at February 12, 2006 and August 28, 2005 were 5.26% and 4.51%, respectively.

 

The Company’s Taiwan subsidiary has a $6,208 bank revolving credit facility that expires in January 2007. At February 12, 2006 and August 28, 2005, no amounts were borrowed under the credit facility and $698 and $2,495, respectively, were used to support standby letters of credit. A second $15,520 bank revolving credit facility is in place, which expires in July 2006. At February 12, 2006 and August 28, 2005, no amounts were borrowed under the second credit facility and $2,623 and $790, respectively, were used to support standby letters of credit. Applicable interest rates on the credit facility at February 12, 2006 and August 28, 2005, were 3.88% and 3.75%, respectively.

 

The Company’s wholly-owned United Kingdom subsidiary has a $105,348 bank revolving credit facility expiring in February 2007, and a $52,674 bank overdraft facility renewable on a yearly basis in March 2006. At February 12, 2006, $43,895 was outstanding under the revolving credit facility with an applicable interest rate of 5.02% and no amounts were outstanding under the bank overdraft facility. At August 28, 2005, $39,750 was outstanding under the revolving credit facility with an applicable interest rate of 5.30% and no amounts were outstanding under the bank overdraft facility.

 

Letters of Credit

 

The Company has letter of credit facilities (for commercial and standby letters of credit), totaling $395,862. The outstanding commitments under these facilities at February 12, 2006 and August 28, 2005 totaled $64,098 and $131,169, respectively, including $50,993 and $64,532, respectively, in standby letters of credit.

 

Financing Activities

 

During the second quarter and first half of fiscal 2006, $10,979 and $164,872, respectively, in principal amount of the Company’s 3 1/2% Zero Coupon Convertible Subordinated Notes were converted by note holders into 372,943 and 5,632,024 shares of common stock, respectively.

 

Stock Repurchase Programs

 

On November 30, 2001, the Company’s Board of Directors approved a stock repurchase program, authorizing the repurchase of up to $500,000 of Costco Common Stock through November 30, 2004. No shares were repurchased under this program. On October 25, 2004, the Board renewed the program for another three years. Through the end of fiscal 2005, the Company repurchased 9,205,100 shares of common stock at an average price of $44.89, totaling approximately $413,250, including commissions.

 

On August 29, 2005, the Board authorized an additional stock repurchase program of up to $1,000,000. On January 25, 2006, the Board increased the authorization by an additional $1,000,000. During the second quarter of fiscal 2006, the Company purchased 8,784,000 shares at an average price of $49.38, totaling approximately $433,746, including commissions. During the first half of fiscal 2006, the Company repurchased 13,136,000

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands, except earnings per share) (Continued)

 

shares at an average price of $48.76, totaling approximately $640,456, including commissions, exhausting the remaining amount approved by the Board of Directors in October 2004 and reducing the amount of share value available to be purchased under the plan approved in fiscal 2006 to $1,446,294. Under these programs the Company may repurchase shares at any time in the open market or in private transactions as market conditions warrant. Repurchased shares are retired.

 

Derivatives

 

The Company has limited involvement with derivative financial instruments and uses them only to manage well-defined interest rate and foreign exchange risks. Forward foreign exchange contracts are used to hedge the impact of fluctuations of foreign exchange on inventory purchases and typically have very short terms. The aggregate notional amount of foreign exchange contracts outstanding at February 12, 2006 and August 28, 2005 was $37,941 and $42,466, respectively. The majority of the forward foreign exchange contracts were entered into by the Company’s wholly-owned United Kingdom subsidiary, primarily to hedge U.S. dollar merchandise inventory purchases. The Company monitors its foreign currency exchange exposures to ensure the overall effectiveness of its foreign currency hedge positions.

 

The only other derivative instruments the Company holds are interest rate swaps, which the Company uses to manage the interest rate risk associated with its borrowings and to manage the Company’s mix of fixed-rate and variable-rate debt. As of February 12, 2006 and August 28, 2005, the Company had “fixed-to-floating” interest rate swaps with an aggregate notional amount of $300,000 and an aggregate fair value of $2,981, and $7,688, respectively, which is recorded in other assets on the Company’s condensed consolidated balance sheet. These swaps were entered into effective March 25, 2002, and are designated and qualify as fair value hedges of the Company’s $300,000 5 1/2% Senior Notes. As the terms of the swaps match those of the underlying hedged debt, the changes in the fair value of these swaps are offset by corresponding changes in the carrying amount of the hedged debt and result in no net earnings impact.

 

This excerpt taken from the COST 10-Q filed Dec 21, 2005.

Liquidity and Capital Resources (dollars in thousands, except per share data)

 

Cash Flows

 

The Company’s primary sources of liquidity are cash flows generated from warehouse operations and existing cash and cash equivalents and short-term investments balances, which were $3,289,478 and $3,226,439 at November 20, 2005 and November 21, 2004, respectively. Of the $3,289,478 balance, approximately $602,308 represented debit and credit card receivables primarily related to weekend sales immediately prior to the quarter-end close.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Net cash provided by operating activities totaled $137,570 in the first quarter of fiscal 2006 compared to $44,534 in the first quarter of fiscal 2005, an increase of $93,036. Higher net income and a positive impact from the change in operating assets and liabilities quarter-over-quarter increased cash flow from operating activities by $231,809, primarily relating to the timing in the payment of income taxes in the first quarter of fiscal 2006 as compared to the first quarter of fiscal 2005. This increase was offset by decreases in cash flow from an increase in net merchandise inventories (merchandise inventory less accounts payable) of $142,674 in the first quarter of fiscal 2006 as compared to the first quarter of fiscal 2005.

 

A significant component of net cash used in investing activities continues to be the purchase of property and equipment related to the Company’s warehouse expansion and remodel projects. Net cash used in investing activities totaled $154,188 in the first quarter of 2006 compared to $237,484 in the first quarter of fiscal 2005, a decrease of $83,296. The decrease in investing activities primarily relates to a decrease in the net investment in short-term investments of $140,126 offset by an increase in additions to property and equipment of $61,440.

 

Net cash used in financing activities totaled $31,921 in the first quarter of 2006 compared to $221,545 provided by financing activities in the first quarter of fiscal 2005. The decrease of $253,466 primarily resulted from the repurchase of common stock in the first quarter of fiscal 2006 which used $183,781 of cash; and a decrease in cash provided from the exercise of stock options of $53,771 quarter-over-quarter.

 

Dividends

 

On November 4, 2005, Costco’s Board of Directors announced the declaration of a quarterly cash dividend of $0.115 per share payable to shareholders of record on November 18, 2005, payable on December 2, 2005. At the end of the Company’s first quarter of fiscal 2006 and 2005, a dividends payable (current liability) of $54,720 and $47,095, respectively, was established.

 

Expansion Plans

 

Costco’s primary requirement for new capital is to finance land, building and equipment costs for new warehouses plus the costs of initial warehouse operations and working capital requirements, for both domestic and international expansion.

 

While there can be no assurance that current expectations will be realized, and plans are subject to change upon further review, it is management’s current intention to spend approximately $1,100,000 to $1,250,000 during fiscal 2006 in the United States and Canada for real estate, construction, remodeling and equipment for warehouse clubs and related operations; and approximately $100,000 to $150,000 for international expansion, including the United Kingdom, Asia, Mexico and other potential ventures. Through the end of the first quarter of fiscal 2006, the Company had incurred expenditures of approximately $272,568. Future expenditures will be financed with a combination of cash provided from operations, the use of cash and cash equivalents and short-term investments, and other financing sources as required. Expansion plans during the remainder of fiscal 2006 are to open an additional 18 to 20 new warehouse clubs.

 

Bank Credit Facilities and Commercial Paper

 

On November 15, 2005, upon the expiration of the Company’s $150,000 bank credit facility with a group of nine banks, the Company terminated its $500,000 commercial paper program. At August 28 2005, no amounts were outstanding under the commercial paper program and no amounts were outstanding under the credit facility. The applicable interest rate on the credit facility at August 28, 2005, was 3.92%.

 

A wholly-owned Canadian subsidiary has a $168,000 commercial paper program ($167,000 at August 28, 2005) supported by a $50,400 bank credit facility ($50,000 at August 28, 2005) with a Canadian bank, which is

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

guaranteed by the Company and expires in March 2006. At November 20, 2005 and August 28, 2005, no amounts were outstanding under the Canadian commercial paper program or the bank credit facility. Applicable interest rates on the credit facility at November 20, 2005 and August 28, 2005, were 4.75% and 4.25%, respectively. At November 20, 2005, standby letters of credit totaling $22,900 issued under the bank credit facility left $27,500 available for commercial paper support. At August 28, 2005, standby letters of credit totaling $23,000 issued under the bank credit facility left $27,000 available for commercial paper support.

 

The Company’s wholly-owned Japanese subsidiary has a short-term $12,614 bank line of credit that expires in February 2006, and is expected to be renewed. At November 20, 2005 and August 28, 2005, $1,682 and $5,477, respectively, were borrowed under the line of credit, and $3,364 and $3,652, respectively, were used to support standby letters of credit. A second $12,614 bank line of credit was entered into in February 2005 that expires in February 2006. At November 20, 2005 and August 28, 2005, $8,409 and $9,129, respectively, were borrowed under the second facility. Applicable interest rates on both the credit facilities at November 20, 2005 and August 28, 2005, were .66% and .84%, respectively.

 

The Company’s Korean subsidiary has a short-term $11,572 bank line of credit, which expires in February 2006, and is expected to be renewed. At November 20, 2005 and August 28, 2005, no amounts were borrowed under the line of credit and $1,844 and $1,668, respectively, were used to support standby letters of credit. Applicable interest rates on the credit facility at November 20, 2005 and August 28, 2005, were 4.90% and 4.51%, respectively.

 

The Company’s Taiwan subsidiary has a $7,145 bank revolving credit facility that expires in January 2006, and is expected to be renewed. At November 20, 2005 and August 28, 2005, no amounts were borrowed under the credit facility and $1,890 and $2,495, respectively, were used to support standby letters of credit. A second $14,885 bank revolving credit facility is in place, which expires in July 2006. At November 20, 2005 and August 28, 2005, no amounts were borrowed under the second credit facility and $1,295 and $790, respectively, were used to support standby letters of credit. Applicable interest rates on both credit facilities at November 20, 2005 and August 28, 2005, were 3.80% and 3.75%, respectively.

 

The Company’s wholly-owned United Kingdom subsidiary has a $103,242 bank revolving credit facility expiring in February 2007 and a $60,225 bank overdraft facility renewable on a yearly basis in March 2006. At November 20, 2005, $51,621 was outstanding under the revolving credit facility with an applicable interest rate of 5.00% and no amounts were outstanding under the bank overdraft facility. At August 28, 2005, $39,750 was outstanding under the revolving credit facility with an applicable interest rate of 5.30% and no amounts were outstanding under the bank overdraft facility.

 

Letters of Credit

 

The Company has letter of credit facilities (for commercial and standby letters of credit), totaling $399,797. The outstanding commitments under these facilities at November 20, 2005 and August 28, 2005 totaled $74,608 and $131,169, respectively, including $66,010 and $64,532, respectively, in standby letters of credit.

 

Financing Activities

 

During the first quarter of fiscal 2006, $153,893 in principal amount of the Company’s 3 1/2% Zero Coupon Convertible Subordinated Notes were converted by note holders into 5,259,081 shares of common stock.

 

Stock Repurchase Program

 

On November 30, 2001, the Company’s Board of Directors approved a stock repurchase program, authorizing the repurchase of up to $500,000 of Costco Common Stock through November 30, 2004. On

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

October 25, 2004, the Board of Directors renewed the program for another three years. Through the end of fiscal 2005 the Company had repurchased 9,205,100 shares of common stock under this program, at an average price of $44.89, totaling approximately $413,252, including commissions.

 

On August 29, 2005, the Board of Directors of Costco authorized an additional stock repurchase program of up to $1,000,000. Under the program, which has no expiration date, the Company may repurchase shares at any time in the open market or in private transactions as conditions warrant. During the first quarter of fiscal 2006, the Company purchased 4,352,000 shares at an average price of $47.50, exhausting the remaining amount approved by the Board of Directors in October 2004 and reducing the amount of share value available to be purchased under the plan approved in fiscal 2006 to $880,040. Repurchased shares are retired.

 

Derivatives

 

The Company has limited involvement with derivative financial instruments and uses them only to manage well-defined interest rate and foreign exchange risks. Forward foreign exchange contracts are used to hedge the impact of fluctuations of foreign exchange on inventory purchases and typically have very short terms. The aggregate amount of foreign exchange contracts outstanding at November 20, 2005 and August 28, 2005, was $30,439 and $42,466, respectively. The majority of the forward foreign exchange contracts were entered into by the Company’s wholly-owned United Kingdom subsidiary, primarily to hedge U.S. dollar merchandise inventory purchases. The Company monitors its foreign currency exchange exposures to ensure the overall effectiveness of its foreign currency hedge positions. The only other derivative instruments the Company holds are interest rate swaps, which the Company uses to manage the interest rate risk associated with its borrowings and to manage the Company’s mix of fixed-rate and variable-rate debt. As of November 20, 2005 and August 28, 2005, the Company had “fixed-to-floating” interest rate swaps with an aggregate notional amount of $300,000 and an aggregate fair value of $3,873, and $7,688, respectively, which is recorded in other assets on the Company’s condensed consolidated balance sheet. These swaps were entered into effective March 25, 2002, and are designated and qualify as fair value hedges of the Company’s $300,000 5 1/2% Senior Notes. As the terms of the swaps match those of the underlying hedged debt, the changes in the fair value of these swaps are offset by corresponding changes in the carrying amount of the hedged debt and result in no net earnings impact.

 

This excerpt taken from the COST 10-Q filed Jun 16, 2005.

Liquidity and Capital Resources (dollars in thousands, except per share data)

 

Cash Flows

 

Cash flow generated from warehouse operations provides the primary source of liquidity. Net cash provided by operating activities totaled $1,257,901 in the first thirty-six weeks of fiscal 2005 compared to $1,618,649 in the first thirty-six weeks of fiscal 2004. The decrease of $360,748 is primarily a result of a decrease in the change in receivables, other current assets, deferred income and accrued and other current liabilities of $579,956. This decrease is primarily attributable to a reduction in income taxes payable of approximately $147,000 and the prepayment of employee medical costs affecting the change by approximately $59,000 in fiscal 2005, and the collection of an operating tax receivable of approximately $218,000 and an increase in income taxes payable of approximately $86,000 in the first thirty-six weeks of fiscal 2004. These decreases in cash flows from operating activities during the first thirty-six weeks of fiscal 2005 were partially offset by an increase in net income of $122,768, an increase in depreciation, amortization and other of $26,011, a larger increase in stock-based compensation of $20,264 and a larger add-back for gain/loss on sales of property and equipment of $16,929 in fiscal 2005 as compared to fiscal 2004.

 

A significant component of net cash used in investing activities continues to be the purchase of property and equipment related to the Company’s warehouse expansion and remodel projects. Net cash used in investing activities totaled $1,642,259 in the first thirty-six weeks of fiscal 2005 compared to $807,350 in the first thirty-six weeks of fiscal 2004, an increase of $834,909. The increase in investing activities primarily relates to an increase in the net investment in short-term investments of $712,454 and an increase in additions to property and equipment of $182,905 in the first thirty-six weeks of fiscal 2005 over the first thirty-six weeks of fiscal 2004, offset by the purchase of the remaining 20% minority interest in Costco Wholesale UK Limited of $95,153 in the first thirty-six weeks of fiscal 2004.

 

Net cash provided by financing activities totaled $260,960 in the first thirty-six weeks of fiscal 2005 compared to $129,374 in the first thirty-six weeks of fiscal 2004. The increase of $131,586 primarily resulted

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

from increased proceeds from the exercise of stock options of $159,930 and increased proceeds from short-term borrowings of $58,119 in the first thirty-six weeks of fiscal 2005 compared to the first thirty-six weeks of fiscal 2004. These amounts were partially offset by an increase in dividends paid in fiscal 2005 of $94,827.

 

Dividends

 

On April 22, 2005, Costco’s Board of Directors announced the declaration of a quarterly cash dividend of $0.115 per share payable on May 27, 2005, to shareholders of record on May 6, 2005, reflecting a 15% increase in the quarterly dividend. At the end of the Company’s third quarter of fiscal 2005, May 8, 2005, a dividends payable liability of $55,118 was established, which is included in other current liabilities in the accompanying condensed consolidated balance sheet. At August 29, 2004, there was no dividend payable as the dividend was paid on August 27, 2004.

 

Expansion Plans

 

Costco’s primary requirement for new capital is to finance land, building and equipment costs for new warehouses and remodel projects, plus the costs of initial warehouse operations and working capital requirements, as well as additional capital for international expansion through investments in foreign subsidiaries and joint ventures.

 

While there can be no assurance that current expectations will be realized, and plans are subject to change upon further review, it is management’s current intention to spend approximately $750,000 to $850,000 during fiscal 2005 in the United States and Canada for real estate, construction, remodeling and equipment for warehouse clubs and related operations; and approximately $100,000 to $125,000 for international expansion, including the United Kingdom, Asia, Mexico and other potential ventures. Through the end of the third quarter of fiscal 2005, the Company had incurred expenditures of $628,057. Future expenditures will be financed with a combination of cash provided from operations, the use of cash and cash equivalents and short-term investments (totaling $4,050,899 as of May 8, 2005), and other financing sources as required. Of the $4,050,899, approximately $626,669 represented debit and credit card receivables primarily related to weekend sales immediately prior to the end of the quarter. Expansion plans during the remainder of fiscal 2005 are to open an additional eight to ten new warehouses.

 

Bank Credit Facilities and Commercial Paper Programs (all amounts stated in thousands of US dollars)

 

The Company has a $500,000 commercial paper program supported by a $150,000 bank credit facility ($300,000 at August 29, 2004) with a group of nine banks, which expires on November 15, 2005. At May 8, 2005 and August 29, 2004, no amounts were outstanding under the commercial paper program and no amounts were outstanding under the credit facility.

 

A wholly-owned Canadian subsidiary has a $161,000 commercial paper program ($152,000 at August 29, 2004) supported by a $48,000 bank credit facility ($46,000 at August 29, 2004), that is guaranteed by the Company and expires in March 2006. At May 8, 2005 and August 29, 2004, no amounts were borrowed under the Canadian commercial paper program or the bank credit facility. At May 8, 2005, standby letters of credit totaling $22,000 issued under the bank credit facility left $26,000 available for commercial paper support. At August 29, 2004, standby letters of credit totaling $21,000 issued under the bank credit facility left $25,000 available for commercial paper support.

 

The Company has agreed to limit the combined amount outstanding under the U.S. and Canadian commercial paper programs to the combined available amounts of the supporting bank credit facilities, which are $176,000 and $325,000 at May 8, 2005 and August 29, 2004, respectively.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

The Company’s wholly-owned Japanese subsidiary has a short-term $14,309 bank line of credit that expires in February 2006. At May 8, 2005 and August 29, 2004, $5,723 and $0, respectively, was borrowed under the line of credit, and $2,576 at both dates was used to support standby letters of credit. A second $14,309 credit facility was entered into in February 2005 that expires in February 2006. At May 8, 2005, $2,862 was borrowed under the second facility and this bank line was not in place at August 29, 2004.

 

The Company’s Korean subsidiary has a short-term $12,024 bank line of credit, which expires in January 2006. At May 8, 2005 and August 29, 2004, no amounts were borrowed under the line of credit and $1,858 and $0, respectively, was used to support standby letters of credit.

 

The Company’s Taiwan subsidiary has a $6,466 bank revolving credit facility that expires in December 2005. At May 8, 2005 and August 29, 2004, no amounts were borrowed under the credit facility and $2,603 and $1,165, respectively, was used to support standby letters of credit. A second $3,233 bank revolving credit facility is in place, which expires in January 2006. At May 8, 2005 and August 29, 2004, no amounts were borrowed under the second credit facility and $760 and $738, respectively, was used to support standby letters of credit.

 

The Company’s wholly-owned United Kingdom subsidiary has a $113,568 bank revolving credit facility expiring in February 2007 and a $66,248 bank overdraft facility renewable on a yearly basis in March 2006. At May 8, 2005, $37,856 was outstanding under the revolving credit facility with an applicable interest rate of 5.30% and no amounts were outstanding under the bank overdraft facility. At August 29, 2004, $21,595 was outstanding under the revolving credit facility with an applicable interest rate of 5.285% and no amounts were outstanding under the bank overdraft facility.

 

Letters of Credit

 

The Company has letter of credit facilities (for commercial and standby letters of credit) totaling $387,469. The outstanding commitments under these facilities at May 8, 2005 and August 29, 2004, totaled $92,291 and $166,800, respectively, including $58,661 and $52,900, respectively, in standby letters of credit.

 

Financing Activities

 

The Company’s 7 1/8% Senior Notes of $300,688 at May 8, 2005 ($304,350 at August 29, 2004) were due on June 15, 2005. The Company repaid the 7 1/8% Senior Notes from its cash and cash equivalents and short-term investment balances.

 

During the third quarter and first thirty-six weeks of fiscal 2005, $14,080 and $280,727, respectively, in principal amount of the Company’s 3 1/2% Zero Coupon Convertible Subordinated Notes were converted by note holders into 490,000 and 9,906,900 shares of common stock, respectively.

 

Derivatives

 

The Company has limited involvement with derivative financial instruments and uses them only to manage well-defined interest rate and foreign exchange risks. Forward foreign exchange contracts are used to hedge the impact of fluctuations of foreign exchange on inventory purchases and typically have very short terms. The aggregate amount of foreign exchange contracts outstanding at May 8, 2005, was not material. The only significant derivative instruments that the Company holds are interest rate swaps, which the Company uses to manage the interest rate risk associated with its borrowings and to manage the Company’s mix of fixed-rate and variable-rate debt. As of May 8, 2005, the Company had “fixed-to-floating” interest rate swaps with an aggregate notional amount of $600,000 and an aggregate fair value of $9,326, of which $8,638 and $688 are recorded in

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

other assets and other current assets, respectively, on the Company’s consolidated balance sheet. These swaps were entered into effective November 13, 2001, and March 25, 2002, and are designated and qualify as fair value hedges of the Company’s $300,000 7 1/8% Senior Notes and the Company’s $300,000 5 1/2% Senior Notes, respectively. As the terms of the swaps match those of the underlying hedged debt, the changes in the fair value of these swaps are offset by corresponding changes in the carrying amount of the hedged debt and result in no net earnings impact. The Company repaid the $300,000 7 1/8% Senior Notes on the due date of June 15, 2005.

 

This excerpt taken from the COST 10-Q filed Mar 24, 2005.

Liquidity and Capital Resources (dollars in thousands, except per share data)

 

Cash Flows

 

Cash flow generated from warehouse operations provides the primary source of liquidity. Net cash provided by operating activities totaled $764,274 in the first half of fiscal 2005 compared to $1,272,684 in the first half of fiscal 2004. The decrease of $508,410 is primarily a result of a decrease in the change in receivables, other current assets, deferred income and accrued and other current liabilities of $609,940. This decrease is primarily attributable to a reduction in income taxes payable of approximately $220,000 in fiscal 2005, the collection of an operating tax receivable of approximately $218,000 in the first half of fiscal 2004 and the prepayment of employee medical costs of approximately $128,000 in fiscal 2005. In addition, the investment in net inventory increased by approximately $62,000 in the first half of fiscal 2005 compared to the first half of fiscal 2004. These decreases in cash flows from operating activities were partially offset by the increase in net income of $111,638 during the first half of fiscal 2005.

 

A significant component of net cash used in investing activities continues to be the purchase of property and equipment related to the Company’s warehouse expansion and remodel projects. Net cash used in investing activities totaled $834,941 in the first half of fiscal 2005 compared to $532,513 in the first half of fiscal 2004, an increase of $302,428. The increase in investing activities primarily relates to an increase in the net investment in short-term investments of $313,314, an increase in additions to property and equipment in the first half of fiscal 2005 of $78,580, offset by the purchase of the remaining 20% minority interest in Costco Wholesale UK Limited of $95,153 in the first half of fiscal 2004.

 

Net cash provided by financing activities totaled $269,429 in the first half of fiscal 2005 compared to a use of cash of $131,969 in the first half of fiscal 2004. The increase of $401,398 primarily resulted from an increase in bank checks outstanding of $268,712 during the first half of fiscal 2005 and increased proceeds from the exercise of stock options of $143,144 in the first half of fiscal 2005 compared to the first half of fiscal 2004.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Dividends

 

On January 27, 2005, Costco’s Board of Directors announced the declaration of a quarterly cash dividend of $0.10 per share payable on February 25, 2005, to shareholders of record on February 8, 2005. At the end of the Company’s second quarter of fiscal 2005, a dividends payable (current liability) of $47,734 was established.

 

Expansion Plans

 

Costco’s primary requirement for new capital is to finance land, building and equipment costs for new warehouses and remodel projects, plus the costs of initial warehouse operations and working capital requirements, as well as additional capital for international expansion through investments in foreign subsidiaries and joint ventures.

 

While there can be no assurance that current expectations will be realized, and plans are subject to change upon further review, it is management’s current intention to spend approximately $700,000 to $850,000 during fiscal 2005 in the United States and Canada for real estate, construction, remodeling and equipment for warehouse clubs and related operations; and approximately $50,000 to $100,000 for international expansion, including the United Kingdom, Asia, Mexico and other potential ventures. Through the end of the second quarter of fiscal 2005, the Company had incurred expenditures of approximately $409,500. Future expenditures will be financed with a combination of cash provided from operations, the use of cash and cash equivalents and short-term investments (totaling $3,788,388 as of February 13, 2005), and other financing sources as required. Of the $3,788,388 approximately $475,000 represented debit and credit card receivables primarily related to weekend sales immediately prior to the quarter-end close. Expansion plans during the remainder of fiscal 2005 are to open an additional 14 to 16 new warehouses, including the relocation of three to four warehouses to larger and better-located facilities.

 

Bank Credit Facilities and Commercial Paper Programs (all amounts stated in thousands of US dollars)

 

The Company has a $500,000 commercial paper program supported by a $150,000 bank credit facility ($300,000 at August 29, 2004) with a group of nine banks, which expires on November 15, 2005. At February 13, 2005 and August 29, 2004, no amounts were outstanding under the commercial paper program and no amounts were outstanding under the credit facility.

 

A wholly-owned Canadian subsidiary has a $161,000 commercial paper program ($152,000 at August 29, 2004) supported by a $48,000 bank credit facility ($46,000 at August 29, 2004), that is guaranteed by the Company and expires in March 2006. At February 13, 2005 and August 29, 2004, no amounts were borrowed under the Canadian commercial paper program or the bank credit facility. At February 13, 2005, standby letters of credit totaling $23,000 issued under the bank credit facility left $25,000 available for commercial paper support. At August 29, 2004, standby letters of credit totalling $21,000 issued under the bank credit facility left $25,000 available for commercial paper support.

 

The Company has agreed to limit the combined amount outstanding under the U.S. and Canadian commercial paper programs to the combined available amounts of the supporting bank credit facilities, which are $175,000 and $325,000 at February 13, 2005 and August 29, 2004, respectively.

 

The Company’s wholly-owned Japanese subsidiary has a short-term $14,190 bank line of credit that expires in May 2005. At February 13, 2005 and August 29, 2004, $9,460 and $0, respectively, was borrowed under the line of credit, and $2,550 at both dates was used to support standby letters of credit. A second $14,190 credit facility was entered into in February 2005 that expires in February 2006. No amounts were borrowed under the second facility at February 13, 2005.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

The Company’s Korean subsidiary has a short-term $11,617 bank line of credit, which expires in January 2006. At February 13, 2005 and August 29, 2004, no amounts were borrowed under the line of credit and $1,913 and $0, respectively, was used to support standby letters of credit.

 

The Company’s wholly-owned United Kingdom subsidiary has a $111,870 bank revolving credit facility expiring in February 2007 and a $65,258 bank overdraft facility renewable on a yearly basis in March 2005. At February 13, 2005, $29,832 was outstanding under the revolving credit facility with an applicable interest rate of 5.263% and no amounts were outstanding under the bank overdraft facility. At August 29, 2004, $21,595 was outstanding under the revolving credit facility with an applicable interest rate of 5.285% and no amounts were outstanding under the bank overdraft facility.

 

Letters of Credit

 

The Company has letter of credit facilities (for commercial and standby letters of credit) totaling approximately $390,124. The outstanding commitments under these facilities at February 13, 2005 and August 29, 2004, totaled approximately $82,062 and $166,800, respectively, including approximately $63,014 and $52,900, respectively, in standby letters of credit.

 

Financing Activities

 

The Company’s 7 1/8% Senior Notes of $300,969 and $304,350 at February 13, 2005 and August 29, 2004, respectively, are due on June 15, 2005. The Company plans to repay the 7 1/8% Senior Notes from its cash and cash equivalents and short-term investment balances.

 

During the second quarter and first half of fiscal 2005, $122,882 and $266,647, respectively, in principal amount of the Company’s 3 1/2% Zero Coupon Convertible Subordinated Notes were converted by note holders into 4,323,000 and 9,417,000 shares of common stock, respectively.

 

Derivatives

 

The Company has limited involvement with derivative financial instruments and uses them only to manage well-defined interest rate and foreign exchange risks. Forward foreign exchange contracts are used to hedge the impact of fluctuations of foreign exchange on inventory purchases and typically have very short terms. The aggregate amount of foreign exchange contracts outstanding at February 13, 2005, was not material. The only significant derivative instruments that the Company holds are interest rate swaps, which the Company uses to manage the interest rate risk associated with its borrowings and to manage the Company’s mix of fixed-rate and variable-rate debt. As of February 13, 2005, the Company had “fixed-to-floating” interest rate swaps with an aggregate notional amount of $600,000 and an aggregate fair value of $15,169, of which $14,200 and $969 are recorded in other assets and other current assets, respectively, on the Company’s consolidated balance sheet. These swaps were entered into effective November 13, 2001, and March 25, 2002, and are designated and qualify as fair value hedges of the Company’s $300,000 7 1/8% Senior Notes and the Company’s $300,000 5 1/2% Senior Notes, respectively. As the terms of the swaps match those of the underlying hedged debt, the changes in the fair value of these swaps are offset by corresponding changes in the carrying amount of the hedged debt and result in no net earnings impact.

 

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